Climb Global Solutions, Inc. (then Wayside Technology Group, Inc.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context and results
The company operated two segments: Lifeboat Distribution, a technical-software distributor, and TechXtend, a value-added reseller of software, hardware and services. Total sales were nearly flat year over year, but segment performance diverged.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $66.0 | $66.9 | Down 1% |
| Gross profit / margin | $5.3 / 8.1% | $5.6 / 8.3% | Gross profit down 5%; margin down 0.2 percentage points |
| Operating income / margin | $1.4 / 2.1% | $1.6 / 2.3% | Operating income down 12% |
| Net income | $1.0 | $1.0 | Down about 1% |
| Diluted EPS | $0.22 | $0.22 | Unchanged |
| Operating cash flow | $0.8 | $1.2 | Down $0.4 |
Lifeboat sales grew 9% to $53.9 million, while TechXtend sales fell 31% to $12.1 million, primarily because TechXtend had fewer extended-payment-term transactions than in the unusually strong prior-year quarter. Lifeboat gross profit was flat at $3.8 million; its margin declined to 7.0% from 7.7%, reflecting discount, rebate and pricing pressure. TechXtend gross profit fell 14% to $1.5 million, while its margin increased to 12.7% from 10.1% as fewer lower-margin extended-term transactions occurred.
Cash, liquidity and capital
Cash and cash equivalents were $13.6 million at March 31, up $3.8 million from year-end. Operating cash flow was $0.8 million; investing activities provided $4.4 million, mainly from net redemptions of marketable securities; financing activities used $1.3 million, including $0.8 million of dividends and $0.5 million of stock repurchases. The large accounts-receivable decrease ($16.9 million) and accounts-payable decrease ($17.5 million) primarily reflected lower sales, including extended-term sales, versus Q4 2012.
Total assets were $73.7 million, current liabilities were $41.7 million and stockholders’ equity was $32.0 million. The company reported no outstanding borrowings and no long-term debt. Its new $10 million revolving facility, secured by company assets, matures January 4, 2016, bears interest at LIBOR plus 1.5 percentage points, and had no borrowings outstanding at quarter-end. The company said it was in compliance with covenants and expected cash and unused facility capacity to cover working-capital and cash needs for at least 12 months. Capital-lease obligations were $28,000; operating-lease commitments totaled $685,000.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expected competitive pricing pressure and vendor rebate and discount trends to continue affecting margins; financing larger extended-term transactions could also reduce gross margins.
- Management cited quarterly variability from product mix, vendor incentives and relationships, customer payment performance, extended-term sales, industry demand, competition, returns and other operating factors. Actual results could differ materially from forward-looking statements.
- Customer concentration was notable: three customers represented 14.5%, 14.4% and 11.3% of Q1 sales. One vendor represented 10.4% of purchases. Canadian operations generated $4.8 million of sales versus $5.9 million a year earlier, and currency movements pose risk.
- The effective tax rate declined to 33.4% from 39.6%, primarily due to a change in New Jersey apportionment rules. The company reported no off-balance-sheet arrangements and no standby repurchase obligations. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- The company paid $0.16 per share in dividends, matching the prior-year quarter, and repurchased 30,700 shares under its public program during the quarter.
Important facts for investors to verify
- Whether Lifeboat’s sales growth and TechXtend’s steep decline persist, particularly as extended-payment-term sales fluctuate.
- Whether competitive pricing and vendor rebate eligibility continue to pressure gross margins.
- Customer and vendor concentration, receivable quality, and the cash-flow impact of extended payment terms.
- Availability and covenant terms of the secured credit facility, and the sustainability of dividends and share repurchases.
- Management’s stated risks and contingencies, including customer credit, vendor relationships, foreign exchange and estimates for returns, bad debts, inventory and taxes.