Business context and reporting period
Wayside Technology Group, Inc. (NASDAQ: WSTG) filed this unaudited Form 10-Q for the quarter ended June 30, 2019. The filing describes Lifeboat Distribution, a global distributor of third-party technology products, and TechXtend, a value-added reseller serving customers in the U.S. and Canada. Note: the request identifies Climb Global Solutions, Inc.; the filing itself is for Wayside Technology Group, Inc., so confirm the intended issuer.
Unless otherwise noted, financial amounts below are in millions of U.S. dollars. Comparisons are with the corresponding 2018 period.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $50.7 | $43.9 | $95.5 | $84.5 |
| Gross profit | $7.8 | $6.5 | $15.1 | $13.4 |
| Gross margin | 15.4% | 14.8% | 15.8% | 15.9% |
| Operating income (loss) | $2.2 | $(1.2) | $4.0 | $0.6 |
| Net income (loss) | $1.9 | $(1.1) | $3.3 | $0.5 |
| Diluted EPS | $0.41 | $(0.25) | $0.74 | $0.10 |
| Operating cash flow | Not presented separately | Not presented separately | $(3.9) | $7.8 |
Q2 SG&A was $5.5 million, or 10.8% of sales, versus $5.3 million, or 12.1%. The six-month figures were $11.0 million, or 11.5%, versus $10.3 million, or 12.2%. The company paid dividends of $0.17 per share in Q2 and $0.34 per share in the first half.
At June 30, cash was $9.4 million, current assets $99.4 million, and current liabilities $60.5 million. Total assets were $105.7 million and stockholders’ equity was $42.8 million. Funded borrowings under the $20 million revolving facility were zero; operating lease liabilities totaled $2.8 million. The facility matures August 31, 2020.
Material changes versus the prior comparable period
- Q2 sales rose 15% and gross profit rose 20%; first-half sales rose 13% and gross profit rose 12%.
- Lifeboat drove growth: Q2 sales increased 23% to $47.3 million; first-half sales increased 16% to $87.4 million. Management cited growth in established product lines and contributions from product lines added in 2018 and early 2019.
- TechXtend sales declined 40% in Q2 to $3.4 million and 12% in the first half to $8.2 million, reflecting fewer large enterprise transactions and less extended-term-payment business.
- Q2 gross margin improved year over year, partly because security, maintenance and service offerings recorded net represented a greater share of sales. First-half gross margin edged down 0.1 percentage point.
- Separation expense fell to $0.1 million in both Q2 and the first half, compared with $2.4 million in the comparable 2018 periods. The prior-year amount included accelerated vesting costs and cash payments for the former CEO’s departure.
- Cash fell $5.5 million from year-end. First-half operating cash use reflected working-capital movements, including increased receivables and lower payables; dividends used $1.5 million.
Outlook, management commentary and risks
Management gave no numerical revenue or earnings guidance. It said it expects working-capital needs to rise with business investment and believes cash plus available revolver capacity will fund requirements for at least the next 12 months. It plans continued investment in business development, sales and marketing.
Management cited variable quarterly results, IT spending and customer demand, product mix, pricing and competition, vendor relationships and incentives, product availability, and the timing of enterprise purchases as risks. Two customers represented 45% of Q2 sales and 44% of first-half sales; two vendors represented 37% of Q2 purchases. The company also disclosed foreign-currency exposure, state tax uncertainty, and customer credit and collection risks. It reported compliance with credit-facility covenants and effective disclosure controls.
The company adopted lease accounting in January 2019, recognizing approximately $3.0 million of lease liabilities and $2.2 million of right-of-use assets at adoption, with no equity impact. Management was evaluating the expected effect of the new credit-loss standard, effective for the company in 2020.
Important facts for investors to verify
- Confirm issuer identity: this filing is for Wayside Technology Group, Inc., not Climb Global Solutions, Inc.
- Assess sustainability and quality of sales growth, especially reliance on two customers and Lifeboat’s contribution.
- Review receivables collection, payment-term exposure, working-capital requirements, and the causes of negative operating cash flow.
- Separate underlying performance from the prior-year CEO separation charge; note that adjusted gross billings and adjusted earnings are non-GAAP measures.
- Monitor TechXtend’s sales trajectory, product mix and gross margins, vendor concentration, lease commitments, and the August 2020 credit-facility maturity.