Business context and reporting period
The filing is Wayside Technology Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The supplied request names Climb Global Solutions, Inc., but the filing identifies Wayside Technology Group, Inc. as the registrant; verify the issuer identity.
Wayside distributes third-party software and hardware through its Lifeboat Distribution segment and resells technology products and services through TechXtend. Unless indicated otherwise, financial statement amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $103.0 | $105.3 | $215.8 | $198.6 |
| Gross profit / margin | $6.6 / 6.4% | $7.0 / 6.6% in financial statements | $13.3 / 6.2% | $13.0 / 6.5% |
| Income from operations | $1.7 | $2.2 | $3.5 | $3.7 |
| Net income | $1.3 | $1.5 | $2.6 | $2.6 |
| Diluted earnings per share | $0.30 | $0.34 | $0.60 | $0.56 |
| Operating cash flow | Not separately provided | Not separately provided | $0.2 | $4.7 |
The filing’s MD&A gives Q2 2016 gross margin as 6.7%, while the financial statements imply approximately 6.6%; the filing does not reconcile this difference. First-half net income was nearly flat year over year despite higher sales.
- At June 30, cash was $9.7, current assets $76.3, current liabilities $53.5, and working capital approximately $22.8. The current ratio was approximately 1.43.
- Total assets were $90.9 and stockholders’ equity $37.4. No credit-facility borrowings were outstanding; the facility provides up to $10.0 and matures January 31, 2019. The company reported covenant compliance.
- First-half operating cash flow fell to $0.2 from $4.7, chiefly reflecting working-capital movements, including a $22.7 reduction in accounts payable and accrued expenses. Investing used $0.3; financing used $3.9, including $2.4 of share repurchases and $1.5 of dividends.
- Cash declined $3.8 from year-end to $9.7. First-half dividends were $0.34 per share. The company repurchased $2.4 of stock during the period.
Material changes versus the prior comparable period
- Q2 sales decreased 2%; first-half sales increased 9%. Lifeboat sales rose 7% in Q2 and 14% in the first half, while TechXtend sales fell 53% and 31%, respectively.
- TechXtend’s comparisons were affected by an approximately $6.6 large enterprise sale recorded in Q2 2016. Management also cited quarter-to-quarter variability in enterprise purchasing decisions.
- Q2 gross profit declined 6%, and operating income declined 23%. For the first half, gross profit increased 3%, while operating income declined 6%.
- Margins were pressured by competition and product mix, particularly in Lifeboat. Q2 SG&A increased 2%; first-half SG&A increased 6%, mainly from employee costs.
- The effective tax rate declined to about 31% from 33.7%, which management attributed primarily to the accounting treatment of share-based payment tax effects under ASU 2016-09.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects working-capital needs to increase with business growth and believes cash plus available credit will fund requirements for at least 12 months.
- In July 2017, after quarter-end, the company paid approximately $8.0 to a new vendor as a prepayment against future purchases, partly financed with credit-facility borrowings. The filing does not state the amount borrowed.
- Management plans continued investment in information technology and marketing while monitoring SG&A. It expects price competition to continue and notes that quarterly results can fluctuate with product mix, customer IT spending, competitive bids, product availability, and timing of sales.
- Customer and supplier concentration is material: two customers represented 38.9% of Q2 sales and 41.3% of first-half sales; two vendors represented 40.7% of first-half purchases. The company also identified foreign-exchange exposure, especially to the Canadian dollar and euro.
- Operating lease commitments totaled $4.5. The company reported no off-balance-sheet arrangements. Adoption of the new revenue-recognition standard was expected beginning January 1, 2018; the company was still evaluating its impact and transition approach.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing’s registrant—Wayside Technology Group, Inc.—matches the intended Climb Global Solutions issuer and reporting history.
- Verify the Q2 2016 gross-margin discrepancy between MD&A and the financial statements.
- Track the July vendor prepayment, resulting credit-facility borrowing, and subsequent cash collections from extended-payment-term sales.
- Assess concentration and renewal or competitive-bid risks for major customers and vendors, alongside Lifeboat margin trends.
- Review future cash conversion, share repurchases and dividends, and the eventual financial-statement effects of revenue-recognition adoption.