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, 2016. The company operates Lifeboat Distribution, a technical software distributor, and TechXtend, a value-added software, hardware and services reseller. The filing identifies the issuer as Wayside Technology Group, Inc.; it does not identify it as Climb Global Solutions.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $105.3 | $92.0 | $198.6 | $184.7 |
| Gross profit | $7.0 | $6.4 | $13.0 | $12.8 |
| Gross margin | 6.7% | 7.0% | 6.5% | 6.9% |
| Operating income | $2.2 | $2.0 | $3.7 | $3.9 |
| Net income | $1.5 | $1.4 | $2.6 | $2.7 |
| Diluted EPS | $0.34 | $0.29 | $0.56 | $0.57 |
Revenue by segment: Q2 Lifeboat sales rose 10% to $89.7 million and TechXtend sales rose 46% to $15.6 million. For the first half, Lifeboat sales increased 7% to $176.0 million and TechXtend increased 10% to $22.6 million. Management attributed Lifeboat growth to added product lines and stronger account penetration; TechXtend growth was primarily associated with larger sales on extended payment terms.
Cash flow and liquidity: First-half operating cash flow was $4.7 million, compared with cash used of $0.2 million in the prior-year period. Investing used $0.2 million and financing used $3.5 million, principally for $1.6 million in dividends and $2.0 million in treasury-stock purchases. Cash increased to $24.6 million from $23.8 million at year-end 2015. At June 30, current assets were $90.0 million and current liabilities were $58.1 million. The company had no borrowings under its $10 million revolving facility, which matures January 31, 2019, and reported compliance with its covenants. Operating lease obligations totaled $4.8 million.
Material changes and management commentary
- Q2 sales increased 14% year over year, while first-half sales increased 8%; gross profit grew more slowly, and gross margins declined in both reported periods.
- Q2 Lifeboat margin was 6.2% versus 6.3%; management cited a vendor program change that reduced margin on one product line. TechXtend Q2 margin fell to 9.3% from 12.3%, primarily because extended-payment transactions carry lower margins.
- Management said competitive pricing, vendor rebate targets, and a greater expected share of extended-payment sales could continue to pressure margins for the rest of 2016. Vendor rebates and discounts were $1.0 million in each first-half period.
- Management expects cash and unused credit availability to fund working capital and other cash needs for at least the next 12 months. No numerical earnings or revenue guidance was provided.
- First-half share-based compensation expense increased to $0.8 million from $0.5 million. The company repurchased $2.0 million of treasury stock and paid $1.6 million in dividends during the first half.
Risks, contingencies and other disclosures
- Results may fluctuate with product demand and mix, competition and pricing, vendor relationships and incentives, product availability, returns, and the timing of sales. Management warns that sales below forecast could materially affect results.
- Two customers represented 18.9% and 17.9% of first-half 2016 sales; together they represented 29.5% of net receivables at June 30. Two vendors accounted for 23.9% and 10.0% of first-half purchases, creating vendor concentration exposure.
- Canadian operations generated 6.8% of first-half sales and are exposed to foreign-exchange and market risks. The filing reports a $3,000 foreign-currency transaction loss for the first half; translation adjustments increased comprehensive income by $70,000.
- Federal, New Jersey and Canadian tax years 2012–2015 remained open for examination. The recently concluded IRS examination of 2011 and 2012 resulted in no change to filed federal returns.
- The company reported no off-balance-sheet arrangements and no material change in internal control over financial reporting; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether extended-payment sales growth is sustainable and how customer financing affects cash conversion, receivables and margins.
- Whether vendor program changes, pricing competition and rebate thresholds continue to reduce gross margins.
- The scale and collectability of customer receivables and the company’s exposure to its largest customers and suppliers.
- Future capital returns, including repurchases under the Rule 10b5-1 plan and dividends, alongside working-capital needs.
- Potential effects of adopting the revenue-recognition, share-based-payment and lease accounting standards discussed in the filing; the company was still evaluating impacts where stated.