Business context and reporting period
The filing is Wayside Technology Group, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2016; the filing does not identify the issuer as Climb Global Solutions. Wayside operated Lifeboat Distribution, a technical-software distributor, and TechXtend, a value-added reseller of software, hardware and services. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $93.323 | $92.691 |
| Gross profit / margin | $5.953 / 6.4% | $6.356 / 6.9% |
| Operating income / margin | $1.493 / 1.6% | $1.890 / 2.0% |
| Net income | $1.029 | $1.303 |
| Diluted EPS | $0.22 | $0.28 |
| Cash provided by operations | $2.302 | $1.528 |
| Capital expenditures | $0.024 | $0.040 |
At March 31, cash was $24.290 million, total current assets $83.660 million and current liabilities $52.667 million. Total assets were $91.194 million and stockholders’ equity $38.527 million. The company had no borrowings under its $10 million revolving facility, extended to mature January 31, 2019; it reported compliance with covenants. Management believed cash and unused credit capacity would cover working-capital and cash requirements for at least 12 months. Operating lease commitments totaled $4.826 million, including $0.484 million due within one year.
Operating cash flow benefited chiefly from a $4.332 million reduction in accounts receivable and was offset in part by a $2.901 million reduction in accounts payable and accrued expenses. Cash increased $0.467 million during the quarter. Financing used $1.682 million, primarily for $0.816 million of dividends and $0.910 million of treasury-stock purchases. The quarterly dividend was $0.17 per share.
Material changes versus the prior period
- Sales rose 1% overall. Lifeboat sales increased 4% to $86.340 million, attributed mainly to additional product lines and deeper account penetration, partly offset by lower sales to a key account. TechXtend sales fell 28% to $6.983 million, primarily because extended-payment sales declined $2.2 million and hardware sales declined $0.4 million.
- Gross profit fell 6%. Lifeboat gross margin declined to 6.0% from 6.3%, which management attributed partly to a major vendor program change; TechXtend gross margin was approximately flat at 11.5%, but lower sales reduced its gross profit.
- SG&A was essentially flat at $4.460 million; as a share of sales it decreased to 4.8% from 4.9%. Net income declined 21% and diluted EPS fell from $0.28 to $0.22.
- Canadian sales were $6.6 million versus $5.6 million. Foreign-currency translation contributed $0.123 million of other comprehensive income, compared with a $0.609 million loss in Q1 2015.
Outlook, risks and unusual items
No quantified earnings or sales guidance was provided. Management expected competitive pricing to continue affecting margins, discounts and vendor rebates for the remainder of 2016, and noted that financing more extended-payment transactions could also reduce margins. It planned continued investment in Lifeboat and close monitoring of SG&A.
Key risks identified include competition and pricing, product availability and mix, dependence on vendor relationships and rebate programs, customer and vendor concentration, changes in demand, and Canadian-dollar exchange-rate movements. Two vendors represented 31.2% and 10.0% of Q1 purchases; two customers represented 21.4% and 20.5% of sales. The company stated it had no off-balance-sheet arrangements. Its 2011–2012 IRS examination concluded with no changes; 2012–2015 federal, New Jersey and Canadian returns remained open to examination.
The company repurchased 42,488 shares under its public program during the quarter; total shares purchased, including 10,089 shares surrendered for employee tax withholding, were 52,577. A Rule 10b5-1 plan began purchases March 7 and was intended to remain in effect through August 31, 2016, with authorization for up to 400,000 shares.
Important facts for investors to verify
- Whether Lifeboat’s sales growth can offset continued TechXtend weakness and whether the vendor program change has lasting effects on Lifeboat margins.
- Customer and vendor concentration, rebate eligibility and the impact of competitive pricing on gross margins.
- Receivables quality and exposure from extended-payment transactions, including use of the revolving facility if such sales increase.
- Actual share repurchases and dividends, and the continuing cost and dilution effects of stock-based compensation; $3.9 million of unrecognized compensation cost was expected to be recognized over a weighted-average 3.6 years.