Business context and reporting period
Wayside Technology Group, Inc. (the registrant named in this 10-Q) reported results for the quarter and nine months ended September 30, 2013. It operated two segments: 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 dollars; the filing reports financial statements in thousands.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $70.5 | $75.5 | $210.5 | $211.6 |
| Gross profit | $5.3 | $5.7 | $16.5 | $16.9 |
| Gross margin | 7.5% | 7.5% | 7.9% | 8.0% |
| Income from operations | $1.8 | $2.1 | $5.3 | $5.7 |
| Net income | $1.3 | $1.4 | $3.9 | $3.7 |
| Diluted EPS | $0.29 | $0.29 | $0.85 | $0.80 |
| Operating cash flow | Not separately provided | Not separately provided | $4.3 | $3.1 |
- At September 30, cash and cash equivalents were $14.7 million, with no marketable securities and no borrowings under the $10 million revolving credit facility. Current assets were $67.7 million and current liabilities $43.3 million, for working capital of $24.4 million.
- Total assets were $76.4 million and stockholders’ equity $33.1 million. The company reported no outstanding long-term debt; the prior-year-end capital lease obligation had been repaid.
- Nine-month cash flow included $4.3 million provided by operations, $4.3 million provided by investing activities (primarily net securities redemptions), and $3.7 million used in financing, including $2.2 million in dividends and $1.8 million in share repurchases.
- Dividends were $0.16 per share in Q3 and $0.48 per share for the first nine months, unchanged from the comparable 2012 periods.
Material changes and management commentary
- Q3 sales fell about 7% year over year. Lifeboat sales increased 2% to $56.9 million, while TechXtend sales declined 30% to $13.6 million. For the first nine months, Lifeboat grew 8% to $171.9 million, while TechXtend declined 27% to $38.6 million.
- Management attributed TechXtend’s decline to fewer large transactions and sales with extended payment terms versus unusually strong comparable 2012 periods. Lifeboat growth was attributed to virtual-infrastructure business, new product lines, and deeper account penetration.
- Q3 gross margin was unchanged year over year; nine-month gross margin edged down. Management said price competition intensified and expected margins, discounts, and vendor rebates to remain affected by the trend. Vendor rebates were $0.3 million in Q3 2013 versus $0.4 million a year earlier, and $1.0 million versus $1.2 million for the nine-month periods.
- Q3 net income was slightly lower despite a lower tax provision. The effective tax rate declined to 30.5% for Q3 and 32.4% for the nine months, from 39.6% and 39.7%, respectively, primarily because of changed New Jersey apportionment rules.
- Management said available cash and unused credit capacity should fund working-capital and cash requirements for at least the next 12 months. No specific earnings or revenue guidance was provided.
Risks, contingencies, and other notable items
- Results may fluctuate with sales volume, product mix, competitive pricing, vendor rebates and discounts, major vendor relationships, customer payment performance, and the timing of large or extended-term transactions. Management warned that sales below expectations could adversely affect results.
- Three customers each represented a significant share of sales; together they accounted for 41.2% of nine-month 2013 sales. One vendor accounted for 10.0% of nine-month purchases. Customer concentration also exposes receivables to collection risk.
- Canadian operations generated 7.3% of nine-month sales and are exposed to currency, demand, and pricing fluctuations. The filing reported a $15.4 million nine-month sales contribution from Canada, down from $16.8 million.
- The credit facility is secured by company assets, bears interest at LIBOR plus 1.5 percentage points if drawn, and has financial covenants. The company reported compliance at quarter-end. Operating lease commitments totaled $638,000; the filing reported no off-balance-sheet arrangements.
- The filing describes estimates and risks relating to returns, doubtful accounts, inventory obsolescence, taxes, share-based compensation, contingencies, and litigation, but does not provide a quantified material litigation contingency.
Important facts for investors to verify
- Whether TechXtend’s lower sales reflect temporary timing and comparison effects or a continuing decline in large and extended-payment transactions.
- Whether Lifeboat growth can offset TechXtend weakness, and how competitive pricing and vendor rebate thresholds affect margins.
- Receivables quality and cash conversion, particularly given large customer exposures and the material period-to-period movement in receivables and payables.
- Future dividend and repurchase capacity, including the credit facility’s covenants and restrictions on cash dividends.
- The filing is for Wayside Technology Group, Inc.; confirm the entity and period when matching it to Climb Global Solutions or other company records.