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WSTG > SEC Filings for WSTG > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for WAYSIDE TECHNOLOGY GROUP, INC.

Form 10-Q for WAYSIDE TECHNOLOGY GROUP, INC.


31-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of risk and uncertainties, including those set forth under the heading "Certain Factors Affecting Results of Operations and Stock Price" and elsewhere in this report and those set forth in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included in this report and the consolidated financial statements and related notes included in our 2012 Annual Report on Form 10-K.

Overview

The Company operates through two reportable operating segments. The "Lifeboat Distribution" segment distributes technical software to corporate resellers, value added resellers (VARs), consultants and systems integrators primarily in the United States and Canada. The "TechXtend" segment is a value-added reseller of software, hardware and services for corporations, government organizations and academic institutions in the United States and Canada.

We offer an extensive line of products from leading publishers of software and tools for virtualization, networking, software development, database modeling, security, and other technically sophisticated domains as well as computer hardware. We market these products through direct sales, our catalogs, direct mail programs, advertisements in trade magazines, as well as through Internet and e-mail promotions.

The Company's sales, gross profit and results of operations have fluctuated and are expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including but not limited to: the availability and level of vendor rebates and discounts, the loss of any major vendor, our customers ability to meet their payment obligations in a timely manner, the extent to which the Company finalizes larger sales transactions with extended payment terms, the condition of the software industry in general, shifts in demand for software products, pricing, industry shipments of new software products or upgrades, the timing of new merchandise and catalog offerings, fluctuations in response rates, fluctuations in merchandise returns, adverse weather conditions that affect response, distribution or shipping, shifts in the timing of holidays and changes in the Company's product offerings. The Company's operating expenditures are based on sales forecasts. If sales do not meet expectations in any given quarter, operating results may be materially adversely affected.


Results of Operations

The following table sets forth for the periods indicated certain financial information derived from the Company's unaudited condensed consolidated statements of earnings expressed as a percentage of net sales. This comparison of financial results is not necessarily indicative of future results:

                                                Six months     Three months
                                                  ended           ended
                                                 June 30,        June 30,
                                               2013   2012    2013     2012
Net sales                                       100 % 100.0 %   100 %  100.0 %
Cost of sales                                  92.0    91.8    91.9     91.9
Gross profit                                    8.0     8.2     8.1      8.1
Selling, general and administrative expenses    5.5     5.5     5.1      5.1
Income from operations                          2.5     2.7     3.0      3.0
Interest income, net                             .2      .1     0.1      0.1
Realized foreign currency exchange gain           -       -       -        -
Income before income taxes                      2.7     2.8     3.1      3.1
Provision for income taxes                      0.9     1.1     1.0      1.2
Net income                                      1.8 %   1.7 %   2.1 %    1.9 %

Net Sales

Net sales for the second quarter of 2013 increased 7% or $4.9 million to $74.1 million compared to $69.2 million for the same period in 2012. Net sales for the second quarter of 2013 for our Lifeboat segment were $61.2 million compared to $53.5 million in the second quarter of 2012, representing an increase of $7.7 million or 14%. Net sales for the second quarter of 2013 for our TechXtend segment were $12.9 million compared to $15.6 million in the second quarter of 2012, representing a decrease of $2.7 million or 18%.

The 14% increase in net sales for the Lifeboat Distribution segment was mainly a result of the strengthening of our account penetration, our continued focus on the expanding virtual infrastructure-centric business and the addition of several key product lines. The 18% decrease in net sales in the TechXtend segment was primarily due to a decrease in extended payment terms sales transactions as compared to exceptionally strong levels of extended payment terms sales in the second quarter ended June 30, 2012.

For the six months ended June 30, 2013, net sales increased 3% or $4.0 million to $140.1 million compared to $136.1 million for the same period in 2012. Net sales for the six months ended June 30, 2013 for our Lifeboat segment increased 12% or $12.2 million to $115.1 million compared to $102.9 million for the same period in 2012. Net sales for the six months ended June 30, 2013 for our TechXtend segment decreased 25% or $8.2 million to $25.0 million compared to $33.2 million for the same period in 2012.

The 12% increase in net sales from our Lifeboat segment in the first six months of 2013 compared to the same period in 2012 was mainly a result of our continued focus on the expanding virtual infrastructure-centric business, the addition of several key product lines, and the strengthening of our account penetration. The 25% decrease in net sales in the TechXtend segment was primarily due to a decrease in extended payment terms sales transactions as compared to exceptionally strong levels of extended payment terms sales in both the first and second quarter of 2012.


Gross Profit

Gross Profit for the second quarter ended June 30, 2013 was $6.0 million compared to $5.6 million for the second quarter of 2012. Total gross profit for our Lifeboat segment was $4.5 million compared to $3.8 million in the second quarter of 2012, representing a 17% increase. The increase in gross profit for the Lifeboat segment was due to higher sales volume in the current year. Total gross profit for our TechXtend segment was $1.5 million compared to $1.7 million in the second quarter of 2012, representing a 17% decrease. The decrease in gross profit in the TechXtend segment was the result of the decreased sales volume, including a decrease in extended payment terms sales transactions. Vendor rebates and discounts for the quarter ended June 30, 2013 amounted to $0.3 million compared to $0.4 million for the second quarter of 2012 and represent 0.4% and 0.6% of net sales, respectively. Vendor rebates are dependent on reaching certain targets set by our vendors. Vendors have been periodically substantially increasing their target revenues for rebate eligibility. Therefore, despite our increasing revenue, vendor rebates have declined.

For the six months ended June 30, 2013 gross profit increased 1% or $0.1 million to $11.3 million compared to $11.2 million for the same period in 2012. Lifeboat's gross profit for the six months ended June 30, 2013 increased 9% to $8.3 million as compared to $7.6 million for the first six months of 2012. The increase in gross profit for the Lifeboat segment was primarily due to higher sales volume. TechXtend gross profit for the six months ended June 30, 2013 decreased by 15% to $3.0 million as compared to $3.5 million for the first six months of 2012. This decrease for the TechXtend segment was primarily due to the decreased sales volume, including a decrease in extended payment terms sales transactions.

Gross profit margin, (gross profit as a percentage of net sales) for the second quarter of 2013 and 2012 was 8.1% for each period. Gross profit margin for the six months ended June 30, 2013 was 8.0% compared to 8.2% in the same period in 2012. Gross profit margin for our Lifeboat segment for the second quarter of 2013 was 7.4% compared to 7.2% for the second quarter of 2012. Gross profit margin for our TechXtend segment for the second quarter of 2013 was 11.3% compared to 11.2% for the second quarter of 2012. The slight increase in gross profit margin for the TechXtend segment was primarily caused by fewer larger extended payment term sales transactions during the quarter which typically carry lower margins.

Vendor rebates and discounts for the six month period ended June 30, 2013 amounted to $0.7 million compared to $0.7 million for the six month period ended June 30, 2012 and represent 0.5% of net sales for each period. Vendor rebates are dependent on reaching certain targets set by our vendors. Vendors have been periodically substantially increasing their target revenues for rebate eligibility. The Company monitors gross profits and gross profit margins carefully. Price competition in our market continued to intensify in 2013, with competitors lowering their prices significantly and the Company responded immediately. We anticipate that margins, as well as discounts and rebates, for the remainder of the year will continue to be affected by this current trend.

Selling, General and Administrative Expenses

Total selling, general, and administrative ("SG&A") expenses for the second quarter of 2013 were $3.8 million compared to $3.6 million for the second quarter of 2012, representing an increase of $0.2 million or 7%. This increase is primarily the result of an increase in commissions and bonus for our Lifeboat segment (which are based on gross profit) and an increase in salary expense (from increased headcount in sales, finance and operations to support business growth) in 2013 compared to 2012, offset in party by a decrease in commissions and bonus for our TechXtend segment (which are based on gross profit). As a percentage of net sales, SG&A expenses for the second quarter of 2013 and 2012 remained consistent at 5.1% for each period.

For the six months ended June 30, 2013, SG&A expenses were $7.7 million compared to $7.5 million in the same period in 2012, representing an increase of $0.2 million or 3%. This increase is primarily the result of an increase in sales commissions for our Lifeboat segment (which are based on gross profit) and an increase in salary expense (from increased headcount in sales, finance and operations to support business growth) in 2013 compare to 2012, offset in part by a decrease in commissions and bonus for our TechXtend segment (which are based on gross profit). As a percentage of net sales, SG&A expenses were 5.5% for the six months ended June 30, 2013 and 2012.


Direct selling costs (a component of SG&A) for the second quarter of 2013 were $2.0 million compared to $1.9 million for the second quarter of 2012. Total direct selling costs for our Lifeboat segment for the second quarter of 2013 were $1.2 million compared to $1.1 million for the same period in 2012. Total direct selling costs for our TechXtend segment for the second quarter of 2013 were $0.8 million compared to $0.8 million for the same period in 2012.

The Company expects that its SG&A expenses, as a percentage of net sales, may vary by quarter depending on changes in sales volume, and levels of continuing investments in employee headcount and marketing. We continue to monitor our SG&A expenses closely.

Income Taxes

For the three months ended June 30, 2013, the Company recorded a provision for income taxes of $773,000 or 33.4% of income, compared to $865,000 or 39.9% of income for the same period in 2012. The current quarter was impacted primarily by a change in state apportionment rules which lowered our state rate compared with the prior period.

For the six months ended June 30, 2013, the Company recorded a provision for income taxes of $1,284,000 or 33.4% of income, compared to $1,541,000 or 39.8% of income for the same period in 2012. The tax rate for current year was impacted primarily by a change in state apportionment rules which lowered our state rate compared with the prior period.

Liquidity and Capital Resources

During the first six months of 2013 our cash and cash equivalents increased by $2.2 million to $12.0 million at June 30, 2013, from $9.8 million at December 31, 2012. During the first six months of 2013, net cash provided by operating activities amounted to $0.7 million, net cash provided by investing activities amounted to $4.3 million and net cash used in financing activities amounted to $2.7 million.

Net cash provided by operating activities in the first six months of 2013 was $0.7 million and primarily resulted from $3.4 million in net income excluding non-cash charges, and a $10.6 million decrease in accounts receivable partially offset by a $12.9 million decrease in accounts payable and accrued expenses, and a $0.3 million increase in prepaid expenses & other current assets and other assets. The decreases in accounts receivable and account payable and accrued expenses were mainly due to lower sales volume, including sales on extended payment terms, in the second quarter of 2013 compared to the fourth quarter of 2012.

Net cash provided by investing activities in the first six months of 2013 amounted to $4.3 million. This primarily resulted from net redemptions of $4.4 million in marketable securities, partially offset by capital expenditures of $0.1 million. These marketable securities were highly rated, highly liquid and were classified as available-for-sale securities in accordance with ASC Topic
320 "Investments in Debt and Equity Securities", and as a result, unrealized gains and losses were reported as part of accumulated other comprehensive income.

Net cash used in financing activities in the first six months of 2013 amounted to $2.7 million. This consisted primarily of dividends paid of $1.5 million and Common Stock repurchases of $1.2 million.

The Company's current and anticipated use of its cash and cash equivalents is, and will continue to be, to fund working capital, operational expenditures, the Common Stock repurchase program and dividends if declared by the board of directors.

We believe that the funds held in cash and cash equivalents and our unused borrowings on our credit facility will be sufficient to fund our working capital and cash requirements for at least the next 12 months.


Contractual Obligations as of June 30, 2013 are summarized as follows:

Payment due by Period           Total      Less than 1 year      1-3 years     4-5 years    After 5 years
Long-term debt obligations            -                    -              -            -                -
Capital Lease obligations     $      14    $              14              -            -                -
Operating Lease
obligations (1)               $     615    $             253    $       362            -                -
Purchase Obligations                  -                    -              -            -                -
Other Long term
Obligations reflected on
the Company's Balance
Sheet under U.S. GAAP                 -                    -              -            -                -
Total Contractual
Obligations                   $     629    $             267    $       362            -                -



(1) Operating leases relate primarily to the leases of the space used for our operations in Shrewsbury, New Jersey, Mississauga, Canada and Almere, Netherlands. The commitments for operating leases include the minimum rent payments.

On January 4, 2013, the Company, entered into a $10,000,000 revolving credit facility (the "Credit Facility") with Citibank, N.A. ("Citibank") pursuant to a Business Loan Agreement (the "Loan Agreement"), Promissory Note (the "Note"), Commercial Security Agreements (the "Security Agreements") and Commercial Pledge Agreement (the "Pledge Agreement"). The Credit Facility will be used for business and working capital purposes, including financing of larger extended payment terms sales transactions. The Credit Facility matures on January 4, 2016, at which time the Company must pay this loan in one payment of any outstanding principal plus all accrued unpaid interest. In addition, the Company will pay regular monthly payments of all accrued unpaid interest. The interest rate for any borrowings under the Credit Facility is subject to change from time to time based on the changes in an independent index which is the LIBOR Rate (the "Index"). If the Index becomes unavailable during the term of this loan, Citibank may designate a substitute index after notifying the Company. Interest on the unpaid principal balance of the Note will be calculated using a rate of 1.500 percentage points over the Index. The Credit Facility is secured by the assets of the Company.

Among other affirmative covenants set forth in the Loan Agreement, the Company must maintain (i) a ratio of Total Liabilities to Tangible Net Worth (each as defined in the Loan Agreement) of not greater than 2.50 to 1.00, to be tested quarterly and (ii) a minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 2.00 to 1.00. Additionally, the Loan Agreement contains negative covenants related to, among other items, prohibitions against the creation of certain liens, engaging in any business activities substantially different than those currently engaged in by the Company, and paying dividends on Wayside's stock other than (i) dividends payable in its stock and (ii) cash dividends in amounts and frequency consistent with past practice, without first securing the written consent of Citibank. The Company is in compliance with all covenants at June 30, 2013.

At June 30, 2013, the Company had no borrowings outstanding under the Credit Facility. The Company had no interest expense related to the Credit Facility for the quarter ended June 30, 2013.

The Company is not committed by standby letters of credit and has no standby repurchase obligations. The Company is not engaged in any transactions with related parties.

Foreign Exchange

The Company's Canadian business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors. We are subject to fluctuations primarily in the Canadian Dollar-to-U.S. Dollar exchange rate.

Off-Balance Sheet Arrangements

As of June 30, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


Critical Accounting Policies and Estimates

Management's discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company recognizes revenue from the sale of software and hardware for microcomputers, servers and networks upon shipment or upon electronic delivery of the product. The Company expenses the advertising costs associated with producing its catalogs. The costs of these catalogs are expensed in the same month the catalogs are mailed.

On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, stock-based compensation, contingencies and litigation.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies, used in the preparation of its unaudited condensed consolidated financial statements affect its more significant judgments and estimates.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required.

The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance related to deferred tax assets. In the event the Company was to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

Under the fair value recognition provision stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense as it is amortized on a straight-line basis over the requisite service period, which is the vesting period. We make certain assumptions in order to value and expense our various share-based compensation awards. In connection with valuing stock options, we use the Black-Scholes model, which requires us to consider certain facts and to estimate certain subjective assumptions. The key facts and assumptions we consider are: (i) the expected volatility of our Common Stock; (ii) the expected term of the award; and (iii) the expected forfeiture rate. In connection with our restricted stock program we make assumptions principally related to the forfeiture rate. We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value stock based awards granted in future periods. Such changes may lead to a significant change in the expense we recognize in connection with share-based payments.

Certain Factors Affecting Results of Operations and Stock Price

This report includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements in this report regarding future events or conditions, including but not limited to statements regarding industry prospects and the Company's expected financial position, results of operations, business and financing plans, are forward-looking statements. These statements can be identified by forward-looking words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," and "continue" or similar words.


Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Substantial risks and uncertainties unknown at this time could cause actual results to differ materially from those indicated by such forward-looking statements, including, but not limited to, the continued acceptance of the Company's distribution channel by vendors and customers, the timely availability and acceptance of new products, product mix, market conditions, competitive pricing pressures, contribution of key vendor relationships and support programs, including vendor rebates and discounts, as well as factors that affect the software industry in general and other factors generally. We strongly urge current and prospective investors to carefully consider the cautionary statements and risk factors contained in this report and our annual report on Form 10-K for the year ended December 31, 2012.

The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The statements concerning future sales, future gross profit margin and future selling and administrative expenses are forward looking statements involving certain risks and uncertainties such as availability of products, product mix, pricing pressures, market conditions and other factors, which could result in a fluctuation of sales below recent experience.

Stock Volatility. The technology sector of the United States stock markets has experienced substantial volatility in recent periods. Numerous conditions which impact the technology sector or the stock market in general or the Company in particular, whether or not such events relate to or reflect upon the Company's operating performance, could adversely affect the market price of the Company's Common Stock. Furthermore, fluctuations in the Company's operating results, announcements regarding litigation, the loss of a significant vendor, increased competition, reduced vendor incentives and trade credit, higher postage and operating expenses, and other developments, could have a significant impact on the market price of the Company's Common Stock.

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