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WSTG > SEC Filings for WSTG > Form 10-Q on 30-Oct-2013All Recent SEC Filings

Show all filings for WAYSIDE TECHNOLOGY GROUP, INC.

Form 10-Q for WAYSIDE TECHNOLOGY GROUP, INC.


30-Oct-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:

                                                  Nine months      Three months
                                                     ended             ended
                                                 September 30,     September 30,
                                                 2013     2012     2013     2012
Net sales                                          100 %  100.0 %    100 %  100.0 %
Cost of sales                                     92.1     92.0     92.5     92.5
Gross profit                                       7.9      8.0      7.5      7.5
Selling, general and administrative expenses       5.3      5.3      4.9      4.8
Income from operations                             2.6      2.7      2.6      2.7
Interest income, net                                .1       .2       .1       .3
Realized foreign currency exchange gain(loss)        -        -        -        -
Income before income taxes                         2.7      2.9      2.7      3.0
Provision for income taxes                         0.9      1.2      0.8      1.2
Net income                                         1.8 %    1.7 %    1.9 %    1.8 %

Net Sales

Net sales for the third quarter of 2013 decreased 7% or $5.1 million to $70.5 million compared to $75.5 million for the same period in 2012. Net sales for the third quarter of 2013 for our Lifeboat segment were $56.9 million compared to $56.0 million in the third quarter of 2012, representing an increase of $0.9 million or 2%. Net sales for the third quarter of 2013 for our TechXtend segment were $13.6 million compared to $19.5 million in the third quarter of 2012, representing a decrease of $5.9 million or 30%.

The 2% increase in net sales for the Lifeboat Distribution segment was mainly a result of the strengthening of our account penetration. The 30% decrease in net sales in the TechXtend segment was primarily due to a decrease in large single sales transactions and a decrease in extended payment terms sales transactions as compared to exceptionally strong levels of large single sales transactions and extended payment terms sales transactions in the third quarter ended September 30, 2012.

For the nine months ended September 30, 2013, net sales decreased 0.5% or $1.1 million to $210.5 million compared to $211.6 million for the same period in 2012. Net sales for the nine months ended September 30, 2013 for our Lifeboat segment increased 8% or $13.1 million to $171.9 million compared to $158.8 million for the same period in 2012. Net sales for the nine months ended September 30, 2013 for our TechXtend segment decreased 27% or $14.2 million to $38.6 million compared to $52.8 million for the same period in 2012.

The 8% increase in net sales from our Lifeboat segment in the first nine 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 27% decrease in net sales in the TechXtend segment was primarily due to a decrease in extended payment terms sales transactions and a decrease in large single sales transactions as compared to exceptionally strong levels of extended payment terms sales transactions and large single sales transactions in the first nine months of 2012.


Gross Profit

Gross Profit for the third quarter ended September 30, 2013 was $5.3 million compared to $5.7 million for the third quarter of 2012. Total gross profit for our Lifeboat segment was $3.8 million compared to $3.7 million in the third quarter of 2012, representing a 4% 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 $1.4 million compared to $2.0 million in the third quarter of 2012, representing a 29% decrease. The decrease in gross profit in the TechXtend segment was the result of the decreased sales volume, including a decrease in large single sales transactions and a decrease in extended payment terms sales transactions. Vendor rebates and discounts for the quarter ended September 30, 2013 amounted to $0.3 million compared to $0.4 million for the third quarter of 2012 and represent 0.4% and 0.5% of net sales, respectively. Vendor rebates are dependent on reaching certain targets set by our vendors.

For the nine months ended September 30, 2013 gross profit decreased 2% or $0.4 million to $16.5 million compared to $16.9 million for the same period in 2012. Lifeboat's gross profit for the nine months ended September 30, 2013 increased 7% to $12.1 million as compared to $11.3 million for the first nine months of 2012. The increase in gross profit for the Lifeboat segment was primarily due to higher sales volume. TechXtend gross profit for the nine months ended September 30, 2013 decreased by 20% to $4.4 million as compared to $5.5 million for the first nine 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 and a decrease in large single sales transactions.

Gross profit margin; (gross profit as a percentage of net sales) for the third quarter of 2013 and 2012 was 7.5%. Gross profit margin for the nine months ended September 30, 2013 was 7.9% compared to 8.0% in the same period in 2012. Gross profit margin for our Lifeboat segment for the third quarter of 2013 was 6.8% compared to 6.6% for the third quarter of 2012. Gross profit margin for our TechXtend segment for the third quarter of 2013 was 10.4% compared to 10.2% for the third quarter of 2012. The slight increase in gross profit margin for the Lifeboat segment was primarily caused by a slight increase in rebates as a percentage of revenues. 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 nine month period ended September 30, 2013 amounted to $1.0 million compared to $1.2 million for the nine month period ended September 30, 2012 and represent 0.5% and 0.6% of net sales for each period, 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. 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 third quarter of 2013 were $3.5 million compared to $3.6 million for the third quarter of 2012, representing a decrease of $0.1 million or 4%. This decrease is primarily the result of a decrease in commissions and bonus for our TechXtend segment (which are based on gross profit and segment income). As a percentage of net sales, SG&A expenses for the third quarter of 2013 were 4.9% compared to 4.8% for the third quarter of 2012.

For the nine months ended September 30, 2013, SG&A expenses were $11.2 million compared to $11.1 million in the same period in 2012, representing an increase of $0.1 million or 1%. 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 and fringe expenses (from increased headcount in sales, finance and operations to support business growth) in 2013 compared 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 5.3% for the nine months ended September 30, 2013 and 2012.

Direct selling costs (a component of SG&A) for the third quarter of 2013 were $1.8 million compared to $1.9 million for the third quarter of 2012. Total direct selling costs for our Lifeboat segment for the third quarter of 2013 were $1.1 million compared to $1.1 million for the same period in 2012. Total direct selling costs for our TechXtend segment for the third quarter of 2013 were $0.7 million compared to $0.9 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 September 30, 2013, the Company recorded a provision for income taxes of $584,000 or 30.5% of income, compared to $887,000 or 39.6% 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 nine months ended September 30, 2013, the Company recorded a provision for income taxes of $1,868,000 or 32.4% of income, compared to $2,428,000 or 39.7% 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 nine months of 2013 our cash and cash equivalents increased by $4.9 million to $14.7 million at September 30, 2013, from $9.8 million at December 31, 2012. During the first nine months of 2013, net cash provided by operating activities amounted to $4.3 million, net cash provided by investing activities amounted to $4.3 million and net cash used in financing activities amounted to $3.7 million.

Net cash provided by operating activities in the first nine months of 2013 was $4.3 million and primarily resulted from $5.1 million in net income excluding non-cash charges, a $15.0 million decrease in accounts receivable, and a decrease in inventory of $0.5 million partially offset by a $15.9 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 third quarter of 2013 compared to the fourth quarter of 2012.

Net cash provided by investing activities in the first nine 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 nine months of 2013 amounted to $3.7 million. This consisted primarily of dividends paid of $2.2 million and Common Stock repurchases of $1.8 million, partially offset by proceeds received from stock option exercises of $0.2 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 September 30, 2013 are summarized as follows:

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