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WSTG > SEC Filings for WSTG > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for WAYSIDE TECHNOLOGY GROUP, INC.

Form 10-K for WAYSIDE TECHNOLOGY GROUP, INC.


21-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. This discussion and analysis contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain risks and uncertainties, including those set forth under the heading "Risk Factors" and elsewhere in this report.

Overview

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

We offer an extensive line of products from leading publishers of software and tools for virtualization/cloud computing, security, networking, storage & infrastructure management, application lifecycle management and other technically sophisticated domains as well as computer hardware. We market these products through direct sales, the Internet, our catalogs, direct mail programs, advertisements in trade magazines and e-mail promotions.

Forward-looking Statements

This report includes "forward-looking statements" within the meaning of
Section 21E of 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, business and financing plans, are forward-looking statements.

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. We strongly urge current and prospective investors to carefully consider the cautionary statements and risks contained in this report, particularly the risks described under "Item 1A. Risk Factors" above. Such risks include, but are not limited to, the continued acceptance of the Company's distribution channel by vendors and customers, the timely availability and acceptance of new products, contribution of key vendor relationships and support programs, as well as factors that affect the software industry generally.

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.

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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 or customer, 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.

Financial Overview

Net sales totaled $300.4 million in 2013 as compared to $297.1 million in 2012, representing a 1% increase. Gross profit increased by $0.5 million or 2% in 2013 as compared to 2012. Selling, general and administrative ("SG&A") expenses increased by $0.1 million in 2013 as compared to 2012. Income from operations amounted to $8.9 million in 2013 as compared to $8.5 million in 2012, representing an increase of $0.4 million or 4% as compared to 2012. This increase resulted from the increase in total sales and total gross margin (Lifeboat Distribution segment increased offset by a decrease in TechXtend segment) offset by a slight increase in SG&A expenses. Our income before provision for income taxes increased by $0.3 million to $9.4 million in 2013 compared to $9.1 million in 2012. We reported a net income of $6.4 million for 2013 compared to $5.5 million in 2012.

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 condition of the software industry in general, shifts in demand for software products, pricing, level of extended payment terms sales transactions, 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 years indicated the percentage of net sales represented by selected items reflected in the Company's Consolidated Statements of Earnings. The year-to-year comparison of financial results is not necessarily indicative of future results:

                                                 Years ended December 31,
                                                 2013        2012     2011
Net sales                                         100.0 %     100.0 % 100.0 %
Cost of sales                                      91.9        92.0    90.7
Gross profit                                        8.1         8.0     9.3
Selling, general and administrative expenses        5.2         5.1     5.9
Income from operations                              2.9         2.9     3.4
Other income                                        0.2         0.2     0.2
Income before income taxes                          3.1         3.1     3.6
Income tax provision                                1.0         1.2     1.4
Net income                                          2.1 %       1.9 %   2.2 %

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net Sales

Net sales for 2013 increased 1%, or $3.3 million to $300.4 million in 2013 compared to $297.1 million in 2012. Total sales for our Lifeboat Distribution segment in 2013 were $237.7 million compared to $217.3 million in 2012, representing a 9% increase. Total sales for the TechXtend segment in 2013 amounted to $62.8 million, compared to $79.7 million in 2012, representing a 21% decrease.

The increase in net sales for our 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; primarily on sales generated out of the USA sales office. The 21% decrease in 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 in the first three quarters of 2013 as compared to exceptionally strong levels of large single sales transactions and extended payment terms sales transactions in 2012.

Gross Profit

Gross Profit for 2013 was $24.4 million compared to $23.9 million in 2012, a 2% increase. Total gross profit for our Lifeboat Distribution segment in 2013 was $17.4 million compared to $15.8 million in 2012, representing a 10% increase. The increase in gross profit for the Lifeboat Distribution segment was due to increased sales volume as gross profit margin remained relatively stable. Total gross profit for our TechXtend segment in 2013 was $6.9 million compared to $8.1 million in 2012, representing a 14% decrease. The decrease in gross profit for the TechXtend segment was the result primarily of decreased software sales volume, including a decrease in large single sale transactions and extended payment terms sales transactions, offset in part by a higher gross margin in 2013 as compared to 2012 primarily on software sales. Vendor rebates and discounts for 2013 improved and amounted to $1.7 million compared to $1.5 million for 2012, representing a 13% increase. The increase in vendor rebates and discounts as a percentage of net sales was experienced mainly at the TechXtend segment.

Gross profit margin (gross profit as a percentage of net sales) for 2013 was 8.1% compared to 8.0% in 2012. Gross profit margin for our Lifeboat Distribution segment was consistent at 7.3% in 2013 and 2012. Gross profit margin for our TechXtend segment in 2013 was 11.0% compared to 10.1% in 2012. This increase is due to increased pricing and vendor rebates in 2013 as compared to 2012.

The increase in gross profit dollars and the increase in gross profit margins were primarily caused by the sales growth within our Lifeboat Distribution segment and increase in pricing and an increase in rebates earned at our TechXtend segment.

The Company monitors gross profits and gross profit margins carefully. Price competition in our market persisted in 2013. Although our total gross profit margins improved slightly in 2013, we anticipate that margins, as well as discounts and rebates, will continue to be under pressure in the near future.

Selling, General and Administrative Expenses

Total selling, general and administrative ("SG&A") expenses for 2013 were $15.5 million compared to $15.4 million in 2012, representing an increase of $0.1 million or 0.8%. This increase is primarily the result of an increase in sales commissions and bonus for our Lifeboat segment due to our growth in this segment, increase in operations bonus, the addition of employees in TechXtend government sales, finance and operations to support business growth offset by a decrease in TechXtend sales commissions and bonus due to decrease in this segment and a decrease in legal and consulting fees. SG&A expenses as a percentage of net sales were 5.2% in each of 2013 and 2012.

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Direct selling costs (a component of SG&A) for 2013 were $8.0 million compared to $8.1 million in 2012. Total direct selling costs for our Lifeboat Distribution segment for 2013 were $4.7 million compared to $4.5 million in 2012, mainly due to increased commission and bonus expense compared to the prior year on higher segment gross profit and income. Total direct selling costs for our TechXtend segment for 2013 were $3.3 million compared to $3.6 million in 2012. The decrease in the TechXtend segment was due to lower commission and bonus expense resulting from lower segment gross profit and segment income which are the bases for calculating commission and bonus expense offset by an increase in government sales salaries.

The Company expects that its SG&A expenses, as a percentage of net sales, may vary depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives. We plan to continue to expand our investment in information technology and marketing, while monitoring our sales and general and administrative expenses closely.

Income Taxes

For the year ended December 31, 2013, the Company recorded a provision for income taxes of $3.0 million which consists of a provision of $2.9 million for U.S. federal income taxes, as well as a $0.1 million provision for foreign taxes, and a deferred tax expense of $0.1 million.

The current year effective tax rate was 32.1% compared to 39.6% in 2012. The decrease in the effective tax rate was primarily the result of a change in the state of New Jersey's apportionment rules which lowered our state rate compared with the prior year.

As of December 31, 2013, the Company had a U.S. deferred tax asset of approximately $0.4 million.

For the year ended December 31, 2012, the Company recorded a provision for income taxes of $3.6 million which consists of a provision of $2.8 million for U.S. federal income taxes, as well as a $0.5 million provision for state and local taxes, a $0.2 million provision for foreign taxes, and a deferred tax expense of $0.1 million.

As of December 31, 2012, the Company had a U.S. deferred tax asset of approximately $0.5 million.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net Sales

Net sales for 2012 increased 19%, or $46.9 million to $297.1 million in 2012 compared to $250.2 million in 2011. Total sales for our Lifeboat Distribution segment in 2012 were $217.3 million compared to $192.7 million in 2011, representing a 13% increase. Total sales for the TechXtend segment in 2012 amounted to $79.7 million, compared to $57.4 million in 2011, representing a 39% increase.

The increase in net sales for our 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 39% increase in sales in the TechXtend segment was primarily due to an increase in larger extended payment term transactions, solution focus selling and higher average order sizes in 2012.

Gross Profit

Gross Profit for 2012 was $23.9 million compared to $23.2 million in 2011, a 3% increase. Total gross profit for our Lifeboat Distribution segment was $15.8 million compared to $16.8 million in 2011, representing a 6% decrease. The decrease in gross profit for the Lifeboat Distribution segment was due to lower vendor rebate attainment and competitive pricing pressure within this segment. Total gross profit for our TechXtend segment was $8.1 million compared to $6.4 million in 2011, representing a 25% increase.

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The increase in gross profit for the TechXtend segment was the result of increased sales volume offset in part by a lower gross margin in 2012 as compared to 2011 and lower vendor rebates. Vendor rebates and discounts for 2012 amounted to $1.8 million compared to $2.9 million for 2011. 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.

Gross profit margin (gross profit as a percentage of net sales) for 2012 was 8.0% compared to 9.3% in 2011. Gross profit margin for our Lifeboat Distribution segment in 2012 was 7.3% compared to 8.7% in 2011. Gross profit margin for our TechXtend segment in 2012 was 10.1% compared to 11.2% in 2011.

The increase in gross profit dollars and the decrease in gross profit margins were primarily caused by the sales growth within our Lifeboat Distribution and TechXtend segments, offset in part, by continued pressure on discounts and rebates earned and competitive pricing pressure in both segments, and, in part, by our having won several large bids, including transactions on extended payment terms, based on aggressive pricing.

The Company monitors gross profits and gross profit margins carefully. Price competition in our market intensified further in 2012, with competitors lowering their prices significantly and the Company responding immediately. Although our sales volume increased substantially as a result, gross margins, as well as the rebates and discounts that are material elements of the Company's overall profitability, were negatively impacted during the year ended December 31, 2012.

Selling, General and Administrative Expenses

Total selling, general and administrative ("SG&A") expenses for 2012 were $15.4 million compared to $14.6 million in 2011, representing an increase of $0.8 million. This increase is primarily the result of an increase in sales commissions for our TechXtend segment due to our growth in this segment, the addition of employees in sales, finance and operations to support business growth and higher professional fees. As a result of the increase in net sales, SG&A expenses declined as a percentage of net sales to 5.2% in 2012, compared to 5.9% in 2011.

Direct selling costs (a component of SG&A) for 2012 were $8.1 million compared to $7.8 million in 2011. Total direct selling costs for our Lifeboat Distribution segment for 2012 were $4.5 million compared to $4.7 million in 2011, mainly due to lower commission and bonus expense compared to the prior year. Total direct selling costs for our TechXtend segment for 2012 were $3.6 million compared to $3.1 million in 2011. The increase in the TechXtend segment was due to higher commission, salaries and bonus expense resulting from growth in the segment.

The Company expects that its SG&A expenses, as a percentage of net sales, may vary depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives.

Income Taxes

For the year ended December 31, 2012, the Company recorded a provision for income taxes of $3.6 million which consists of a provision of $2.8 million for U.S. federal income taxes, as well as a $0.5 million provision for state and local taxes, a $0.2 million provision for foreign taxes, and a deferred tax expense of $0.1 million. As of December 31, 2012, the Company had a U.S. deferred tax asset of approximately $0.5 million.

For the year ended December 31, 2011, the Company recorded a provision for income taxes of $3.4 million which consists of a provision of $2.4 million for U.S. federal income taxes, as well as a $0.5 million provision for state and local taxes, a $0.3 million provision for foreign taxes, and a deferred tax expense of $0.3 million. As of December 31, 2011, the Company had a U.S. deferred tax asset of approximately $0.6 million.

Page 18


Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02 "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income". This update requires companies to present the effects on the line items of net income of significant reclassifications out of accumulated other comprehensive income if the amount being reclassified is required under U.S. generally accepted accounting principles ("US GAAP") to be reclassified in its entirety to net income in the same reporting period. ASU 2013-02 is effective prospectively for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of the amended guidance did not have a significant impact on our consolidated financial statements.

Liquidity and Capital Resources

Our cash and cash equivalents increased by $9.8 million to $19.6 million at December 31, 2013 from $9.8 million at December 31, 2012. Net cash provided by operating activities amounted to $10.3 million, net cash provided by investing activities amounted to $4.2 million, and net cash used in financing activities amounted to $4.8 million.

Net cash provided by operating activities in 2013 was $10.3 million. In 2013, cash was mainly provided by $8.1 million from net income net of non-cash charges, a $2.0 million decrease in accounts receivable, a $0.4 million decrease in inventory, and a $0.8 million increase in accounts payable, offset in part by an increase in prepaid and other current assets of $0.8 million.

In 2013, cash provided by investing activities was $4.2 million. This resulted primarily from $4.4 million net redemptions of available-for-sale marketable securities. These securities are highly rated and highly liquid. These securities are 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 are reported as part of accumulated other comprehensive income. This was partially offset by $0.2 million for the purchase of equipment and leasehold improvements.

Net cash used in financing activities in 2013 of $4.8 million consisted of $3.0 million of dividend payments on our Common Stock and $2.1 million for the purchases of treasury shares of our Common Stock offset by the tax benefit from share based compensation of $0.2 million and the exercise of stock options of $0.2 million.

In 2008, the Board of Directors authorized the purchase of 500,000 shares of our Common Stock. In 2002, the Board of Directors authorized the purchase of 1,490,000 shares of our Common Stock. In October 1999, the Company was authorized by the Board of Directors to buy back 521,013 shares of our Common Stock in both open market and private transactions, as conditions warrant. A total of 2,296,066 shares of the Company's stock had been bought back as of December 31, 2013 leaving a balance of 214,947 shares of Common Stock that the Company is authorized to buy back in the future.

On October 23, 2012, the Board of Directors approved, and on October 29, 2012, the Company entered into a written purchase plan intended to comply with the requirements of Rule 10b5-1 under the Exchange Act, as amended (the "Plan"). Purchases involving shares of the Company's Common Stock under the Plan commenced October 29, 2012, and the Plan is intended to be in effect until October 29, 2014. Pursuant to the Plan, the Company's broker shall effect purchases of up to an aggregate of 350,000 shares of Common Stock.

We intend to hold the repurchased shares in treasury for general corporate purposes, including issuances under various stock plans. As of December 31, 2013, we held 631,207 shares of our Common Stock in treasury at an average cost of $11.12 per share. As of December 31, 2012, we held 543,627 shares of our Common Stock in treasury at an average cost of $9.88 per share.

Page 19


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 stock repurchase program and dividends, if any, declared by the Board of Directors.

On January 4, 2013, the Company entered into a $10,000,000 revolving credit facility (the "Credit Facility") with Citibank, N.A. pursuant to a Business Loan Agreement, Promissory Note, Commercial Security Agreements and Commercial Pledge Agreement. The Credit Facility, which will be used for business and working capital purposes, including financing of larger extended payment terms sales transactions which may become a more significant portion of the Company's net sales. The Credit Facility matures on January 4, 2016. (see Note 7 Credit Facility in the Notes to our Consolidated Financial Statements). As of December 31, 2013 there were no borrowings outstanding on the Credit Facility.

The Company believes that the cash flows from operations and funds held in cash and cash equivalents as well as available borrowing on the Credit Facility will be sufficient to fund the Company's working capital and cash requirements for at least the next 12 months.

The Company had cash and cash equivalents of $19.6 million as of December 31, 2013, of which $3.7 million was held outside the United States. Our current intention is to reinvest the majority of our earnings from foreign operations. Our current plans do not anticipate a need to repatriate cash to fund our domestic operations. In the event cash from foreign operations is needed to fund operations in the U.S., we would be subject to additional income taxes in the U.S. reduced by any foreign taxes paid on these earnings.

Contractual Obligations as of December 31, 2013

(Amounts in thousands)

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                       -                    -              -            -
Operating Leases
obligations (1)           $     620    $             280    $       340            -                -
Purchase Obligations              -                    -              -            -                -
Other Long term
Obligations reflected
on the Company's
Balance Sheet under
GAAP                              -                    -              -            -                -
Total Contractual
Obligations               $     620    $             280    $       340            -                -



(1) Operating leases relate primarily to the lease 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.

As of December 31, 2013, the Company is not committed by lines of credit or standby letters of credit, and has no standby repurchase obligations or other commercial commitments (see Note 7 Credit Facility in the Notes to our Consolidated Financial Statements).

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.

Page 20


Off-Balance Sheet Arrangements

As of December 31, 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 US GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and . . .

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