What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-06 · 91 added, 49 removed, 202 unchanged (41% of the section changed)

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COVID-19 has resulted and will continue to result in significant economic disruption, which could also impact our business.

While we did not incur significant disruptions to our operations during the three months ended March 31, 2022 as a result of the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our business, liquidity or results of operations at this time.

While we did not incur significant disruptions to our operations during the three months ended June 30, 2022 as a result of the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our business, liquidity or results of operations at this time.

This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

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Historically we have sought to return value to investors through the payment of quarterly dividends and share repurchases.

Total dividends paid and shares repurchased were $0.7 million and $0.2 million, respectively, during the three months ended March 31, 2022.

Total dividends paid and shares repurchased were $0.8 million and less than $0.1 million, respectively, during the three months ended March 31, 2021.

Total dividends paid and shares repurchased were $0.7 million and $0.2 million, respectively, during the three months ended June 30, 2022.

Total dividends paid and shares repurchased were $0.7 million and $0.1 million, respectively, during the three months ended June 30, 2021.

The payment of future dividends and share repurchases is at the discretion of our Board of Directors and dependent on results of operations, projected capital requirements and other factors the Board of Directors may find relevant.

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Financial Overview

Net sales increased 14%, or $8.5 million, to $71.3 million for the three months ended March 31, 2022 compared to $62.8 million for the same period in the prior year.

Gross profit increased 10%, or $1.2 million, to $12.0 million for the three months ended March 31, 2022 compared to $10.8 million for the same period in the prior year.

Selling, general and administrative (“SG&A”) expenses decreased 2%, or $0.2 million, to $8.2 million for the three months ended March 31, 2022 compared to $8.4 million for the same period in the prior year.

Amortization and depreciation expense decreased 11%, or less than $0.1 million, to $0.4 million for the three months ended March 31, 2022 compared to $0.4 million for the same period in the prior year.

Net income for the three months ended March 31, 2022 was $2.7 million compared to $1.5 million for the same period in the prior year.

Diluted income per share for the three months ended March 31, 2022 was $0.61 compared to $0.35 for the same period in the prior year.

Net sales decreased 10%, or $7.5 million, to $67.9 million for the three months ended June 30, 2022 compared to $75.4 million for the same period in the prior year.

Gross profit increased 14%, or $1.5 million, to $12.5 million for the three months ended June 30, 2022 compared to $11.0 million for the same period in the prior year.

Selling, general and administrative (“SG&A”) expenses decreased 3%, or $0.2 million, to $7.9 million for the three months ended June 30, 2022 compared to $8.1 million for the same period in the prior year.

Amortization and depreciation expense increased 12%, or less than $0.1 million, to $0.4 million for the three months ended June 30, 2022 compared to $0.4 million for the same period in the prior year.

Net income for the three months ended June 30, 2022 was $2.8 million compared to $1.8 million for the same period in the prior year.

Diluted income per share for the three months ended June 30, 2022 was $0.63 compared to $0.41 for the same period in the prior year.

Critical Accounting Policies and Estimates

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The Company does not enter into foreign exchange contracts for trading purposes and the risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the Company minimizes by limiting its counterparties to major financial institutions.

There were no contracts outstanding as of March 31, 2022.

There were no contracts outstanding as of June 30, 2022.

Interest, Net

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This comparison of financial results is not necessarily indicative of future results:

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These key indicators include financial information that is prepared in accordance with US GAAP and presented in our Consolidated Financial Statements as well as non-US GAAP performance measurement tools.

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We consider gross profit growth and effective margin to be key metrics in evaluating our business.

During the three months ended March 31, 2022, gross profit increased 10%, or $1.2 million, to $12.0 million compared to $10.8 million for the same period in the prior year while effective margin increased to 35.5% compared to 24.4% for the same period in the prior year.

During the three months ended June 30, 2022, gross profit increased 14%, or $1.5 million, to $12.5 million compared to $11.0 million for the same period in the prior year while effective margin increased to 36.4% compared to 32.0% for the same period in the prior year.

During the six months ended June 30, 2022, gross profit increased 12%, or $2.7 million, to $24.5 million compared to $21.8 million for the same period in the prior year while effective margin increased to 36.0% compared to 28.2% for the same period in the prior year.

Reconciliations of Non-GAAP Financial Measures

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In addition, other companies, including companies in our industry, might calculate adjusted gross billings of product and services or similarly titled measures differently, which may reduce their usefulness as comparative measures.

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In addition, other companies, including companies in our industry, might calculate adjusted EBITDA, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Net Sales and Adjusted Gross Billings

Net sales for the three months ended March 31, 2022 increased 14%, or $8.5 million, to $71.3 million compared to $62.8 million for the same period in the prior year.

Adjusted gross billings for the three months ended March 31, 2022 increased 13%, or $27.8 million, to $238.7 million compared to $210.9 million for the same period in the prior year.

Adjusted gross billings and net sales increased at a similar rate due to consistency in the product mix between hardware sales, which are recorded on a gross basis, and security, maintenance and cloud products, which are recorded net of related cost of sales.

Distribution segment net sales for the three months ended March 31, 2022 increased 20%, or $11.0 million, to $65.8 million compared to $54.8 million for the same period in the prior year.

Adjusted gross billings for the Distribution segment for the three months ended March 31, 2022 increased 15%, or $28.5 million, to $221.8 million compared to $193.3 million

for the same period in the prior year.

The increase in net sales and adjusted gross billings in our Distribution segment was due to organic growth from our existing vendor partnerships.

Solutions segment net sales for the three months ended March 31, 2022 decreased 31%, or $2.5 million, to $5.5 million compared to $8.0 million for the same period in the prior year.

Adjusted gross billings for the Solutions segment for the three months ended March 31, 2022 decreased 4%, or $0.6 million, to $16.9 million compared to $17.5 million for the same period in the prior year.

The decrease in net sales and adjusted gross billings in our Solutions segment was primarily due to the impact of a large one-time sale during the three months ended March 31, 2021.

During the three months ended March 31, 2022, the Company had two major customers that accounted for 24% and 14%, respectively, of our total net sales.

The Company had two major customers that accounted for 20% and 13%, respectively, of its total net sales during the three months ended March 31, 2021.

The Company had two major vendors that accounted for 22% and 10%, respectively, of total purchases during the three months ended March 31, 2022 and 24% and 19%, respectively, of total purchases during the three months ended March 31, 2021.

Gross profit for the three months ended March 31, 2022 increased 10%, or $1.2 million, to $12.0 million compared to $10.8 million for the same period in the prior year.

Distribution segment gross profit for the three months ended March 31, 2022 increased 22%, or $1.7 million, to $9.6 million compared to $7.9 million for the same period in the prior year.

Net sales for the three months ended June 30, 2022 decreased 10%, or $7.5 million, to $67.9 million compared to $75.4 million for the same period in the prior year.

Adjusted gross billings for the three months ended June 30, 2022 increased 3%, or $6.7 million, to $241.8 million compared to $235.1 million for the same period in the prior year.

Adjusted gross billings increased while net sales decreased due to differences in the product mix between the two periods and an unfavorable impact of foreign exchange rates.

During the three months ended June 30, 2022, adjusted gross billings included a greater percentage of security, maintenance and cloud products, which are recorded net of related cost of sales, while during the three months ended June 30, 2021, adjusted gross billings included a greater percentage of hardware and software products, which are recorded on a gross basis.

Distribution segment net sales for the three months ended June 30, 2022 decreased 10%, or $6.9 million, to $63.0 million compared to $69.9 million for the same period in the prior year.

Adjusted gross billings for the Distribution segment for the three months ended June 30, 2022 increased 3%, or $6.7 million, to $226.1 million compared to $219.4 million for the same period in the prior year.

Adjusted gross billings increased while net sales decreased due to the aforementioned differences in the product mix between the two periods in our Distribution segment.

Solutions segment net sales for the three months ended June 30, 2022 decreased 11%, or $0.6 million, to $4.9 million compared to $5.5 million for the same period in the prior year.

Adjusted gross billings for the Solutions segment for the three months ended June 30, 2022 remained consistent at $15.7 million with the same period in the prior year.

Adjusted gross billings remained consistent with the same period in the prior year while net sales decreased due to the aforementioned differences in the product mix between the two periods in our Distribution segment.

During the three months ended June 30, 2022, the Company had two major customers that accounted for 21% and 20%, respectively, of our total net sales.

The Company had two major customers that accounted for 17% and 17%, respectively, of our total net sales during the three months ended June 30, 2021.

The Company had two major vendors that accounted for 16% and 9%, respectively, of total purchases during the three months ended June 30, 2022 and 18% and 12%, respectively, of total purchases during the three months ended June 30, 2021.

Gross profit for the three months ended June 30, 2022 increased 14%, or $1.5 million, to $12.5 million compared to $11.0 million for the same period in the prior year.

Distribution segment gross profit for the three months ended June 30, 2022 increased 16%, or $1.5 million, to $10.3 million compared to $8.8 million for the same period in the prior year.

The increase in Distribution segment gross profit was due to organic growth from our existing vendor partnerships and lower early pay discounts and fewer other rebates and discounts offered to our customers as a percentage of adjusted gross billings.

Solutions segment gross profit for the three months ended June 30, 2022 remained consistent at $2.2 million with the same period in the prior year.

Customer rebates and discounts for the three months ended June 30, 2022 were $1.8 million compared to $2.5 million for the same period in the prior year.

Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.

Vendor rebates and discounts for the three months ended June 30, 2022 were $1.6 million compared to $1.1 million for the same period in the prior year.

Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors.

The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended June 30, 2022 decreased 3%, or $0.2 million, to $7.9 million compared to $8.1 million for the same period in the prior year.

SG&A expenses were 3.2% of adjusted gross billings for the three months ended June 30, 2022, compared to 3.5% for the same period in the prior year.

The decrease in SG&A expenses were primarily due to a decrease in personnel costs compared to the same period in the prior year.

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

Amortization and Depreciation Expense

Amortization and depreciation expense for the three months ended June 30, 2022 increased 12%, or less than $0.1 million, to $0.4 million compared to $0.4 million for the same period in the prior year.

For the three months ended June 30, 2022 and 2021, the Company recorded a provision for income taxes of $0.9 million and $1.0 million, respectively.

The effective tax rate for the three months ended June 30, 2022 and 2021 was 23.7% and 35.1%, respectively.

The provision for income taxes in the prior year was impacted by a deferred tax adjustment due to an increase in the corporate tax rate in a foreign jurisdiction the Company operates in that will impact the rate at which deferred taxes are reversed in future periods.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net Sales and Adjusted Gross Billings

Net sales for the six months ended June 30, 2022 increased 1%, or $1.0 million, to $139.2 million compared to $138.2 million for the same period in the prior year.

Adjusted gross billings for the six months ended June 30, 2022 increased 8%, or $34.5 million, to $480.5 million compared to $446.0 million for the same period in the prior year.

Adjusted gross billings increased while net sales decreased due to differences in the product mix between the two periods and an unfavorable impact of foreign exchange rates.

During the six months ended June 30, 2022, adjusted gross billings included a greater percentage of security, maintenance and cloud products, which are recorded net of related cost of sales, while during the six months ended June 30, 2021, adjusted gross billings included a greater percentage of hardware and software products, which are recorded on a gross basis.

Distribution segment net sales for the six months ended June 30, 2022 increased 3%, or $4.1 million, to $128.8 million compared to $124.7 million for the same period in the prior year.

Adjusted gross billings for the Distribution segment for the six months ended June 30, 2022 increased 9%, or $35.2 million, to $447.9 million compared to $412.7 million for the same period in the prior year.

Adjusted gross billings increased at a greater rate than the increase in net sales due to the aforementioned differences in the product mix between the two periods in our Distribution segment.

Solutions segment net sales for the six months ended June 30, 2022 decreased 23%, or $3.1 million, to $10.4 million compared to $13.5 million for the same period in the prior year.

Adjusted gross billings for the Solutions segment for the six months ended June 30, 2022 decreased 2%, or $0.6 million, to $32.6 million compared to $33.2 million for the same period in the prior year.

Adjusted gross billings decreased at a greater rate than the decrease in net sales due to the aforementioned differences in the product mix between the two periods in our Distribution segment.

During the six months ended June 30, 2022, the Company had two major customers that accounted for 23% and 18%, respectively, of our total net sales.

The Company had two major customers that accounted for 18% and 15%, respectively, of our total net sales during the six months ended June 30, 2021.

The Company had two major vendors that accounted for 19% and 9%, respectively, of total purchases during the six months ended June 30, 2022 and 21% and 9%, respectively, of total purchases during the six months ended June 30, 2021.

Gross profit for the six months ended June 30, 2022 increased 12%, or $2.7 million, to $24.5 million compared to $21.8 million for the same period in the prior year.

Distribution segment gross profit for the six months ended June 30, 2022 increased 19%, or $3.2 million, to $19.9 million compared to $16.7 million for the same period in the prior year.

The increase in Distribution segment gross profit was due to organic growth from our existing vendor partnerships and lower early pay discounts and other rebates and discounts offered to our customers as a percentage of adjusted gross billings.

Solutions segment gross profit for the three months ended March 31, 2022 decreased 20%, or $0.6 million, to $2.4 million compared to $3.0 million for the same period in the prior year.

The decrease in gross profit in our Solutions segment was primarily due to the impact of a large one-time sale during the three months ended March 31, 2021.

Customer rebates and discounts for the three months ended March 31, 2022 were $1.9 million compared to $2.1 million for the same period in the prior year.

Solutions segment gross profit for the six months ended June 30, 2022 decreased 10%, or $0.5 million, to $4.6 million compared to $5.1 million for the same period in the prior year.

Customer rebates and discounts for the six months ended June 30, 2022 were $3.7 million compared to $4.5 million for the same period in the prior year.

Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.

Vendor rebates and discounts for the three months ended March 31, 2022 were $1.0 million compared to $0.9 million for the same period in the prior year.

Vendor rebates and discounts for the six months ended June 30, 2022 were $2.6 million compared to $1.9 million for the same period in the prior year.

Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors.

The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully.

We anticipate that price competition in our market will continue in both of our business segments.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended March 31, 2022 decreased 2%, or $0.2 million, to $8.2 million compared to $8.4 million for the same period in the prior year.

SG&A expenses were 3.5% of adjusted gross billings for the three months ended March 31, 2022, compared to 4.0% for the same period in the prior year.

SG&A expenses for the six months ended June 30, 2022 decreased 3%, or $0.5 million, to $16.1 million compared to $16.6 million for the same period in the prior year.

SG&A expenses were 3.4% of adjusted gross billings for the six months ended June 30, 2022, compared to 3.7% for the same period in the prior year.

The decrease in SG&A expenses were primarily due to a decrease in personnel costs compared to the same period in the prior year.

We plan to continue to expand our investment in business development, sales and marketing to maximize our market penetration.

Amortization and Depreciation Expense

Amortization and depreciation expense for the three months ended March 31, 2022 decreased 11%, or less than $0.1 million, to $0.4 million compared to $0.4 million for the same period in the prior year.

For the three months ended March 31, 2022 and 2021, the Company recorded a provision for income taxes of $0.8 million and $0.4 million, respectively.

The effective tax rate for the three months ended March 31, 2022 and 2021 was 22.7% and 22.1%, respectively.

The change in the provision for income taxes was impacted by the result of changes in the mix of jurisdictions in which taxable income was earned.

Amortization and depreciation expense for the six months ended June 30, 2022 remained consistent at $0.8 million with the same period in the prior year.

For the six months ended June 30, 2022 and 2021, the Company recorded a provision for income taxes of $1.7 million and $1.4 million, respectively.

The effective tax rate for the six months ended June 30, 2022 and 2021 was 23.2% and 29.7%, respectively.

Liquidity and Capital Resources

Our cash and cash equivalents increased to $37.0 million as of March 31, 2022 compared to $29.3 million as of December 31, 2021.

The increase in cash and cash equivalents was primarily the result of $9.2 million of cash and cash equivalents provided by operating activities, $0.2 million of cash used in investing activities and $1.0 million of cash used for dividends.

Net cash and cash equivalents provided by operating activities for the three months ended March 31, 2022 was $9.2 million, comprised primarily of net income adjusted for non-cash items of $3.8 million and changes in operating assets and liabilities of $5.4 million.

Net cash and cash equivalents used in investing activities during the three months ended March 31, 2022 consisted of $0.2 million of purchases of fixed assets.

Net cash and cash equivalents used in financing activities during the three months ended March 31, 2022 was $1.0 million, comprised of dividend payments on our Common Stock of $0.8 million and purchases of treasury stock of $0.2 million.

Our cash and cash equivalents as of June 30, 2022 remained consistent at $29.3 million compared to as of December 31, 2021.

Net cash and cash equivalents provided by operating activities for the six months ended June 30, 2022 was $1.3 million, comprised primarily of net income adjusted for non-cash items of $7.3 million and changes in operating assets and liabilities of $6.0 million.

Net cash and cash equivalents used in investing activities during the six months ended June 30, 2022 consisted of $0.7 million of purchases of fixed assets.

Net cash and cash equivalents provided by financing activities during the six months ended June 30, 2022 was $0.2 million, comprised of borrowings under term loan, net of $2.1 million, dividend payments on our Common Stock of $1.5 million and purchases of treasury stock of $0.4 million.

On November 15, 2017, the Company entered into a $20,000,000 revolving credit facility (the “Credit Facility”) with Citibank, N.A.

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The Amended Credit Facility, which will continue to be used for working capital and general corporate purposes, matures on June 30, 2023, at which time the Company must pay all outstanding principal of all outstanding loans plus all accrued and unpaid interest, and any, fees, costs and expenses.

As of March 31, 2022, no borrowings were outstanding under the Credit Facility.

On April 13, 2021, Wayside Technology UK Holdings Limited (“Wayside UK”), a wholly-owned subsidiary of the Company, entered into an uncommitted short term credit facility of £8,000,000 (“Uncommitted Credit Facility”) with Citibank N.A., London Branch (“Citibank London”) pursuant to certain terms and conditions.

As of June 30, 2022, no borrowings were outstanding under the Credit Facility.

Citibank N.A., London Branch (“Citibank London”) pursuant to certain terms and conditions.

Obligations under the Uncommitted Credit Facility are guaranteed by the Company and will be used for working capital and general corporate purposes and have a maturity date of April 13, 2023, at which time Wayside UK must pay all outstanding principal of all outstanding loans plus all accrued and unpaid interest, and any interest, fees, costs and expenses, if any.

As of March 31, 2022, no borrowings were outstanding under the Uncommitted Credit Facility.

As of June 30, 2022, no borrowings were outstanding under the Uncommitted Credit Facility.

On April 8, 2022, the Company entered into a $2,148,000 term loan (the “Term Loan”) with First American Commercial Bancorp, Inc.

(“First American”) pursuant to a Master Loan and Security Agreement.

The proceeds from the Term Loan will be used to fund certain capital expenditures.

The borrowing under the Term Loan bears interest at a rate of 3.73% per annum and is being repaid over forty-eight monthly installments of principal and interest through April 2026.

As of June 30, 2022, the Company had $2.1 million outstanding under the Term Loan.

We anticipate that our working capital needs will increase as we invest in the growth of our business.

We believe that the funds held in cash and cash equivalents and our unused borrowings under our Uncommitted Credit Facility will be sufficient to fund our working capital and cash requirements for the next 12 months.

We believe that the funds held in cash and cash equivalents and our unused borrowings under our Credit Facility and Uncommitted Credit Facility will be sufficient to fund our working capital and cash requirements for the next 12 months.

Foreign Exchange

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Off-Balance Sheet Arrangements

As of March 31, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of June 30, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

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Item 2. Management’s Discussion and Analysis