Climb Global Solutions, Inc. - Quarter Report: 2012 September (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2012

 

OR

 

 

For the transition period from                 to                

 

Commission File No. 000-26408

 

Wayside Technology Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702

(Address of principal executive offices)

 

(732) 389-8950

Registrant’s Telephone Number

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Check One:

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

There were 4,761,794 outstanding shares of common stock, par value $.01 per share, (“Common Stock”) as of October 30, 2012, not including 522,706 shares classified as treasury stock

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

		September 30, 2012			December 31, 2011
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	10,745		$	9,202
Marketable securities		4,585			5,375
Accounts receivable, net of allowances of $1,666 and $1,513, respectively		49,051			47,066
Inventory, net		1,509			1,240
Prepaid expenses and other current assets		1,115			1,997
Deferred income taxes		352			329
Total current assets		67,357			65,209
Equipment and leasehold improvements, net		333			458
Accounts receivable-long-term		10,183			8,889
Other assets		72			54
Deferred income taxes		201			251
Total assets		$	78,146		$	74,861
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	46,782		$	45,796
Current portion - capital lease obligation		76			76
Total current liabilities		46,858			45,872
Long- term portion- capital lease obligation		—			55
Total liabilities		46,858			45,927
Commitments and contingencies
Stockholders’ equity
Common Stock, $.01 par value; 10,000,000 shares authorized, 5,284,500 shares issued; 4,761,794 and 4,679,878 shares outstanding, respectively		53			53
Additional paid-in capital		27,431			26,725
Treasury stock, at cost, 522,706 and 604,622 shares, respectively		(4,994		)	(4,991		)
Retained earnings		8,265			6,818
Accumulated other comprehensive income		533			329
Total stockholders’ equity		31,288			28,934
Total liabilities and stockholders’ equity		$	78,146		$	74,861

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except per share data)

 

		Nine months ended							Three months ended
		September 30,							September 30,
		2012				2011			2012			2011
Net sales		$	211,610			$	175,951		$	75,534		$	63,741
Cost of sales		194,755				159,768			69,836			57,984
Gross profit		16,855				16,183			5,698			5,757
Selling, general and administrative expenses		11,148				10,635			3,611			3,465
Income from operations		5,707				5,548			2,087			2,292
Interest income, net		394				264			140			92
Realized foreign exchange gain		13				1			12			—
Income before income tax provision		6,114				5,813			2,239			2,384
Provision for income taxes		2,428				2,248			887			890
Net income		$	3,686			$	3,565		$	1,352		$	1,494
Net income per common share - Basic		$	0.83			$	0.81		$	0.30		$	0.34
Net income per common share — Diluted		$	0.80			$	0.77		$	0.29		$	0.33
Weighted average common shares outstanding-Basic		4,467				4,411			4,502			4,406
Weighted average common shares outstanding-Diluted		4,635				4,618			4,643			4,575
Dividends paid per common share		$	0.48			$	0.48		$	0.16		$	0.16

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

		Nine months ended						Three months ended
		September 30,						September 30,
		2012			2011			2012			2011
Net income		$	3,686		$	3,565		$	1,352		$	1,494
Other comprehensive income, net of tax:
Foreign currency translation adjustment		197			(141		)	204			(229		)
Unrealized gain (loss) on available- for -sale marketable securities		7			(12		)	2			(16		)
Other comprehensive income (loss)		204			(153		)	206			(245		)
Comprehensive income		$	3,890		$	3,412		$	1,558		$	1,249

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share amounts)

 

		Common Stock					Additional Paid-In			Treasury					Retained			Accumulated Other Comprehensive
		Shares		Amount			Capital			Shares		Amount			Earnings			Income			Total
Balance at January 1, 2012		5,284,500		$	53		$	26,725		604,622		$	(4,991	)	$	6,818		$	329		$	28,934
Net income															3,686						3,686
Translation adjustment																		197			197
Unrealized gain on available- for-sale securities																		7			7
Dividends paid															(2,239		)				(2,239		)
Stock options exercised							124			(63,500	)	306									430
Share-based compensation expense							743														743
Restricted stock grants (net of forfeitures)							(332		)	(68,475	)	332									—
Tax benefit from share-based compensation							171														171
Treasury shares repurchased										50,059		(641		)							(641		)
Balance at September 30, 2012		5,284,500		$	53		27,431			522,706		(4,994		)	8,265			533			31,288

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Nine months ended
		September 30,
		2012			2011
Net income		$	3,686		$	3,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		233			238
Deferred income taxes		26			340
Provision for doubtful accounts receivable		145			105
Share-based compensation expense		743			824
Changes in operating assets and liabilities:
Accounts receivable		(3,267		)	2,786
Inventory		(268		)	(266		)
Prepaid expenses and other current assets		885			(267		)
Accounts payable and accrued expenses		923			(5,779		)
Net change in other assets and liabilities		(21		)	(2		)
Net cash provided by operating activities		3,085			1,544
Cash flows from investing activities:
Purchases of available-for-sale securities		(5,575		)	(4,161		)
Redemptions of available-for-sale securities		6,373			4,280
Capital expenditures		(105		)	(199		)
Net cash provided by (used in) investing activities		693			(80		)
Cash flows from financing activities:
Dividend paid		(2,239		)	(2,247		)
Treasury stock repurchased		(641		)	(1,437		)
Tax benefit from share-based compensation		171			205
Repayment of capital lease obligations		(55		)	(62		)
Proceeds from stock option exercises		430			71
Net cash used in financing activities		(2,334		)	(3,470		)
Effect of foreign exchange rate on cash		99			(92		)
Net (decrease) increase in cash and cash equivalents		1,543			(2,098		)
Cash and cash equivalents at beginning of period		9,202			10,955
Cash and cash equivalents at end of period		$	10,745		$	8,857
Supplementary disclosure of cash flow information:
Income taxes paid		$	2,598		$	1,931

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

September 30, 2012

 

1.                                      The accompanying unaudited condensed consolidated financial statements of Wayside Technology Group, Inc. and its subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“ U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements.

 

The preparation of these condensed consolidated 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. 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, and contingencies and litigation. The Company bases its estimates on its 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. In the opinion of the Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation, have been included in the accompanying financial statements. The Company’s actual results may differ from these estimates under different assumptions or conditions. The unaudited condensed consolidated statements of earnings for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2011.

 

2.                                      Assets and liabilities of the Company’s foreign subsidiaries have been translated at current exchange rates, and related sales and expenses have been translated at average rates of exchange in effect during the period. The sales from our Canadian operations in the first nine months of 2012 were $16.8 million as compared to $13.9 million for the first nine months of 2011. The sales from our Canadian operations for the third quarter of 2012 were $5.4 million as compared to $5.1 million for the third quarter of 2011.

 

3.                                      Cumulative translation adjustments and unrealized gains (losses) on available-for-sale securities have been classified within accumulated other comprehensive income, which is a separate component of stockholders’ equity in accordance with FASB ASC Topic 220, “Comprehensive Income.”

 

4.                                      The Company records revenues from sales transactions when title to products sold passes to the customer. Usual sales terms are FOB shipping point, at which time title and risk of loss have passed to the customer and delivery has occurred.  Revenue is recognized in accordance with ASC Topic 985-605 “ Software Revenue Recognition” and ASC Topic 605-10-S99, and ASC Topic 605 -45, “Reporting Revenue Gross as a Principal versus Net as an Agent”. The majority of the Company’s revenues relates to physical products and is recognized on a gross basis with the selling price to the customer recorded as net sales and the acquisition cost of the product to the Company recorded as cost of sales. At the time of sale, the Company also records an estimate for sales returns based on historical experience. Certain software maintenance products, third party services and extended warranties sold by the Company (for which the Company is not the primary obligor) are recognized on a net basis. Accordingly, such revenues are recognized in net sales either at the time of sale or over the contract period, based on the nature of the contract, at the net amount retained by the Company, with no cost of goods sold.

 

Accounts receivable long-term result from product sales with extended payment terms that are discounted to their present values at the prevailing market rates. In subsequent periods, the accounts receivable are increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years. The amounts due under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable.

 

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5.                                      Vendor rebates and price protection are recorded when earned as a reduction to cost of sales or merchandise inventory, as applicable. Cooperative reimbursements from vendors, which are earned and available, are recorded in the period in which the related advertising expenditure is incurred. Cooperative reimbursements are recorded as reduction in cost of sales in accordance with ASC Topic 605-50 “Accounting by a Customer (including reseller) for Certain Consideration Received from a Vendor.”

 

6.                                      The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value at September 30, 2012 and December 31, 2011 because of the relative short maturity of these instruments.

 

Investments in available-for-sale securities at September 30, 2012 were (in thousands):

 

		Cost			Market value			Unrealized (loss)
Certificates of deposit		$	4,597		$	4,585		$	(12	)
Total Marketable securities		$	4,597		$	4,585		$	(12	)

 

The cost and market value of the Company’s investments at September 30, 2012 determined by contractual maturity were (in thousands):

 

					Estimated
		Cost			Fair Value
Due in one year or less		$	4,597		$	4,585

 

Investments in available-for-sale securities at December 31, 2011 were (in thousands):

 

		Cost			Market value			Unrealized (loss)
Certificates of deposit		$	5,394		$	5,375		$	(19	)
Total Marketable securities		$	5,394		$	5,375		$	(19	)

 

The cost and market value of the Company’s investments at December 31, 2011 determined by contractual maturity were (in thousands):

 

					Estimated
		Cost			Fair Value
Due in one year or less		$	5,394		$	5,375

 

7.                                      The Company accounts for the fair value measurement in accordance with FASB ASC Topic 820 “Fair Value Measurement and Disclosure”, which establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. The Company uses the following methods for determining fair value in accordance with ASC Topic 820. For assets and liabilities that are measured using quoted prices in active markets for the identical asset or liability, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs (Level 1). Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data (Level 2). For all remaining assets and liabilities for which there are no significant observable inputs, fair value is derived using an assessment of various discount rates, default risk, credit quality and the overall capital market liquidity (Level 3).

 

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The following table summarizes the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets:

 

					Fair Value Measurements at September 30, 2012 Using
(In thousands) Description		Balance at September 30, 2012			Quoted Prices in Active Markets for Identical Items (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Certificates of deposit		$	4,585		$	—		$	4,585		$	—

 

					Fair Value Measurements at December 31, 2011 Using
(In thousands) Description		Balance at December 31, 2011			Quoted Prices in Active Markets for Identical Items (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Certificates of deposit		$	5,375		$	—		$	5,375		$	—

 

Certificates of deposit- The fair value of certificates of deposit is estimated using third-party quotations for similar certificates of deposit. These deposits are categorized in Level 2 of the fair value hierarchy.

 

8.                                      Balance Sheet Detail — (in thousands):

 

Equipment and leasehold improvements consist of the following as of September 30, 2012 and December 31, 2011:

 

		September  30, 2012			December 31, 2011
Equipment		$	2,805		$	2,696
Leasehold improvements		562			560
		3,367			3,256
Less accumulated depreciation and amortization		(3,034		)	(2,798		)
		$	333		$	458

 

Accounts payable and accrued expenses consist of the following as of September 30, 2012 and December 31, 2011:

 

		September 30, 2012			December 31,  2011
Trade accounts payable		$	43,935		$	42,417
Other accrued expenses		2,847			3,379
		$	46,782		$	45,796

 

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Accumulated other comprehensive income consists of the following as of September 30, 2012 and December 31, 2011:

 

		September 30, 2012			December 31, 2011
Foreign currency translation adjustments		$	545		$	348
Unrealized (loss) on marketable securities		(12		)	(19		)
		$	533		$	329

 

9.                                      Basic Earnings Per Share (“EPS”) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed considering the potentially dilutive effect of outstanding stock options and nonvested shares of restricted stock. A reconciliation of the numerators and denominators of the basic and diluted per share computations follows (in thousands, except share and per share data):

 

		Nine months  ended						Three months  ended
		September 30,						September 30,
		2012			2011			2012			2011
Numerator:
Net income		$	3,686		$	3,565		$	1,352		$	1,494
Denominator:
Weighted average shares (Basic)		4,467			4,411			4,502			4,406
Dilutive effect of outstanding options and non-vested shares of restricted stock		168			207			141			169
Weighted average shares including assumed conversions (Diluted)		4,635			4,618			4,643			4,575
Basic net income per share		$	0.83		$	0.81		$	0.30		$	0.34
Diluted net income per share		$	0.80		$	0.77		$	0.29		$	0.33

 

10.                               The Company had one major vendor that accounted for 14.5% and 13.6% of total purchases during the nine and three months, respectively, that ended September 30, 2012. The Company had one major vendor that accounted for 11.9% and 12.0% of total purchases during the nine and three months, respectively, that ended September 30, 2011. The Company had three major customers that accounted for 13.1%, 13.6% and 11.6%, respectively, of its total net sales during the nine months ended September 30, 2012, and 12.5%, 14.4% and 10.4% of total net sales for the three months then ended. These same customers accounted for 12.1%, 8.7% and 8.3%, respectively, of total net accounts receivable as of September 30, 2012. The Company had three major customers that accounted for 14.5%, 11.2% and 10.7%, respectively, of its total net sales during the nine months ended September 30, 2011, and 14.4%, 12.0% and 10.1% of total net sales for the three months then ended.

 

11.                               The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2009. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

 

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The provision consists of the following (in thousands):

 

		Nine months ended						Three months ended
		September 30,						September 30,
		2012			2011			2012			2011
Current:
Federal		$	1,872		$	1,466		$	664		$	543
State		362			275			134			7
Canada		168			167			45			64
		2,402			1,908			843			614
Deferred tax (benefit) expense		26			340			44			276
		$	2,428		$	2,248		$	887		$	890
Effective tax rate		39.7		%	38.7		%	39.6		%	37.3		%

 

12.                               The 2012 Stock-Based Compensation Plan (the “2012 Plan”) authorizes the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses and other equity-based awards. The total number of shares of Common Stock initially available for award under the 2012 Plan was 600,000.  As of September 30, 2012, the number of shares of Common stock available for future award grants to employees and directors under the 2012 Plan is 600,000.

 

The 2006 Stock-Based Compensation Plan (the “2006 Plan”) authorizes the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses, and other equity-based awards. The total number of shares of Common Stock initially available for award under the 2006 Plan was 800,000. As of September 30, 2012, the number of shares of Common Stock available for future award grants to employees and directors under the 2006 Plan is 53,775.

 

During 2006, the Company granted a total of 315,000 shares of Restricted Stock to officers, directors and employees. Included in this grant were 200,000 Restricted Shares granted to the Company’s CEO in accordance with his employment agreement. These 200,000 Restricted Shares vest over 40 equal quarterly installments. The remaining grants of Restricted Stock vest over 20 equal quarterly installments.

 

During 2007, the Company granted a total of 30,000 shares of Restricted Stock to officers, directors and employees. These shares of Restricted Stock vest over 20 equal quarterly installments. In 2007, a total of 12,500 shares of Restricted Stock were forfeited as a result of employees and officers terminating employment with the Company.

 

During 2008, the Company granted a total of 57,500 shares of Restricted Stock to officers and directors. These shares of Restricted Stock vest over 20 equal quarterly installments.  In 2008, a total of 3,500 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

During 2009, the Company granted a total of 140,000 shares of Restricted Stock to officers and employees. These shares of Restricted Stock vest over 20 equal quarterly installments.

 

During 2010, the Company granted a total of 150,500 shares of Restricted Stock to officers and employees. These shares of Restricted Stock vest over 20 equal quarterly installments. In 2010, a total of 5,875 shares of Restricted Stock were forfeited as a result of employees and officers terminating employment with the Company.

 

During 2011, the Company granted a total of 15,000 shares of Restricted Stock to employees. These shares of Restricted Stock vest over 20 equal quarterly installments. In 2011, a total of 8,375 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

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During 2012, the Company granted a total of 72,000 shares of Restricted Stock to officers, directors and employees.  These shares Restricted Shares vest over 20 equal quarterly installments.  In 2012, a total of 3,525 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

Changes during 2012 in options outstanding under the Company’s combined plans (i.e., the 2012 Plan, the 2006 Plan, the 1995 Non-Employee Director Plan and the 1995 Stock Option Plan) were as follows:

 

		Number of  Options		Weighted Average Exercise Price			Weighted Average Remaining  Contractual Life		Aggregate Intrinsic Value ($M)(1)
Outstanding at January 1, 2012		374,140		$	8.33
Granted in 2012		—		—
Canceled in 2012		—		—
Exercised in 2012		63,500		$	6.78
Outstanding at September 30, 2012		310,640		$	8.65		1.8		$	1.2
Exercisable at September 30, 2012		310,640		$	8.65		1.8		$	1.2

 

(1) The intrinsic value of an option is calculated as the difference between the market value on the last trading day of the quarter (September 28, 2012) and the exercise price of the outstanding options. The market value as of September 28, 2012 was $12.45 per share represented by the closing price as reported by The Nasdaq Global Market on that day.

 

A summary of nonvested shares of Restricted Stock awards outstanding under the Company’s 2006 Plan as of September 30, 2012, and changes during the nine months then ended is as follows:

 

		Shares		Weighted Average  Grant Date Fair Value
Nonvested shares at January 1, 2012		262,275		$	10.44
Granted in 2012		72,000		12.70
Vested in 2012		(73,950	)	10.05
Forfeited in 2012		(3,525	)	11.79
Nonvested shares at September 30, 2012		256,800		$	11.16

 

As of September 30, 2012, there is approximately $2.9 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.5 years.

 

For the nine months ended September 30, 2012 and 2011, the Company recognized share-based compensation cost of approximately $743,000 and $824,000, respectively, which is included in the Company’s selling, general and administrative expense.

 

13.                                            ASC Topic 280, “Segment Reporting,” requires that public companies report profits and losses and certain other information on their “reportable operating segments” in their annual and interim financial statements. The internal organization used by the public company’s Chief Operating Decision Maker (CODM) to assess performance and allocate resources determines the basis for reportable operating segments. The Company’s CODM is the Chief Executive Officer.

 

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

 

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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.

 

As permitted by ASC Topic 280, the Company has utilized the aggregation criteria in combining its operations in Canada with the domestic segments as the Canadian operations provide the same products and services to similar clients and are considered together when the Company’s CODM decides how to allocate resources.

 

Segment income is based on segment revenue less the applicable segment’s cost of revenues as well as segment direct costs (including such items as payroll costs and payroll related costs, such as profit sharing, incentive awards and insurance) and excluding general and administrative expenses not attributed to an individual segment business unit. The Company only identifies accounts receivable and inventory by segment as shown below as “Selected Assets” it does not allocate its other assets, including capital expenditures by segment.

 

The following segment reporting information of the Company is provided (in thousands):

 

		Nine months ended						Three months ended
		September 30,						September 30,
Revenue:		2012			2011			2012			2011
Lifeboat Distribution		$	158,838		$	137,621		$	55,989		$	49,118
TechXtend		52,772			38,330			19,545			14,623
		211,610			175,951			75,534			63,741
Gross Profit:
Lifeboat Distribution		$	11,336		$	11,817		$	3,707		$	4,105
TechXtend		5,519			$	4,366		1,991			1,652
		16,855			16,183			5,698			5,757
Direct Costs:
Lifeboat Distribution		$	3,310		$	3,403		$	1,071		$	1,135
TechXtend		2,547			2,192			866			732
		5,857			5,595			1,937			1,867
Segment Income:
Lifeboat Distribution		$	8,026		$	8,414		$	2,636		$	2,970
TechXtend		2,972			2,174			1,125			920
Segment Income		10,998			10,588			3,761			3,890
Corporate general and administrative expenses		$	5,291		$	5,040		$	1,674		$	1,598
Interest income, net		394			264			140			92
Foreign currency translation gain		13			1			12			—
Income before taxes		$	6,114		$	5,813		$	2,239		$	2,384
Selected Assets By Segment:
Lifeboat Distribution		$	27,367
TechXtend		33,375
Corporate assets		17,404
Segment Selected Assets		$	78,146

 

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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, 2011, 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 2011 Annual Report on Form 10-K.

 

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 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.

 

More generally, 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: overall pricing trends in the markets we serve; the availability and level of vendor rebates and discounts; the loss of any major vendor; condition of the software industry in general; shifts in demand for software products;  our customers’ ability to meet their payment obligations in a timely manner; industry shipments of new software products or upgrades; the timing of new merchandise and catalog offerings; fluctuations in response rates; fluctuations in postage, paper, shipping and printing costs and 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. If revenues 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 ended				Three months  ended
		September 30,				September 30,
		2012		2011		2012		2011
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales		92.0		90.8		92.5		91.0
Gross profit		8.0		9.2		7.5		9.0
Selling, general and administrative expenses		5.3		6.0		4.8		5.4
Income from operations		2.7		3.2		2.7		3.6
Interest income, net		.2		.1		.3		0.1
Realized foreign currency exchange gain		—		—		—		—
Income before income taxes		2.9		3.3		3.0		3.7
Provision for income taxes		1.2		1.3		1.2		1.4
Net income		1.7	%	2.0	%	1.8	%	2.3	%

 

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