ePlus Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2021; comparisons are with the corresponding 2020 periods. ePlus provides IT products and services, financing, and lifecycle management through technology and financing segments. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $494.8M | $427.6M | $1,369.5M | $1,215.7M |
| Gross profit / margin | $117.1M / 23.7% | $98.2M / 23.0% | $345.6M / 25.2% | $295.7M / 24.3% |
| Operating income / margin | $36.1M / 7.3% | $29.3M / 6.8% | $112.8M / 8.2% | $82.7M / 6.8% |
| Net earnings | $26.4M | $21.6M | $81.4M | $58.8M |
| Diluted EPS | $0.98 | $0.81 | $3.03 | $2.20 |
| Adjusted EBITDA (non-GAAP) | $41.8M | $34.4M | $130.3M | $98.7M |
Quarterly sales rose 15.7%; nine-month sales rose 12.6%. Product and service sales both increased, with services up 20.0% in the quarter and 19.9% year to date. Management attributed growth to demand across several customer markets and, for the nine-month period, partly to the SMP acquisition. Gross-margin expansion reflected product mix, more net-reported software and maintenance sales, higher service margins, and improved financing-segment gross profit. Operating expenses increased, including from compensation, travel, software, and property-related costs.
The technology segment generated $1,313.6M of nine-month sales and $82.6M of operating income; the financing segment generated $55.9M of sales and $30.2M of operating income. Cisco products represented 40% of technology-segment sales for the nine months, underscoring vendor concentration.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow: Used $121.5M in the nine months, versus $5.2M provided a year earlier. Working-capital investment was significant, particularly higher receivables and inventory; the technology segment used $112.7M in operating cash.
- Investing and financing cash flow: Investing activities used $18.4M, including $21.4M of property, equipment, and operating-lease-equipment purchases. Financing activities provided $116.0M, including $59.0M of net floor-plan borrowings.
- Cash and working capital: Cash was $105.6M at December 31, 2021, down from $129.6M at March 31, 2021. Trade receivables were $520.6M and inventory was $147.7M, compared with $391.6M and $70.0M, respectively, at fiscal year-end. The technology-segment cash conversion cycle increased to 47 days from 24 days a year earlier.
- Debt and facilities: The company reported $157.7M outstanding under its floor-plan facility, $44.0M under its revolving credit facility, $14.8M of other recourse borrowings, and $43.6M of non-recourse borrowings. In October 2021, the credit agreement was amended to provide a discretionary floor-plan facility of up to $375M and a revolving-credit sublimit of up to $100M. Borrowings bear interest at LIBOR plus 1.75%; the facility is secured and includes a parent guaranty.
- Liquidity: Management said cash, operating funds, credit availability, and the ability to monetize its investment portfolio should meet requirements for at least the next year. The company relies on its credit facility for technology-segment working capital.
Outlook, risks, and notable items
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management cautions that interim results are not necessarily indicative of full-year or future performance.
- Management reported ongoing IT product shortages and expects extended lead times to persist for at least the next few quarters. Supply constraints could affect delivery timing, product costs, and the ability to fulfill customer demand.
- Inflation had not materially affected reported results, and the company generally had been able to pass supplier price increases to customers. Wage increases, fixed-price service engagements, and higher interest rates could create future pressure.
- Other risks include COVID-19 and its effects on customers and operations, customer and vendor concentration, customer credit and collections, dependence on vendor incentives and product availability, variable-rate borrowing and LIBOR transition, and potential changes in IT spending.
- The company recognized $15.6M of net gains on financial-asset sales during the nine months, on $753.9M of proceeds; these transactions can shift revenue and earnings between periods. It completed a two-for-one stock split in December 2021, with share and per-share figures retrospectively adjusted.
- Legal matters arise in the ordinary course; the filing describes outcomes as uncertain and provides no clear quantified exposure. Management stated disclosure controls were effective at December 31, 2021, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivables collections, inventory levels, and the cash conversion cycle improve, given the sharp increase in working-capital use.
- Whether product shortages and longer lead times affect customer delivery, sales conversion, or margins.
- Available borrowing capacity and terms under the discretionary credit facility, including LIBOR exposure and the facility’s renewal and termination provisions.
- The sustainability of margin and earnings growth, including the contribution from financing-asset sales and non-GAAP adjustments.
- Exposure to Cisco and other major vendors, and changes in customer-market demand and concentration.