ePlus Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019; comparisons are with the corresponding 2018 periods unless stated otherwise. ePlus provides IT products, services, managed solutions, and customer financing, principally in North America and the UK. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Net sales | $429.0 | $345.7 | $1,221.9 | $1,047.2 |
| Gross profit / margin | $103.7 / 24.2% | $82.9 / 24.0% | $299.4 / 24.5% | $249.1 / 23.8% |
| Operating income | $26.3 | $20.0 | $77.4 | $65.1 |
| Net earnings | $19.6 | $14.9 | $55.8 | $48.1 |
| Diluted EPS | $1.46 | $1.10 | $4.16 | $3.54 |
| Adjusted EBITDA (non-GAAP) | $31.9 | $25.6 | $95.8 | $80.8 |
- Quarterly sales rose 24.1%; nine-month sales rose 16.7%. Product and services sales increased in both periods. Management attributed growth to customer demand and the SLAIT and ABS Technology acquisitions.
- Quarterly net earnings increased 31.5%; nine-month net earnings increased 16.0%. Nine-month diluted EPS grew 17.5%. Adjusted EBITDA margin was 7.4% for the quarter, unchanged year over year, and 7.8% for nine months versus 7.7%.
- Quarterly consolidated gross margin improved 20 basis points; nine-month margin improved 70 basis points. For the technology segment, however, quarterly gross margin declined to 21.3% from 22.1%, including lower product and services margins. Nine-month technology margin was 22.2%, up from 22.0%.
- Cash and cash equivalents were $59.6 at December 31, 2019, down from $79.8 at March 31, 2019. Current assets were $690.0 and current liabilities $439.5. Stockholders’ equity was $472.5.
- Operating cash flow was a use of $74.7 for nine months, versus $2.2 provided in the prior-year period. Investing used $20.0; financing provided $74.6. Cash use reflected working-capital needs and growth in financing receivables, as well as acquisitions and repurchases. Management noted that adoption of lease accounting changed the classification of financing-receivable cash flows versus the comparative period.
- At December 31, non-recourse notes payable totaled $66.1 and recourse notes payable $2.2. Floor-plan payables were $144.5; the WFCDF accounts-receivable component had no outstanding balance. The WFCDF facility limit was $250, with a temporary increase to $325 elected in July 2019. The company reported compliance with facility covenants.
Material changes, outlook and risks
- Financing-segment results benefited materially from sales of financing assets: gains were $9.5 in the quarter and $17.0 for nine months, versus $2.4 and $5.0, respectively, in 2018. Proceeds from these sales were $246.0 and $414.6, respectively. These transactions may shift revenue and earnings between periods.
- Technology-segment sales increased 22.7% for the quarter and 15.8% for nine months; financing-segment sales increased 67.7% and 45.8%. Financing-segment operating income rose to $10.1 for the quarter and $24.6 for nine months. Technology operating income rose more slowly, to $16.2 and $52.8, respectively.
- ABS Technology was acquired in August 2019 for preliminary consideration of $15.3; purchase accounting remained incomplete at filing. SLAIT was acquired in January 2019 for approximately $50.0. Acquisition-related expenses, amortization and higher staffing costs contributed to increased expenses. Headcount was 1,602 at December 31, up 337 year over year.
- In September 2019, ePlus settled a contingent-consideration arrangement for $9.6, paid in October. The filing also reports $0.8 of claim distributions in the quarter and $1.0 for nine months in other income. Management said asserted legal matters were not expected to result in a material loss, while noting litigation outcomes remain uncertain.
- Management expects cash on hand, operating funds and available credit to cover working capital, capital expenditures and other requirements for at least the next 12 months. The filing gives no specific earnings or revenue guidance. Management expects continued investment in staff and sales locations, which may weigh on short-term results.
- Key risks include dependence on the WFCDF facility for technology-segment working capital, customer and vendor concentration, changes in IT spending and vendor incentives, credit losses, competition, hiring and retention, cybersecurity, financing availability, residual values on leased equipment, and transaction timing. Cisco represented 41% of technology-segment sales in both the quarter and nine-month period. Management reported no material change to previously disclosed risk factors.
- ePlus adopted lease accounting (Topic 842) in the quarter ended June 30, 2019, recording initial right-of-use assets of $12.7 and lease liabilities of $12.3. Adoption affects comparability of cash-flow classifications. The company was evaluating the expected-credit-loss standard, scheduled to take effect for it in the quarter ending June 30, 2020.
Important facts for investors to verify
- Whether operating cash flow and working-capital requirements improve, particularly as receivables and financing receivables grow.
- How much earnings growth depends on financing-asset sale gains and whether those gains are repeatable.
- Technology-segment margins, vendor incentives and Cisco concentration, alongside the durability of services growth.
- Acquisition integration, final ABS purchase accounting, and the contribution of acquired businesses to future earnings and cash flow.
- Liquidity and borrowing availability under the WFCDF facility, including facility terms, collateral limits and covenant compliance.
- Credit quality and residual-value assumptions for financing receivables and leased assets, and the effect of the forthcoming expected-credit-loss accounting standard.