ePlus Inc. — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2018; comparisons are with the same 2017 periods. Amounts are in U.S. dollars. ePlus provides IT products, software, consulting and managed services, and customer financing, primarily in North America and the UK. Its reportable segments are Technology and Financing.
Key financial results
| Metric | Three months ended Dec. 31, 2018 | Year-over-year | Nine months ended Dec. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Net sales | $345.7 million | Up 0.4% | $1,047.2 million | Down 3.8% |
| Gross profit / margin | $82.9 million / 24.0% | Up 8.1%; margin up 170 bps | $249.1 million / 23.8% | Up 3.0%; margin up 160 bps |
| Operating income / margin | $20.0 million / 5.8% | Up 22.2%; margin up 100 bps | $65.1 million / 6.2% | Down 1.0%; margin up 30 bps |
| Net earnings | $14.9 million | Down 4.6% | $48.1 million | Up 4.1% |
| Diluted GAAP EPS | $1.10 | Down from $1.11 | $3.54 | Up from $3.30 |
| Adjusted EBITDA (non-GAAP) | $25.6 million; 7.4% margin | Up 17.7%; margin up 110 bps | $80.8 million; 7.7% margin | Up 1.7%; margin up 40 bps |
| Operating cash flow | Not separately provided | — | $2.2 million | Down from $48.8 million |
At December 31, 2018, cash was $84.3 million, versus $118.2 million at March 31, 2018. Current assets were $613.2 million and current liabilities $361.2 million. Technology floor-plan payables were $124.6 million. Non-recourse notes payable totaled $66.6 million; there were no recourse notes payable at quarter-end. The filing reports no outstanding balance on the credit facility’s accounts-receivable component.
Material changes and management commentary
- Quarterly sales were broadly flat, while nine-month sales declined, reflecting weaker demand in several end markets and lower financing revenue. Technology-segment sales rose 0.8% in the quarter but fell 3.5% for the nine months; Financing-segment sales fell 10.0% and 12.5%, respectively.
- Gross margin improved in both periods. Management attributed the gains primarily to a greater share of third-party maintenance, software assurance, subscriptions and services, which are generally recorded net, as well as improved product margins in the quarter.
- Quarterly net earnings and EPS declined despite stronger operating performance, in part because the prior-year quarter included a $5.7 million tax benefit associated with the U.S. federal tax-rate change. The effective tax rate was 28.3% in the current quarter versus 4.2% a year earlier; nine-month rates were 27.3% and 29.7%.
- Operating cash flow fell sharply as working capital absorbed cash, particularly from a $56.8 million increase in accounts receivable and an $11.7 million increase in inventories. Management cited higher billings in the final 15 days of December. The cash conversion cycle increased to 26 days from 24, mainly due to collection timing.
- Cash decreased $33.9 million during the nine months, including $15.9 million used for share repurchases and employee tax-withholding share purchases. Investing cash outflow was $48.0 million, primarily reflecting financing receivables and leased-asset investment; financing cash inflow was $11.8 million.
- Management said cash on hand, operating cash generation, available credit and potential portfolio monetization should provide sufficient liquidity for at least the next 12 months. It also noted that the business depends on the WFCDF facility for daily working capital; loss of the facility could materially adversely affect results. The company was in covenant compliance at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified forecast. Management expects to continue investing in sales locations and personnel where suitable opportunities arise; such investment may weigh on near-term results.
- On January 15, 2019, ePlus amended the WFCDF facility, increasing the accounts-receivable sublimit from $30 million to $50 million and modifying collateral terms. On January 22, 2019, it acquired SLAIT Consulting for $50.7 million in cash; initial purchase accounting was incomplete at filing.
- A $0.9 million distribution from claims in a customer bankruptcy was recognized as other income in the quarter. A further $5.4 million distribution received in January 2019 was expected to be recognized in the fiscal fourth quarter.
- Cisco accounted for approximately 40% of Technology-segment sales in the quarter and 42% for the nine months, representing a significant vendor concentration. Other disclosed risks include changing vendor incentives, customer IT-spending cycles and creditworthiness, competition and technology shifts, foreign-exchange exposure, and the availability and terms of financing.
- Management said it was not reasonably possible that asserted legal claims would result in a material loss beyond recorded accruals, while cautioning that legal outcomes remain uncertain. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether receivables and inventory convert to cash as expected, given the very low nine-month operating cash flow and the year-end billing and collection timing cited by management.
- How the $50.7 million SLAIT acquisition affects liquidity, operating costs, integration execution and future growth.
- Continued access to the WFCDF facility, its borrowing availability and covenant compliance, particularly as floor-plan balances and working-capital needs change.
- Whether gross-margin gains persist if product mix shifts or vendor incentives decline, and whether concentration in Cisco products remains manageable.
- The durability of Financing-segment earnings, including gains from asset sales, off-lease equipment dispositions and customer lease activity.
- Comparability of reported and non-GAAP results: the filing’s non-GAAP measures exclude specified items and should not be treated as substitutes for GAAP results; prior periods were adjusted retrospectively for revenue-recognition adoption.