ePlus inc. — Form 10-Q Summary
Business context and reporting period. ePlus provides IT products and services, leasing, and supply-chain management solutions through technology sales and financing segments. This unaudited filing covers the quarter and six months ended September 30, 2011, in fiscal 2012; comparisons are to the corresponding 2010 periods unless noted. Financial amounts below are in USD millions unless stated otherwise.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Total revenue | $262.9 (+12.8%) | $474.4 (+12.4%) |
| Earnings before tax | $11.8 (down from $13.1) | $18.1 (down from $20.9) |
| Net earnings | $7.1 (−10.7%) | $10.8 (−14.7%) |
| Diluted EPS | $0.85 (vs. $0.94) | $1.28 (vs. $1.51) |
| Product and services gross margin | 13.9% (vs. 14.4%) | 14.0% (vs. 14.3%) |
Segment results. Technology sales revenue rose 14.0% to $254.8 million for the quarter and 14.3% to $458.7 million for six months; pretax earnings were nearly flat for the quarter at $9.2 million and up 2.0% to $13.2 million for six months. Financing revenue fell 15.8% to $8.0 million for the quarter and 24.3% to $15.7 million for six months; pretax earnings declined 31.5% to $2.6 million and 38.4% to $4.9 million, respectively.
Cash flow and balance sheet. Six-month operating cash flow was negative $20.1 million, versus negative $21.8 million a year earlier; the filing attributes the 2011 outflow chiefly to a $30.3 million increase in receivables. Investing cash flow was negative $2.6 million and financing cash flow negative $7.6 million. Cash declined $30.4 million from March 31 to $45.4 million. Management’s adjusted, non-GAAP operating cash flow measure was negative $11.5 million, excluding $8.6 million of lessee principal payments made directly to lenders.
At September 30, total assets were $378.1 million and total liabilities $163.6 million. Non-recourse notes payable were $23.0 million, down from $29.6 million at March 31. The technology subsidiary’s floor-plan balance was $63.8 million; no balance was drawn on its accounts-receivable component. The GECDF facility limit was $125 million in aggregate, subject to collateral availability and covenants. The company reported covenant compliance. The financing lease portfolio, including leased equipment, was $108.9 million, down from $118.3 million at March 31.
Material changes versus the prior period
- Product and services sales grew, but costs and expenses grew faster overall; hiring and commissions contributed to higher technology-segment expenses. Technology-segment headcount increased to 700 from 598 a year earlier.
- Financing results weakened as the lease portfolio contracted and gains from sales of leases and leased equipment declined. Six-month lease revenue was down 23.5%.
- Effective April 1, 2011, ePlus adopted new multiple-deliverable revenue guidance prospectively. It recognized $12.0 million of quarterly and $16.9 million of six-month product revenue earlier than it would have under its prior method. Under the prior method, reported pretax earnings would have been $10.4 million for the quarter and $16.0 million for six months, rather than $11.8 million and $18.1 million.
- The company acquired NCC Networks in June for $3.5 million cash plus contingent consideration; the estimated total purchase price was $5.0 million, including $1.5 million fair value of contingent consideration. The acquisition added $3.7 million of goodwill.
- ePlus repurchased 387,958 shares during the six months for approximately $9.7 million at an average $24.96 per share; cash-flow-statement repurchases were $10.0 million.
Outlook, commentary, risks and contingencies
Management cited industry forecasts for increased U.S. IT spending in 2011 and customer interest in cost-saving technologies such as virtualization and cloud computing. It expects cash on hand, operating cash generation, and available credit to fund working capital, capital expenditures, and other needs for at least the next 12 months. It did not provide numerical earnings or revenue guidance. Management expects to continue hiring and expanding into targeted markets, noting that these investments may weigh on near-term results.
- Risks include weaker customer IT spending, competitive pricing, changes to manufacturer incentives, vendor or customer concentration, credit losses, lease residual-value estimates, recruiting and retention, and availability of financing. Cisco and Hewlett Packard represented approximately 52% and 14% of quarterly product and services sales, respectively.
- The company relies on the GECDF facility for technology-business working capital; it says loss of the facility could materially adversely affect results. The parent guarantees up to $10.5 million, and either party may terminate the facility on 90 days’ notice.
- In the Lawson patent case, a jury found infringement and the court issued a permanent injunction; Lawson appealed. ePlus is pursuing contempt proceedings and intends to appeal the ruling that barred it from seeking monetary damages. Outcomes, timing, and recoveries remain uncertain.
- In a separate Cyberco-related case, summary judgment was entered for Huntington National Bank and reconsideration was denied; ePlus said it would consider appellate relief after final judgment. The company cautions that litigation outcomes may adversely affect a particular period.
- Management reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective as of September 30, 2011.
Important facts for investors to verify
- How much of reported sales growth and earnings was attributable to the newly adopted revenue-recognition method, and how deferred bundled revenue evolves.
- Whether receivables growth converts to cash and whether operating cash flow improves after the reported working-capital outflow.
- Whether technology sales margins and manufacturer incentives hold up, and whether financing-segment revenue and earnings stabilize.
- Availability and terms of the GECDF facility, covenant compliance, and the effect of continued share repurchases and acquisitions on liquidity.
- Developments in the Lawson and Cyberco matters, including potential costs, damages, and any recovery.