ePlus inc. — Q3 FY2024 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended December 31, 2023, ePlus’s fiscal third quarter and year to date. The company provides IT products, professional and managed services, and customer financing. Its technology business comprises product, professional services, and managed services; financing is reported separately. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2023 | Year over year | Nine months ended Dec. 31, 2023 | Year over year |
|---|---|---|---|---|
| Net sales | $509.1 | Down 18.4% | $1,670.8 | Up 6.0% |
| Gross profit / margin | $133.8 / 26.3% | Profit down 3.3%; margin up 4.1 percentage points | $420.4 / 25.2% | Profit up 9.2%; margin up 0.8 percentage points |
| Operating income / margin | $38.0 / 7.5% | Income down 18.3%; margin unchanged | $129.2 / 7.7% | Income up 4.4%; margin down 0.2 percentage points |
| Net earnings | $27.3 | Down 23.6% | $93.8 | Up 8.4% |
| Diluted EPS | $1.02 | Versus $1.34 | $3.52 | Versus $3.24 |
| Adjusted EBITDA (non-GAAP) | $46.2; 9.1% margin | Down 13.4%; margin up from 8.6% | $153.6; 9.2% margin | Up 8.2%; margin up from 9.0% |
Cash flow and balance sheet. Nine-month operating cash flow was $143.5 million, compared with cash used of $147.0 million in the prior-year period. Investing used $55.8 million, including $48.6 million for the NSG acquisition; financing used $48.7 million. Cash increased $39.1 million to $142.2 million from March 31, 2023. At December 31, current assets were $1,219.3 million and current liabilities were $631.5 million.
Debt and funding. Floor-plan payables were $92.5 million, down from $134.6 million at March 31, 2023. Non-recourse notes payable totaled $48.4 million; recourse notes payable were paid off, and the revolving credit facility had no balance outstanding. The WFCDF facility has a $500 million floor-plan limit and a $200 million revolving sublimit; availability is subject to borrowing-base terms. Non-recourse borrowing weighted-average interest rate was 6.64%, versus 5.01% at March 31, 2023.
Material changes versus prior comparable periods
- Quarter: Product sales fell to $434.4 million from $556.0 million, driving the decline in total sales; professional, managed-services, and financing revenue partly offset it. Gross margin improved despite lower gross profit. Technology operating income declined, partly offset by higher financing-segment operating income.
- Nine months: Sales growth reflected product and managed-services growth, including acquired NSG and Future Com business, while financing revenue declined, mainly from lower post-contract earnings. Technology gross profit and operating income increased; financing operating income was slightly lower.
- Operating expenses rose 4.2% for the quarter and 11.4% year to date, including higher salaries, headcount, and acquisition-related amortization. Headcount was 1,897 at quarter-end, up 8.7% year over year.
- The cash conversion cycle lengthened to 54 days from 51; days sales outstanding rose to 71 from 62, reflecting more sales with extended payment terms.
Outlook, commentary, risks, and unusual items
- No quantified full-year guidance is provided. Management said cash on hand, operating cash generation, and available credit should fund working capital, capital expenditures, and other needs for at least the next year.
- Management expects product lead-time constraints to persist for at least the next few quarters. It also cited inflation, interest rates, customer IT spending, hiring and retention, vendor incentives, and tighter financing-partner approval as factors that may affect results and liquidity.
- Financing-asset sales were unusually high in the quarter: proceeds were $422.1 million, versus $157.2 million a year earlier; nine-month proceeds were $704.3 million versus $586.1 million. Related gains were $8.1 million for the quarter and $16.3 million year to date. Management notes that transaction timing can shift revenue and earnings between periods.
- NSG was acquired April 30, 2023, for net consideration of $48.6 million. After quarter-end, ePlus acquired certain PEAK assets and liabilities on January 27, 2024, for preliminary consideration of $5.6 million; purchase accounting was incomplete at filing.
- Cisco products represented 45% of technology-business net sales for the nine months, up from 38% in the prior-year period. Loss of key customers or vendors, supply disruption, cybersecurity events, and loss of or reduced access to credit are identified risks. The filing reports ordinary-course legal matters and says no material loss beyond amounts recognized was considered reasonably possible at December 31, 2023.
- The WFCDF facility is important to daily working capital and operations; the company warns its loss could materially adversely affect results. The company reported effective disclosure controls as of December 31, 2023, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp quarterly product-sales decline reflects purchase timing or a more persistent change in customer demand, and whether service growth continues.
- How elevated receivables and the longer cash conversion cycle affect working capital and operating cash flow.
- The sustainability and timing of financing-asset sale proceeds and gains, alongside the decline in post-contract earnings.
- Whether acquisition integration, related amortization, and the subsequent PEAK acquisition deliver expected growth without materially increasing costs.
- Exposure to Cisco and other key vendors, continued product availability, and access to the WFCDF and financing-partner funding.
- Non-GAAP measures are supplemental; compare them with GAAP results and review management’s reconciliation in the filing.