ePlus Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2019; the comparable period is the year-earlier quarter and six-month period. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
ePlus provides IT products and solutions, consulting and managed services, and equipment financing and leasing, mainly to commercial enterprises and public-sector customers in North America and the UK. Its technology segment generates most revenue; financing is a smaller but profitable segment. The statements are unaudited.
Financial performance
| Metric | Three months ended September 30, 2019 | Year-over-year | Six months ended September 30, 2019 | Year-over-year |
|---|---|---|---|---|
| Net sales | $411.6 | +19.3% | $792.9 | +13.0% |
| Gross profit / margin | $103.0 / 25.0% | +20.5%; margin +0.2 percentage points | $195.7 / 24.7% | +17.7%; margin +1.0 percentage point |
| Operating income / margin | $28.4 / 6.9% | +15.5%; margin down 0.2 points | $51.1 / 6.4% | +13.5%; margin unchanged |
| Net earnings / margin | $20.1 / 4.9% | +11.6%; margin down 0.3 points | $36.3 / 4.6% | +9.0%; margin down 0.1 points |
| Diluted EPS | $1.51 | +$0.18 | $2.71 | +$0.26 |
| Adjusted EBITDA (non-GAAP) | $35.4; 8.6% margin | +18.5%; margin down 0.1 points | $64.0; 8.1% margin | +15.8%; margin up 0.2 points |
Growth reflected higher product and service sales, organic demand, and acquisitions. Services revenue increased 35.1% in the quarter and 35.4% year to date. Management attributed margin improvement, particularly for the six-month period, to product mix and higher product margins. Higher operating expenses—including compensation, acquisition costs, and amortization—outpaced revenue growth and moderated earnings growth. Non-GAAP measures exclude specified items; they supplement, rather than replace, GAAP results.
Cash flow, balance sheet and liquidity
- Cash: $55.8 at September 30, down $24.0 from March 31, 2019.
- Cash flows, six months: operating activities used $54.4, versus $17.1 used a year earlier; investing activities used $18.1, including $13.8 for acquisitions; financing activities provided $48.4. Operating cash use was principally associated with a $76.4 increase in financing receivables. The company noted that adoption of lease accounting changed the classification of financing-receivable cash flows, limiting direct comparability with the prior period.
- Borrowings and working-capital financing: Non-recourse notes payable were $86.0, up from $48.6 at March 31; there were no recourse notes payable. Accounts payable—floor plan was $129.7. The technology segment’s WFCDF facility had an aggregate limit of $325, including a $50 accounts-receivable sub-limit; no amount was drawn on that sub-limit. The company reported compliance with facility covenants.
- Other balance-sheet measures: Total assets were $914.3, total liabilities $464.0, and stockholders’ equity $450.3. Current assets were $641.6 and current liabilities $421.5.
Management said cash, internally generated funds, available credit and potential monetization of the investment portfolio provide sufficient liquidity, and expects cash and available credit to fund requirements for at least the next 12 months. It also cautioned that expansion, acquisitions and working-capital needs may require additional financing.
Material changes and notable items
- ePlus acquired certain assets and liabilities of ABS Technology on August 23, 2019. Preliminary consideration was $15.3, including $13.8 paid at closing; the purchase accounting remained incomplete at filing. The acquired business’s reported-period revenue and earnings were not material. The earlier SLAIT acquisition also contributed to growth and expenses.
- Financing-segment sales rose 34.8% in the quarter and 33.8% for six months. Gains on sales of financial assets were $4.1 in the quarter and $7.5 year to date, compared with $1.2 and $2.5, respectively, in the prior-year periods. These gains and asset transfers can shift revenue and earnings between periods.
- In September, the company settled a contingent-consideration arrangement for $9.6, paid in October 2019. This is a subsequent-period cash outflow. It also recorded $1.1 of contingent-consideration expense in the quarter.
- ePlus adopted ASC 842 lease accounting in the quarter ended June 30, 2019, recording opening right-of-use assets of $12.7 and lease liabilities of $12.3.
- The company repurchased 149,044 shares under its plan for $10.7 during the six months and repurchased additional shares to meet employee tax-withholding obligations. Its May 2019 authorization permits repurchases of up to 500,000 shares through May 27, 2020.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management expects to continue investing in staff, locations and growth, which may weigh on short-term results. Risks highlighted include customer IT spending and demand, vendor incentives and product concentration, competition, hiring and retaining skilled personnel, customer credit and financing availability, lease residual values, interest and foreign-exchange movements, cybersecurity, and acquisition integration. Cisco products represented 42% of technology-segment sales for the six-month period, underscoring vendor concentration.
Management reported no material change to previously disclosed risk factors and no legal matter expected to result in a material loss, while noting litigation outcomes remain uncertain. The company relied on its WFCDF facility for daily technology-segment working capital and warned that losing it could materially harm future results. It also noted that quarterly results may fluctuate, including with financial-asset transfers and equipment sales. Disclosure controls were assessed as effective as of September 30, 2019.
Investor verification priorities
- Assess the quality and sustainability of revenue and earnings growth, including acquisition contributions and the effect of financing-asset sale gains.
- Review operating cash conversion and the financing segment’s growing receivables; account for the ASC 842 cash-flow classification change when comparing periods.
- Verify available borrowing capacity and terms after the temporary $325 facility limit, which was scheduled to end no later than October 31, 2019, and consider the $9.6 contingent-consideration payment made in October.
- Track gross-margin and operating-expense trends, especially service margins, compensation, acquisition costs and amortization.
- Monitor dependence on Cisco and other vendors, customer concentration and credit quality, and the integration and final purchase accounting for ABS Technology.