ePlus inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2015; comparative periods ended December 31, 2014. Amounts are in U.S. dollars unless stated otherwise. ePlus integrates IT products, software, professional and managed services, proprietary software, and customer financing through its technology and financing segments.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Nine months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $298.6 million | Down 2.5% | $904.8 million | Up 3.3% |
| Gross profit / margin | $64.1 million / 21.5% | Profit down 2.1%; margin up 10 bps | $195.1 million / 21.6% | Profit up 5.0%; margin up 40 bps |
| Operating income / margin | $17.6 million / 5.9% | Down 14.2%; margin down 80 bps | $59.4 million / 6.6% | Up 6.7%; margin up 20 bps |
| Net earnings | $10.3 million | Down 33.6% | $34.8 million | Down 5.8% |
| Diluted EPS | $1.40 | Down 34.3% | $4.74 | Down 4.6% |
| Adjusted EBITDA, non-GAAP | $19.0 million; 6.4% margin | Down 12.9%; margin down 70 bps | $63.1 million; 7.0% margin | Up 7.4%; margin up 30 bps |
Quarterly net sales fell despite 4.4% growth in non-GAAP gross sales of product and services, reflecting a higher share of third-party maintenance and services presented net. Product and services sales declined 2.6%, with weaker telecom, state and local government/education, and energy/utility demand partly offset by strength in technology, financial, state and retail customers. For the nine-month period, product and services sales grew 3.3%, supported by technology, healthcare, financial, and state and local government/education demand.
Product and services gross margin was 19.6% for the quarter and 19.7% for nine months, compared with 19.4% and 19.2%, respectively. Management cited value-added services and mix; lower vendor incentives partly offset these benefits. Quarterly salaries and benefits and other operating costs contributed to lower operating income.
Cash flow, balance sheet, and financing
- Cash was $66.6 million at December 31, 2015, down $9.6 million from March 31, 2015. Current assets were $473.8 million and current liabilities $295.2 million.
- Operating cash flow was negative $18.9 million for nine months, versus negative $9.9 million a year earlier. Working-capital use included higher trade receivables ($31.7 million cash outflow), financing receivables ($10.7 million), and lower salaries/commissions payable, deferred revenue, and other liabilities ($9.0 million).
- Investing cash flow was negative $44.3 million, including $16.6 million for the IGX acquisition and investment in financing receivables and leased equipment. Financing cash flow was positive $53.6 million, principally from floor-plan and notes payable borrowings.
- Total recourse and non-recourse notes payable were $49.6 million at December 31, 2015 ($4.1 million recourse; $45.5 million non-recourse). The separate floor-plan payable balance was $128.0 million, up from $99.4 million at March 31, 2015.
- The GECDF technology working-capital facility had a $250 million aggregate limit; the accounts-receivable component had a $30 million sublimit and no outstanding balance. The company reported compliance with facility covenants. Management said cash, operating funds, available credit, and possible portfolio monetization should cover requirements for at least the next 12 months.
Material developments, outlook, and risks
- IGX acquisition: On December 4, 2015, ePlus acquired IGX businesses providing security, networking, and related services for $16.6 million net of cash acquired. The preliminary allocation included $7.9 million of customer-relationship intangibles and $8.3 million of goodwill. The acquisition expands the company’s U.K. and European presence.
- Prior-period unusual income: The prior-year quarter included $6.2 million from a class-action settlement. Prior-year nine-month other income of $7.6 million also included a $1.4 million financing-arrangement gain. Neither item recurred in 2015; this substantially affects comparisons of earnings and EPS.
- Financing portfolio: Financing-segment revenue increased 10.5% in the quarter and 6.0% year to date. The company recognized net gains on sales of financing assets of $1.4 million and $5.4 million, respectively, in those periods. Financing receivables and operating leases totaled $156.9 million at December 31, 2015, according to management’s discussion.
- Customer credit: A bankrupt law-firm customer had $3.2 million of notes and lease receivables, on non-accrual status and fully reserved. Total credit-loss reserves were $5.5 million.
- Legal matter: ePlus’s $18.2 million judgment against Lawson was vacated after the underlying patent was canceled; ePlus petitioned the U.S. Supreme Court to consider the case. The filing does not establish an expected recovery.
- Concentration and operating risks: Cisco, Hewlett-Packard, and NetApp represented approximately 48%, 6%, and 7% of technology-segment product and services sales, respectively, in the quarter. Risks also include vendor incentives, customer IT spending and credit, competition and technology change, residual values, cybersecurity, and access to the GECDF facility. The IGX acquisition adds foreign-currency exposure, which management described as not significant at present.
- Guidance: The filing provides no quantified earnings or revenue guidance. Management expects continued expansion through hiring and new locations where opportunities arise, while noting such investment may weigh on short-term results.
Investor verification points
- Assess whether quarterly sales softness and lower operating income are temporary, particularly across telecom, public-sector, and energy/utility customers.
- Track cash conversion and collections: the technology-segment cash conversion cycle rose to 20 days from 18 days a year earlier, while operating cash flow was negative.
- Monitor growth in floor-plan payables and continued availability and covenant compliance under the GECDF facility, which management identifies as important to daily working capital.
- Review post-acquisition IGX performance, integration costs, preliminary purchase accounting, and the expected contribution from international expansion.
- Separate recurring earnings from financing-asset sale gains and prior-year settlement/financing gains; review the credit exposure and reserve for the bankrupt customer.