ePlus Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the three months ended June 30, 2012, ePlus’s first fiscal quarter of fiscal 2013. The company sells IT products and services and provides equipment and software financing through its Technology Sales and Financing segments. Financial statements are unaudited.
Key financial results
| Metric | Quarter ended June 30, 2012 | Comparable 2011 period | Change |
|---|---|---|---|
| Total revenue | $244.7 million | $178.9 million, as restated | +36.8% |
| Pre-tax earnings | $13.6 million | $6.3 million | +115.9% |
| Net earnings | $8.1 million | $3.7 million | +117.7% |
| Diluted earnings per share | $1.02 | $0.44 | Up $0.58 |
| Operating cash flow | $(11.9) million | $2.1 million | Down $14.0 million |
Technology Sales revenue increased 38.0% to $236.3 million; segment pre-tax earnings rose to $10.8 million from $4.0 million. Financing revenue increased 10.1% to $8.4 million, and segment pre-tax earnings rose 21.0% to $2.7 million. Product-and-services gross margin was 17.0%, versus 16.9%. The effective tax rate was 40.6%, versus 41.1%.
Cash and cash equivalents were $55.4 million at June 30, up from $33.8 million at March 31, 2012. Short-term investments were $3.7 million. Operating cash use reflected higher receivables and lower equipment and trade payables, partly offset by reduced lease investments. Investing activities provided $13.1 million, including proceeds from notes receivable and short-term investments; financing activities provided $20.4 million, including $11.5 million of net floor-plan borrowings and $9.8 million of increased notes payable. Management’s adjusted, non-GAAP operating cash flow was $(8.6) million after adding $3.4 million of lease payments made directly by customers to lenders.
Total liabilities were $219.4 million. Floor-plan accounts payable was $97.4 million, compared with $85.9 million at March 31; non-recourse notes payable were $32.8 million, compared with $26.3 million; recourse notes payable were $1.7 million. The company had no balance drawn on the accounts-receivable component of its credit facility at quarter-end.
Material changes and unusual items
- Year-over-year growth was led by technology product and service sales, which increased 38.4%. Management attributed growth to demand, particularly from Fortune 100 customers. Salaries and benefits rose 16.5%, reflecting hiring and higher commissions; the company reported 836 employees versus 755 a year earlier.
- The 2011 comparison was restated: third-party software assurance, maintenance and services revenue and corresponding costs were reduced by $32.6 million because ePlus concluded it acted as agent, not principal. The change reduced reported revenue and costs equally and did not change earnings, EPS or cash flows.
- Lease-payment sales generated $29.4 million of proceeds and a $1.2 million gain in the quarter, versus $1.2 million of proceeds and a $0.1 million gain a year earlier.
- A large law-firm customer filed for bankruptcy. At June 30, ePlus reported $4.5 million of notes and lease-related receivables and $2.9 million of reserves for estimated probable losses.
- On July 23, after quarter-end, ePlus Technology amended and restated its GECDF facility, increasing the aggregate limit from $125 million to $175 million; the accounts-receivable component retained a $30 million sublimit. Availability remains subject to collateral and covenants.
Outlook, risks and contingencies
No company-specific earnings or revenue guidance is provided. Management said cash, operating funds and available credit should meet working-capital, capital-expenditure and other needs for at least the next 12 months. It expects to continue expanding through hiring and new locations when suitable opportunities arise, while noting those investments may weigh on short-term results.
Key risks include weaker IT spending, competitive pressure, changes to vendor incentives, dependence on major vendors and customer credit quality, residual-value uncertainty in leased equipment, and access to financing. Cisco and HP represented approximately 53% and 10% of Technology Sales product-and-services sales, respectively. The company relied on its GECDF facility for daily working capital and stated that loss of the facility could materially harm future results. Management reported compliance with facility covenants at June 30.
Legal contingencies include the Lawson patent litigation, in which ePlus was pursuing contempt and damages-related appeals, and an appeal in its suit against Huntington National Bank concerning losses related to former customer Cyberco. Outcomes and recoveries were uncertain. Management reported disclosure controls were effective and that a previously identified material weakness in applying U.S. GAAP had been remediated. Officers and directors beneficially owned approximately 53.8% of outstanding shares, potentially giving them significant influence over corporate matters.
Investor verification priorities
- Review the restated 2011 figures when assessing growth, and distinguish reported revenue from gross billings.
- Track working-capital conversion, particularly receivables and payables, and reconcile GAAP operating cash flow with the company’s adjusted non-GAAP measure.
- Monitor the bankrupt customer’s exposure and reserves, lease portfolio quality and residual values, and proceeds or gains from lease-asset sales.
- Check usage, availability and covenant compliance under the amended $175 million GECDF facility, as well as vendor concentration and incentive trends.
- Follow the Lawson and Huntington proceedings and assess whether any subsequent developments change potential costs or recoveries.