ePlus Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017. The unaudited consolidated statements compare with the periods ended December 31, 2016; balance-sheet comparisons are with March 31, 2017. ePlus provides IT products, software, professional and managed services, and customer financing, primarily in North America and the U.K.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Year-over-year | Nine months ended Dec. 31, 2017 | Year-over-year |
|---|---|---|---|---|
| Net sales | $342.6 million | +4.9% | $1,080.6 million | +8.4% |
| Gross profit / gross margin | $76.7 million / 22.4% | +3.9%; down 0.2 percentage points | $241.9 million / 22.4% | +8.3%; unchanged |
| Operating income / margin | $16.4 million / 4.8% | -23.1%; down 1.7 points | $65.7 million / 6.1% | -1.9%; down 0.6 points |
| Net earnings | $15.6 million | +23.5% | $46.2 million | +15.4% |
| Diluted EPS | $1.11 | +$0.20 | $3.30 | +$0.44 |
| Adjusted EBITDA (non-GAAP) | $19.3 million; 5.6% margin | -16.9%; margin down 1.5 points | $72.8 million; 6.7% margin | +0.6%; margin down 0.6 points |
Amounts in the table are reported figures; margins and growth rates are as stated or calculated from the filing. Nine-month product-and-services gross margin was 20.2%, versus 20.5% a year earlier. Adjusted gross billings, a company-defined non-GAAP volume measure, rose 7.3% in the quarter to $464.1 million and 10.0% year to date to $1,449.4 million.
Cash flow, balance sheet and financing
- For the nine months, operating cash flow was $48.8 million, versus $29.7 million in the prior-year period. Investing used $54.8 million and financing used $27.8 million. Cash declined $33.7 million to $76.1 million from $109.8 million at March 31, 2017.
- At December 31, 2017, current assets were $569.2 million and current liabilities were $358.7 million. Total assets were $764.7 million; total liabilities were $381.0 million.
- Non-recourse notes payable totaled $31.5 million, down from $36.5 million at March 31, 2017; recourse notes payable were zero. Floor-plan payables were $107.8 million, down from $132.6 million. The Wells Fargo Commercial Distribution Finance facility had a $250 million aggregate limit at quarter-end; availability is subject to eligible collateral and covenants. The company reported covenant compliance.
- Financing receivables, net, were $139.4 million, compared with $115.3 million at March 31, 2017. Financing receivables and operating leases totaled $147.2 million, up 4.8% year over year.
Changes, drivers and notable items
- Quarterly sales growth reflected greater demand from commercial customers, particularly in technology, financial services and healthcare, partly offset by weaker SLED and other demand. Year-to-date growth also included several large customer projects.
- Quarterly operating income declined as SG&A and depreciation and amortization grew faster than gross profit. Management cited increased headcount, salaries and benefits, variable compensation, healthcare costs, and acquisition-related costs. Headcount was 1,284, up 120 year over year; 98 additions came from IDS and OneCloud acquisitions.
- Lower product margins and reduced vendor incentives weighed on product-and-services margins. Management said service and financing revenue partly offset lower product margins.
- Technology generated 97% of nine-month net sales and 70% of operating income; financing generated 3% of sales and 30% of operating income. Technology segment operating income fell 32.4% in the quarter and 13.0% year to date. Financing segment operating income rose 12.6% and 54.8%, respectively.
- Net earnings and GAAP EPS benefited from a sharply lower tax provision. The quarterly effective tax rate was 4.2%, including a $3.4 million deferred-tax remeasurement benefit following U.S. tax legislation reducing the federal statutory rate to 21%. The nine-month effective rate was 29.7%. The company described its tax accounting as provisional, with estimates to be finalized in fiscal Q4. Excluding specified items, non-GAAP diluted EPS was $0.97 for the quarter, down from $1.12, and $3.14 year to date, up from $3.12.
- Acquisitions included OneCloud, acquired in May 2017, and IDS, acquired in September 2017. Nine-month acquisition cash use was $37.7 million. The IDS transaction included $10.0 million of preliminary fair-value contingent consideration, with a maximum payout of $15.0 million over three years; purchase accounting remained preliminary. Combined contingent consideration liabilities were $13.1 million at quarter-end.
- The company repurchased $13.4 million of common stock during the nine months, including shares acquired for employee tax withholding. A new authorization permits repurchase of up to 500,000 shares through August 18, 2018.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected cash on hand, operating cash flow and available credit to fund working capital, capital expenditures and other needs for at least the next 12 months. It noted that growth investments, new locations and hiring may reduce near-term results, and weaker IT product demand could materially affect operating cash flow.
- The company relies on the WFCDF facility for technology-segment working capital and its accounts-payable process; loss of the facility could materially adversely affect results. Borrowing availability depends on collateral and covenants.
- Key business risks include vendor concentration and changes in vendor incentives, customer and vendor losses, competitive pressure and product-margin changes, customer credit quality, IT spending and technology shifts, staffing and integration of acquisitions, residual values on leased equipment, cybersecurity, and foreign-exchange and regulatory developments. Cisco, HP Inc./HPE and NetApp together represented 55% of trailing-12-month sales, down from 60% a year earlier.
- Management reported no material change to previously disclosed risk factors, no material change to market-risk disclosures, and no asserted legal matter for which a material loss was considered at least reasonably possible. The filing notes ordinary-course claims and uncertainty of litigation outcomes. Disclosure controls were assessed as effective at December 31, 2017.
- Revenue recognition standard ASC 606 was scheduled for adoption in the quarter ending June 30, 2018. The company was still assessing gross-versus-net presentation for third-party product and software sales and had not completed its analysis.
Most important facts for investors to verify
- How much of reported earnings growth reflects the tax-law benefit, and what is the finalized fiscal-year tax provision and deferred-tax measurement?
- Whether technology-segment margins and operating income recover after the quarter’s decline, given higher staffing costs, lower vendor incentives and competitive project pricing.
- Cash conversion, acquisition spending and financing-portfolio growth, including the sustainability of operating cash flow and the potential proceeds and gains from asset sales.
- Actual borrowing availability under the WFCDF facility, covenant headroom and the company’s dependence on that facility for daily working capital.
- Final IDS purchase accounting and contingent-consideration outcomes, and the performance of IDS and OneCloud after acquisition.
- Vendor concentration, customer demand by end market, and the impact of ASC 606 adoption on reported revenue and presentation.