ePlus Inc. — Form 10-Q Summary
Reporting period: Fiscal 2023 second quarter and six months ended September 30, 2022; filed November 3, 2022. Amounts below are in U.S. dollars. The company provides IT products and solutions, professional and managed services, and equipment financing.
Financial performance
| Metric | Three months ended September 30, 2022 | Year-over-year | Six months ended September 30, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $493.7 million | +7.8% | $952.1 million | +8.8% |
| Gross profit / margin | $133.3 million / 27.0% | +8.4%; margin +0.1 percentage point | $246.8 million / 25.9% | +8.0%; margin -0.2 percentage point |
| Operating income / margin | $44.1 million / 8.9% | -0.4%; margin down from 9.7% | $77.3 million / 8.1% | +0.7%; margin down from 8.8% |
| Net earnings | $28.5 million | -9.4% | $50.8 million | -7.5% |
| Diluted EPS | $1.07 | From $1.17 | $1.91 | From $2.04 |
| Adjusted EBITDA (non-GAAP) / margin | $50.3 million / 10.2% | +0.2%; margin down from 11.0% | $88.6 million / 9.3% | +0.2%; margin down from 10.1% |
Technology segment sales rose 8.1% for the quarter and 10.0% year to date, with higher product demand and growth in services. Financing segment sales increased 2.4% for the quarter but declined 16.3% year to date; segment operating income fell in both periods. Consolidated results reflected higher gross profit but faster growth in operating expenses and foreign-exchange losses. Other expense was $3.9 million for the quarter and $6.0 million year to date, primarily due to foreign currency losses.
Cash flow, balance sheet and liquidity
- Cash was $99.5 million at September 30, down $55.8 million from March 31, 2022. Six-month operating cash flow was negative $119.7 million, versus negative $135.0 million a year earlier; investing cash flow was negative $12.3 million and financing cash flow provided $71.3 million.
- Working capital absorbed cash, particularly trade receivables and inventory. Inventory increased to $274.9 million from $155.1 million at fiscal year-end. The technology segment’s cash conversion cycle increased to 54 days from 35 days a year earlier, mainly as inventory days rose to 36 from 18.
- Total assets were $1.37 billion and stockholders’ equity was $705.6 million. Current assets were $1.07 billion and current liabilities $607.3 million.
- At quarter-end, recourse notes payable were $94.7 million, including $85.0 million drawn on the revolving facility; non-recourse notes payable were $20.8 million. Accounts payable-floor plan was $136.2 million. The WFCDF facility had stated limits of $375 million for floor-plan financing and $100 million for revolving credit, subject to borrowing-base limits.
- On October 31, after quarter-end, the facility was amended to raise those limits to $425 million and $150 million, respectively, increase the swingline limit, and replace LIBOR-based pricing with Term SOFR-based pricing. Management said cash, operating cash generation and available facility capacity should meet expected needs for at least the next year.
Changes, outlook and risks
- Sales growth was supported by demand, higher prices on some products, and services volume. Product shortages and longer lead times remained material: management said extended lead times were likely to persist for at least the next few quarters. Open orders were $1.0 billion at September 30, compared with $707.1 million a year earlier.
- Inflation, wage increases and higher interest rates are raising costs. Management generally passed supplier price increases to customers, but said passing through labor costs on fixed-price service engagements takes longer. Rising third-party service costs pressured service margins.
- Technology operating expenses increased with headcount, salaries and benefits, marketing, travel and professional fees. The company had 1,729 employees, up 175 from a year earlier.
- Future Com, a cybersecurity and cloud-security provider, was acquired July 15 for preliminary consideration of $13.3 million, including $13.0 million cash. The accounting allocation remains preliminary; acquired revenue and earnings were not material.
- The company reported Cisco products at 39% of technology-segment sales in the quarter, indicating supplier concentration. Other stated risks include customer and vendor concentration, credit losses, cybersecurity, talent retention, supply availability, interest and foreign-currency movements, and dependence on its credit facility.
- Legal proceedings arise in the ordinary course; management reported no reasonable possibility of material loss beyond amounts already recognized. Disclosure controls were assessed as effective. The financing segment completed a new hosted software/ERP implementation; management expects about $1.5 million of annual related licensing and amortization costs.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results and that quarterly performance can fluctuate.
Investor verification points
- Track whether supply constraints ease and the elevated inventory and 54-day cash conversion cycle convert into deliveries and cash collections.
- Review working-capital funding needs, borrowing-base availability, variable-rate exposure, and compliance with the amended WFCDF facility terms.
- Assess whether operating-expense growth, service delivery costs and foreign-exchange losses continue to pressure GAAP earnings and margins; consider non-GAAP adjustments separately.
- Monitor financing-segment earnings and asset-sale gains: six-month gains on sales of financial assets were $9.9 million, down from $13.3 million, while proceeds were $428.9 million versus $690.3 million.
- Check the final purchase accounting and integration results for Future Com, and the costs and control effects of the new financing-system implementation.