ePlus Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2020. Financial statements are unaudited. ePlus provides IT products, services, managed solutions, and customer financing through technology and financing segments.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Dec. 31, 2020 | Year-over-year | Nine months ended Dec. 31, 2020 | Year-over-year |
|---|---|---|---|---|
| Net sales | $427.6 | Down 0.3% | $1,215.7 | Down 0.5% |
| Gross profit / margin | $98.2 / 23.0% | $103.7 / 24.2% | $295.7 / 24.3% | $299.4 / 24.5% |
| Operating income / margin | $29.3 / 6.8% | $26.3 / 6.1% | $82.7 / 6.8% | $77.4 / 6.3% |
| Net earnings | $21.6 | Up 10.7% | $58.8 | Up 5.4% |
| Diluted EPS | $1.62 | $1.46 | $4.39 | $4.16 |
| Adjusted EBITDA / margin | $34.4 / 8.0% | $31.9 / 7.4% | $98.7 / 8.1% | $95.8 / 7.8% |
- For the quarter, technology-segment sales rose 1.2% to $415.6 million, while financing-segment sales fell 34.5% to $12.0 million. Technology operating income increased to $22.8 million; financing operating income declined to $6.4 million.
- For the nine months, technology sales were essentially flat at $1,176.2 million and operating income increased to $61.7 million. Financing sales declined 12.2% to $39.6 million and operating income fell to $21.1 million.
- Services sales increased 3.3% for the quarter and 3.5% year to date. Management attributed lower consolidated sales mainly to prior-year financing transactions and softness in technology and healthcare customer markets.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was positive $5.2 million, versus negative $74.7 million a year earlier. Investing used $30.7 million, including $27.1 million for the SMP acquisition; financing provided $26.4 million. Cash increased $0.2 million to $86.5 million from March 31, 2020.
- At December 31, 2020, total assets were $1,126.0 million, current assets $826.7 million, current liabilities $531.0 million, total liabilities $580.9 million, and equity $545.0 million.
- Technology-segment floor-plan payables were $177.1 million, up from $127.4 million at March 31, 2020. There were no borrowings under the facility’s accounts-receivable component at quarter-end, compared with $35.0 million at March 31. Non-recourse notes payable totaled $68.3 million; no recourse borrowings were outstanding.
- The Wells Fargo facility limit was $275 million, with a $100 million accounts-receivable sublimit and a temporary option to raise the aggregate limit to $350 million subject to stated conditions. The company says cash, operating funds, and available credit should meet requirements for at least the next year, while warning that loss of the facility could materially harm liquidity.
- Working-capital movements remained significant: accounts receivable, inventory, and financing receivables increased. The technology-segment cash conversion cycle was 24 days versus 26 days a year earlier. Cash benefited from $4.8 million of payroll-tax payments deferred under the CARES Act.
Material changes and unusual items
- Gross profit and gross margin declined despite higher operating income and net earnings. Management cited weaker financing-segment gains versus a strong prior-year comparison and a product mix with more lower-margin hardware and third-party licenses.
- Operating expenses fell 11.0% for the quarter, partly reflecting lower salaries and benefits, travel, marketing, and office costs. COVID-19 restrictions contributed to lower travel and related spending.
- Financing-segment gains on sales of financial assets were $3.0 million for the quarter and $10.1 million year to date, compared with $9.5 million and $17.0 million, respectively, in the prior-year periods. Such transaction timing can shift revenue and earnings between periods.
- On December 31, 2020, ePlus acquired certain assets and liabilities of Systems Management and Planning, Inc. for preliminary consideration of $27.1 million. The purchase accounting remained incomplete at filing; acquired revenue and earnings were not material for the reported period.
- The company adopted the expected-credit-loss accounting standard on April 1, 2020; the adoption effect was not significant. The nine-month provision for credit losses was $1.9 million, versus $0.5 million a year earlier.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management says cash and available funding are expected to support at least the next year, but does not rule out longer-term liquidity impacts.
- COVID-19 effects remain uncertain, including possible changes in customer demand and payment behavior, supply-chain disruption, and tighter financing markets. Some lenders had narrowed transaction eligibility or extended approval times, potentially requiring ePlus to use its own capital or decline transactions.
- Other disclosed risks include dependence on vendor incentives and credit facilities, customer and vendor concentration, changing IT markets, cybersecurity, credit losses, and variability in lease residual values and financial-asset sale timing. Cisco represented 32% of technology-segment sales in the quarter and 37% year to date.
- Management reported no litigation believed likely to have a material adverse effect and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective at December 31, 2020.
Investor verification priorities
- Reconcile GAAP earnings with non-GAAP measures, including the exclusions for share-based compensation, acquisition costs, and acquisition-related amortization.
- Track receivables, inventory, financing-receivable growth, credit-loss provisions, and operating cash flow conversion.
- Assess dependence on Cisco and other major vendors, vendor incentives, and the availability and terms of the Wells Fargo facility and financing-segment lenders.
- Review the final purchase accounting and subsequent contribution of the SMP acquisition, including goodwill and acquired customer relationships.
- Monitor the effect of financing-asset sale gains and COVID-19-related demand, collections, supply-chain, and funding conditions on future periods.