ePlus Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020 (the first quarter of fiscal 2021); filed August 5, 2020. ePlus provides IT products and technology, professional and managed services, and financing and lifecycle-management solutions. Its reportable segments are Technology and Financing.
Financial results
| Metric | Quarter ended June 30, 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $355.0 million | $381.4 million | Down 6.9% |
| Gross profit / margin | $98.6 million / 27.8% | $92.6 million / 24.3% | Profit up 6.4%; margin up 350 bps |
| Operating income / margin | $25.0 million / 7.0% | $22.8 million / 6.0% | Income up 9.8% |
| Net earnings | $17.4 million | $16.2 million | Up 7.2% |
| Diluted EPS | $1.30 | $1.20 | Up 8.3% |
| Adjusted EBITDA (non-GAAP) | $30.7 million; 8.7% margin | $28.6 million; 7.5% margin | Up 7.5% |
| Operating cash flow | $6.4 million provided | $87.4 million used | Improved |
Product sales declined 8.5% to $307.2 million, while services sales rose 4.4% to $47.8 million. Management attributed stronger gross margin mainly to a shift toward services, subscriptions and other offerings for which revenue is recorded net, along with improved product margins and higher financing-segment gross profit. The filing reports non-GAAP diluted EPS of $1.51 versus $1.44; these measures exclude specified items and are not substitutes for GAAP results.
Segments and business drivers
- Technology: Sales were $341.2 million, down 7.4%; operating income was $17.5 million, up 11.4%. Adjusted gross billings were nearly flat at $546.4 million, down 0.4%. Closed customer locations and changes in product and service mix affected reported sales.
- Financing: Sales were $13.8 million, up 7.6%; operating income was $7.5 million, up 6.3%. The segment recognized $2.5 million of net gains on sales of financial assets, versus $3.3 million a year earlier.
- Cisco accounted for 37% of Technology-segment net sales in the quarter, compared with 40% a year earlier.
Cash, balance sheet and debt
- Cash and cash equivalents were $144.4 million at June 30, up from $86.2 million at March 31, 2020. Operating activities provided $6.4 million; investing used $2.2 million; financing provided $54.0 million. Financing cash flow included $48.3 million of net floor-plan borrowings and $8.5 million of net recourse and non-recourse note borrowings, partly offset by $2.7 million of share repurchases/withholding-related stock purchases.
- Management said cash growth was primarily supported by vendor payment-term extensions that deferred $34.2 million of payments and $2.6 million of payroll tax deferrals under the CARES Act. The latter are payable in December 2021 and December 2022.
- Total assets were $1.059 billion and stockholders’ equity was $502.7 million. Current assets were $806.8 million versus current liabilities of $519.6 million.
- Floor-plan payables were $175.7 million, up from $127.4 million at March 31. Recourse notes payable were $37.3 million current, including a $35.0 million balance under the accounts-receivable credit facility; non-recourse notes payable totaled $61.2 million, including $5.5 million long term. These balances have different collateral and recourse characteristics.
- The Wells Fargo Commercial Distribution Finance facility limit was amended to $275 million, with an election for a temporary increase to $350 million. The company exercised that increase on July 23, 2020. It repaid the $35 million accounts-receivable component on July 1.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said cash, operating funds and available credit were expected to meet requirements for at least the next year, while emphasizing uncertainty from COVID-19 and tighter financing markets.
- COVID-19 had disrupted customer deliveries where locations were closed; ePlus extended payment terms for a limited number of customers and adjusted work arrangements. Management cautioned that pandemic duration, economic conditions, customer spending and payment capacity remain uncertain.
- Other stated risks include dependence on the WFCDF facility for working capital, vendor and Cisco concentration, customer credit losses, supply-chain disruption, interest-rate and LIBOR-transition exposure, and the ability to fund customer financing transactions. The company said loss of the WFCDF facility could materially adversely affect operations.
- The allowance for credit losses rose to $4.0 million from $3.2 million at April 1, including a $0.8 million provision; it reflects the newly adopted expected-credit-loss standard and management’s forecast of COVID-related deterioration. Adoption of the standard had no significant cumulative retained-earnings effect.
- Management reported no litigation believed likely to have a material adverse effect and no material change to previously disclosed risk factors. The filing reports no material loss contingency accrual beyond recorded amounts.
Key facts for investors to verify
- Whether the improved gross margin and earnings can persist if product sales remain weak or sales mix shifts back toward lower-margin reported revenue.
- How much liquidity depends on extended vendor terms, floor-plan borrowing and the temporary facility uplift, and the facility’s availability and terms after the temporary period.
- Whether customer collections, inventory levels and credit-loss reserves reflect continuing COVID-19 effects; the cash conversion cycle increased to 30 days from 24 days year over year.
- The sustainability and timing of financing-segment asset-sale gains, and the related ability to fund new transactions as lenders tighten credit.
- Reconcile reported sales with adjusted gross billings and non-GAAP measures, including their definitions and exclusions; remaining disclosed performance obligations were $44.4 million, subject to stated exclusions.