ePlus Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2016 (fiscal 2017 first quarter). The unaudited filing compares results with the three months ended June 30, 2015. ePlus provides IT products and services and customer financing, through technology and financing segments.
Financial performance and position
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $298.5 million | $269.9 million | +10.6% |
| Gross profit | $67.7 million | $59.1 million | +14.4% |
| Gross margin | 22.7% | 21.9% | +0.8 percentage points |
| Operating expenses | $50.2 million | $44.1 million | +13.9% |
| Earnings before tax | $17.5 million | $15.1 million | +16.1% |
| Net earnings | $10.7 million | $8.8 million | +21.1% |
| Diluted EPS | $1.50 | $1.21 | +24.0% |
| Adjusted EBITDA (non-GAAP) | $19.3 million | $16.3 million | +18.4% |
- Technology segment sales of products and services rose 11.7% to $290.2 million; segment earnings increased 12.3% to $14.6 million. Financing segment revenue fell 15.7% to $7.0 million, but segment earnings rose 40.3% to $2.9 million, primarily as direct lease costs declined.
- Cash and cash equivalents were $78.8 million at June 30, down $16.0 million from March 31, 2016. Operating cash flow was negative $12.7 million, versus positive $21.8 million a year earlier; the filing attributes the current-period use chiefly to higher trade receivables and inventory.
- Investing activities used $17.5 million; financing activities provided $14.0 million. Financing cash flows included $22.6 million of net floor-plan borrowings and $12.0 million of borrowings on recourse and non-recourse notes, partly offset by $20.6 million of cash share repurchases.
- Total assets were $639.1 million and total liabilities $329.3 million. Recourse and non-recourse notes payable totaled $56.9 million; floor-plan payables were $144.5 million, up from $121.9 million at March 31. The $250 million Wells Fargo facility had no accounts-receivable-component balance outstanding at quarter-end.
- Financing receivables, net, were $137.2 million. The company reported $3.2 million of net credit exposure associated with a customer in bankruptcy; related note and lease receivables were its only receivables on nonaccrual status.
Material changes and management commentary
- Growth was driven by demand from state and local government and education, telecommunications/media/entertainment, and healthcare customers; financial-services demand partly offset the increase. Adjusted gross billings of products and services rose 19.6% to $397.5 million, faster than reported sales because a higher proportion of third-party maintenance, software assurance, and services is presented net.
- Gross-margin improvement reflected product mix, higher professional and managed-services sales, and vendor incentives earned as a percentage of product-and-services sales increasing 40 basis points year over year. Salaries and benefits rose 13.8%, reflecting additional personnel, volume-related compensation, and higher healthcare costs.
- Management said cash on hand, operating cash generation, available credit, and potential portfolio monetization should provide sufficient liquidity for at least the next 12 months. It also noted that a decline in IT-product demand could materially affect operating cash flows. No numerical earnings or revenue guidance was provided.
- On July 28, 2016, the Wells Fargo facility’s aggregate limit was temporarily increased from $250 million to $300 million through October 31, 2016. ePlus reported covenant compliance at June 30 and said losing the facility could materially adversely affect results because it supports daily working capital and the technology segment’s accounts-payable process.
- Early adoption of the share-based compensation accounting update benefited the quarter’s tax provision by $0.4 million, or $0.06 per diluted share. The effective tax rate was 39.0%, versus 41.6% a year earlier. The filing’s non-GAAP measures exclude specified items and should be considered alongside GAAP results.
- Management assessed the UK’s Brexit-related currency and operating exposure as insignificant to consolidated results and position, while stating it would continue to monitor developments. No material change to previously disclosed risk factors was reported; the company disclosed no legal proceedings expected to have a material effect.
Investor facts to verify
- Whether operating cash flow rebounds as receivables and inventory normalize; reconcile cash earnings with the quarter’s working-capital outflow.
- The duration and availability of the increased Wells Fargo facility limit after October 31, 2016, and the company’s reliance on this facility.
- Credit quality and recoverability of the bankrupt customer’s receivables, along with changes in credit-loss reserves.
- Vendor and customer concentration: Cisco represented approximately 52% of product and services sales in the quarter; confirm ongoing exposure and vendor-incentive trends.
- The effect of share repurchases on cash and share count: ePlus repurchased 226,792 shares under its plan during the quarter, in addition to shares withheld for employee tax obligations.
- Whether reported earnings growth and non-GAAP measures remain supported by underlying segment performance, particularly given lower financing revenue and the one-time tax benefit.