ePlus Inc. Form 10-Q Summary
Business context and period: This unaudited filing covers the fiscal second quarter and first six months ended September 30, 2015 (fiscal 2016), compared with the same periods in 2014. ePlus sells and integrates IT products and services and provides customer financing through its technology and financing segments. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Key financial results
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $336.3; up 13.0% from $297.5 | $606.2; up 6.4% from $569.8 |
| Gross profit / gross margin | $71.9 / 21.4%, versus $63.9 / 21.5% | $131.1 / 21.6%, versus $120.4 / 21.1% |
| Operating income / margin | $26.7 / 7.9%, versus $20.3 / 6.8% | $41.7 / 6.9%, versus $35.1 / 6.2% |
| Net earnings | $15.7, up 31.2% from $12.0 | $24.5, up 14.3% from $21.4 |
| Diluted EPS | $2.15, versus $1.63 | $3.35, versus $2.86 |
| Adjusted EBITDA and margin | $27.9 / 8.3%, versus $21.4 / 7.2% | $44.1 / 7.3%, versus $37.0 / 6.5% |
Technology generated 97% of net sales and 85% of operating income in both current reporting periods. Second-quarter technology sales of products and services rose 13.1%; management attributed growth to demand from technology, healthcare, and state and local government and education customers. Financing-segment revenue increased 13.5% in the quarter, partly reflecting higher gains on sales of financial assets.
Cash flow, liquidity and debt
- Cash and cash equivalents were $62.8 at September 30, 2015, down $13.3 from March 31, 2015. Current assets were $454.2 and current liabilities $265.6.
- For the six months, operating cash flow was negative $22.7, compared with negative $11.0 a year earlier. The company cited working-capital changes, especially a $40.0 cash use from trade receivables, and reductions in salaries and commissions payable, deferred revenue and other liabilities.
- Investing cash flow was negative $27.9, principally reflecting new financing receivables, leased assets and capital expenditures. Financing cash flow was positive $37.3, including $27.6 of net floor-plan borrowings. Cash declined by $13.3 overall.
- At September 30, recourse and non-recourse notes payable totaled approximately $42.7 ($4.0 recourse and $38.6 non-recourse). The separate floor-plan payable balance was $127.1, up from $99.4 at March 31. The GECDF facility limit was $250.0; its accounts-receivable component had no balance outstanding. The company reported compliance with facility covenants.
- Net financing receivables and operating leases totaled approximately $152.1. Cash, operating funds, available credit and potential portfolio monetization were identified as liquidity sources. Management expected these resources to cover needs for at least the next 12 months.
Material changes and unusual items
- Quarterly earnings growth reflected higher sales and operating income; gross margin edged down year over year on a product-mix shift. First-half product-and-services gross margin improved to 19.7% from 19.0%, while vendor incentives as a percentage of product-and-services sales declined 40 basis points for the half.
- Financing-asset sale gains recognized in net sales were $2.5 for the quarter and $4.0 for the half, compared with $0.9 and $3.2, respectively, in 2014. The prior-year six-month comparison also included a separate $1.4 gain in other income from repurchasing rights to payments under a financing arrangement; there was no comparable current-period gain.
- Capital expenditures, including purchases of equipment under operating leases, rose to $15.6 for the first half from $1.9. The financing segment’s portfolio of receivables and operating leases was $152.1, down 4.6% from September 2014.
- The board authorized repurchases of up to 500,000 shares from August 17, 2015 through August 16, 2016. No shares had been repurchased under this authorization by September 30; $2.5 of stock purchases during the half related to employee tax withholding.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said it expects cash, operating cash generation and available credit to fund working capital, capital expenditures and other requirements for at least the next 12 months, but cautioned that weaker IT demand could materially affect operating cash flow. It also expects to continue investing in expansion, including new locations and personnel, which may weigh on near-term results.
- Vendor and customer concentration are notable: Cisco represented approximately 50% of technology-segment product-and-services sales in the quarter and half; Hewlett-Packard and NetApp represented smaller portions. Management warns that vendor supply disruptions or reduced incentives could hurt results.
- A large law-firm customer in bankruptcy had $3.2 of notes and lease receivables, fully reserved, and was on non-accrual status. Total reserves for credit losses were $5.5.
- ePlus’s Lawson patent litigation remained unresolved. The appeals court vacated the injunction and contempt order after the patent was canceled; a rehearing petition was denied, and ePlus intended to seek Supreme Court review. The outcome and any recovery are uncertain.
- The company noted exposure to changes in IT spending, competition, credit losses, residual values on leased equipment, vendor programs, key personnel, cybersecurity and dependence on the GECDF facility. It reported no material change to previously disclosed risk factors and no material change in internal controls; disclosure controls were deemed effective.
- The filing lists amendments to the GECDF wholesale-financing and business-financing agreements dated October 20, 2015. Their detailed terms are not provided in the supplied filing text.
Important facts for investors to verify
- Whether revenue and margin trends persist, and how much reported financing revenue and earnings depend on asset-sale gains.
- Whether receivables growth and other working-capital movements continue to pressure operating cash flow.
- Available borrowing capacity and terms under the GECDF facility, including the October 20 amendments, and the impact of the rising floor-plan balance.
- Customer and vendor concentration, credit quality and the adequacy of reserves, including the fully reserved bankrupt-customer exposure.
- Developments and potential financial effects of the Lawson litigation and other contingencies.