ePlus Inc. — Q2 FY2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended September 30, 2014, ePlus’s fiscal second quarter and first half of fiscal 2015. The company sells IT products and services and provides customer equipment financing through technology and financing segments. Financial statements are unaudited; amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended Sept. 30, 2014 | Six months ended Sept. 30, 2014 |
|---|---|---|
| Total revenue | $297.5; up 9.7% year over year | $569.8; up 7.4% |
| Operating income | $20.3; up 38.3% | $35.1; up 25.0% |
| Net earnings | $12.0; up 39.1% | $21.4; up 30.3% |
| Diluted EPS | $1.63, versus $1.06 | $2.86, versus $2.03 |
| Consolidated gross margin | 21.5%, versus 19.5% | 21.1%, versus 19.9% |
- Product and services revenue was $286.6 million for the quarter and $547.9 million for the half year. The technology segment drove growth, with segment earnings of $17.6 million for the quarter and $30.1 million year to date.
- Financing segment revenue was $9.1 million for the quarter, up 13.6%, but $18.0 million for the half year, down 4.4%, chiefly reflecting lower gains on sales of financial assets. Segment earnings were $2.7 million and $6.4 million, respectively; the half-year result included a $1.4 million gain on repurchasing rights to financing payments.
- Management attributed improved product and services margins primarily to a more favorable mix, including third-party maintenance, software assurance and services; vendor incentives also contributed. Management cautioned that reduced vendor incentives could pressure margins.
- Cash and cash equivalents were $62.9 million at September 30, down $17.2 million from March 31. Current assets were $420.4 million and current liabilities $268.6 million. Cash flows were negative $11.0 million from operations, negative $22.2 million from investing, and positive $15.9 million from financing. Operating cash use reflected working-capital movements, notably a $29.3 million cash outflow from trade payables. The company’s adjusted, non-GAAP operating cash flow, including customer payments made directly to lenders, was negative $4.0 million.
- At period end, recourse and non-recourse notes payable totaled $68.1 million ($2.9 million recourse and $65.3 million non-recourse); accounts payable—floor plan was $120.6 million. The GECDF facility limit was increased to $225 million in July, with $120.6 million outstanding under the floor-plan component and no outstanding accounts-receivable-component balance. The company reported compliance with facility covenants and said available cash, operating funds and credit were expected to meet needs for at least the next 12 months.
Material changes and notable items
- Shares repurchased during the six months totaled 651,019 under repurchase plans for $32.8 million, plus $2.0 million of shares withheld for employee tax obligations. The board authorized repurchases of up to 500,000 shares over 12 months beginning June 16, 2014. Lower weighted-average shares contributed to the increase in EPS.
- ePlus acquired Evolve Technology Group on August 18 for a stated total purchase price of $10.5 million, including contingent consideration. The acquisition expanded its western U.S. presence; $7.8 million of cash, net of cash acquired, was reported in investing activities.
- In the Lawson patent litigation, the U.S. Patent and Trademark Office canceled the patent at issue and the Appeals Court vacated the injunction and contempt order on July 25, 2014. ePlus petitioned for rehearing; the outcome remained uncertain. Separately, ePlus received $6.2 million on October 31, 2014 from a class-action settlement; the company expected to recognize it as other income in fiscal Q3, not in this quarter’s results.
- Cisco products represented approximately 56% of technology-segment product and services sales in the quarter, up from 47% a year earlier. Hewlett-Packard represented 8% and NetApp 6%.
Outlook, commentary and risks
The filing gives no specific revenue or earnings forecast. Management said it expects to continue expanding sales locations and hiring in targeted markets when suitable personnel and locations are available, while noting these investments may weigh on near-term results. It cited market-share gains, customer spending, vendor referrals and focus on faster-growing areas such as virtualization, collaboration and security as drivers of growth. Results may vary with IT spending, vendor incentives, customer and vendor concentration, financing availability, credit losses, lease residual values, asset-sale timing and litigation. Management also warned that quarterly results are not necessarily indicative of future performance.
Investor facts to verify
- Whether technology-segment growth and improved gross margins persist, especially given vendor incentive exposure and Cisco concentration.
- How working-capital movements affect operating cash generation and whether liquidity remains adequate as floor-plan balances and financing receivables change.
- The impact of continued share repurchases on cash, share count and per-share results.
- The final accounting and cash impact of the Evolve acquisition and the $6.2 million settlement payment received after quarter-end.
- The outcome of the Lawson rehearing petition and any resulting financial or legal exposure.