ePlus Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2014, ended September 30, 2013. The company provides IT products and services, financing and leasing, and supply-chain software. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Three months ended Sept. 30, 2013 | Year-over-year | Six months ended Sept. 30, 2013 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $271.1 | +4.3% | $530.4 | +5.1% |
| Pretax earnings | $14.7 | −13.1% | $28.0 | −8.0% |
| Net earnings | $8.6 | −14.4% | $16.4 | −9.1% |
| Diluted EPS | $1.06 | vs. $1.25 | $2.03 | vs. $2.25 |
Product-and-services gross margin was 17.8% for the quarter, down from 18.0%; for the six-month period it was 17.7%, up from 17.5%. Management attributed quarterly pressure partly to vendor incentives and the mix of third-party services reported net, while the six-month improvement reflected higher professional-services margins. The effective tax rate was 41.5% for the quarter and 41.4% for six months, compared with 40.7% and 40.6% a year earlier.
Cash flow, balance sheet and liquidity
- For the six months, operating cash flow was $5.6 million, compared with cash used of $7.4 million a year earlier. Investing used $25.3 million; financing provided $20.7 million. Cash increased $1.0 million to $53.7 million from March 31, 2013.
- Management’s adjusted, non-GAAP operating cash flow, which adds customer principal payments made directly to lenders, was $14.6 million versus negative $0.02 million. The filing cautions that these non-GAAP measures are not substitutes for GAAP cash flows.
- Total assets were $465.3 million and total liabilities $212.5 million at September 30. The balance sheet included $80.3 million of floor-plan payables and $43.7 million of recourse and non-recourse notes payable.
- The GECDF facility had a $175 million aggregate limit; $80.3 million was outstanding under its floor-plan component and none under its accounts-receivable component. The company reported covenant compliance. It also had $49.1 million of net notes receivable and $91.4 million invested in leases and leased equipment.
- Management said cash, operating funds and available credit should be sufficient for working capital, capital expenditures and other needs for at least the next 12 months. It noted reliance on the GECDF facility for technology-segment working capital and that losing it could materially harm results.
Changes, outlook and notable matters
- Technology-segment revenue rose 4.5% in the quarter and 4.8% for six months, but pretax segment earnings fell 7.8% and 9.4%, respectively. Salaries and benefits increased with hiring and commissions; technology staffing rose to 881 from 793 year over year.
- Financing-segment revenue fell 3.2% in the quarter, while pretax earnings declined 51.7%. For six months, revenue increased 12.7% and pretax earnings were essentially flat. Higher gains on sales of financial assets helped six-month financing revenue: $5.6 million versus $1.7 million a year earlier. Management cautioned that such gains and other transaction-dependent income may not recur.
- Open orders were $65.7 million at September 30, versus $54.8 million a year earlier; management expected them to be processed in the customary timeframe. The filing gives no formal earnings or revenue guidance. Management described continued hiring and geographic and solution expansion, which may weigh on near-term results.
- A court entered an $18.2 million judgment for ePlus in its Lawson patent dispute and ordered daily coercive fines. Lawson appealed, posted a bond, and collection and the daily fine were stayed pending appeal. The company’s patent reexamination appeal also remained unresolved; outcomes are uncertain.
- Management identified a material weakness in financial reporting controls over accounting for assignment agreements and concluded disclosure controls were ineffective as of September 30. An assignment had been recorded as a sale when it should initially have been treated as a secured borrowing; management said the June-quarter impact was not material. The company revised authorizations, enhanced review procedures and provided training, but remediation was ongoing.
- The filing reports a prior-period EPS correction: 2012 basic and diluted EPS were reduced by $0.03 each for the quarter and by $0.06 and $0.04, respectively, for six months, following changes to the share-count calculation.
Important facts for investors to verify
- Progress in remediating the material weakness and the reliability of future reporting on financial-asset transfers.
- Status and potential collectability of the Lawson judgment, appeals and related patent proceedings.
- Whether operating cash generation remains adequate after considering working-capital needs, lease and note-receivable growth, and customer payments routed directly to lenders.
- Sustainability of financing-segment gains from asset transfers and the company’s exposure to customer credit losses, including the bankruptcy-related reserve.
- Dependence on the GECDF facility and major vendors: Cisco accounted for 50.5% of six-month product-and-services sales, with Hewlett Packard at 10.4% and NetApp at 7.4%.
- Whether vendor incentives, margins, and rising personnel costs support profitable growth; the filing provides no formal financial forecast.