ePlus Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2012 (fiscal 2013 third quarter). The filing is unaudited. ePlus sells IT products and services, provides leasing and financing, and offers supply-chain software. Its reportable segments are technology sales and financing.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Year-over-year change | Nine months ended Dec. 31, 2012 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $242.0 million | Up 8.0% | $746.8 million | Up 23.1% |
| Pre-tax earnings | $15.5 million | Up 7.6% | $46.0 million | Up 41.3% |
| Net earnings | $9.0 million | Up 3.3% | $27.1 million | Up 39.1% |
| Basic / diluted EPS | $1.11 / $1.11 | Prior year: $1.08 / $1.07 | $3.42 / $3.38 | Prior year: $2.33 / $2.31 |
| Operating cash flow | Not presented for the quarter | $13.8 million | Prior-year use of $24.5 million |
Amounts are stated in U.S. dollars. Prior-year comparisons use restated results. Product-and-services gross margin was 17.5% for both the quarter and nine-month period, versus 18.2% and 17.8%, respectively, a year earlier. Management attributed the decline mainly to vendor incentives and sales mix. Financing-segment pre-tax earnings rose 31.9% for the quarter and 13.0% for the nine months; technology-sales pre-tax earnings fell 1.9% for the quarter but rose 52.0% for the nine months.
At December 31, cash and cash equivalents were $42.2 million, versus $33.8 million at March 31, 2012. Total assets were $499.9 million and stockholders’ equity was $229.6 million. Accounts receivable was $221.9 million, up $47.3 million from March 31; management linked the increase to advanced integration projects billed but deferred pending completion. Deferred revenue was $51.3 million, compared with $15.9 million at March 31.
Financing balances included $81.7 million of floor-plan payables, $34.6 million of non-recourse notes and $1.5 million of recourse notes. The GECDF working-capital facility limit was increased to $175 million in July 2012; its accounts-receivable component had no balance outstanding. The company reported covenant compliance. Management said cash, operating funds and available credit should cover working capital, capital expenditures and other needs for at least the next 12 months.
For the nine months, investing activities used $0.9 million and financing activities used $4.5 million. Financing cash use included the $20.1 million special dividend, partly offset by net borrowings on recourse and non-recourse notes. Separately disclosed non-GAAP operating cash flow, adjusting for lease payments made directly by customers to lenders, was $25.2 million; the filing cautions that this measure is not a substitute for GAAP cash flow.
Material changes and unusual items
- Technology-sales revenue increased 23.5% for the nine months, reflecting demand, geographic expansion and prior-year acquisitions. The company added 113 employees over 12 months and had 869 employees at period end.
- Several advanced integration projects were not scheduled for completion by quarter-end. Deferred revenue increased $34.6 million year over year to $51.3 million, and open orders rose to $73.3 million from $56.0 million.
- The 2011 comparative revenue and corresponding costs were restated to report certain third-party software assurance, maintenance and services sales on a net, rather than gross, basis. This reduced reported revenue by $48.6 million for the prior-year quarter and $140.4 million for the prior-year nine months, without changing earnings or cash flows.
- The company paid a special cash dividend of $2.50 per share, totaling $20.1 million, in December. A new authorization permits repurchases of up to 500,000 shares through September 15, 2013.
- Financing revenue benefited from early lease terminations and equipment buyouts, as well as increased sales of financing receivables. Gains on sales of financing receivables were $4.4 million for the nine months, versus $3.2 million in the prior-year period.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management cited analyst expectations of U.S. IT spending growth averaging below 3% for calendar 2013, noted continued customer interest in cloud and virtualization, and said expansion, hiring and acquisitions may weigh on short-term results. The filing cautions that quarterly results can fluctuate with IT demand, customer spending, vendor incentives, product mix, lease residual values and the timing of transactions.
- Customer credit: A large law-firm customer filed for bankruptcy. At December 31, ePlus had $3.4 million of notes and lease-related receivables from it and reserves of $2.8 million for estimated probable losses.
- Vendor concentration: Cisco and Hewlett Packard represented 48.7% and 10.9% of nine-month product-and-services sales, respectively. Changes in vendor supply or incentive programs could affect results and margins.
- Credit facility dependence: The company relies on the GECDF facility for daily working capital; its loss could materially adversely affect future results. Facility availability is subject to eligible assets and covenants.
- Legal matters: In the Lawson patent case, an appeals court upheld infringement and the injunction but upheld the bar on monetary damages, and remanded the matter. ePlus was seeking contempt damages, with a hearing expected in early April 2013. A separate appeal concerning the Cyberco matter had oral argument in January 2013; outcomes and recoveries remain uncertain.
- Goodwill and controls: The annual test found the fair values of the Technology and Software Document Management reporting units exceeded carrying values; management said a 10% fair-value change would not have altered the conclusion. Management stated disclosure controls were effective at December 31, 2012.
Important facts for investors to verify
- Whether the deferred integration projects were completed and converted to recognized revenue and collected cash after quarter-end.
- Subsequent changes in receivables, credit-loss reserves and recovery prospects for the bankrupt law-firm customer.
- Ongoing availability, borrowing-base capacity and covenant compliance under the GECDF facility.
- Future gross margins and vendor incentives, particularly given Cisco and HP sales concentration.
- Developments and potential costs or recoveries in the Lawson and Cyberco litigation.
- The effect of the large special dividend and any future share repurchases on liquidity and capital allocation.