ePlus Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2011 (fiscal 2012 third quarter). Financial statements are unaudited; amounts below are in millions unless noted.
Business context and reporting period
ePlus sells IT products, services and supply-chain software, and provides equipment leasing through its technology sales and financing segments. It filed as an accelerated filer. The company acquired security-services provider NCC Networks in June 2011 and, after quarter-end, acquired VantiCore for $2.2 million plus assumed debt of $0.3 million.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2011 | Year-over-year | Nine months ended Dec. 31, 2011 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $272.6 | +18.5% | $747.0 | +14.6% |
| Earnings before tax | $14.4 | +$1.1 | $32.6 | -$1.7 |
| Net earnings | $8.7 | +15.8% | $19.5 | -3.3% |
| Diluted EPS | $1.10 | vs. $0.89 | $2.35 | vs. $2.41 |
| Product and services gross margin | 14.8% | vs. 15.5% | 14.3% | vs. 14.7% |
For the quarter, product-and-services revenue rose 19.2%; financing-segment revenue increased 9.9%. For the nine months, technology-segment revenue rose 15.9%, while financing revenue fell 13.9% and financing pretax earnings declined 19.9%. Management attributed year-to-date earnings pressure partly to hiring and lower financing transaction volumes. The effective tax rate was 39.4% for the quarter and 40.1% year to date.
Operating cash flow was negative $24.5 million for the nine months, compared with negative $32.6 million a year earlier; investing cash flow was negative $5.3 million and financing cash flow was positive $8.1 million. Receivables growth and increased lease investment used cash. The company’s adjusted, non-GAAP operating cash use—adding back lease payments made directly by lessees to lenders—was $11.9 million, compared with $10.4 million.
Cash was $54.1 million at December 31, down from $75.8 million at March 31. Total assets were $414.4 million and total liabilities $198.0 million. Floor-plan payables were $83.0 million, versus $63.8 million at March 31; non-recourse notes payable were $23.4 million, versus $29.6 million. No balance was drawn on the $30 million accounts-receivable component of the GECDF facility. The company said cash, operating funds and available credit should meet requirements for at least 12 months.
Material changes, outlook, risks and unusual items
- Adoption of new multiple-deliverable revenue guidance on April 1, 2011 allowed product revenue to be recognized upon delivery separately from related services. It added $11.6 million and $28.5 million to reported revenue for the quarter and nine months, respectively. Under the prior method, nine-month pretax earnings would have been $27.9 million rather than $32.6 million. Management cautioned that this timing change affects comparability.
- Share repurchases totaled 705,403 shares for $18.1 million during the nine months. The company had repurchased 4.6 million shares cumulatively since 2001.
- Product-and-services gross margin declined year over year. Management cited product/service mix, competitive pricing and vendor incentives; Cisco represented 45% of quarterly product-and-services sales, up from 35%, while HP represented 13%, down from 20%.
- Management expects to continue adding sales locations and staff where opportunities arise, noting these investments may weigh on short-term results. It gave no specific revenue or earnings guidance. It cited uncertainty in the economy and IT spending as potential pressures.
- The $125 million GECDF facility is important to technology-sales working capital and may be terminated on 90 days’ notice. Management reported covenant compliance and no expected breach; loss of the facility could materially harm results. Availability is subject to collateral and other limits.
- ePlus holds a permanent injunction against Lawson Software following a patent-infringement verdict; Lawson appealed, and ePlus sought a contempt finding and appealed the denial of monetary damages. The outcome and any recovery are uncertain, and litigation costs are significant. The company also described an ongoing Cyberco-related recovery suit following summary judgment for the defendant.
- Other notable exposures include lease residual-value estimates, customer credit and collection risk, reliance on vendor incentive programs, and potential changes in customer spending. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much reported growth and earnings reflect the new revenue-recognition timing, and the comparable results under the prior method.
- Whether lower gross margins and reduced year-to-date financing revenue and earnings persist.
- Receivables, lease investment and operating cash flow trends, including the distinction between GAAP and adjusted cash-flow measures.
- GECDF facility availability, borrowing-base constraints, covenant compliance and the company’s ability to replace the facility if needed.
- Exposure to major vendors, lease residual values and credit losses, and developments in the Lawson litigation and NCC contingent consideration.