Business context and reporting period
ePlus Inc. filed this unaudited Form 10-Q for the three months ended June 30, 2019, the first quarter of its fiscal year ending March 31, 2020. The company provides IT products, consulting and managed services, and technology financing, primarily in North America and the UK. Its technology segment generated 97% of quarterly net sales; financing generated 31% of operating income.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars.
- Revenue: Net sales were $381.4, up 7.0% from $356.5. Product sales rose 4.0% to $335.6; services rose 35.8% to $45.8. Adjusted gross billings, a non-GAAP measure, increased 13.7% to $548.4.
- Profit and margins: Gross profit was $92.6, up 14.8%; gross margin expanded to 24.3% from 22.6%. Operating income was $22.8, up 11.2%, with operating margin of 6.0% versus 5.7%. Net earnings were $16.2, up 6.0%; diluted EPS was $1.20 versus $1.12. Adjusted EBITDA was $28.6, up 12.6%, and adjusted EBITDA margin was 7.5% versus 7.1%. These EBITDA and adjusted earnings measures are non-GAAP.
- Segment results: Technology sales increased 6.2% to $368.5, but operating income edged up 1.3% to $15.7. Financing sales rose 32.8% to $12.8 and operating income increased 42.4% to $7.0.
- Cash flow: Operating activities used $87.4, compared with $49.0 used a year earlier. Investing activities used $1.2; financing activities provided $44.3. Cash declined $44.2 during the quarter to $35.6. Operating cash use included a $58.2 increase in financing receivables. Comparability is affected by lease-accounting adoption: 2019 financing-receivable movements are presented in operating cash flow, whereas the company did not recast 2018.
- Liquidity and obligations: Current assets were $626.2 and current liabilities $407.4 at June 30. The balance sheet included $136.0 of floor-plan payables and $72.9 of non-recourse notes payable, compared with $116.1 and $48.6, respectively, at March 31. There were no outstanding borrowings under the facility’s accounts-receivable component. The $250 facility limit was temporarily increased to $325 on July 31, 2019. The company reported compliance with facility covenants.
- Other metrics: Effective tax rate was 28.7%, up from 25.7%. The company repurchased 148,790 shares under its plan and withheld another 38,811 shares for employee tax obligations. Total assets were $874.8 and stockholders’ equity $428.6 at quarter-end.
Material changes and unusual items
- Growth reflected both organic demand and the January 2019 acquisition of SLAIT Consulting. SLAIT contributed to services growth and higher operating costs; its acquired revenue and earnings were described as not material. Purchase accounting remained preliminary. The acquisition consideration was approximately $50.0, including $34.4 of goodwill.
- Financing-segment results benefited from $3.3 of gains on sales of financial assets, versus $1.3 in the prior-year quarter; proceeds from those sales were $69.9 versus $46.9.
- ePlus adopted ASC 842 leases in the quarter. Adoption added $12.7 of right-of-use assets and $12.3 of lease liabilities at the start of the quarter; comparative periods were not updated.
- Operating expenses rose 16.0% to $69.9, including higher variable compensation, software costs, and SLAIT-related expenses. Vendor incentives as a percentage of technology-segment sales fell 40 basis points year over year.
Outlook, commentary, and risks
No specific revenue or earnings guidance was provided. Management said cash on hand, operating funds, available credit, and potential portfolio monetization should be sufficient for working capital, capital expenditures, and other needs for at least the next 12 months. It expects to continue investing in growth, including potential acquisitions and new locations, which could increase working-capital needs or weigh on short-term results.
Risks highlighted include dependence on the WFCDF facility for technology-segment working capital (whose loss could materially harm results), availability and terms of financing, customer IT spending and credit quality, vendor incentives and product supply, competition and staffing, and changes in interest rates, currency rates, technology, and regulation. Cisco products represented 40% of technology-segment sales in the quarter. Management reported no legal proceedings expected to have a material effect and no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much operating cash use reflects expansion of financing receivables versus recurring working-capital needs, considering the ASC 842 cash-flow classification change.
- Whether gross-margin gains and growth persist if vendor incentives decline or revenue mix changes.
- The contribution and integration costs of SLAIT, including final purchase-accounting adjustments and goodwill implications.
- Availability, borrowing-base constraints, and covenant compliance for the WFCDF facility, including the temporary limit increase.
- The sustainability of financing-segment gains from asset sales and the growth and credit quality of the financing portfolio.