ePlus Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal second quarter and six months ended September 30, 2018; comparatives are the corresponding 2017 periods. ePlus provides IT products, software, consulting, professional and managed services, and equipment financing, primarily in North America and the U.K. The technology segment generated about 97% of six-month net sales; financing generated about 23% of operating income.
Key financial results
Amounts below are in millions except per-share data. Period changes are versus the comparable 2017 period.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $345.0; down 7.1% | $701.6; down 5.8% |
| Gross profit / margin | $85.5 / 24.8% (23.6% prior year) | $166.2 / 23.7% (22.2% prior year) |
| Operating income / margin | $24.6 / 7.1% (down 14.8%; 7.8% prior-year margin) | $45.0 / 6.4% (down 8.7%; 6.6% prior-year margin) |
| Net earnings | $18.0; up 4.5% | $33.3; up 8.6% |
| Diluted earnings per share | $1.33, versus $1.23 | $2.45, versus $2.19, per the financial statements |
| Adjusted EBITDA (non-GAAP) | $29.9; down 10.3%; 8.7% margin | $55.3; down 4.3%; 7.9% margin |
| Operating cash flow | Not separately presented for the quarter | $(17.1), versus $13.3 provided |
At September 30, cash was $75.6 million, down from $118.2 million at March 31. Current assets were $577.8 million and current liabilities $340.4 million. Non-recourse notes payable totaled $65.3 million; accounts payable—floor plan was $120.8 million. There were no recourse notes payable outstanding. The $325 million WFCDF facility supported technology-segment working capital; the company reported covenant compliance and no balance on its $30 million accounts-receivable component.
Changes, management commentary and outlook
- Sales fell primarily on lower demand in technology, SLED, and telecom/media/entertainment markets; healthcare and other markets partly offset declines. A greater mix of services and software support, reported net, also reduced reported sales.
- Gross margin improved as product mix shifted toward services and software support and product margins improved. Operating expenses rose, partly reflecting a full-period contribution from the IDS acquisition. Lower financing-segment revenue and operating income reflected, in part, fewer large lease terminations than in the prior year.
- Net earnings rose despite lower operating income, helped by a lower effective tax rate: 27.7% for the quarter and 26.8% for the six months, versus 40.0% and 38.0%. Management attributed the reduction primarily to the U.S. corporate tax-rate change.
- Six-month operating cash use reflected working-capital needs, including higher receivables and inventory and lower accrued payables and other liabilities. Cash also funded $10.1 million of share repurchases and withholding-related share purchases. The cash conversion cycle increased to 25 days from 23, mainly due to higher days sales outstanding.
- Management said cash, 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. No specific earnings or revenue guidance was provided. Management cautioned that results may fluctuate with IT spending, customer demand, vendor incentives, interest rates, residual values and transaction timing.
Risks, contingencies and unusual items
- Cisco represented 45% of technology-segment sales in the quarter and 43% for the six months, creating vendor concentration exposure. The company also cited risks involving customer demand and credit, vendor incentives, competition, skilled personnel, cybersecurity, regulation, foreign exchange and access to financing.
- The WFCDF facility is important to daily working capital; the company warned its loss could materially adversely affect future results. The $325 million limit was temporarily elected through October 31, 2018, subject to the facility terms.
- Contingent consideration liabilities were $13.5 million. Management reported no material probable loss for asserted legal or other claims; outcomes remain uncertain. A maximum $0.3 million payment exposure on certain lease-transfer guarantees was considered remote.
- The company adopted the revenue-recognition standard using full retrospective application; prior-period figures were adjusted. It was evaluating forthcoming lease and expected-credit-loss accounting standards.
- Non-GAAP adjusted EBITDA and non-GAAP earnings measures exclude specified items and are not substitutes for GAAP results.
Important facts for investors to verify
- Reconcile the six-month diluted EPS discrepancy: the statements and key-metrics table report $2.45, while one MD&A passage says $2.42.
- Track whether revenue and adjusted gross billings stabilize, and whether improved gross margins can offset lower sales and higher operating expenses.
- Monitor working-capital conversion, receivables collections, cash balances, floor-plan borrowings and continued availability and renewal terms of the WFCDF facility.
- Assess the sustainability of financing-segment earnings, given lower post-contract earnings and transactional gains, as well as the growth and credit quality of financing receivables.
- Review Cisco and other vendor concentration, vendor incentive trends, and the effect of the lower tax rate on comparisons of GAAP and non-GAAP earnings.