ePlus Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2020 (ePlus fiscal second quarter), with year-to-date comparisons for the six months ended September 30. The filing is unaudited. ePlus provides IT products, services, managed solutions, and technology financing; the technology segment generated 97% of six-month sales.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $433.1, up 5.2% | $788.1, down 0.6% |
| Gross profit / margin | $99.0 / 22.9%, versus $103.0 / 25.0% | $197.5 / 25.1%, versus $195.7 / 24.7% |
| Operating income / margin | $28.5 / 6.6%, versus $28.4 / 6.9% | $53.5 / 6.8%, versus $51.1 / 6.4% |
| Net earnings | $19.8, down 1.3% | $37.2, up 2.5% |
| Diluted EPS | $1.48, versus $1.51 | $2.78, versus $2.71 |
| Adjusted EBITDA / margin | $33.6 / 7.7%, versus $35.4 / 8.6% | $64.3 / 8.2%, versus $64.0 / 8.1% |
Six-month operating cash flow was $8.4 million, compared with cash used of $54.4 million a year earlier. Investing activities used $2.8 million; financing activities provided $69.7 million. Cash rose to $161.1 million at September 30 from $86.2 million at March 31, 2020.
Total assets were $1,038.7 million and total liabilities were $515.6 million. Current assets were $768.0 million against current liabilities of $476.5 million. The balance sheet included $219.0 million of floor-plan payables, $2.3 million of current recourse notes, and $38.1 million of non-recourse notes payable in total. The WFCDF facility limit was $275 million, with a $100 million accounts-receivable sublimit; no amount was outstanding on that component at September 30.
Material changes and management commentary
- Second-quarter sales rose as product sales increased, including a shift toward hardware and third-party software licenses recorded on a gross basis. That mix lowered gross margin; management attributed the quarterly decline to lower-margin product mix and a smaller proportion of net-reported services and subscription-related sales.
- For the six-month period, sales declined modestly as technology and healthcare demand weakened, partly offset by telecom, media and entertainment, state and local government, financial services, and other markets. Services sales increased 3.6% year over year.
- Quarterly SG&A fell 5.2%, partly due to lower travel, office, and personnel-related expenses during the pandemic. The six-month operating-income improvement reflected higher gross profit and lower operating costs.
- Cash growth was substantially supported by temporary vendor payment-term extensions that deferred $76.3 million of payments by 30 days, and $4.8 million of payroll-tax deferrals under the CARES Act. Most vendor extension programs ended in October 2020. The company stated cash, operating funds, and available credit were expected to meet requirements for at least the next year, while noting COVID-19 uncertainty.
- Financing-segment net gains on sales of financial assets were $7.0 million for the six months, on total sale proceeds of $191.7 million. The segment’s operating cash flow was negative $36.0 million, mainly reflecting investment in financing receivables.
Outlook, risks, and unusual items
No specific revenue, earnings, or EPS guidance is provided in the filing. Management said the duration and impact of COVID-19 remain uncertain and may affect customer demand and collections, vendor and supply-chain operations, and access to financing. Financing lenders had tightened approval standards, potentially requiring ePlus to fund transactions itself or decline them. The company also cited reliance on the WFCDF facility for working capital; its loss could materially harm operations. On October 1, 2020, after quarter-end, ePlus elected to temporarily increase the facility limit to $350 million for at least 30 days.
Other risks include dependence on key vendors and vendor incentives, customer credit risk, interest-rate and foreign-currency exposure, and economic and technology-market changes. Cisco products represented 40% of technology-segment sales for the six months, indicating supplier concentration. The expected-credit-loss standard was adopted April 1, 2020; its cumulative adoption adjustment was not significant. The allowance for credit losses increased to $4.9 million from $3.2 million at adoption. Management reported no material change in previously disclosed risk factors, no litigation believed likely to have a material adverse effect, and effective disclosure controls.
Important facts for investors to verify
- Whether sales growth and margin performance persist as product mix changes, especially after the second-quarter gross-margin decline.
- How operating cash flow and liquidity evolve after temporary vendor payment extensions end and deferred payroll taxes become payable.
- Available borrowing capacity and continuing access to the WFCDF facility and financing-segment lenders.
- Customer credit quality, receivables aging, and the adequacy of credit-loss reserves given pandemic-related uncertainty.
- Exposure to Cisco and other major vendors, and the contribution of financial-asset sales to financing-segment results.