ePlus inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019. Comparisons are with the three months ended June 30, 2017 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless specified.
Business context and results
ePlus provides IT products, software, consulting, professional and managed services, and technology financing. Its technology segment accounted for 97% of quarterly net sales; the financing segment accounted for 3%. The interim statements are unaudited.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $356.5 | $373.4 | -4.5% |
| Gross profit / gross margin | $80.7 / 22.6% | $77.6 / 20.8% | Profit +4.0%; margin +180 bps |
| Operating income / margin | $20.5 / 5.7% | $20.5 / 5.5% | Income approximately flat |
| Net earnings | $15.3 | $13.4 | +13.8% |
| Diluted EPS | $1.12 | $0.96 | +16.7% |
| Adjusted EBITDA / margin | $25.4 / 7.1% | $24.4 / 6.5% | EBITDA +3.9% |
Technology segment sales declined 4.4% to $346.9 million; gross profit rose 4.5% to $72.8 million, while operating income fell 3.3% to $15.5 million. Financing segment sales fell 7.5% to $9.7 million; operating income increased 11.1% to $4.9 million. Technology adjusted gross billings, a non-GAAP volume measure, decreased 1.1% to $482.3 million.
Cash flow, balance sheet and debt
- Operating cash flow was a use of $49.0 million, compared with a use of $3.5 million a year earlier. Management attributed the current-period outflow mainly to working-capital investment, including a $60.1 million increase in accounts receivable and a $12.4 million increase in inventory.
- Investing cash flow was a use of $31.8 million, primarily from $49.4 million of financing receivables issued and $7.2 million of assets purchased for lease or financing. Financing cash flow provided $20.0 million.
- Cash declined $60.7 million from March 31 to $57.5 million. Current assets were $571.6 million and current liabilities $346.4 million at June 30.
- Non-recourse notes payable were $54.6 million, up from $50.9 million at March 31; there were no recourse notes payable at quarter-end. Accounts payable—floor plan was $129.6 million, versus $112.1 million at March 31. The technology credit facility had a stated $250 million limit at June 30, with no balance under its accounts-receivable component.
- Financing receivables and operating leases totaled $140.7 million at June 30, compared with $128.2 million at June 30, 2017. The company repurchased 70,445 shares under its plan for $5.5 million and withheld 37,086 shares for employee tax obligations for $3.6 million.
Material changes and management commentary
- Management attributed lower sales to softer demand in technology, SLED (state and local government and education), and telecom, media and entertainment markets, partly offset by financial services and healthcare. Gross-margin improvement reflected a greater mix of third-party maintenance, software assurance, subscription/SaaS and services, higher product margins, and increased vendor incentives.
- Operating expenses rose 5.5% to $60.2 million, including higher variable compensation, additional employees and general and administrative costs. Headcount was 1,249, up 2.1% year over year.
- The effective tax rate fell to 25.7% from 35.4%, primarily reflecting the U.S. federal tax-rate reduction to 21%; the current-quarter rate also included a $0.6 million tax benefit related to vesting share-based compensation.
- Net gains on sales of financial assets were $1.3 million, compared with $2.3 million a year earlier. Cisco represented 40% of technology-segment sales, down from 49% a year earlier, leaving notable vendor concentration.
- The company adopted ASC Topic 606 on April 1, 2018 using the full retrospective method. It increased prior-year net sales and cost of sales by $6.2 million, with no impact on retained earnings at March 31, 2018.
Outlook, risks and contingencies
No specific full-year earnings or revenue guidance is provided. Management said cash on hand, operating cash generation, available credit and potential portfolio monetization should fund working capital, capital expenditures and other requirements for at least the next 12 months. It also cautioned that growth, product delays or weaker IT demand could affect cash flows. The company elected on July 17, 2018 to temporarily raise the WFCDF facility limit to $325 million; the facility is important to daily working capital, and its loss could materially harm future results. The company reported covenant compliance at June 30.
- Risks include reduced vendor incentives, customer or vendor concentration, changes in customer IT spending, competition and technology shifts, customer credit losses, residual-value uncertainty, foreign exchange and interest-rate movements, and dependence on skilled staff and vendor relationships.
- The filing identifies rising interest rates as a risk to financing spreads and the ability to monetize receivables and leased assets. WFCDF borrowings are variable-rate; most other disclosed financing is fixed-rate.
- No legal proceeding with an expected material loss contingency was reported. The company disclosed a maximum potential $0.4 million payment under certain lease-termination guarantees and considered payment remote. Performance guarantees were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sales decline and working-capital cash outflow reverse in subsequent quarters, particularly receivables growth and collections.
- Whether gross-margin gains persist if product mix changes or vendor incentives decline; also track Cisco concentration and broader vendor exposure.
- The actual availability and terms of the WFCDF facility, its temporary $325 million limit election, and the company’s continued covenant compliance.
- How financing-asset sales, gains and proceeds affect recurring earnings and cash generation; the filing reports lower asset-sale gains year over year.
- Comparability of reported periods after retrospective adoption of Topic 606, and the effect of the forthcoming lease and expected-credit-loss accounting standards.
- Non-GAAP measures are supplemental, company-defined measures and are not substitutes for GAAP results. The filing’s cash-conversion-cycle table reports 22 days versus 25 days a year earlier, while the accompanying narrative states 26 days; verify the intended comparison.