ePlus Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2014, the first quarter of fiscal 2015. Amounts are in U.S. dollars; financial statement amounts are unaudited. ePlus provides IT products and services and equipment financing through its technology and financing segments.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $272.3 million | $259.3 million | +5.0% |
| Operating income | $14.7 million | $13.4 million | +10.4% |
| Net earnings | $9.5 million | $7.9 million | +20.7% |
| Diluted earnings per share | $1.25 | $0.97 | +28.9% |
| Consolidated gross margin | 20.7% | 20.3% | +0.4 percentage points |
Product and services revenue increased 5.8% to $261.4 million; financing revenue fell 17.5% to $8.9 million. Product and services gross margin improved to 18.5% from 17.7%, which management attributed to improved product margins, vendor incentives, and service mix. The effective tax rate was 41.4%, compared with 41.2%.
Technology segment revenue rose 6.0% to $263.4 million and segment earnings rose 30.0% to $12.4 million. Financing segment revenue declined 17.8% to $8.9 million; segment earnings were $3.7 million, down slightly from $3.8 million. Lower gains from asset sales weighed on financing revenue.
Cash flow, balance sheet, and liquidity
- Operating cash flow was negative $5.4 million, versus negative $7.1 million a year earlier. Investing cash flow was negative $0.7 million, versus negative $15.1 million. Financing cash flow was negative $7.3 million, compared with positive $42.2 million.
- Cash decreased $13.3 million during the quarter to $66.9 million. Share repurchases were a major use of cash: cash-flow statements report $29.2 million, including purchases under the repurchase plans and shares withheld for employee taxes.
- At June 30, current assets were $387.9 million and current liabilities $244.1 million. Total assets were $530.5 million; total liabilities were $281.8 million.
- Recourse notes payable totaled $1.9 million and non-recourse notes payable $64.2 million. The technology subsidiary also had $104.0 million outstanding under its floor-plan facility; there were no borrowings under its accounts-receivable component. These categories are distinct.
- The GECDF facility limit was $175 million at quarter-end. On July 31, 2014, it was amended to a $225 million limit, retaining a $30 million accounts-receivable sub-limit. The company said it was compliant with facility covenants at June 30 and expected available cash, operating funds, and credit to meet requirements for at least 12 months.
- Financing receivables and operating-lease investments totaled $158.4 million at June 30, compared with $138.3 million a year earlier. The filing reports a $3.3 million exposure to a customer that filed for bankruptcy, with reserves of $3.2 million.
Material changes, outlook, and risks
- Management attributed technology growth to customer demand, market-share gains, new customers, and focus on faster-growing areas such as virtualization, collaboration, and security. The company added employees, particularly in sales and engineering, and expects to continue investing in new locations and staff; these investments may weigh on near-term results.
- Financing results included a $1.4 million gain in other income from repurchasing rights to payments under a financing arrangement. Lower transactional gains on sales of financial assets also reduced financing revenue; such gains and other transaction-related income may not recur.
- The company repurchased 552,073 shares under its plans during the quarter at an average $49.31 per share. A new authorization permits repurchase of up to 500,000 shares over 12 months beginning June 16, 2014.
- In the Lawson patent litigation, the USPTO issued a notice canceling the patent at issue on April 3, 2014. On July 25, the appeals court vacated the injunction and contempt order underlying an $18.2 million judgment; ePlus said it was assessing the opinion. Collection had been stayed pending appeal. The outcome and any recovery remain uncertain.
- Key risks include reliance on major vendors and vendor incentive programs, customer IT spending, competition and technology shifts, retaining skilled personnel, customer credit and lease residual values, and reliance on the GECDF facility. Cisco represented approximately 47% of technology product-and-services sales; HP and NetApp represented about 7% and 6%, respectively.
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results may fluctuate and that one quarter should not be relied on as an indication of future performance. The company was evaluating the future revenue-recognition standard (ASU 2014-09), effective for it beginning fiscal 2018.
Most important facts for investors to verify
- Subsequent developments and financial implications of the Lawson patent appeal, including whether any judgment or recovery remains possible.
- How much of earnings growth depended on the $1.4 million debt-repurchase gain and asset-sale gains, and whether financing revenue can recover.
- Availability, borrowing-base limits, and covenant headroom under the amended $225 million GECDF facility, given the company’s reliance on it for working capital.
- Credit quality and reserve adequacy for financing receivables, especially the bankrupt customer exposure and other individually impaired balances.
- Whether technology-segment margin gains and vendor incentives are sustainable amid vendor concentration and continued hiring and expansion spending.