ePlus Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2012. Financial statements are unaudited. Unless otherwise noted, amounts are in millions of dollars. Prior-year results are as restated.
Business context
ePlus provides IT products and services, supply-chain management software, and equipment leasing and financing. Its reportable segments are technology sales and financing.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $260.1; up 27.7% year over year | $504.8; up 31.9% |
| Pretax earnings | $16.9; versus $11.8 | $30.5; versus $18.1 |
| Net earnings | $10.0; up 42.0% | $18.1; up 68.1% |
| Diluted EPS | $1.27; versus $0.85 | $2.29; versus $1.28 |
| Product and services gross margin | 18.0%; versus 18.1% | 17.5%; versus 17.6% |
Technology sales drove growth: segment revenue rose 28.7% in the quarter and 33.0% for the six months; pretax earnings increased 61.5% and 94.2%, respectively. Financing segment revenue grew 3.1% and 6.5%, while pretax earnings declined 22.7% in the quarter and 2.6% for the six months. The company attributed technology sales growth primarily to increased customer demand, particularly from Fortune 100 companies. Higher salaries and benefits reflected hiring and commissions; headcount increased to 851 company-wide from 759 a year earlier.
For the six months, cash used in operating activities was $7.4, improved from $20.1 used in the prior-year period. Investing activities provided $5.6, compared with $2.6 used; financing activities provided $11.9, versus $7.6 used. Cash and cash equivalents increased $10.2 from March 31 to $43.9. Management’s adjusted operating cash flow measure, including principal payments made directly by lessees to lenders, was negative $0.02 for the six months; the comparable prior-year measure was negative $11.5.
Balance sheet, debt and liquidity
At September 30, total assets were $440.8, total liabilities $202.1, and stockholders’ equity $238.7. Cash and short-term investments totaled $45.9. Accounts receivable was $194.3, and net investment in leases and leased equipment was $112.4.
Debt included $33.0 of non-recourse equipment notes and $1.7 of recourse notes. The technology subsidiary had $84.4 outstanding under the floor-plan facility, classified as accounts payable; no balance was outstanding under its $30.0 accounts-receivable component. The GECDF facility’s aggregate limit was increased from $125 to $175 in July 2012. Management reported covenant compliance and believes cash, operating funds and available credit will meet needs for at least the next 12 months.
Material changes, outlook and risks
- Prior-year third-party software assurance, maintenance and services revenue and related costs were restated to net presentation because ePlus concluded it acted as agent. The restatement reduced reported 2011 revenue by $59.2 for the quarter and $91.8 for the six months, with no effect on earnings, EPS or cash flows.
- Vendor concentration increased: Cisco and Hewlett Packard represented 51.6% and 10.1%, respectively, of product and services sales for the six-month period. Management cautioned that reduced vendor incentives could pressure margins.
- A customer that filed for bankruptcy had $3.6 of notes and lease-related receivables at September 30, with $2.9 reserved as the estimated probable loss.
- Management cited uncertain economic and IT-spending conditions, competition, customer credit risk, hiring and retention, vendor relationships and incentives, lease residual values, and access to financing as risks. It gave no specific revenue or earnings guidance; it noted analysts had lowered forecasts for IT spending in the second half of 2012 and 2013.
- In the Lawson patent dispute, ePlus had obtained an infringement verdict and injunction; appeals and its contempt motion remained unresolved. A separate appeal related to the Cyberco matter was also pending. Outcomes and potential recoveries were uncertain.
- The filing reported effective disclosure controls as of September 30 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rapid technology-sales growth can be sustained without further gross-margin pressure or disproportionate expense growth.
- Collection trends and reserve adequacy for the bankrupt customer and other receivables, including lease-credit exposures.
- Availability, covenants and continued access to the GECDF facility, which management says is important to working capital and daily operations.
- Vendor concentration and the continuation of manufacturer incentive programs.
- Developments and financial implications of the Lawson and Cyberco litigation.
- Cash generation, noting reported operating cash flow remained slightly negative after management’s adjustment for direct lessee payments.