ePlus inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2022; comparisons are to the corresponding 2021 periods unless stated otherwise. Amounts are in millions of dollars except per-share data. ePlus provides IT products and technology, professional and managed services, and financing solutions. Its technology segment generated 97% of nine-month sales; financing generated 17% of operating income.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $623.5 | $494.8 | $1,575.5 | $1,369.5 |
| Gross profit / margin | $138.4 / 22.2% | $117.1 / 23.7% | $385.2 / 24.4% | $345.6 / 25.2% |
| Operating income / margin | $46.5 / 7.5% | $36.1 / 7.3% | $123.7 / 7.9% | $112.8 / 8.2% |
| Net earnings / margin | $35.7 / 5.7% | $26.4 / 5.3% | $86.5 / 5.5% | $81.4 / 5.9% |
| Diluted EPS | $1.34 | $0.98 | $3.24 | $3.03 |
| Adjusted EBITDA (non-GAAP) | $53.3 | $41.8 | $141.9 | $130.3 |
- Q3 sales rose 26.0%, led by product sales growth of 28.6%; services grew 7.9%. For the nine months, sales increased 15.0%, with product sales up 15.9% and services up 9.4%.
- Q3 gross profit increased 18.1%, but gross margin fell 150 basis points, mainly reflecting lower service margins and a less favorable mix of product sales. Nine-month gross margin fell 80 basis points.
- Q3 operating income increased 28.7%; nine-month operating income increased 9.7%. Nine-month net earnings rose 6.3%, slower than revenue growth, and net margin declined 40 basis points.
- Technology-segment sales grew 28.3% in Q3 and 16.6% year to date. Financing-segment sales fell 34.5% and 22.1%, respectively; its operating income declined to $5.4 million in Q3 and $21.5 million year to date.
Cash flow, balance sheet and debt
- For the nine months, operating cash flow was negative $147.0 million versus negative $121.5 million a year earlier. Working-capital investment included increases in receivables, inventory and financing receivables. Investing cash outflow was $15.6 million, including $13.3 million for the Future Com acquisition. Financing provided $103.6 million; cash fell $56.0 million to $99.4 million.
- At December 31, 2022, current assets were $1,293.4 million and current liabilities $793.6 million. Trade receivables were $674.9 million and inventory $244.8 million. Since March 31, 2022, cash declined from $155.4 million, while trade receivables and inventory increased from $430.4 million and $155.1 million, respectively.
- Debt included $95.0 million drawn on the revolving facility, $8.0 million of other recourse notes and $48.5 million of non-recourse notes. The separate accounts-payable floor-plan balance was $154.5 million. The revolving facility limit was $150 million and the floor-plan facility limit $425 million. Borrowings under the WFCDF facility have variable, market-based interest rates.
- Management said cash on hand, operating cash generation and available WFCDF borrowing capacity should cover working capital, capital expenditures and other ordinary requirements for at least the next year. The filing does not provide numerical earnings or revenue guidance.
Management commentary, risks and unusual items
- Management cited customer demand and higher prices for some products as drivers of technology growth. Product supply constraints were extending lead times and requiring higher inventory; management expected extended lead times to persist for at least the next few quarters. The technology-segment cash conversion cycle increased to 51 days from 47 days a year earlier.
- Operating costs increased, including salaries and benefits, general and administrative costs, credit-loss provisions and interest expense. Employee count rose to 1,745 from 1,554 a year earlier.
- Q3 other income included a $1.9 million receipt relating to a class-action claim and foreign-exchange gains. Year-to-date other expense was $3.1 million, primarily reflecting foreign-exchange losses, partly offset by the claim receipt.
- ePlus acquired certain Future Com assets and liabilities in July 2022 for $13.3 million, adding cybersecurity capabilities. The acquired business’s reported-period revenue and earnings were not material. The company’s annual goodwill impairment test found reporting-unit fair value above carrying value.
- Cisco accounted for 39% of technology-segment sales in Q3, indicating supplier concentration. Other cited risks include inflation, rising interest rates and wages, supply-chain disruption, dependence on key vendors and personnel, customer credit risk, cybersecurity, and the potential loss of the WFCDF credit facility. The company reported no material change to the risk factors in its FY2022 Form 10-K.
- Management concluded disclosure controls were effective. A new financing-segment ERP system was implemented in August 2022; controls were automated or modified, and the company said it would continue evaluating them.
- Legal proceedings arise in the ordinary course; management did not believe a material loss beyond amounts already recognized was reasonably possible as of December 31, 2022. A separate bylaw-related class action was dismissed following a bylaw amendment; the company agreed to pay plaintiff’s counsel $150,000 in fees and expenses.
Important facts for investors to verify
- Whether elevated receivables, inventory and negative operating cash flow reverse as orders are delivered and collected; monitor the 51-day cash conversion cycle.
- How supply constraints, pricing, customer demand and service mix affect gross margin, particularly given the year-over-year margin declines.
- Available borrowing capacity and covenant or borrowing-base headroom under the WFCDF facilities, alongside variable-rate interest costs and floor-plan obligations.
- Whether financing-segment earnings and proceeds from financial-asset sales remain below prior-year levels, and how those sales affect future revenue.
- Exposure to Cisco and other key suppliers, and whether the Future Com acquisition and financing-segment ERP deployment deliver expected benefits without added execution or control issues.