ePlus inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, three months ended June 30, 2022. Comparative results are for the three months ended June 30, 2021, unless noted. Amounts are in millions of dollars except per-share data.
Business context
ePlus provides IT products and solutions, consulting, professional and managed services, and technology financing. Its technology segment generated 98% of quarterly net sales; financing generated 2%. The filing is unaudited.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $458.4 | $416.6 |
| Gross profit / gross margin | $113.5 / 24.8% | $105.5 / 25.3% |
| Operating income / margin | $33.2 / 7.2% | $32.5 / 7.8% |
| Net earnings | $22.3 | $23.5 |
| Diluted EPS | $0.84 | $0.87 |
| Adjusted EBITDA / margin | $38.3 / 8.4% | $38.3 / 9.2% |
| Operating cash flow | $(102.9) | $(65.1) |
Sales rose 10.0%, driven by product sales (+9.5%) and services (+13.5%). Technology-segment sales increased 12.1% to $448.8 million, while financing-segment sales fell 41.2% to $9.6 million. Technology operating income rose 15.8% to $29.2 million; financing operating income declined 45.2% to $4.0 million. The effective tax rate was 28.0%, versus 27.8%.
At June 30, cash was $83.5 million, down from $155.4 million at March 31, 2022. Current assets were $985.3 million and current liabilities were $534.0 million. Operating cash use reflected higher receivables and inventory; inventory increased to $246.9 million from $155.1 million at March 31. The technology-segment cash conversion cycle increased to 46 days from 32 days a year earlier, mainly as days inventory outstanding rose to 30 from 13.
Borrowings included $40.0 million drawn on the $100 million revolving facility, $138.0 million outstanding under the $375 million floor-plan facility, $51.4 million in total recourse borrowings, and $26.4 million in non-recourse notes payable. The company repurchased shares and withheld shares for employee taxes for a total cash use of $7.2 million.
Material changes and unusual items
- Gross margin contracted 50 basis points; management attributed the decline mainly to lower services margins and lower financing-segment gross profit. Technology-segment gross margin fell 30 basis points, largely due to higher third-party professional-services costs.
- Operating expenses increased 10.0%, including higher salaries and benefits, software and maintenance fees, travel costs, and credit-loss provision.
- Other expense was $2.2 million, compared with $0.1 million of income a year earlier, primarily due to foreign-exchange losses.
- Financing-segment results weakened alongside lower post-contract earnings and transactional gains. Gains on sales of financial assets were $1.8 million on $52.5 million of proceeds, compared with $3.2 million on $75.3 million of proceeds in the prior-year quarter.
- Technology-segment open orders were $1.0 billion, versus $565.8 million a year earlier; deferred revenue was $130.7 million, versus $100.3 million.
- Cisco products represented 35% of technology-segment sales, down from 42% in the prior-year quarter.
Outlook, risks and contingencies
Management provided no numerical earnings or revenue guidance. It said cash on hand, operating cash generation and available credit should fund working capital, capital expenditures and other ordinary requirements for at least the next year. Management expected extended IT product lead times to persist for at least the next few quarters and said supplier price increases, wage inflation and higher interest rates could pressure margins and costs. It reported that price increases had generally been passed on to customers, though labor costs on fixed-price service engagements may take longer to recover.
Key risks include product and component shortages, customer spending changes, inflation and interest-rate exposure, reliance on major vendors and the WFCDF credit facility, customer credit and collections, foreign exchange, cybersecurity, and hiring and retaining skilled staff. Management said it did not believe the facility would be terminated. It reported no material change to the risk factors in its latest Form 10-K. Routine legal matters were disclosed; management did not believe a material loss beyond amounts already recognized was reasonably possible.
Subsequent event: on July 15, 2022, a subsidiary acquired certain assets and liabilities of Future Com, a cybersecurity and cloud-security provider, for preliminary consideration of $13.0 million in cash. Acquisition accounting was incomplete at the filing date.
Important facts for investors to verify
- Whether inventory build, extended product lead times and the 46-day cash conversion cycle convert into customer deliveries, collections and improved operating cash flow.
- Whether gross-margin pressure, wage and supplier-cost inflation, and operating-expense growth persist as sales expand.
- How the financing segment’s lower asset-sale gains and earnings develop, and the effect of its planned hosted portfolio-management software, for which management anticipated about $1.5 million in annual costs once deployed.
- Availability, borrowing-base capacity and variable-rate cost of the WFCDF credit facility, alongside the company’s cash and working-capital needs.
- Future Com’s final purchase accounting, integration and contribution to ePlus’s cybersecurity business.