ePlus Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended June 30, 2021; comparisons are with the three months ended June 30, 2020, unless otherwise noted. ePlus provides IT products and solutions, professional and managed services, and technology financing, primarily in North America. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $416.6 million | $355.0 million | +17.4% |
| Gross profit / gross margin | $105.5 million / 25.3% | $98.6 million / 27.8% | Profit +7.1%; margin down 2.5 percentage points |
| Operating income / margin | $32.5 million / 7.8% | $25.0 million / 7.0% | +29.8% |
| Net earnings / net margin | $23.5 million / 5.6% | $17.4 million / 4.9% | +35.5% |
| Diluted EPS | $1.75 | $1.30 | +34.6% |
| Adjusted EBITDA / margin | $38.3 million / 9.2% | $30.7 million / 8.7% | +24.6%; margin up 0.5 percentage points |
| Operating cash flow | $(65.1) million | $6.4 million | Decreased $71.5 million |
Product sales rose 17.5% to $361.1 million and services sales rose 16.3% to $55.6 million. The company attributed lower gross margin primarily to a mix shift toward hardware and third-party licenses reported gross, rather than maintenance, subscription and service revenue reported net. Management also cited a 10-basis-point decline in vendor incentives as a factor in technology-segment margin pressure.
Segments and material changes
- Technology: Sales increased 17.3% to $400.4 million; operating income rose 43.9% to $25.2 million. Gross margin decreased to 23.8% from 25.4%. Adjusted gross billings increased 15.9% to $633.0 million.
- Financing: Sales increased 18.0% to $16.3 million, but operating income declined 3.2% to $7.2 million. Gross profit fell 14.0% to $10.1 million, reflecting higher costs for off-lease equipment and operating-lease depreciation. Financing receivables and operating leases were $141.7 million, down 23.4% from June 30, 2020.
- Telecom, media and entertainment, healthcare, and other customer categories contributed to technology sales growth; financial services, state and local government/education, and technology customer categories declined. Cisco represented 42% of technology-segment sales for the quarter, compared with 37% a year earlier.
- The December 2020 SMP acquisition added 102 employees and expanded the company’s regional presence and solution offerings. Its contribution to current-quarter revenue and earnings was described as not material.
Cash, debt and liquidity
- Cash and cash equivalents were $93.8 million at June 30, 2021, down from $129.6 million at March 31, 2021. The quarter’s $65.1 million operating cash outflow primarily reflected higher accounts receivable and inventory and lower trade accounts payable.
- Investing activities used $6.2 million, principally for property, equipment and equipment under operating leases. Financing activities provided $35.5 million, including $40.9 million in net floor-plan borrowings; cash repurchases of common stock were $3.8 million.
- Current assets were $774.2 million and current liabilities were $446.4 million. Total liabilities were $493.8 million and stockholders’ equity was $583.6 million.
- Floor-plan borrowings, presented within accounts payable, were $139.6 million, up from $98.7 million at March 31. The $275 million aggregate WFCDF credit-facility limit was temporarily increased to $350 million on July 2, after quarter-end; the separate accounts-receivable component had no outstanding balance at June 30.
- Recourse notes payable totaled $17.0 million and non-recourse notes payable totaled $15.3 million at June 30. Management said cash, operating funds, available credit and the ability to monetize investments were sufficient for liquidity needs, and expected available resources to cover working capital, capital expenditure and other requirements for at least the next year.
Outlook, risks and contingencies
The filing provides no quantitative earnings or revenue guidance. Management reported ongoing worldwide shortages of semiconductors and other IT components, which have delayed some customer sales and may affect delivery times, costs and demand fulfillment. It expected extended lead times to persist for at least the next few quarters. Supplier price increases and wage inflation had occurred; management said it had generally passed price increases to customers, but warned that it might not always be able to do so. Fixed-price service contracts also expose profitability to cost-estimation risk.
COVID-19 impacts remained uncertain, including possible effects on customer spending, collections, operations and access to financing. Other disclosed risks include reliance on vendors and vendor incentives, customer credit, competition and rapid technology changes, interest rates and the company’s dependence on its WFCDF facility for technology-segment working capital. The company stated that loss of this facility could materially adversely affect future results. Legal proceedings arise in the ordinary course; the filing gives no specific quantified exposure. Performance guarantees are generally backed by surety bonds, and management did not expect related liability to have a material adverse effect.
Key investor verification points
- Whether product shortages and longer lead times persist, and how they affect order fulfillment, deferred sales and costs.
- Whether sales growth converts to earnings and cash, particularly given lower gross margins and the quarter’s substantial working-capital cash outflow.
- Technology-segment margin trends, vendor incentive levels and concentration in Cisco and other major suppliers.
- Availability and terms of the WFCDF facility, including the temporary limit increase, and the company’s reliance on floor-plan funding.
- Performance and asset quality of financing receivables and leases, including residual-value realizations and customer credit losses.
- Whether the reported liquidity outlook remains adequate if COVID-19, supply constraints or customer payment delays worsen; management’s statements are not a formal earnings forecast.