Business context and reporting period
ePlus inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2015, the first quarter of its fiscal year ending March 31, 2016. The company provides IT products, services and proprietary software, alongside customer financing and leasing. Its technology and financing segments generated 97% and 3% of quarterly net sales, respectively.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Three months ended June 30, 2015 | Comparable 2014 period |
|---|---|---|
| Net sales | $269.9 | $272.3 |
| Gross profit / margin | $59.1 / 21.9% | $56.4 / 20.7% |
| Operating income / margin | $15.1 / 5.6% | $14.7 / 5.4% |
| Net earnings | $8.8 | $9.5 |
| Diluted EPS | $1.21 | $1.25 |
| Operating cash flow | $21.8 provided | $5.4 used |
- Gross margin on product and services improved to 20.0% from 18.5%. Management attributed the increase to sales mix, including professional and managed services and third-party maintenance.
- Adjusted EBITDA was reported as $16.3 million, up approximately 4% year over year; adjusted EBITDA margin was 6.0%, versus 5.7%. The filing gives inconsistent 2014 EBITDA comparatives: $15.613 million in one table and $15.636 million in the reconciliation.
- Investing cash outflow was $26.4 million, largely reflecting financing receivables issuance, leased-asset purchases and capital spending. Financing activities provided $17.3 million. Cash increased $12.6 million to $88.8 million.
- At June 30, current assets were $448.0 million and current liabilities $268.6 million. Total liabilities were $292.4 million; stockholders’ equity was $287.9 million.
- Recourse notes payable totaled $7.0 million and non-recourse notes payable $68.8 million. Floor-plan payables were $110.4 million. The GECDF facility’s aggregate limit was $225 million at quarter-end and was increased to $250 million on July 24, 2015; its accounts-receivable sublimit remained $30 million.
Material changes versus the prior comparable period
- Net sales declined 0.9%, while gross profit rose 4.8% and operating income rose 2.2%. Net earnings fell 7.0%, partly because the prior-year quarter included a $1.4 million gain on a financing-arrangement repurchase.
- Technology segment earnings increased 4.7% to $13.0 million, despite a 0.7% decline in segment net sales. Financing segment earnings declined 45.4% to $2.0 million, including the absence of the prior-year $1.4 million gain and lower transactional gains.
- Operating cash flow improved from a $5.4 million use to $21.8 million provided, primarily reflecting lower receivables. Investing outflows increased substantially, to $26.4 million from $0.7 million.
- Technology-segment non-GAAP gross sales of products and services rose 2.1% to $332.3 million. Reported product-and-services sales declined 0.6%; management said a larger share of revenue was recognized net as third-party software assurance, maintenance and services expanded.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said cash, operating cash generation, available credit and potential portfolio monetization were expected to fund requirements for at least the next 12 months. It also expected to continue investing in sales locations and personnel; such investments may weigh on near-term results.
- Management cited exposure to IT spending, customer and vendor concentration, vendor incentive changes, competition, credit losses, residual values on leased equipment, interest rates, and the availability of credit facilities. Cisco represented approximately 51% of technology-segment product-and-services sales, compared with 47% a year earlier.
- One customer in bankruptcy accounted for $3.2 million of notes and lease receivables, fully reserved at quarter-end. The company reported $5.4 million of total credit-loss reserves.
- The company is reviewing whether to pursue further action in its Lawson patent litigation after a split appellate court denied rehearing; the relevant patent had been canceled and prior injunction and contempt orders vacated. The outcome and any recovery are uncertain.
- A $110,000 increase in the fair value of acquisition-related contingent consideration was recorded in general and administrative expense. The quarter also included $2.5 million of share repurchases to satisfy employee tax withholding; the prior repurchase authorization expired June 15, 2015, and no new authorization was in place at quarter-end.
- Management reported compliance with the GECDF facility covenants at June 30, 2015 and effective disclosure controls. The filing says there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the filing’s differing 2014 Adjusted EBITDA figures ($15.613 million and $15.636 million) and confirm the intended year-over-year comparison.
- Assess whether improved margins can persist given higher personnel costs and the risk of reduced vendor incentives.
- Monitor cash conversion, financing receivables growth, credit quality and the fully reserved bankrupt-customer exposure.
- Confirm the post-quarter GECDF facility amendment and ongoing borrowing availability, covenant compliance and dependence on that facility for technology-segment working capital.
- Follow the Lawson litigation and potential implications, and note that the filing provides no specific financial guidance.