ePlus Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended December 31, 2014 (fiscal 2015), compared with the corresponding 2013 periods. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
ePlus provides IT products and services, professional and managed services, proprietary software, and customer financing. It reports Technology and Financing segments. The company acquired Evolve Technology Group in August 2014 to expand its western U.S. presence; the stated purchase price was $10.7 million.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Change year over year | Nine months ended Dec. 31, 2014 | Change year over year |
|---|---|---|---|---|
| Total revenue | $306.2 million | +14.6% | $876.0 million | +9.8% |
| Operating income | $20.6 million | +13.9% | $55.6 million | +20.7% |
| Net earnings | $15.5 million | +46.1% | $36.9 million | +36.5% |
| Diluted EPS | $2.13 | vs. $1.32 | $4.97 | vs. $3.34 |
| Consolidated gross margin | 21.4% | vs. 21.2% | 21.2% | vs. 20.3% |
Technology segment revenue was $297.8 million for the quarter (+15.5%) and $849.6 million for nine months (+10.4%). Management attributed growth to customer demand, market-share gains, vendor referrals, organic selling, and acquisitions. Product-and-services gross margin improved to 19.4% for the quarter and 19.2% for nine months, partly reflecting more professional, managed, maintenance, and other services. Technology segment earnings rose 18.3% for the quarter and 24.9% for nine months.
Financing segment revenue declined 8.9% to $8.4 million for the quarter and 5.9% to $26.4 million for nine months, mainly due to lower transactional gains on asset sales. Financing segment earnings included unusual other income and therefore rose sharply: to $8.7 million for the quarter and $15.2 million for nine months.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $51.5 million at December 31, down $28.7 million, or 35.7%, from March 31, 2014. Current assets were $446.2 million and current liabilities $285.8 million.
- For nine months, operating cash flow was negative $9.9 million, versus negative $26.8 million a year earlier. Working-capital uses included increases in trade receivables and financing receivables and lower trade payables. Management’s adjusted non-GAAP operating cash flow, adding customer payments made directly to lenders, was negative $0.2 million; this is not a GAAP measure.
- Investing cash flow was negative $31.7 million, including $8.0 million of acquisition cash outflow and investment in financing receivables. Financing cash flow was positive $13.0 million, including $37.1 million of share repurchases and net borrowing activity.
- At period end, recourse notes payable were $3.8 million and non-recourse notes payable $68.7 million. Floor-plan accounts payable were $110.6 million. The GECDF facility limit had increased to $225 million; the accounts-receivable sublimit was $30 million, with no balance outstanding under that component. The company reported compliance with facility covenants.
- Net financing receivables were $148.0 million, up from $123.8 million at March 31. Total assets were $591.4 million and total liabilities $321.2 million.
Management said cash, operating funds, available credit, and possible portfolio monetization were expected to support working capital, capital expenditures, and other needs for at least the next 12 months. It also noted reliance on the GECDF facility for Technology segment working capital; loss of that facility could materially harm results.
Material changes, outlook and risks
- Unusual income: The company recorded $6.2 million of other income after receiving a flat-panel price-fixing class-action settlement in October 2014. Nine-month other income was $7.6 million, including a $1.4 million gain related to repurchasing rights to financing-agreement payments. These items contributed to earnings growth and should be distinguished from recurring operating performance.
- Share repurchases: ePlus repurchased 690,922 shares for $35.1 million during the nine months, including 400,000 shares purchased in connection with a secondary offering. The lower average share count supported EPS growth.
- Lawson patent litigation: The Patent and Trademark Office canceled the patent at issue in April 2014; in July, the appeals court vacated the injunction and contempt order, including the $18.2 million judgment. ePlus had petitioned for rehearing; outcome and timing remained uncertain.
- Concentration and execution risks: Cisco, HP, and NetApp represented significant shares of Technology segment product-and-services sales. Results are exposed to vendor incentives, IT spending, competition, customer credit, residual values on leased equipment, skilled-personnel retention, acquisition integration, and financing availability.
- Annual goodwill testing found reporting-unit fair values substantially above carrying values; no impairment was recorded. The filing described no material change in previously disclosed risk factors and provided no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year performance.
Most important facts for investors to verify
- How much of reported earnings growth came from the $6.2 million settlement and other non-recurring income, versus underlying operations.
- Whether Technology segment growth and improved service mix can continue as operating expenses rise and vendor incentives change.
- Cash conversion and working-capital trends, particularly trade receivables, financing receivables, and floor-plan funding.
- Availability and covenant terms of the GECDF facility, and the company’s dependence on it for daily working capital.
- Developments in the Lawson litigation, the Evolve acquisition’s performance, and credit quality/reserve adequacy for financing receivables.