ePlus Inc. — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2013. Financial statements are unaudited. The company provides IT products and services, leasing and financing, and supply-chain management software through technology and financing segments. Unless stated otherwise, amounts are in millions of dollars.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2013 | Year-over-year | Nine months ended Dec. 31, 2013 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $267.2 | Up 10.4% | $797.6 | Up 6.8% |
| Pre-tax earnings | $18.1 | Up from $15.5 | $46.1 | About flat vs. $46.0 |
| Net earnings | $10.6 | Up 17.5% | $27.1 | Down $0.1 |
| Diluted EPS | $1.32 | Up from $1.11 | $3.34 | Down from $3.38 |
- Revenue mix and margins: Product and services sales were $255.7 million for the quarter, up 12.1%, and $764.1 million for the nine months, up 7.2%. Product-and-services gross margin improved to 18.9% from 17.5% for the quarter and to 18.1% from 17.5% year to date. Management cited higher services and software-assurance mix and improved product margins; vendor-incentive changes reduced year-over-year gross margin by 0.2 percentage points for the quarter and 0.1 points year to date.
- Segment trends: Technology segment revenue rose 12.4% for the quarter and 7.3% year to date; segment earnings increased 49.5% and 7.3%, respectively. Financing segment revenue fell 26.7% for the quarter and 4.3% year to date; earnings declined 47.2% for the quarter and 24.9% year to date. Lower quarterly financing revenue reflected prior-year gains from early lease terminations and equipment buyouts. Nine-month gains on sales of financial assets rose to $7.9 million from $4.4 million.
- Cash flow: Nine-month operating cash flow was a use of $26.8 million, versus $13.8 million provided a year earlier. Management attributed the outflow principally to increases in trade receivables and lease investments. The company’s adjusted, non-GAAP operating cash flow was a use of $12.3 million, adding back customer principal payments made directly to lenders. Investing cash use was $21.2 million; financing cash provided was $35.8 million. Cash declined $12.2 million to $40.5 million from March 31, 2013.
- Balance sheet and funding: Total assets were $506.8 million, up from $437.9 million at March 31, 2013; total liabilities were $247.0 million, up from $199.6 million. Cash was $40.5 million, with no short-term investments. Trade receivables were $214.1 million and inventory $24.3 million. Financing investments in notes and leases totaled $140.1 million. Recourse and non-recourse notes payable totaled $53.4 million ($2.9 million and $50.5 million, respectively). Floor-plan payables were $84.8 million, compared with $66.3 million at March 31.
- Credit facilities: The GECDF facility had a $175 million aggregate limit; floor-plan balance was $84.8 million and the accounts-receivable component had no outstanding balance. The company reported compliance with facility covenants. Management said cash, operating funds and available credit should cover working capital, capital expenditures and other needs for at least 12 months. It also warned that losing the GECDF facility could materially harm liquidity and results.
- Other items: The company spent $2.8 million to acquire AdviStor, Inc. in November 2013, adding storage engineering and sales capabilities. It repurchased $10.3 million of shares during the nine-month period and authorized a new program for up to 750,000 shares over 12 months beginning November 14, 2013. The prior-year period included a $20.1 million special dividend.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expects to continue expanding sales locations and hiring in targeted markets; these investments may weigh on near-term results. Open customer orders were $67.1 million at December 31, 2013, down from $73.3 million a year earlier.
- Key business risks include customer IT-spending reductions, competitive pricing, reliance on major vendors and manufacturer incentives, hiring and retaining skilled staff, customer credit losses, lease residual values, and access to credit and financing. Cisco, HP and NetApp represented 48.8%, 10.2% and 8.7% of nine-month product-and-services sales, respectively.
- Lawson patent litigation: A trial-court contempt judgment for $18.2 million and a daily coercive fine of $62,362 were stayed pending appeal after Lawson posted a bond. An adverse patent reexamination decision was affirmed, and rehearing was denied January 29, 2014. The company anticipated the injunction could be vacated going forward but continued to assert its right to enforce the contempt judgment; appeal outcome and timing were uncertain.
- Controls: Management concluded disclosure controls were effective as of December 31, 2013. A material weakness identified in the prior quarter concerning accounting for transfers and servicing of financial assets was reported as remediated in the December quarter through additional reviews.
Important facts for investors to verify
- Whether technology-segment growth and improved gross margins persist, particularly if vendor incentives or product mix change.
- Whether financing-segment earnings recover and how much future income depends on asset-sale gains and other irregular transactions.
- Working-capital trends, especially receivables, lease investment growth, and the resulting operating cash outflow.
- Availability and terms of the GECDF facility, covenant compliance, and the company’s ability to fund growth and customer financing.
- Developments and potential financial effects of the Lawson appeals and patent reexamination proceedings; the judgment was stayed and the outcome was unresolved.
- Integration and performance of AdviStor, and the pace and price of share repurchases.