ePlus Inc. (NASDAQ: PLUS) — Q2 FY2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended September 30, 2021, for ePlus’s fiscal year ending March 31, 2022. ePlus provides IT products, consulting, professional and managed services, and equipment financing. Its technology and financing segments generated 96% and 4% of six-month sales, respectively.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding prior-year periods.
| Metric | Three months ended September 30, 2021 | Six months ended September 30, 2021 |
|---|---|---|
| Net sales | $458.0, up 5.8% | $874.7, up 11.0% |
| Gross profit / margin | $123.0 / 26.9%, versus $99.0 / 22.9% | $228.5 / 26.1%, versus $197.5 / 25.1% |
| Operating income / margin | $44.3 / 9.7%, versus $28.5 / 6.6% | $76.8 / 8.8%, versus $53.5 / 6.8% |
| Net earnings | $31.4, up 58.3% | $54.9, up 47.6% |
| Diluted EPS | $2.34, versus $1.48 | $4.09, versus $2.78 |
| Adjusted EBITDA / margin | $50.2 / 11.0%, versus $33.6 / 7.7% | $88.5 / 10.1%, versus $64.3 / 8.2% |
- Services sales rose 23.1% in the quarter and 19.8% year to date; management attributed the growth to higher managed and professional services revenue. Quarterly product sales increased 3.5%.
- Technology segment six-month operating income was $55.5 million, up from $38.8 million; financing segment operating income was $21.3 million, up from $14.7 million.
- Six-month operating cash flow was negative $135.0 million, compared with positive $8.4 million a year earlier. Management attributed the outflow primarily to higher accounts receivable and inventory and lower trade payables. Investing cash flow was negative $13.7 million; financing cash flow was positive $75.8 million.
- Cash declined to $57.0 million at September 30 from $129.6 million at March 31, 2021. Current assets were $829.6 million and current liabilities $475.6 million. Inventory rose to $134.5 million from $70.0 million; trade receivables rose to $457.3 million from $391.6 million.
- At September 30, recourse borrowings totaled $44.9 million, including $29.0 million drawn on the accounts-receivable facility; non-recourse notes payable totaled $25.4 million. Floor-plan payables were $145.9 million, up from $98.7 million at March 31.
Material changes and notable items
- Quarterly gross margin increased 400 basis points. Management cited a more favorable product mix, including a greater share of third-party maintenance, software assurance and subscription/SaaS sales recognized on a net basis, as well as higher service and financing-segment gross profit.
- Financing-segment results included net gains on sales of financial assets of $10.1 million for the quarter and $13.3 million year to date, compared with $4.5 million and $7.0 million, respectively, in the prior-year periods. Related sale proceeds were $615.0 million for the quarter and $690.3 million year to date. These transactions can shift revenue and earnings between periods.
- On October 13, 2021, after quarter-end, ePlus replaced its prior credit facility with a discretionary secured facility providing up to $375 million for floor-plan financing and a $100 million revolving-credit sublimit. The filing states that losing access to the facility could materially adversely affect working capital and liquidity.
- On November 9, 2021, the board declared a two-for-one stock split, payable December 13 to shareholders of record November 29. Reported historical share and per-share figures are pre-split unless identified as pro forma.
- During the six months, the company repurchased 49,028 shares under its plan and acquired additional shares to meet employee tax-withholding obligations. The filing reports $6.9 million in total cash used for share repurchases.
Outlook, commentary and risks
- The filing provides no formal earnings or revenue guidance. Management said cash on hand, operating funds and available credit should be sufficient for working capital, capital expenditures and other needs for at least the next year.
- Management reported ongoing worldwide IT-product supply constraints, including semiconductor and component shortages, and expected extended lead times to persist for at least the next few quarters. Constraints could affect delivery timing, costs and the ability to meet demand.
- COVID-19’s future effects remain uncertain, including potential impacts on customer spending, collections, operations and financing availability. Management also cited inflation and wage increases, vendor and customer concentration, credit risk, interest rates, product availability and execution risks.
- Cisco represented 40% of technology-segment sales in the quarter and 41% year to date. The company also reported that its six largest suppliers together accounted for over 60% of revenue in the trailing twelve months.
- Legal proceedings arise in the ordinary course; the filing does not identify a specific matter with a clear quantified exposure. Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective as of September 30, 2021.
Key facts for investors to verify
- Whether working-capital demands—particularly receivables, inventory and the 35-day cash conversion cycle, versus 21 days a year earlier—normalize and convert reported earnings into operating cash.
- How much financing-segment earnings depend on gains from financial-asset sales, and whether those gains and transaction volumes are sustainable.
- The terms, availability and ongoing capacity of the post-quarter credit facility, given its discretionary nature and importance to technology-segment liquidity.
- Whether supply constraints, customer and vendor concentration, and the large customer projects cited by management affect fulfillment, collections or margins.
- How the stock split is reflected in subsequent reported share counts and per-share comparisons.