ePlus inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended June 30, 2013. Comparisons are with the three months ended June 30, 2012 unless noted. Amounts are in U.S. dollars.
Business context and financial performance
ePlus provides IT hardware, software and services, supply-chain management solutions, and customer financing through technology and financing segments. The unaudited interim results are not necessarily indicative of full-year performance.
| Metric | Q1 FY2014 | Prior-year quarter / change |
|---|---|---|
| Total revenue | $259.3 million | $244.7 million; up 6.0% |
| Technology segment revenue | $248.5 million | $236.3 million; up 5.2% |
| Financing segment revenue | $10.8 million | $8.4 million; up 28.2% |
| Pre-tax earnings | $13.4 million | $13.6 million |
| Net earnings | $7.9 million | $8.1 million; down 2.6% |
| Basic / diluted EPS | $0.98 / $0.97 | $1.01 / $1.00 |
| Product-and-services gross margin | 17.7% | 17.0%; down from 19.7% in the immediately preceding quarter |
| Operating cash flow | $(7.1) million | $(11.9) million |
Technology segment pre-tax earnings fell 11.7% to $9.6 million as personnel and other operating costs grew faster than revenue. Financing segment pre-tax earnings rose 38.9% to $3.8 million. Its revenue included $4.3 million of gains from sales of financing receivables, versus $1.2 million in the prior-year quarter. The effective tax rate was 41.2%, compared with 40.6%.
Cash, debt and liquidity
- Cash and cash equivalents were $72.7 million at June 30, up $20.0 million from March 31, 2013. The company also had no short-term investments at quarter-end.
- Operating activities used $7.1 million; investing activities used $15.1 million; financing activities provided $42.2 million. Financing inflows included $39.4 million of net floor-plan borrowings. Management’s adjusted, non-GAAP operating cash flow measure, which adds lessee payments made directly to lenders, was $(2.3) million.
- Total assets were $494.5 million and total liabilities were $248.3 million. Notes payable comprised $38.9 million non-recourse and $1.5 million recourse debt. Floor-plan payables were $105.6 million, up from $66.3 million at March 31.
- The GECDF facility limit was $175 million, with $105.6 million outstanding on the floor-plan component and no balance on the $30 million accounts-receivable component. Availability is subject to asset-based limits and covenants; the company reported covenant compliance. Management said cash, operating funds and available credit should cover requirements for at least the next 12 months.
Material changes, outlook and risks
- Growth reflected increased product and service demand, particularly from Fortune 100 customers, and expansion into new regions. Open orders were $81.2 million, down from $92.2 million a year earlier.
- Technology-segment headcount increased to 860 from 777 year over year; company-wide headcount was 919, compared with 836. Management expects continued investment in locations and personnel, which may weigh on near-term results.
- Management cited analyst forecasts of U.S. IT spending growth below 3% on average for calendar 2013 and warned that weaker customer spending could affect sales and operating cash flow. No company-specific earnings or revenue guidance was provided.
- Gross margin is exposed to product mix, pricing and vendor incentives; Cisco represented approximately 54% of product-and-services sales, with Hewlett Packard at 10% and NetApp at 9%. Dependence on key vendors and the possibility of reduced incentives are material risks.
- The Lawson patent dispute remains unresolved. The court modified an injunction in June 2013; ePlus is seeking contempt damages, but the timing and outcome are uncertain. The filing says monetary damages in the underlying patent case were barred by the appellate ruling.
- A specific customer in bankruptcy had $3.4 million in receivables and a related $2.8 million reserve. The company also disclosed a $1.0 million contingent-consideration liability and $316,000 of gross unrecognized tax-position liability.
- The company corrected prior-year EPS: reported Q1 2012 basic and diluted EPS were reduced by $0.03 and $0.02, respectively, due to a weighted-average share-count correction. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether reported financing-segment growth and earnings are sustainable without the unusually large receivables-sale gains.
- Track technology gross margin, vendor incentives, customer spending, open orders and the pace of hiring-related expense growth.
- Review working-capital needs and floor-plan facility availability, including borrowing-base limits, covenants and dependence on GECDF.
- Monitor credit quality and reserve adequacy, especially the bankrupt customer exposure, and follow the Lawson contempt proceeding and any resulting financial impact.