ePlus(US:PLUS)2023-02-06 16:00markdown Part I. Financial Information [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) This section presents ePlus inc.'s unaudited consolidated financial statements as of December 31, 2022, and for the three and nine-month periods then ended [Unaudited Consolidated Balance Sheets](index=6&type=section&id=Unaudited%20Consolidated%20Balance%20Sheets) The balance sheet shows a significant increase in total assets to **$1.60 billion** as of December 31, 2022, from **$1.17 billion** as of March 31, 2022, driven by substantial growth in accounts receivable, inventories, and financing receivables, while total liabilities also rose to **$851.4 million** from **$505.5 million**, primarily due to increases in accounts payable and recourse notes payable Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Dec 31, 2022 | Mar 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $1,293,443 | $897,482 | | **Total Assets** | **$1,597,865** | **$1,166,203** | | **Total Current Liabilities** | $793,577 | $460,036 | | **Total Liabilities** | **$851,445** | **$505,465** | | **Total Stockholders' Equity** | $746,420 | $660,738 | [Unaudited Consolidated Statements of Operations](index=8&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Operations) For the third quarter ended December 31, 2022, net sales grew **26.0%** year-over-year to **$623.5 million**, and net earnings increased **35.1%** to **$35.7 million**, while for the nine-month period, net sales rose **15.0%** to **$1.58 billion**, with net earnings up **6.3%** to **$86.5 million**, primarily driven by strong product sales Key Performance Indicators (Q3 FY23 vs Q3 FY22, in thousands, except EPS) | Metric | Q3 2022 | Q3 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $623,476 | $494,834 | +26.0% | | Gross Profit | $138,372 | $117,117 | +18.1% | | Operating Income | $46,458 | $36,085 | +28.7% | | Net Earnings | $35,694 | $26,424 | +35.1% | | Diluted EPS | $1.34 | $0.98 | +36.7% | Key Performance Indicators (Nine Months Ended Dec 31, in thousands, except EPS) | Metric | 9M 2022 | 9M 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $1,575,541 | $1,369,500 | +15.0% | | Gross Profit | $385,199 | $345,631 | +11.4% | | Operating Income | $123,748 | $112,840 | +9.7% | | Net Earnings | $86,502 | $81,355 | +6.3% | | Diluted EPS | $3.24 | $3.03 | +6.9% | [Unaudited Consolidated Statements of Cash Flows](index=10&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended December 31, 2022, net cash used in operating activities was **$147.0 million**, an increase from **$121.5 million** in the prior-year period, primarily due to significant increases in accounts receivable and inventories, while net cash provided by financing activities was **$103.6 million**, resulting in an overall decrease of **$56.0 million** in cash and cash equivalents Cash Flow Summary (Nine Months Ended Dec 31, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(147,038) | $(121,542) | | Net cash used in investing activities | $(15,624) | $(18,448) | | Net cash provided by financing activities | $103,555 | $115,996 | | **Net decrease in cash and cash equivalents** | **$(55,983)** | **$(23,996)** | [Notes to Unaudited Consolidated Financial Statements](index=14&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on significant accounting policies, revenue recognition, financing receivables, goodwill, business combinations, and segment reporting, including the acquisition of Future Com, Ltd., substantial sales from Cisco Systems, and breakdowns of revenue and operating income by segment - A substantial portion of technology segment net sales are from Cisco Systems, accounting for **39%** in Q3 2022 and **38%** in Q3 2021[31](index=31&type=chunk) - On July 15, 2022, ePlus acquired Future Com, Ltd., a cybersecurity solutions provider, for a total consideration of **$13.3 million**, resulting in **$9.7 million** of goodwill[86](index=86&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk) Remaining Performance Obligations (in thousands) | Period | Expected Revenue | | :--- | :--- | | Remainder of FY2023 | $24,466 | | FY2024 | $45,891 | | FY2025 | $21,815 | | FY2026 | $8,191 | | FY2027 and thereafter | $4,741 | | **Total** | **$105,104** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, highlighting strong revenue growth driven by the technology segment despite supply chain constraints and economic uncertainties, covering consolidated and segment-level results, key business trends, and the company's liquidity position and capital resources [Consolidated Results of Operations](index=34&type=section&id=Consolidated%20Results%20of%20Operations) Consolidated net sales for Q3 2022 increased **26.0%** YoY to **$623.5 million**, driven by a **28.6%** rise in product sales, while gross profit grew **18.1%**, though gross margin declined to **22.2%** from **23.7%** due to lower service margins, and operating expenses rose **13.4%**, primarily from increased salaries and benefits, leading to a **35.1%** increase in net earnings to **$35.7 million** - Q3 net sales increased **26.0%** YoY, primarily due to increased demand and higher prices for some products in the technology segment[112](index=112&type=chunk) - Q3 gross margin decreased by **150 basis points** to **22.2%**, mainly due to lower service margins and a lower volume of sales of third-party maintenance and software assurance[117](index=117&type=chunk) - Q3 operating expenses increased **13.4%** YoY, driven by a **$6.8 million** increase in salaries and benefits due to a **12.3%** increase in headcount to **1,745 employees**[119](index=119&type=chunk) [Segment Results of Operations](index=37&type=section&id=Segment%20Results%20of%20Operations) The Technology segment drove overall growth, with Q3 net sales up **28.3%** YoY to **$611.8 million** and operating income surging **51.3%** to **$41.1 million**, while the Financing segment's Q3 net sales decreased **34.5%** to **$11.7 million**, and its operating income fell to **$5.4 million** from **$8.9 million** in the prior year, attributed to lower post-contract and portfolio earnings Segment Performance (Q3 2022 vs Q3 2021, in thousands) | Segment | Metric | Q3 2022 | Q3 2021 | YoY Change | | :--- | :--- | :--- | :--- | :--- | | **Technology** | Net Sales | $611,774 | $476,975 | +28.3% | | | Operating Income | $41,090 | $27,166 | +51.3% | | **Financing** | Net Sales | $11,702 | $17,859 | -34.5% | | | Operating Income | $5,368 | $8,919 | -39.8% | - Technology segment's Adjusted Gross Billings, a key volume metric, increased **29.7%** YoY to **$888.6 million** in Q3 2022[114](index=114&type=chunk)[140](index=140&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) The company finances operations through cash flow and borrowings, primarily the WFCDF Credit Facility, with operating activities using **$147.0 million** in cash for the nine months ended December 31, 2022, largely due to increased working capital needs, and the cash conversion cycle for the technology segment increasing to **51 days** from **47 days** a year prior, driven by higher inventory levels (DIO up to **30 days** from **21 days**), though the company believes it has adequate liquidity for the next year - The company relies on the WFCDF Credit Facility, which has a floor plan facility of up to **$425.0 million** and a revolving credit facility of up to **$150.0 million**[61](index=61&type=chunk)[173](index=173&type=chunk) Technology Segment Cash Conversion Cycle (in days) | Metric | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Days Sales Outstanding (DSO) | 62 | 67 | | Days Inventory Outstanding (DIO) | 30 | 21 | | Days Payable Outstanding (DPO) | (41) | (41) | | **Cash Conversion Cycle** | **51** | **47** | - Inventory increased **57.9%** to **$244.8 million** as of December 31, 2022, from March 31, 2022, due to ongoing projects and supply constraints[182](index=182&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks, primarily from interest rate fluctuations on its variable-rate borrowings under the WFCDF Credit Facility and foreign currency exchange rates arising from international transactions - The company's primary market risks are interest rate fluctuations on its WFCDF Credit Facility and foreign currency exposure from international operations[208](index=208&type=chunk)[209](index=209&type=chunk) [Item 4. Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, with a notable change being the implementation of a new ERP system within the Financing segment in August 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[210](index=210&type=chunk) - In August 2022, a new ERP system was implemented in the Financing segment, leading to modifications in certain internal controls over financial reporting[211](index=211&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) A putative class action complaint filed in February 2022 regarding a company bylaw was voluntarily dismissed by the plaintiff after the company amended the bylaw, with the company subsequently agreeing to pay **$150,000** to the plaintiff's counsel for attorneys' fees and expenses to fully resolve the matter - A stockholder class action lawsuit concerning a bylaw provision was dismissed after the company amended its bylaws, with ePlus agreeing to pay **$150,000** for the plaintiff's counsel's attorneys' fees and expenses[214](index=214&type=chunk) [Item 1A. Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022 - No material changes in risk factors were reported since the Annual Report on Form 10-K for the fiscal year ended March 31, 2022[215](index=215&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the nine months ended December 31, 2022, the company repurchased a total of **128,553 shares**, with **70,473 shares** purchased under its publicly announced share repurchase program, and as of December 31, 2022, **1,000,000 shares** remained authorized for repurchase under the current plan - For the nine months ended December 31, 2022, the company purchased **70,473 shares** under its share repurchase plan and an additional **58,080 shares** to satisfy tax withholding obligations from vested restricted stock[216](index=216&type=chunk)[223](index=223&type=chunk) - As of December 31, 2022, **1,000,000 shares** remained available for repurchase under the plan authorized on March 24, 2022, which runs through May 27, 2023[217](index=217&type=chunk)[223](index=223&type=chunk) [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including amendments to bylaws, credit agreements, and certifications by the CEO and CFO