ePlus Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. Although the request references 2017 Q4, this filing reports FY2018 and includes unaudited quarterly data; the fourth quarter ended March 31, 2018.
Business context
ePlus provides IT products, software, professional and managed services, and IT equipment financing. Its technology segment generated about 97% of FY2018 net sales and 74% of operating income; its financing segment generated about 3% of sales and 26% of operating income. The company reported more than 3,200 customers and operates primarily in the United States, with international operations.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $1,411.0 million | $1,329.4 million | +6.1% |
| Gross profit / gross margin | $323.5 million / 22.9% | $299.8 million / 22.5% | Margin +0.4 percentage points |
| Operating income / operating margin | $84.2 million / 6.0% | $85.7 million / 6.4% | Income -1.7% |
| Net earnings | $55.1 million | $50.6 million | +9.0% |
| Diluted EPS | $3.95 | $3.60 | +9.7% |
| Adjusted EBITDA (non-GAAP) | $102.8 million | $99.3 million | +$3.5 million |
| Cash from operating activities | $82.8 million | $33.0 million | +$49.8 million |
Consolidated gross margin improved on a shift toward value-added services and stronger financing-segment margins. Operating expenses rose 11.8% to $239.2 million, outpacing gross-profit growth and reducing operating income. The effective tax rate fell to 34.3% from 41.3%, largely reflecting the U.S. Tax Cuts and Jobs Act; FY2018 tax expense included a stated $1.7 million net benefit related to the Act.
Cash and cash equivalents were $118.2 million at year-end, up from $109.8 million. Cash from investing was -$57.7 million, including $37.7 million net cash used for acquisitions; cash from financing was -$16.8 million, including $35.2 million of stock repurchases and net repayments on the floor-plan facility. Management said cash, operating cash generation, available credit, and potential portfolio monetization were sufficient for at least the next 12 months.
Total recourse and non-recourse notes payable were $52.3 million, versus $37.4 million a year earlier. Separately, floor-plan payables under the $250 million Wells Fargo facility were $112.1 million; the facility’s accounts-receivable component had no outstanding balance. The technology subsidiary was in compliance with facility covenants. Net financing receivables and operating leases were reported at $138.4 million in selected financial data; the balance sheet shows $131.5 million of financing receivables plus $7.0 million of net operating-lease equipment.
Changes versus the prior comparable period
- Technology-segment net sales rose 5.8%, but operating income fell 9.5% to $62.4 million. Higher salaries, acquisition-related costs, and depreciation and amortization contributed to expense growth.
- Financing-segment net sales increased 20.4% to $41.5 million and operating income rose 29.9% to $21.9 million, led by post-contract earnings, including early terminations and renewal rentals. Gains on sales of financing receivables declined to $6.8 million from $8.1 million.
- Technology product-and-services sales were uneven: the filing reports 23.1% year-over-year growth in Q1, followed by modest or negative comparisons in the remaining quarters. Total Q4 net sales were $330.4 million versus $332.8 million in Q4 FY2017; Q4 net earnings were $8.9 million versus $10.5 million.
- Operating cash flow improved markedly, in part as inventory fell by $55.0 million; management attributed the inventory decline largely to fulfillment of a major customer project. The cash conversion cycle improved to 24 days from 38 days.
Outlook, commentary, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management expects to continue investing in personnel, sales locations, services, and acquisitions; these investments may weigh on short-term results.
- FY2018 acquisitions included IDS, for $38.4 million of total consideration (including contingent consideration), and OneCloud, for about $10.0 million. Their reported post-acquisition contributions were not material. Contingent consideration liabilities rose to $13.5 million.
- The company repurchased 409,839 shares under its plan for $31.6 million and acquired additional shares to meet employee tax-withholding obligations. No cash dividends were paid.
- Credit-loss reserves declined to $2.7 million from $5.4 million after a $3.2 million specific reserve tied to a customer bankruptcy was written off. The filing reports $3.2 million of actual credit losses in FY2018, versus $0.1 million in FY2017.
- Key risks include reliance on major vendors and vendor incentives, competitive pricing and technology shifts (including cloud), customer and vendor concentration, cybersecurity and service-delivery risks, acquisition integration and goodwill impairment, lease residual values, and dependence on the Wells Fargo working-capital facility. Apple represented approximately 12% of net sales; Cisco products represented 43% of technology-segment net sales.
- Management reported no material legal loss contingency considered reasonably possible beyond recorded accruals, while noting litigation outcomes remain uncertain. Performance guarantees were outstanding in the ordinary course; management did not expect them to have a material adverse effect.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of March 31, 2018.
Important facts for investors to verify
- Whether the technology segment can restore operating-income growth as acquisition, compensation, and other operating costs rise.
- Whether uneven quarterly technology sales and the major-customer project’s working-capital effects recur or reverse.
- Ongoing concentration in Apple and Cisco, and the effect of vendor incentives, supply availability, and pricing on margins.
- Credit performance, the residual value and recoverability of leased equipment, and growth in financing receivables and related borrowings.
- Terms, performance milestones, and ultimate payouts for acquisition contingent consideration, as well as acquired-business integration and goodwill assumptions.
- Adoption effects of the new revenue-recognition standard, including the filing’s estimated presentation changes for bill-and-hold and off-lease equipment sales.