ePlus Inc. — FY2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended March 31, 2016 (not a standalone fiscal fourth-quarter filing). ePlus provides IT products, software, professional and managed services, and financing through technology and financing segments. Technology generated about 97% of net sales; financing generated about 3%.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $1,204.2 million | $1,143.3 million | +5.3% |
| Gross profit / margin | $262.1 million / 21.8% | $244.5 million / 21.4% | Margin +0.4 percentage point |
| Operating income / margin | $75.8 million / 6.3% | $70.7 million / 6.2% | Income +7.1% |
| Net earnings | $44.7 million | $45.8 million | -2.4% |
| Diluted EPS | $6.09 | $6.19 | -1.6% |
| Adjusted EBITDA (non-GAAP) | $81.3 million; 6.8% margin | $75.0 million; 6.6% margin | +8.3% |
| Operating cash flow | $13.4 million | $13.8 million | Down $0.5 million |
| Cash and cash equivalents | $94.8 million | $76.2 million | +$18.6 million |
| Recourse and non-recourse notes payable | $47.4 million | $56.6 million | Down $9.1 million |
Technology-segment net sales increased 5.5% to $1,169.1 million and operating income rose 4.5% to $63.7 million. Financing-segment net sales increased 0.9% to $35.1 million, while operating income rose 23.7% to $12.1 million, helped by lower expenses and higher post-contract earnings and transaction gains.
Cash, debt, and liquidity
- Investing activities used $50.2 million, including $16.6 million net cash paid for the IGX acquisition, purchases of equipment and assets to lease, and financing-receivable activity. Financing activities provided $55.2 million, primarily from net borrowings.
- The technology subsidiary had a $250 million Wells Fargo Commercial Distribution Finance facility. At year-end, the floor-plan balance was $121.9 million; the accounts-receivable component had no outstanding balance. The company reported compliance with facility covenants.
- Cash conversion cycle improved to 18 days from 23 days, mainly due to lower days sales outstanding. Management stated that cash, operating cash generation, available credit, and possible investment-portfolio monetization were expected to fund requirements for at least the next 12 months.
- Current assets were $478.0 million and current liabilities were $273.4 million. The liability total includes $121.9 million of floor-plan payables.
Material changes and unusual items
- Adjusted gross billings of products and services rose 8.5% to $1.56 billion. Growth was higher than reported net-sales growth partly because more third-party software assurance, subscriptions, maintenance, and services were reported net.
- Consolidated gross margin improved to 21.8%. Management cited product mix and growth in professional and managed services; lower vendor incentives reduced product-and-services gross margin by 30 basis points.
- FY2015 net earnings included $7.6 million of other income, principally a $6.2 million class-action settlement and a $1.4 million gain on repurchase of rights to financing payments. Neither item recurred in FY2016. FY2016 non-GAAP diluted EPS was $6.33 versus $5.75 in FY2015; the company’s non-GAAP measure excludes other income and acquisition-related amortization, net of taxes.
- ePlus acquired IGX in December 2015 for $16.6 million net of cash acquired, expanding its U.S. footprint and establishing a U.K. operating presence. The acquisition’s reported revenue and earnings contribution was not material. Goodwill and other intangible assets increased to $54.2 million from $40.8 million.
- FY2016 fourth-quarter net sales were $299.4 million and net earnings were $10.0 million. Fourth-quarter product-and-services sales were 13.3% above the prior-year quarter, according to management.
- The Lawson patent litigation concluded after the Supreme Court denied ePlus’s petition for certiorari in February 2016; the prior $18.2 million judgment had been vacated after the patent was canceled.
Outlook, risks, and contingencies
No quantified revenue or earnings guidance is provided. Management described plans to expand sales locations, hire personnel, grow services, and consider acquisitions; these investments may weigh on near-term results. The company cited risks including dependence on key vendors—Cisco products represented 49% of technology-segment net sales—vendor incentive changes, pricing competition, customer spending and credit quality, acquisition integration, technology and cloud-market shifts, personnel retention, cybersecurity, lease residual values, and reliance on its working-capital credit facility.
Credit-loss reserves were $5.2 million at March 31, 2016, including a $3.2 million specific reserve tied to a customer bankruptcy. The company reported no legal proceedings with expected material loss contingencies and stated that performance-guarantee obligations were being met. Its independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm how much of reported growth and margin improvement came from services and net-presented third-party arrangements versus product volume, and monitor vendor-incentive trends.
- Review the concentration and terms of Cisco-related sales, the $250 million facility, floor-plan utilization, covenant headroom, and availability under the facility.
- Assess cash conversion and working-capital requirements against the modest $13.4 million of operating cash flow and $50.2 million of investing outflows.
- Track IGX integration, U.K. operations, acquisition-related goodwill and intangibles, and future amortization expense.
- Evaluate credit exposure and lease residual-value assumptions, including the bankruptcy-related reserve and the financing portfolio’s gains from asset sales.
- Distinguish GAAP results from management’s non-GAAP measures and account for the prior-year $7.6 million of unusual other income when comparing earnings.