ePlus Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing also presents unaudited fourth-quarter results for the three months ended March 31, 2015; this is an annual report, not a standalone quarterly filing.
Business context
ePlus sells IT hardware, software, professional and managed services, and proprietary procurement software, and provides IT equipment and services financing. Technology generated 97% of FY2015 net sales; financing generated 3%. The company serves commercial, government, and education customers, primarily in the United States.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1,143.3 million | $1,057.5 million |
| Gross profit / gross margin | $244.5 million / 21.4% | $216.9 million / 20.5% |
| Operating income / margin | $70.7 million / 6.2% | $60.1 million / 5.7% |
| Net earnings | $45.8 million | $35.3 million |
| Diluted earnings per share | $6.19 | $4.37 |
| Adjusted EBITDA / margin | $75.0 million / 6.6% | $62.9 million / 5.9% |
| Cash from operating activities | $13.8 million | $(8.2) million |
Net sales rose 8.1%, operating income 17.7%, and net earnings 30.0%. Gross-margin improvement reflected greater sales of services and third-party maintenance. Net earnings included $7.6 million of other income, principally a $6.2 million class-action settlement and a $1.4 million gain related to repurchased financing rights; these items make the year-over-year earnings comparison less representative of recurring operations.
Investing activities used $30.6 million, including financing-receivable originations, capital spending, and acquisition spending; financing activities provided $12.8 million, partly offset by share repurchases. Cash and equivalents were $76.2 million at year-end, down from $80.2 million. Recourse and non-recourse notes payable totaled $56.6 million, down from $68.9 million. Separately, accounts payable under the technology segment’s floor-plan facility was $99.4 million, versus $93.4 million. The $225 million GE Commercial Distribution Finance facility supports working capital; the company reported covenant compliance and no balance under its accounts-receivable component.
At year-end, total assets were $571.5 million, total liabilities $292.3 million, and stockholders’ equity $279.3 million. The effective tax rate was 41.5%, compared with 41.3%.
Fourth-quarter results and material changes
FY2015 fourth-quarter net sales were $267.3 million, compared with $259.9 million a year earlier; operating income was $15.1 million versus $14.0 million, and net earnings were $8.9 million versus $8.2 million. Diluted EPS was $1.22 versus $1.03. Technology product-and-service sales fell 13.0% sequentially from the third quarter, which management attributed mainly to customer IT-spending seasonality.
Technology segment net sales increased 8.5% for the year and segment earnings rose 18.8%. Financing segment net sales declined 3.6%, while operating income increased 11.0%; its reported segment earnings also included the $7.6 million of other income. ePlus repurchased 700,113 shares under its plans for $35.7 million during FY2015. The Evolve acquisition closed in August 2014 for a stated purchase price of $10.5 million.
Outlook, commentary, and risks
Management provided no numerical revenue or earnings guidance. It expects to continue expanding through targeted hiring, new sales locations, and potential acquisitions, while noting that these investments may reduce near-term results. Management said cash, operating cash flow, and available credit should fund working capital, capital spending, and other requirements for at least the next 12 months.
- Vendor exposure is significant: Cisco products represented 49% of technology-segment net sales; Hewlett-Packard and NetApp represented 8% and 7%. Vendor incentives, supply availability, and changes in vendor relationships could affect margins and sales.
- The technology business is competitive and exposed to pricing pressure, rapid technology changes, and customer shifts toward cloud and service models. The company also depends on its GE working-capital facility.
- Credit and asset risks include customer defaults and recovery of leased-equipment residual values. Credit-loss reserves were $5.6 million and included a $3.2 million reserve associated with a customer in bankruptcy.
- In the Lawson patent litigation, the USPTO issued a notice canceling the patent at issue; the appeals court vacated the injunction and contempt order. ePlus had petitioned for rehearing, with the court’s response pending. The earlier $18.2 million judgment was not presented as collected.
- The company is evaluating the forthcoming revenue-recognition standard; its effect and transition approach had not been determined.
Most important facts for investors to verify
- Separate recurring operating performance from the $7.6 million of FY2015 other income, especially when assessing earnings growth and valuation.
- Review operating cash conversion: cash from operations was $13.8 million despite $45.8 million in net earnings, with working-capital and financing-receivable movements affecting cash.
- Assess liquidity and funding together, distinguishing $56.6 million of recourse and non-recourse notes from the $99.4 million floor-plan payable balance and confirming continued facility availability.
- Track concentration in Cisco and other vendors, vendor incentives, and quarterly technology sales trends.
- Check subsequent developments in the Lawson litigation and the status of the company’s $3.2 million customer-specific credit reserve.
- Consider the share repurchases, Evolve acquisition, and management’s lack of numerical guidance when evaluating capital allocation and future growth.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls as of March 31, 2015.