EPLUS INC annual report, FY2021

Business context and reporting period

ePlus inc. provides IT products, software, professional and managed services, proprietary software, and equipment financing through technology and financing segments. This Form 10-K covers the fiscal year ended March 31, 2021—not a quarter-only period. The technology segment generated 96% of net sales and 71% of operating income; financing generated 4% of net sales and 29% of operating income.

Financial performance and liquidity

MetricFY ended Mar. 31, 2021FY ended Mar. 31, 2020
Net sales$1,568.3 million$1,588.4 million
Gross profit / margin$393.6 million / 25.1%$391.2 million / 24.6%
Operating income / margin$106.3 million / 6.8%$95.3 million / 6.0%
Net earnings / margin$74.4 million / 4.7%$69.1 million / 4.3%
Diluted EPS$5.54$5.15
Adjusted EBITDA (non-GAAP)$128.2 million / 8.2% margin$119.4 million / 7.5% margin
Operating cash flow$129.5 million$(74.2) million
Cash and cash equivalents at year-end$129.6 million$86.2 million

Technology-segment net sales fell 1.4% to $1,508.0 million, while adjusted gross billings, a company-defined non-GAAP measure, rose 1.6% to $2,263.9 million. Product sales declined 2.3%; services revenue grew 4.7%. Management attributed the divergence largely to a greater mix of subscriptions, third-party maintenance and services recorded on a net basis.

At March 31, 2021, current assets were $777.6 million and current liabilities were $459.4 million. Total assets were $1,076.8 million and stockholders’ equity was $562.4 million. Financing-segment borrowings comprised $18.1 million of recourse notes and $56.1 million of non-recourse notes. The technology segment also had $98.7 million outstanding under its floor-plan facility, presented as accounts payable; there was no balance outstanding under the facility’s accounts-receivable component.

Cash from operations was $129.5 million, investing activities used $35.8 million—including $27.0 million for the SMP acquisition—and financing activities used $49.8 million. The company repurchased $6.9 million of stock, including tax-withholding share repurchases. No cash dividends were paid.

Material changes versus the prior year

  • Net sales declined 1.3%, but gross profit increased 0.6% and gross margin expanded 50 basis points. Lower operating expenses and higher technology-segment gross profit contributed to operating income growth of 11.6%.
  • Net earnings increased 7.7%; diluted EPS rose 7.6%. The effective tax rate increased to 30.4% from 28.0%, primarily due to non-deductible executive compensation.
  • Technology-segment operating income rose 21.7% to $75.7 million. Financing-segment operating income fell 7.4% to $30.7 million, reflecting lower transactional gains than in the prior year, partly offset by higher portfolio and post-contract earnings.
  • Operating cash flow improved from a $74.2 million use to $129.5 million provided. Cash increased $43.3 million, partly offset by investment in working capital and the financing portfolio, and share repurchases.
  • Verizon represented 19% of net sales, compared with 15% in FY2020; Cisco products represented 36% of technology-segment net sales, down from 40%.

Outlook, risks and unusual items

The filing provides no quantitative earnings or revenue guidance. Management said available cash, operating cash generation and credit-facility capacity were expected to fund working capital, capital expenditures and other requirements for at least the next year, while noting uncertainty from COVID-19 and tighter financing markets.

  • COVID-19 could affect customer spending and collections, employee operations, supply chains and lenders’ willingness to fund transactions. The company tightened some customer credit lines and transferred certain financing transactions on a non-recourse basis.
  • The $275 million Wells Fargo Commercial Distribution Finance facility is important to technology-segment working capital, is secured by subsidiary assets and can be terminated by either party on 90 days’ notice. Its accounts-receivable sublimit is $100 million; borrowing availability depends on eligible receivables and inventory.
  • Customer and supplier concentration are notable: Verizon accounted for about 20% of trade receivables at year-end, while Cisco accounted for 36% of technology-segment sales. The filing also identifies reliance on a small group of vendors and distributors.
  • Other risks include customer credit losses, vendor incentives and product availability, competition and pricing pressure, cybersecurity, skilled-employee retention, residual values on leased equipment, LIBOR transition, and acquisition integration. The allowance for credit losses increased to $4.4 million from $3.2 million; the FY2021 provision was $1.4 million.
  • The $27.0 million SMP acquisition closed December 31, 2020; management said its contribution to reported revenue and earnings was not material. Prior-year financing-segment results included higher gains from sales of financing receivables ($21.8 million versus $14.5 million in FY2021); FY2020 other income also included $1.0 million from legal-claim distributions.
  • Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Audit critical matters included gross-versus-net revenue judgments for third-party software and accounting for transfers of financial assets. The filing describes routine legal matters but does not provide a clear value for potential aggregate exposure.

Key facts for investors to verify

  • Whether adjusted gross billings growth translates into durable GAAP revenue and profit growth, given the shift toward revenue recorded net.
  • Customer and vendor concentration trends, particularly Verizon’s sales and receivables exposure and Cisco’s share of technology sales.
  • Credit quality, allowance adequacy, collection performance and financing-portfolio growth, including the effect of non-recourse transfers and realized sale gains.
  • Ongoing availability, borrowing-base capacity, covenants and pricing of the Wells Fargo facility, along with the funding capacity of financing-segment lenders.
  • Integration and returns from acquisitions, and whether higher services mix and margins can be sustained as pandemic-related conditions and customer demand evolve.