ePlus Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2017. The filing also reports fourth-quarter results for the three months ended March 31, 2017. All per-share figures reflect the two-for-one stock split completed March 31, 2017.
Business context
ePlus provides IT hardware and software, professional and managed services, proprietary procurement and asset-management software, and equipment financing. Its technology segment generated 97% of fiscal 2017 net sales; its financing segment generated 3% of sales and 20% of operating income.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,329.4 million | $1,204.2 million |
| Gross profit / margin | $299.8 million / 22.5% | $262.1 million / 21.8% |
| Operating income / margin | $85.7 million / 6.4% | $75.8 million / 6.3% |
| Net earnings | $50.6 million | $44.7 million |
| Diluted EPS | $3.60 | $3.05 |
| Adjusted EBITDA / margin | $93.0 million / 7.0% | $81.3 million / 6.8% |
| Cash from operating activities | $33.0 million | $14.1 million |
| Cash and cash equivalents at year-end | $109.8 million | $94.8 million |
| Recourse and non-recourse notes payable | $37.4 million | $47.4 million |
FY2017 investing cash flow was an outflow of $26.3 million and financing cash flow was an inflow of $7.8 million. The $60.0 million inventory build was primarily tied to committed customer orders; the increase was partly supported by customer advance payments and higher deferred revenue. The technology segment’s $250 million Wells Fargo facility had $132.6 million outstanding on its floor-plan component and no accounts-receivable-component balance at year-end; the company reported compliance with facility covenants.
Fourth-quarter net sales were $332.8 million versus $299.4 million a year earlier; net earnings were $10.5 million versus $10.0 million, and diluted EPS was $0.75 versus $0.68.
Changes versus the prior year
- Annual net sales increased 10.4%; adjusted gross billings of products and services rose 14.1%. Management attributed the gap mainly to a higher proportion of third-party software assurance, maintenance, and services recognized on a net basis.
- Gross margin on product and services improved 60 basis points to 20.5%, reflecting product mix, growth in services, and vendor incentives. Operating expenses increased 14.9%, including higher compensation and acquisition-related costs.
- Technology-segment operating income rose 8.2% to $68.9 million. Financing-segment operating income rose 39.4% to $16.8 million, despite a 1.9% decrease in segment net sales; lower direct lease costs and higher post-contract earnings and transaction gains supported results.
- Cash from operations increased, while the cash conversion cycle lengthened to 38 days from 18, principally because inventory days rose to 24 from 7.
Outlook, risks, and unusual items
- No specific numerical earnings or revenue guidance is provided. Management said cash, operating cash generation, and available credit were expected to fund working capital, capital expenditures, and other requirements for at least the next 12 months. It expects to continue investing in staff, sales locations, services, and potential acquisitions; these investments may weigh on near-term results.
- Key risks include dependence on major vendors and vendor incentive programs, pricing competition, customer spending and credit quality, and concentration in a large technology customer that represented approximately 13% of net sales in FY2017. Cisco products represented 47% of technology-segment net sales.
- Other risks include technology shifts toward cloud and as-a-service offerings, cybersecurity and IT-system disruption, acquisition integration, lease residual-value and credit-loss estimates, and reliance on the Wells Fargo working-capital facility. Management considered UK and Brexit exposure immaterial at the reporting date.
- FY2017 included $0.38 million of other income from a DRAM price-fixing class-action settlement. FY2016 had no other income; FY2015 included $7.6 million of unusual other income, primarily a $6.2 million flat-panel settlement and a $1.4 million financing-related gain.
- The December 2016 Consolidated IT Services acquisition had a preliminary purchase price of $13.1 million. After year-end, ePlus acquired OneCloud Consulting on May 17, 2017 for $8.8 million cash plus contingent consideration of up to $4.5 million.
- The company repurchased 656,962 shares under its plan for $26.8 million during FY2017, paid no cash dividend, and completed the two-for-one stock split. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether the customer-order-driven inventory and receivables build converts to cash as expected, and whether the longer cash conversion cycle reverses.
- How much of revenue and gross-profit growth depends on vendor incentives, net-reported service arrangements, and major vendors—especially Cisco.
- The sustainability of financing-segment earnings, including gains from asset sales, post-contract earnings, credit-loss reserves, and lease residual-value assumptions.
- Facility availability and covenant headroom under the Wells Fargo agreement, as well as the distinction between notes payable and the $132.6 million floor-plan payable balance.
- Acquisition integration, final purchase-price allocations, and subsequent results from Consolidated IT Services and OneCloud.