ePlus inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended March 31, 2023. Although the request identifies “2022 Q4,” this filing is an annual report for FY2023; it does not provide a complete standalone fourth-quarter income statement.
Business context
ePlus provides IT hardware and software, professional and managed services, proprietary software, and equipment financing. Its technology segment generated 97% of FY2023 net sales; the financing segment generated 3%. Operations primarily serve U.S. commercial and public-sector customers.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $2,067.7 million | $1,821.0 million | +13.5% |
| Gross profit / margin | $517.5 million / 25.0% | $461.0 million / 25.3% | Profit +12.3%; margin down 0.3 percentage points |
| Operating income / margin | $166.2 million / 8.0% | $147.3 million / 8.1% | Income +12.8%; margin down 0.1 percentage points |
| Net earnings / margin | $119.4 million / 5.8% | $105.6 million / 5.8% | +13.0% |
| Diluted EPS | $4.48 | $3.93 | +14.0% |
| Adjusted EBITDA (non-GAAP) | $190.6 million; 9.2% margin | $170.0 million; 9.3% margin | +12.1%; margin down 0.1 percentage points |
Technology-segment sales rose 16.3% to $2,015.2 million, with product sales up 17.3% and services up 9.9%. Networking and security sales grew 31.4% and 34.9%, respectively. Segment operating income increased 28.5% to $140.1 million. Product gross margin improved 0.5 percentage points to 21.7%, while service gross margin fell 2.5 points to 35.5%, reflecting higher third-party costs and competitively priced contracts.
Financing-segment sales declined 40.4% to $52.5 million and operating income fell 32.0% to $26.1 million, mainly because the prior year included larger customer-driven lease buyouts and equipment sales. Proceeds from sales of financing receivables were $706.0 million, versus $855.1 million.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $15.4 million, compared with negative $20.6 million in FY2022. Investing cash flow was negative $18.9 million, including $13.3 million for the Future Com acquisition. Financing cash flow was negative $21.0 million. Cash and equivalents decreased $52.3 million to $103.1 million.
- Trade receivables were $504.1 million and inventory was $243.3 million at year-end; inventory rose 56.9%. The technology segment cash conversion cycle lengthened to 59 days from 50 days.
- At March 31, 2023, current assets were $1,095.1 million and current liabilities were $561.3 million. Total assets were $1,414.8 million and stockholders’ equity was $782.3 million.
- Technology-segment floor-plan borrowings were $134.6 million, against a $500 million maximum facility. The $200 million revolving facility had no balance outstanding. Recourse notes payable totaled $6.0 million and non-recourse notes payable $34.3 million. The company relies on the WFCDF facility for working capital and accounts-payable operations.
- Management said cash on hand, operating cash generation and available credit should be sufficient for working capital, capital expenditures and other needs for at least the next year. The filing gives no numerical earnings or revenue guidance.
Material changes, outlook and risks
- Overall sales and earnings increased, led by technology products and services. Gross margin was broadly stable, but operating and Adjusted EBITDA margins edged lower.
- Management reported continuing product supply constraints, with extended lead times expected to persist for at least the next few quarters. Constraints have affected delivery timing, inventory levels and working capital; open orders fell to $878.3 million from $973.0 million, while deferred revenue increased to $160.9 million from $116.9 million.
- Inflation, wage growth and higher interest rates are raising costs. The company generally passes supplier price increases to customers, but says labor costs on fixed-price service engagements may take longer to pass through.
- Other expense was $3.2 million, including $5.4 million of foreign-currency transaction losses, partly offset by a $1.9 million gain from a class-action claim. The effective tax rate declined to 26.8% from 28.1%.
- Future Com was acquired in July 2022 for $13.3 million. After year-end, on April 30, 2023, ePlus acquired Network Solutions Group assets and liabilities for preliminary consideration of $59.6 million; initial accounting was incomplete when the filing was made.
- Key exposures include customer concentration (Verizon represented 22% of FY2023 sales and 13% of year-end trade receivables), vendor concentration (Cisco products were about 40% of technology-segment sales), dependence on vendors and third-party providers, cybersecurity and privacy threats, credit access, customer spending, talent costs, and lease residual values. The company reported no material loss reasonably possible from pending legal matters beyond amounts already recognized.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition for third-party software gross-versus-net treatment and accounting for transfers of financing assets were identified as critical audit matters.
Important facts for investors to verify
- Whether working-capital investment, especially higher inventory and receivables, converts to operating cash as supply conditions and deliveries evolve.
- Whether technology-segment growth and service profitability can be sustained, and whether financing-segment revenue remains below FY2022 levels.
- The ongoing availability and terms of the WFCDF facility and financing-segment lenders, particularly as interest rates and credit conditions change.
- Exposure to Verizon, Cisco and other key vendors, and the potential effects of supply constraints or changes to vendor incentives.
- The final accounting and expected contribution of the post-year-end Network Solutions Group acquisition, alongside integration and acquisition-related risks.