ePlus inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020. Although the request identifies 2019 Q4, this filing is an annual report for FY2020; quarterly figures below identify the fiscal fourth quarter where relevant. Amounts are in U.S. dollars unless noted.
Business context
ePlus provides IT hardware and software, professional and managed services, proprietary supply-chain software, and equipment financing. Its technology segment generated 96% of FY2020 net sales; its financing segment generated 35% of operating income. Sales to Verizon represented 15% of annual net sales.
Financial performance and liquidity
| Metric | FY2020 / March 31, 2020 | Prior comparable period |
|---|---|---|
| Net sales | $1,588.4 million | $1,372.7 million; up 15.7% |
| Gross profit / gross margin | $391.2 million / 24.6% | $330.4 million / 24.1% |
| Operating income / margin | $95.3 million / 6.0% | $79.5 million / 5.8% |
| Net earnings / diluted EPS | $69.1 million / $5.15 | $63.2 million / $4.65; earnings up 9.3% |
| Adjusted EBITDA (non-GAAP) | $119.4 million; 7.5% margin | $100.4 million; 7.3% margin |
| Cash and cash equivalents | $86.2 million | $79.8 million |
| Operating cash flow | $(74.2) million | $39.4 million provided |
| Total assets / stockholders’ equity | $909.1 million / $486.1 million | $786.2 million / $424.3 million |
FY2020 technology-segment net sales increased 15.1% to $1,530.1 million, while operating income rose 9.5% to $62.2 million. Financing-segment net sales grew 35.0% to $58.3 million and operating income grew 45.3% to $33.1 million. Financing gains included $21.8 million from sales of financing receivables, versus $9.1 million in FY2019.
Operating cash use reflected working-capital needs and a $109.4 million increase in financing receivables, in part under the cash-flow presentation following adoption of lease accounting standard ASC 842. Financing activities provided $100.6 million, including net borrowings and $35.0 million drawn on the technology segment’s accounts-receivable facility. The cash conversion cycle lengthened to 37 days from 27 days, primarily as days sales outstanding rose to 71 from 59.
At year-end, recourse and non-recourse notes payable totaled $72.8 million, and accounts payable-floor plan was $127.4 million. The Wells Fargo facility’s temporary year-end limit was $300 million, including a $75 million accounts-receivable sublimit; $35 million was outstanding on that component. A May 18, 2020 amendment, after year-end, set a $275 million regular aggregate limit, with a temporary increase option to $350 million, and raised the receivables sublimit to $100 million. Current assets were $649.8 million and current liabilities $386.6 million.
Material changes and unusual items
- Services sales rose 29.2% to $193.1 million, while product sales rose 14.1% to $1,395.3 million. Management cited stronger demand in telecom, media and entertainment and growth from acquired businesses; financial-services demand declined.
- Operating expenses rose 18.0% to $295.9 million, including higher compensation and costs associated with the SLAIT and ABS Technology acquisitions. FY2020 acquisitions included ABS Technology for approximately $15.3 million of consideration.
- The effective tax rate increased to 28.0% from 26.7%, primarily due to a lower tax benefit from restricted-stock vesting. Net earnings included legal-claim distributions of approximately $1.0 million in FY2020 and $6.3 million in FY2019.
- FY2020 fourth-quarter net sales were $366.5 million and net earnings were $13.2 million, compared with $325.4 million and $15.1 million, respectively, in FY2019’s fourth quarter.
- ePlus repurchased $14.4 million of common stock during FY2020. It paid no cash dividends in FY2020 or FY2019.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management described the duration and financial impact of COVID-19 as uncertain, while stating it had continuity measures in place and believed available cash, operating funds and credit capacity could meet needs for at least the next year. It warned that weaker customer spending, delayed collections, supply-chain interruption, tighter financing markets and lower residual values could adversely affect results and liquidity. The company tightened some customer credit limits and transferred certain financing transactions on a non-recourse basis.
Notable exposures include customer concentration (Verizon was approximately 20% of trade receivables at year-end), vendor concentration (Cisco represented 40% of technology-segment net sales), and dependence on the Wells Fargo facility. Credit-loss reserves were $3.2 million, up from $2.6 million. Goodwill was $118.1 million; after a COVID-19-triggered quantitative test, management concluded the technology reporting unit’s fair value substantially exceeded its carrying value. Management reported no litigation loss contingency considered reasonably possible to be material; ordinary-course claims remain possible.
Key facts for investors to verify
- Whether the negative operating cash flow and longer cash conversion cycle persist, and how financing receivable originations affect cash generation.
- Customer collection performance, including Verizon exposure, reserve adequacy and any COVID-related payment extensions or defaults.
- Availability, covenant compliance and actual utilization of the Wells Fargo facility, including terms of post-year-end amendments.
- How much financing-segment earnings depend on receivable-sale gains and whether those gains are repeatable.
- Technology-segment margins and vendor/customer concentration, alongside integration costs and results from acquisitions.
- Reconciliation and limitations of non-GAAP Adjusted EBITDA and adjusted gross billings versus GAAP results.