ePlus inc. (NASDAQ: PLUS) — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012; fourth quarter ended March 31, 2012. The filing is an annual report, not a standalone quarterly filing. Unless noted otherwise, amounts are in U.S. dollars.
Business context and reporting period
ePlus sells IT hardware, software and professional services, proprietary procurement and asset-management software, and equipment leasing and financing. Technology sales generated approximately 96% of FY2012 revenue; financing generated approximately 4%. The company completed acquisitions of NCC Networks, Vanticore and Pacific Blue Micro during the year.
Financial performance and liquidity
| Metric | FY2012 / March 31, 2012 | Comparison |
|---|---|---|
| Total revenue | $825.6 million | Up 14.9% from $718.5 million |
| Sales of products and services | $785.0 million | Up 16.8% |
| Earnings before tax | $39.6 million | Down 2.5% from $40.6 million |
| Net earnings | $23.4 million | Down 1.5% from $23.7 million |
| EPS | $2.92 basic; $2.84 diluted | Prior year: $2.89 basic; $2.82 diluted |
| Product and services gross margin | 17.8% | 17.9% in FY2011 |
| Cash and short-term investments | $41.2 million | Cash alone was $33.8 million, down from $75.8 million |
| Operating cash flow | $(21.6) million | $(9.4) million in FY2011 |
| Investing cash flow | $(38.2) million | Included acquisitions, notes receivable and short-term investments |
| Debt and floor-plan financing | $28.1 million recourse and non-recourse notes; $85.9 million floor-plan balance | Notes included $1.7 million recourse debt; floor-plan balance was $63.8 million a year earlier |
FY2012 operating cash use reflected growth in receivables and inventory, lease investments and other working-capital movements. The company repurchased 735,865 shares for approximately $19.0 million and spent $11.8 million net on acquisitions. Management said available cash and short-term investments, operating funds, credit-facility availability and potential investment-portfolio monetization should meet requirements for at least the next 12 months. The $125 million GE Commercial Distribution Finance facility was in covenant compliance; its floor-plan balance was $85.9 million, and its separate $30 million receivables component had no balance outstanding.
Fourth-quarter results and changes
For the quarter ended March 31, 2012, revenue was $219.0 million, pretax earnings $7.0 million and net earnings $3.9 million; basic and diluted EPS were $0.50 and $0.49. Compared with the restated fourth quarter of FY2011, revenue rose from $176.0 million and net earnings from $3.6 million. Fourth-quarter revenue increased approximately 24.4% year over year, while net earnings increased approximately 8.5%. The quarter’s revenue was slightly below the preceding quarter.
Annual technology-segment revenue grew 16.4% to $792.4 million and segment earnings rose 17.6% to $31.6 million. Financing-segment revenue fell 12.3% to $33.2 million, and segment earnings declined 42.2% to $9.4 million, including the impact of higher credit-loss provisions. A $2.9 million specific reserve was associated primarily with a law firm that filed for bankruptcy in May 2012. Total credit-loss reserves were $5.6 million at year-end.
Outlook, risks, contingencies and unusual items
- Outlook: No company-issued numeric revenue or earnings guidance is provided in the supplied filing text. Management cited industry analysts’ expectations for increased U.S. IT spending in 2012, while cautioning that economic weakness could defer customer spending. It expected continued investment in staff, sales locations and capabilities, which could weigh on near-term results.
- Restatement: FY2011 and FY2010 results were restated to report certain third-party software assurance, maintenance and service transactions net because ePlus acted as agent. Restated revenue and corresponding costs fell by $144.5 million and $126.2 million, respectively; net earnings, EPS and cash flows were unchanged. A separate prior-period lease-revenue correction reduced April 1, 2009 retained earnings by $385,000.
- Controls and audit: Management concluded internal control over financial reporting and disclosure controls were ineffective at March 31, 2012 because of a material weakness involving the application of GAAP. The auditor issued an adverse opinion on internal controls, but an unqualified opinion on the financial statements. Management described planned remediation, including enhanced principal-versus-agent reviews and system and process changes.
- Customer and vendor concentration: Cisco products represented approximately 45% and Hewlett-Packard products 15% of FY2012 product and services sales. Vendor incentive changes reduced product-and-services gross margin by 0.3 percentage points during the year. The filing also highlights customer credit risk, competition, reliance on financing facilities and potential residual-value losses on leased equipment.
- Legal matters: ePlus is pursuing an appeal in its Cyberco-related suit against Huntington National Bank after summary judgment for the bank. In the Lawson patent case, ePlus obtained a permanent injunction following a jury verdict; Lawson appealed, and ePlus sought a contempt finding and appealed the exclusion of monetary damages. Outcomes and recoveries are uncertain.
- Other notable items: Legal and other fees related to patent litigation were $6.0 million, down from $10.5 million in FY2011. Goodwill was $28.4 million at year-end, with no FY2012 impairment charge. The company had no outstanding cash dividends and said it intended to retain earnings.
Important facts for investors to verify
- Review the full restatement note and assess the disclosed material weakness, remediation progress and subsequent control reporting.
- Track receivables, the law-firm bankruptcy exposure, credit-loss reserves and any additional customer defaults or write-offs.
- Monitor cash conversion and working-capital needs as sales grow, including receivables, inventory and floor-plan financing.
- Assess gross-margin trends and dependence on Cisco, Hewlett-Packard and vendor incentive programs.
- Check subsequent developments in the Lawson and Huntington litigation and whether any recoveries are recognized.
- Review acquisition integration, contingent consideration and the performance of acquired businesses.