ePlus Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 31, 2014. The filing also presents unaudited fourth-quarter results for the three months ended March 31, 2014. Amounts below are U.S. dollars.
Business context and results
ePlus provides IT products, professional and managed services, proprietary software, and equipment financing. Its technology segment generated about 97% of FY2014 revenue; financing generated about 3%.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $1,057.5 million | $983.1 million | +7.6% |
| Earnings before tax | $60.1 million | $58.7 million | +2.3% |
| Net earnings | $35.3 million | $34.8 million | +1.3% |
| Diluted EPS | $4.37 | $4.32 | +1.2% |
| Consolidated gross margin | 20.5% | 20.8% | Down 0.3 percentage points |
For Q4 FY2014, revenue was $259.9 million versus $236.3 million a year earlier; net earnings were $8.2 million versus $7.7 million, and diluted EPS was $1.03 versus $0.95.
Cash flow, debt, and liquidity
- Cash and cash equivalents rose to $80.2 million from $52.7 million. Operating cash flow was negative $8.2 million, compared with positive $41.3 million in FY2013. Management attributed the FY2014 use principally to investment in financing receivables and technology-segment working capital. An adjusted, non-GAAP operating cash flow measure was $11.0 million; it includes customer payments made directly to lenders and should be considered alongside GAAP cash flow.
- Investing activities used $28.8 million; financing activities provided $64.5 million, including net borrowings on recourse and non-recourse notes and the floor-plan facility.
- Recourse and non-recourse notes payable totaled $68.9 million at year-end, including $65.3 million non-recourse and $3.6 million recourse. Separately, accounts payable under the floor-plan facility was $93.4 million. The $175 million facility was available subject to asset-based availability and covenants; there was no balance drawn on its $30 million accounts-receivable component. The company reported covenant compliance.
- Current assets were $425.3 million and current liabilities were $244.1 million. Total liabilities were $287.5 million; total stockholders’ equity was $266.4 million.
- Management said cash, operating cash generation, available credit, and possible portfolio monetization were expected to support requirements for at least the next 12 months.
Material changes and management commentary
- Technology-segment revenue rose 8.3% to $1,021.4 million and segment earnings increased 10.3% to $51.3 million. Product-and-services gross margin improved to 18.3% from 18.0%, supported by service and third-party software assurance and maintenance mix; lower vendor incentives partly offset the improvement.
- Financing-segment revenue fell 9.5% to $36.1 million and segment earnings declined 28.1% to $8.8 million. Lower post-contract and fee income were partially offset by higher transactional gains.
- Management cited market-share gains, new customers, vendor referrals, and sales in virtualization, collaboration, and security as drivers of growth. It plans to continue investing in services, geographic reach, hiring, software, and acquisitions; it provided no specific financial guidance.
- FY2014 included the $2.8 million cash acquisition of AdviStor, which expanded storage capabilities. The company repurchased 198,401 shares under its repurchase plan for $10.7 million during the fiscal year.
- In May 2014, after year-end, the company repurchased 400,000 shares for $19.0 million in connection with a secondary offering by existing shareholders; ePlus received no proceeds from that offering. The filing says additional non-recourse borrowing in Q4 contributed to the higher year-end cash balance and was used for this May repurchase.
- No dividend was paid in FY2014. The $2.50-per-share dividend reported for FY2013 was a one-time special dividend.
Risks, contingencies, and unusual items
- Customer concentration remains notable: a large telecommunications customer accounted for 11% of FY2014 revenue, down from 14%. Cisco products represented about 48% of technology product-and-services sales; the company also depends on other key vendors and their incentive programs.
- Credit-loss reserves were $5.8 million, including a $3.1 million specific reserve related to a customer that filed for bankruptcy. The company recorded a $750,000 provision for credit losses in FY2014.
- The Lawson patent litigation involved an $18.2 million contempt judgment, but collection and coercive fines were stayed pending appeal. The USPTO canceled the relevant patent in April 2014; ePlus anticipated the injunction could be vacated but maintained that it was entitled to enforce the contempt judgment. The outcome remained uncertain.
- Other key risks include competition and pricing pressure, reliance on vendor supply and financing facilities, changing IT demand and cloud adoption, residual values of leased equipment, customer creditworthiness, acquisition integration, cybersecurity, and retaining skilled staff.
- The company reported effective disclosure controls and internal control over financial reporting; Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether revenue growth and service-margin gains continue, especially given the Q4 sequential revenue decline and vendor incentive exposure.
- The sources and sustainability of cash generation, including working-capital needs, financing receivable originations, and dependence on the floor-plan facility.
- Credit quality and reserve adequacy, particularly the bankruptcy-related exposure and the growth in financing receivables.
- Developments in the Lawson appeal and any financial or operational effect of patent cancellation.
- The impact of the May 2014 $19.0 million share repurchase and related borrowing on liquidity and per-share results.
- Customer and vendor concentration, including changes in the major telecommunications customer’s purchases and Cisco’s share of sales.