ePlus Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are included below where available. Financial amounts are in U.S. dollars.
Business context
ePlus provides IT hardware and software, professional and managed services, proprietary supply-chain software, and IT equipment financing. Its two segments are Technology and Financing. Technology generated 97% of FY2019 net sales; Financing generated 29% of operating income. ePlus acquired SLAIT Consulting in January 2019 for approximately $50.0 million of preliminary consideration, expanding security and managed-services capabilities.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,372.7 million | $1,418.8 million | Down 3.3% |
| Gross profit / margin | $330.4 million / 24.1% | $323.5 million / 22.8% | Profit up 2.1%; margin up 1.3 percentage points |
| Operating income / margin | $79.5 million / 5.8% | $84.2 million / 5.9% | Down 5.6% |
| Net earnings | $63.2 million | $55.1 million | Up 14.6% |
| Diluted EPS | $4.65 | $3.95 | Up 17.7% |
| Adjusted EBITDA (non-GAAP) | $100.4 million | $102.8 million | Down 2.3% |
| Cash from operating activities | $39.4 million | $82.8 million | Down $43.4 million |
Product sales fell 5.1% to $1,223.2 million, while services sales rose 15.4% to $149.5 million. Management attributed stronger gross margin to a richer mix of professional and managed services, third-party maintenance and subscription offerings, and Financing segment activity.
Technology segment sales declined 3.2% to $1,329.5 million and operating income fell 9.1% to $56.7 million. Financing segment sales declined 6.3% to $43.2 million, while operating income rose 4.3% to $22.8 million.
Fourth quarter: Net sales were $325.4 million versus $329.9 million in Q4 FY2018; operating income was $14.5 million versus $18.5 million; net earnings were $15.1 million versus $8.9 million; diluted EPS was $1.12 versus $0.65. Q4 FY2019 included $5.6 million of other income.
Cash and cash equivalents were $79.8 million at year-end, down from $118.2 million. Current assets were $560.1 million and current liabilities were $328.9 million. Total assets were $786.2 million; total liabilities were $361.9 million; stockholders’ equity was $424.3 million. Financing receivables and operating leases, net, were $122.8 million.
Cash use reflected $49.8 million of acquisition spending, investment in financing receivables and working capital, and share repurchases. Investing activities used $96.2 million; financing activities provided $18.5 million. Notes payable totaled $48.6 million, predominantly non-recourse; separately, accounts payable-floor plan was $116.1 million. The Wells Fargo facility had a $250 million aggregate limit, with no balance on its accounts-receivable component; ePlus reported compliance with covenants. Management said cash, operating cash generation and available credit should fund requirements for at least the next 12 months.
Material changes, outlook and risks
- Net earnings benefited from a lower effective tax rate of 26.7%, compared with 34.3% in FY2018, and $6.3 million of bankruptcy-claim distributions recorded as other income. Thus, earnings growth outpaced operating-income and Adjusted EBITDA trends.
- Operating cash flow fell substantially, mainly as working capital absorbed cash, including a $34.3 million increase in accounts receivable and a $10.9 million increase in inventories. The Technology segment cash-conversion cycle rose from 23 to 27 days.
- Services growth and margin improvement partly offset softer product demand, particularly from technology and telecom, media and entertainment customers. Adjusted gross billings rose 1.0% despite the decline in GAAP net sales, partly reflecting more sales reported net as agent.
- There is no quantified earnings or revenue guidance. Management expects continued investment in personnel, services, geographic reach and acquisitions; these investments may pressure near-term results.
- Key risks include dependence on vendors—Cisco represented approximately 42% of Technology segment net sales—vendor incentives and product availability, intense price competition, customer credit and spending, working-capital and credit-facility availability, acquisition integration and goodwill, interest rates and lease residual values, cybersecurity, and public-sector contract compliance.
- Management reported no material probable legal loss or excess over recorded accruals, while noting litigation outcomes remain uncertain. Deloitte issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How much FY2019 net-earnings growth is sustainable apart from the $6.3 million bankruptcy distributions and the lower year-over-year tax rate.
- Whether services growth and improved gross margins can continue to offset declining product sales and lower Technology segment operating income.
- Whether working-capital use and the longer cash-conversion cycle reverse, and how cash generation compares with acquisition and financing-portfolio investment needs.
- The final purchase accounting and performance of SLAIT, including the preliminary nature of its acquisition allocation and the growth in goodwill and intangible assets.
- The company’s ongoing exposure to Cisco and other vendors, vendor incentives, and the availability and terms of its Wells Fargo working-capital facility.