ePlus(PLUS) - 2021 Q4 - Annual Report

Part I Business ePlus inc. provides IT and consulting solutions through its Technology (96% of net sales, 71% of operating income) and Financing segments, serving diverse enterprises with a 19% concentration from Verizon Communications Inc in fiscal 2021 - The company operates through two segments: Technology and Financing, with Technology being the primary revenue and profit driver[15][19] - Sales to Verizon Communications Inc. represented 19% of net sales for fiscal year ended March 31, 2021, indicating significant customer concentration[19] FY 2021 Segment Contribution | Segment | % of Net Sales | % of Operating Income | | :--- | :--- | :--- | | Technology | 96% | 71% | | Financing | 4% | 29% | FY 2021 Technology Segment Revenue by End Market | End Market | Percentage of Revenue | | :--- | :--- | | Telecommunications, Media & Entertainment | 25% | | Technology | 17% | | SLED (State, Local Gov & Education) | 16% | | Healthcare | 13% | | Financial Services | 13% | Our Business and Solutions ePlus delivers integrated IT solutions across cloud, security, and networking, leveraging key vendor partnerships, with its Technology segment offering IT sales and advanced services, while the Financing segment provides IT asset financing - The company's approach is to lead with advisory consulting to design, deploy, and manage solutions aligned with customer objectives, spanning on-premise, private, public, and hybrid cloud environments[16][17] - Key technology partners include Amazon Web Services, Cisco Systems, Dell EMC, Microsoft, NetApp, and Palo Alto Networks, enabling multi-vendor solutions[17] - The Technology segment's service offerings include managed services (SOC, MDR), professional services (cloud infrastructure, collaboration), and staff augmentation (vCIO, vCISO)[28][32] - The Financing segment specializes in financing IT, communication, and medical equipment, offering solutions like sales-type/operating leases, loans, and consumption-based financing[30][31] Competitive Strengths and Growth Strategy ePlus leverages its diverse customer base, integrated business model, and acquisition track record for growth, achieving a 4.2% net sales CAGR and 7.0% gross profit CAGR from fiscal 2017 to 2021 - The company has a diverse base of over 3,500 customers across various end-markets including technology, healthcare, and financial services[35] - ePlus has successfully integrated nearly 30 acquisitions since 1997, viewing them as a key part of its strategic growth plan[39] - The growth strategy includes deepening customer relationships through cross-selling bundled offerings, gaining top-level engineering certifications, and expanding managed services[44][45][46] Financial Growth (FY 2017 - FY 2021) | Metric | Compound Annual Growth Rate (CAGR) | | :--- | :--- | | Net Sales | 4.2% | | Consolidated Gross Profit | 7.0% | Operations and Human Capital As of March 31, 2021, ePlus employed 1,560 people, emphasizing employee development and utilizing drop-shipment for operations, while its backlog of open orders significantly increased to $476.8 million from $277.6 million year-over-year - The company's four largest distributors accounted for over 30% of purchases for the technology segment, highlighting a reliance on key partners for fulfillment[59] Employee Headcount by Function | Functional Area | 2021 | 2020 | | :--- | :--- | :--- | | Sales and marketing | 589 | 605 | | Professional services | 662 | 666 | | Administration | 217 | 212 | | Software development and internal IT | 85 | 89 | | Management | 7 | 7 | | Total | 1,560 | 1,579 | Backlog and Deferred Revenue (in millions) | Metric | March 31, 2021 | March 31, 2020 | | :--- | :--- | :--- | | Open Orders | $476.8 | $277.6 | | Deferred Revenue | $99.1 | $72.2 | Executive Officers As of March 31, 2021, ePlus inc.'s executive officers include Mark P. Marron (CEO), Elaine D. Marion (CFO), and Darren Raiguel (COO), all possessing extensive industry experience Executive Officers as of March 31, 2021 | Name | Age | Position | | :--- | :--- | :--- | | Mark P. Marron | 59 | Chief Executive Officer, President, and Director | | Elaine D. Marion | 53 | Chief Financial Officer | | Darren Raiguel | 50 | Chief Operating Officer and ePlus Technology, inc. President | Risk Factors The company faces significant risks including COVID-19 impacts, customer and vendor concentration, cybersecurity threats, IT industry evolution, economic weakness, LIBOR phase-out, and challenges in integrating acquisitions and retaining personnel - The COVID-19 pandemic poses risks of delayed orders, supply chain disruptions, and adverse effects on customer financial conditions[82] - A significant portion of revenue and accounts receivable is concentrated with a few key partners and customers. Cisco Systems products represented 36% of technology segment net sales in FY2021, and Verizon Communications Inc. accounted for 20% of trade accounts receivable at year-end[87][95] - The business is vulnerable to cybersecurity threats, including ransomware and phishing, with risks heightened by a remote workforce. A breach could lead to liability, reputational damage, and business disruption[100][101] - Changes in the IT industry, particularly the proliferation of cloud (IaaS, SaaS, PaaS), may reduce demand for the hardware and services ePlus sells and shift revenue to a net basis, impacting reported net sales[140] - The planned phase-out of LIBOR, the benchmark for the company's variable rate debt, creates uncertainty and could increase borrowing costs[153] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[159] Properties As of March 31, 2021, ePlus leases 316,000 square feet across 37 properties in the US, UK, and India, with its Herndon, VA headquarters lease expiring December 31, 2022 - The company leases 316,000 sq. ft. across 37 properties in the US, UK, and India[160] - The lease for the corporate headquarters in Herndon, VA, terminates on December 31, 2022[160] Legal Proceedings The company refers to Note 10 of the Notes to Consolidated Financial Statements for information regarding material pending legal proceedings - For details on legal proceedings, the report refers to Note 10, "Commitments and Contingencies" in the financial statements[161] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[162] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities ePlus common stock trades on NASDAQ under 'PLUS', with no cash dividends paid in fiscal 2021 or 2020, while the company repurchased 96,741 shares in fiscal 2021 and had 440,899 shares remaining for repurchase under its May 2020 program - The company's common stock is listed on the NASDAQ Global Select Market under the trading symbol 'PLUS'[163] - No cash dividends were paid in fiscal years 2021 and 2020. The company intends to retain future earnings for operations and growth[164] - In fiscal year 2021, the company purchased a total of 96,741 shares. This included 59,101 shares under its repurchase program and 37,640 shares to satisfy tax withholding obligations from vested restricted stock[165][166] - As of March 31, 2021, 440,899 shares may yet be purchased under the share repurchase program authorized on May 20, 2020[168][171] Selected Financial Data This item is not applicable - Not Applicable[171] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2021, ePlus reported a 1.3% net sales decrease to $1.57 billion, offset by a 1.6% rise in adjusted gross billings to $2.26 billion, with operating income increasing 11.6% to $106.3 million and net earnings up 7.7% to $74.4 million, alongside strong operating cash flow of $129.5 million Executive Overview and Key Metrics For fiscal 2021, ePlus's net sales decreased 1.3% to $1.57 billion, while adjusted gross billings rose 1.6% to $2.26 billion due to a mix shift, leading to improved profitability with operating income up 11.6% to $106.3 million and adjusted EBITDA up 7.4% to $128.2 million - The increase in Adjusted Gross Billings alongside a decrease in Net Sales was primarily due to a shift in product mix towards items recognized on a net basis, such as third-party maintenance and SaaS licenses[191][192] - The company implemented a flexible work-from-home strategy and other safety protocols in response to the COVID-19 pandemic while maintaining operational continuity[178] Consolidated Key Business Metrics (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales (in millions) | $1,568.3 | $1,588.4 | -1.3% | | Gross Profit (in millions) | $393.6 | $391.2 | +0.6% | | Gross Margin | 25.1% | 24.6% | +50 bps | | Operating Income (in millions) | $106.3 | $95.3 | +11.6% | | Net Earnings (in millions) | $74.4 | $69.1 | +7.7% | | Diluted EPS ($) | $5.54 | $5.15 | +7.6% | | Adjusted EBITDA (in millions) | $128.2 | $119.4 | +7.4% | | Adjusted Gross Billings (Tech, in millions) | $2,263.9 | $2,227.9 | +1.6% | Results of Operations In fiscal 2021, the Technology segment's operating income increased 21.7% to $75.7 million despite a sales dip, while the Financing segment's operating income decreased 7.4% to $30.7 million, and the consolidated effective tax rate rose to 30.4% - The consolidated effective tax rate increased to 30.4% in FY2021 from 28.0% in FY2020, primarily due to non-deductible executive compensation[197][248] Technology Segment Performance (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales (in millions) | $1,508.0 | $1,530.1 | -1.4% | | Adjusted Gross Billings (in millions) | $2,263.9 | $2,227.9 | +1.6% | | Gross Profit (in millions) | $346.2 | $340.6 | +1.7% | | Operating Income (in millions) | $75.7 | $62.2 | +21.7% | Financing Segment Performance (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales (in millions) | $60.4 | $58.3 | +3.6% | | Gross Profit (in millions) | $47.3 | $50.6 | -6.5% | | Operating Income (in millions) | $30.7 | $33.1 | -7.4% | Liquidity and Capital Resources ePlus's liquidity significantly improved in fiscal 2021, with cash and equivalents rising to $129.6 million and net cash from operations at $129.5 million, supported by a stable cash conversion cycle and an amended WFCDF credit facility - The cash conversion cycle for the technology segment was 37 days as of March 31, 2021, unchanged from the prior year, as a 4-day increase in DIO was offset by decreases in DSO and increases in DPO[259][262] - The company amended its WFCDF credit facility in May 2020, increasing the aggregate limit to $275 million (with a temporary uplift option to $350 million) and the accounts receivable sub-limit to $100 million[273] Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $129,507 | $(74,174) | | Net cash used in investing activities | $(35,756) | $(20,339) | | Net cash (used in) from financing activities | $(49,802) | $100,634 | Contractual Obligations as of March 31, 2021 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Non-recourse notes payable | $56,520 | $50,709 | $5,169 | $642 | $ - | | Recourse notes payable | $19,158 | $5,577 | $13,581 | $ - | $ - | | Operating lease obligations | $9,413 | $4,006 | $4,489 | $918 | $ - | | Hosted software | $8,054 | $2,840 | $3,765 | $1,449 | $ - | | Total | $93,145 | $63,132 | $27,004 | $3,009 | $ - | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including credit risk from COVID-19, interest rate risk from variable-rate debt, and foreign currency exposure, though Brexit is not expected to materially impact its financial position - The company faces interest rate risk from its WFCDF credit facility, which bears a market-based variable interest rate[295] - Foreign currency exposure exists from operations in the UK, Europe, and India, but is considered insignificant to the consolidated operations[296] - The company has evaluated Brexit-related risks and determined they are not expected to have a material effect on its results or financial position[297][298] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and Deloitte & Touche LLP's unqualified opinion on financial statements and internal controls, highlighting critical audit matters related to revenue recognition and financial asset transfers - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of March 31, 2021[336][337][349] - A critical audit matter was the determination of gross versus net revenue recognition for third-party software sales, which involves subjective judgment on whether accompanying support is essential to the software's functionality[341][342] - Another critical audit matter was the classification of transfers of financial assets as either sales or secured borrowings, which requires a subjective assessment of whether the assets have been legally isolated from the company[343][344] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that there were no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[300] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2021, an assessment concurred by the independent auditor - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[302] - Management's assessment concluded that the company maintained effective internal control over financial reporting as of March 31, 2021[306] - The independent registered public accounting firm also audited and expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting[307] Other Information The company reports no other information for this item - None[310] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the company's Code of Conduct, is incorporated by reference from the definitive 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's 2021 Proxy Statement[313][314] - The company's Code of Conduct is available on its website at **www.eplus.com/investors/corporate-governance-legal/code-of-conduct**[316](index=316&type=chunk) Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's 2021 Proxy Statement[317] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's 2021 Proxy Statement[318] Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's definitive 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's 2021 Proxy Statement[319] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's 2021 Proxy Statement[320] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including corporate documents, executive employment agreements, and long-term incentive plans - The consolidated financial statements are filed as part of this report[323] - Financial Statement Schedule II - Valuation and Qualifying Accounts is included[324] - The exhibit list includes management contracts and compensatory plans, such as employment agreements for the CEO, CFO, and COO, and details of the 2012 Employee and 2017 Director Long-Term Incentive Plans[325][326][327] Form 10-K Summary This item is not applicable - None[329]