See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
DESCRIPTION OF BUSINESS — Our company was founded in 1990 and is a Delaware corporation. ePlus inc. is sometimes referred to in this Quarterly Report on Form 10-Q as "we," "our," "us," "ourselves," or "ePlus." ePlus inc. is a holding company that through its subsidiaries provides information technology solutions which enable organizations to optimize their IT environment and supply chain processes. We also provide consulting, professional and managed services and complete lifecycle management services including flexible financing solutions. We focus on middle market and large enterprises in North America and the United Kingdom.
BASIS OF PRESENTATION — The unaudited condensed consolidated financial statements include the accounts of ePlus inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accounts of businesses acquired are included in the unaudited condensed consolidated financial statements from the dates of acquisition.
The notes to the consolidated financial statements contained in the 2017 Annual Report Financial Statements include additional discussion of the significant accounting policies and estimates used in the preparation of our consolidated financial statements. There have been no material changes to our significant accounting policies and estimates during the sixnine months ended September 30,December 31, 2017.
STOCK SPLIT — On March 31, 2017, we completed a two-for-one stock split in the form of a stock dividend. References made to outstanding shares or per share amounts in the accompanying financial statements and disclosures have been retroactively adjusted for this stock split. The number of authorized shares reflected on the consolidated balance sheets was not affected by the stock split.
CONCENTRATIONS OF RISK — A substantial portion of our sales of product and services are from sales of Cisco Systems, Hewlett Packard Enterprise (“HPE”) and HP, Inc. collectively(collectively “Hewlett Packard companies’companies”), and NetApp products, which represented approximately 45%39%, 8%5% and 3%7%, and 47%45%, 8%7%, and 4%5%, respectively, for the three and sixnine months ended September 30,December 31, 2017. Sales of Cisco Systems, Hewlett Packard companies, and NetApp represented approximately 50%45%, 5%6% and 6%, and 51%49%, 5%6% and 5%, respectively, for the three and sixnine months ended September 30,December 31, 2016. Any changes in our vendors’ ability to provide products or incentive programs could have a material adverse effect on our business, results of operations and financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which, along with amendments issued in 2015 and 2016, will replace most existing revenue recognition guidance under GAAP and eliminate industry specific guidance. The core principle of the new guidance is that an entity should recognize revenue for the transfer of goods and services equal to an amount it expects to be entitled to receive for those goods and services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Including the one-year deferral, these updates become effective for us in our quarter ending June 30, 2018. The new guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).
We have established a cross-functional implementation team and utilized a bottom-up approach to analyze the impact of the standard on our arrangements by reviewing the current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. Based on our analysis to date, we have reached the following tentative conclusions regarding the new standard and how we expect it to affect our consolidated financial statements and related disclosures:
Our analysis and evaluation of the new standard will continue through its effective date in our quarter ending June 30, 2018. A substantial amount of work remains to be completed due to the complexity of the new standard, the application of judgment and the requirement for the use of estimates in applying the new standard, as well as the volume of our customer portfolio and the related terms and conditions of our contracts that must be reviewed.
Our financing receivables and operating leases consist of assets that we finance for our customers, which we manage as a portfolio of investments. Equipment financed for our customers is accounted for as investments in direct financing, sales-type or operating leases in accordance with Accounting Standards Codification (“ASC”) Topic 840, Leases. We also finance third-party software, maintenance, and services for our customers, which are classified as notes receivables. Our notes receivables are interest bearing and are often due over a period of time that corresponds with the terms of the leased products.
For transfers accounted for as sales, we derecognize the carrying value of the asset transferred and recognize a net gain or loss on the sale, which are presented within net sales in the consolidated statement of operations. During the three months ended September 30,December 31, 2017 and 2016, we recognized net gains of $1.2 million and $1.7$0.9 million, respectively, and total proceeds from these sales were $48.3$32.8 million and $75.4$55.8 million, respectively. During the sixnine months ended September 30,December 31, 2017 and 2016, we recognized net gains of $3.5$4.6 million and $3.2$4.1 million, respectively, and total proceeds from these sales were $134.1$166.9 million and $129.6$185.4 million, respectively.
For certain assignments of financial assets, we retain a servicing obligation. For assignments accounted for as sales, we allocate a portion of the proceeds to deferred revenues, which is recognized as we perform the services. As of both September 30,December 31, 2017 and March 31, 2017, we had deferred revenue of $0.5 million for servicing. In a limited number of such sales, we indemnified the assignee in the event that the lessee elected to early terminate the lease. As of September 30,December 31, 2017, our maximum potential future payments related to such guarantees is $0.6 million. We believe the possibility of making any payments to be remote.
The following table summarizes the changes in the carrying amount of goodwill for the sixnine months ended September 30,December 31, 2017 and 2016, (in thousands):
Our reserves for credit losses and minimum payments associated with our notes receivables and lease-related receivables disaggregated on the basis of our impairment method were as follows (in thousands):
We place receivables on non-accrual status when events, such as a customer’s declaring bankruptcy, occur that indicate a receivable will not be collectable. We charge off uncollectable financing receivables when we stop pursuing collection. As of March 31, 2017 we had a balance outstanding as of $3.2 million for a customer in bankruptcy which was fully reserved and on a non-accrual status. We wrote off this balance against the reserve for credit losses during the sixnine months ended September 30,December 31, 2017, after the bankruptcy case was substantially complete.
The age of the recorded minimum lease payments and net credit exposure associated with our investment in direct financing and sales-type leases that are past due disaggregated based on our internally assigned credit quality rating (“CQR”) were as follows as of September 30,December 31, 2017 and March 31, 2017 (in thousands):
The age of the recorded notes receivable balance disaggregated based on our internally assigned CQR were as follows as September 30,December 31, 2017 and March 31, 2017 (in thousands):
We estimate losses on our net credit exposure to be between 0% - 5% for customers with highest CQR, as these customers are investment grade or the equivalent of investment grade. We estimate losses on our net credit exposure to be between 2% - 15% for customers with average CQR, and between 15% - 100% for customers with low CQR, which includes customers in bankruptcy.
Our property, equipment, other assets and liabilities consist of the following (in thousands):
On July 27, 2017, we executed an amendment to the WFCDF credit facility which temporarily increases the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017, and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election or October 31 of that same year.
Basic earnings per share is calculated by dividing net earnings available to common shareholders by the basic weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is calculated by dividing net earnings available to common shareholders by the basic weighted average number of shares of common stock outstanding plus common stock equivalents during each period.
The following table provides a reconciliation of the numerators and denominators used to calculate basic and diluted net income per common share as disclosed on our consolidated statements of operations for the three and sixnine months ended September 30,December 31, 2017 and 2016 (in thousands, except per share data).
Upon each vesting period of the restricted stock awards, employees are subject to minimum tax withholding obligations. Under the 2012 Employee LTIP, we may purchase a sufficient number of shares due to the participant to satisfy their minimum tax withholding on employee stock awards. For the sixnine months ended September 30,December 31, 2017, the Company had acquired 57,725 shares of common stock at a value of $4.4 million to satisfy tax withholding obligations relating to the vesting of employees’ restricted stock, which was included in treasury stock.
We recognize compensation cost for awards of restricted stock with graded vesting on a straight line basis over the requisite service period. There are no additional conditions for vesting other than service conditions. During the three months ended September 30,December 31, 2017 and 2016, we recognized $1.5$1.7 million and $1.4$1.5 million, respectively, of total share-based compensation expense. During the sixnine months ended September 30,December 31, 2017 and 2016, we recognized $3.0$4.9 million and $2.9$4.5 million, respectively, of total share-based compensation expense. Unrecognized compensation expense related to nonvestednon-vested restricted stock was $12.7$11.1 million as of September 30,December 31, 2017, which will be fully recognized over the next thirty-three (33)thirty (30) months.
We also provide our employees with a contributory 401(k) profit sharing plan. We may make contributions to the plan. These contributions are not required and whether or not we choose to make them is entirely within our discretion. Our employer contributions to the plan are fully vested at all times. For the three months ended September 30,December 31, 2017 and 2016, our estimated contribution expense for the plan was $0.5 million and $0.4$0.5 million, respectively. For the sixnine months ended September 30,December 31, 2017 and 2016, our estimated contribution expense for the plan was $1.1$1.6 million and $0.8$1.2 million, respectively.
Our total gross unrecognized tax benefits recorded for uncertain income tax, and interest and penalties thereon, were negligible as of September 30,December 31, 2017, and September 30,December 31, 2016. We had no additions or reductions to our gross unrecognized tax benefits during the three and sixnine months ended September 30,December 31, 2017. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
We account for the fair values of our assets and liabilities in accordance with ASC Topic 820, Fair Value Measurement and Disclosure. The following table summarizes the fair value hierarchy of our financial instruments as of September 30,December 31, 2017 and March 31, 2017 (in thousands):
Our operations are conducted through two operating segments that are also both reportable segments. Our technology segment includes sales of information technology products, third-party software, third-party maintenance, advanced professional and managed services and our proprietary software to commercial enterprises, state and local governments, and government contractors. Our financing segment consists of the financing of IT equipment, software and related services to commercial enterprises, state and local governments, and government contractors. We measure the performance of the segments based on operating income.
Integrated Data Storage, LLC acquisition
On September 15, 2017, our subsidiary ePlus Technology, inc. acquired certain assets and assumed certain liabilities of Integrated Data Storage, LLC (“IDS”) though an asset purchase agreement. Headquartered in Oak Brook, IL and with offices in downtown Chicago and Indianapolis, IDS is an advanced data center solutions provider focused on cloud enablement and managed services, including its proprietary IDS Cloud, which features enterprise-class technology infrastructure coupled with consulting services to support private, hybrid, and public cloud deployments. The acquisition expands ePlus’ePlus’ footprint in the Midwest and enhances its sales and engineering capabilities in cloud services, disaster recovery and backup as a service, storage, data center, and professional services.
Our preliminary sum of total consideration transferred is $38.4 million, consisting of $29.8 million paid in cash at closing, less $1.4 million in receivables due to us as a working capital adjustment, plus an additional $10.0 million equal to the preliminary fair value of consideration, contingent on the acquiree’s business operations future gross profit. The contingent consideration was calculated using the Monte Carlo simulation model based on our projections of future gross profits. The maximum payout of the contingent consideration is $15.0 million paid over 3 years. Our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed is presented below (in thousands):
| | | Acquisition Date Amount | | | Acquisition Date Amount | |
| Accounts receivable and other assets | | $ | 14,176 | | | $ | 14,353 | |
| Property and equipment | | | 2,062 | | | | 1,620 | |
| Identified intangible assets | | | 13,610 | | | | 13,650 | |
| Accounts payable and other current liabilities | | | (12,483 | ) | | | (12,313 | ) |
| Total identifiable net assets | | | 17,365 | | | | 17,310 | |
| Goodwill | | | 21,033 | | | | 21,088 | |
| Total purchase consideration | | $ | 38,398 | | | $ | 38,398 | |
Our sum for consideration transferred and our allocation of the purchase consideration is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available.
The identified intangible assets of $13.6$13.7 million consist of customer relationships with an estimated useful life of 8 years. The fair value of acquired receivables equals the gross contractual amounts receivable. We expect to collect all acquired receivables.
We recognized goodwill related to this transaction of $21.0$21.1 million, which was assigned to our technology reporting unit. The goodwill recognized in the acquisition is attributable to the acquired assembled workforce and expected synergies, none of which qualify for recognition as a separate intangible asset. The total amount of goodwill is expected to be deductible for tax purposes. The amount of revenues and earnings of the acquiree since the acquisition date are not material. Likewise, the impact to the revenue and earnings of the combined entity for the current reporting period through the acquisition date had the acquisition date been April 1, 2017, is not material.
OneCloud Consulting Inc. acquisition
On May 17, 2017, our subsidiary ePlus Technology, inc., acquired 100% of the stock of OneCloud Consulting, Inc. (“OneCloud”). Based in Milpitas, CA, OneCloud is a versatile team of highly trained technology consultants, architects, developers and instructors. OneCloud enables its customers’ cloud and application strategy via professional services, technical education and software development. The acquisition provides us with additional ability to address customers’ needs in cloud-based solutions and infrastructure, including DevOps, OpenStack, and other emerging technologies, to our broad customer base.
Our preliminary sum of total consideration we transferred was $10.0 million consisting of $7.9 million paid in cash at closing, net of cash acquired, and $2.1 million equal to the fair value of contingent consideration, calculated using the Monte Carlo simulation model. The maximum payout of the contingent consideration is $4.5 million paid over 3 years.
Our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed is presented below (in thousands):
| | | Acquisition Date Amount | |
| | | | |
| Accounts receivable and other assets | | $ | 488 | |
| Identified intangible assets | | | 4,130 | |
| Accounts payable and other current liabilities | | | (1,822 | ) |
| Total identifiable net assets | | | 2,796 | |
| Goodwill | | | 7,189 | |
| Total purchase consideration | | $ | 9,985 | |
The identified intangible assets of $4.1 million consist of customer relationships of $1.7 million with an estimated useful life of 8 years, and internally developed processes of $2.4 million with an estimated useful life of 5 years.
We recognized goodwill related to this transaction of $7.2 million, which was assigned to our technology reporting unit. The goodwill recognized in the acquisition is attributable to the acquired assembled workforce and expected synergies, none of which qualify for recognition as a separate intangible asset. The total amount of goodwill is expected to be deductible for tax purposes. The amount of revenues and earnings of the acquiree since the acquisition date are not material. Likewise, the impact to the revenue and earnings of the combined entity for the current reporting period through the acquisition date had the acquisition date been April 1, 2017, is not material.
Consolidated IT Services acquisition
On December 6, 2016, our subsidiary ePlus Technology, inc., acquired certain assets and assumed certain liabilities of Consolidated IT Services. Consolidated IT Services’ business provides data center, unified communications, networking, and security solutions to a diverse set of domestic and international customers including commercial, enterprise, and state, local, and education (SLED) organizations in the upper Midwest. Acquiring Consolidated IT Services expanded our reach to the upper Midwest, a new geography for ePlus, and enables us to market our advanced technology solutions to their long-standing customer base.
The total purchase price is $13.1 million including $9.5 million paid in cash at closing and $4.0 million that will be paid in cash in equal quarterly installments over 2 years, less $0.4 million paid back to us as part of the final working capital adjustment. Our allocation of the purchase consideration to the assets acquired and liabilities is presented below (in thousands):
| | | Acquisition Date Amount | |
| Accounts receivable and other current assets | | $ | 7,491 | |
| Property and equipment | | | 1,045 | |
| Identified intangible assets | | | 4,090 | |
| Accounts payable and other current liabilities | | | (5,786 | ) |
| Total identifiable net assets | | | 6,840 | |
| Goodwill | | | 6,227 | |
| Total purchase consideration | | $ | 13,067 | |
In the sixnine months ended September 30,December 31, 2017, we increased identified intangible assets and decreased goodwill by $280 thousand from the provisional amounts recorded as of March 31, 2017.
The identified intangible assets of $4.1 million consist entirely of customer relationships with an estimated useful life of 7 years.
We recognized goodwill related to this transaction of $6.2 million, which was assigned to our technology reporting unit. The goodwill recognized in the acquisition is attributable to the acquired assembled workforce and expected synergies, none of which qualify for recognition as a separate intangible asset. The total amount of goodwill is expected to be deductible for tax purposes. The amount of revenues and earnings of the acquiree since the acquisition date are not material. Likewise, the impact to the revenue and earnings of the combined entity for the prior reporting period through the acquisition date had the acquisition date been April 1, 2016 is not material.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our annual report on
Form 10-K for the fiscal year ended March 31, 2017 (“2017 Annual Report”). These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “Risk Factors,” in our 2017 Annual Report.
EXECUTIVE OVERVIEW
Business Description
We are a leading solutions provider that delivers actionable outcomes for organizations by utilizing information technology (IT) and consulting solutions to drive business agility and innovation. Leveraging world-class engineering talent, we assess, plan, deliver, and secure solutions comprised of leading technologies and consumption models aligned with customers’ needs. Our expertise and experience enables ePlus to craft optimized solutions that take advantage of the cost, scale and efficiency of private, public and hybrid cloud in an evolving market. We also provide consulting, professional, managed and complete lifecycle management services including flexible financing solutions. We have been in the business of selling, leasing, financing, and managing information technology and other assets for more than 27 years.
Our primary focus is to deliver integrated technology solutions that address our customers’ Cloud, Security and Digital Infrastructure needs, for both on-premise and in the cloud. Our Hybrid IT framework is a lifecycle approach that includes consulting, assessment, architecture, testing, implementation, managed services, maintenance and periodic consultative reviews. In addition to cloud, our portfolio of expertise includes software defined, security, IoT, data and analytics, mobility, hyper-converged infrastructure, and other advanced technologies. We design, implement and manage an array of IT solutions from multiple leading IT vendors. We are an authorized reseller from over 1,000 vendors, but primarily from approximately 100 vendors, including Artista Networks, Check Point, Cisco Systems, Citrix, Commvault, Dell EMC, F5 Networks, Gigamon, HP Inc., HPE, Juniper Networks, Lenovo, NetApp, Nimble Storage, Oracle, Palo Alto Networks, Pure Storage, Quantum, Splunk, and VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets.
Our scale and financial resources have enabled us to continue investing in engineering and technology resources and stay current with emerging technology trends. By delivering leading edge Hybrid IT solutions, ePlus has become a trusted advisor to our customers. Our integrated technology solutions incorporate hardware, software, security and both managed and professional services. In addition, we offer a wide range of consumption options including leasing and financing for technology and other capital assets. We believe our lifecycle approach offering of integrated solutions, services, financing, and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a unique customer experience that spans the continuum from fast delivery of competitively priced products, services, subsequent management and upkeep, through to end-of-life disposal services. This approach also permits us to accommodate our customers’ business requirements and deliver ever-more-sophisticated hybrid IT solutions, thus solidifying our relationships and value.
Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. For the twelve months ended September 30,December 31, 2017, the percentage of revenue by customer end market within our technology segment includes technology industry 24%25%, state and local government, and educational institutions 18%17%, telecommunications, media and entertainment 15%14%, financial services 14%16%, and healthcare 12%13%. The majority of our sales were generated within the United States; however, we have the ability to support our customers nationally and internationally including a presence in the United Kingdom (“U.K.”), India and Singapore. Our technology segment accounted for 97% of our net sales, and 74%70% of our operating income, while our financing segment accounted for 3% of our net sales, and 26%30% of our operating income for the sixnine months ended September 30,December 31, 2017.
Key Business Metrics
Our management monitors a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business. We believe that the most important of these measures and ratios include gross margin, gross margin on product and services, operating income margin, net earnings, net earnings per common share, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross billings of product and services, and non-GAAP net earnings per share. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets.
These key indicators include financial information that is prepared in accordance with USU.S. GAAP and presented in our unaudited condensed consolidated financial statements as well as non-GAAP performance measurement tools. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance or financial position that either excludes or includes amounts that are not normally included in the most directly comparable measure calculated and presented in accordance with USU.S GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.
Our key business metrics and results from those metrics are as follows, (dollars in thousands):
| | | Three Months Ended
September 30, | | | Six Months Ended
September 30, | | | Three Months Ended
December 31, | | | Nine Months Ended
December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales of products and services | | $ | 357,759 | | | $ | 361,227 | | | $ | 714,839 | | | $ | 651,408 | | | $ | 330,953 | | | $ | 317,391 | | | $ | 1,045,792 | | | $ | 968,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted gross billings of product and services (1) | | $ | 503,581 | | | $ | 487,308 | | | $ | 985,266 | | | $ | 884,781 | | | $ | 464,105 | | | $ | 432,407 | | | $ | 1,449,371 | | | $ | 1,317,188 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 23.6 | % | | | 22.1 | % | | | 22.4 | % | | | 22.3 | % | | | 22.4 | % | | | 22.6 | % | | | 22.4 | % | | | 22.4 | % |
| Gross margin, product and services | | | 21.2 | % | | | 20.2 | % | | | 20.2 | % | | | 20.5 | % | | | 20.1 | % | | | 20.7 | % | | | 20.2 | % | | | 20.5 | % |
| Operating income margin | | | 7.8 | % | | | 7.6 | % | | | 6.7 | % | | | 6.8 | % | | | 4.8 | % | | | 6.5 | % | | | 6.1 | % | | | 6.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | $ | 17,221 | | | $ | 16,775 | | | $ | 30,644 | | | $ | 27,446 | | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | |
| Net earnings margin | | | 4.6 | % | | | 4.5 | % | | | 4.2 | % | | | 4.1 | % | | | 4.5 | % | | | 3.9 | % | | | 4.3 | % | | | 4.0 | % |
| Net earnings per common share - diluted | | $ | 1.23 | | | $ | 1.21 | | | $ | 2.19 | | | $ | 1.95 | | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-GAAP: Net earnings (2) | | $ | 17,835 | | | $ | 17,130 | | | $ | 30,439 | | | $ | 28,089 | | | $ | 13,574 | | | $ | 15,621 | | | $ | 44,013 | | | $ | 43,710 | |
| Non-GAAP: Net earnings per common share - diluted (2) | | $ | 1.27 | | | $ | 1.23 | | | $ | 2.17 | | | $ | 2.00 | | | $ | 0.97 | | | $ | 1.12 | | | $ | 3.14 | | | $ | 3.12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA (3) | | $ | 30,957 | | | $ | 29,926 | | | $ | 53,527 | | | $ | 49,187 | | | $ | 19,284 | | | $ | 23,217 | | | $ | 72,811 | | | $ | 72,404 | |
| Adjusted EBITDA margin (3) | | | 8.3 | % | | | 8.1 | % | | | 7.3 | % | | | 7.3 | % | | | 5.6 | % | | | 7.1 | % | | | 6.7 | % | | | 7.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases of property and equipment used internally | | $ | 955 | | | $ | 912 | | | $ | 2,046 | | | $ | 1,564 | | | $ | 2,018 | | | $ | 849 | | | $ | 4,064 | | | $ | 2,413 | |
| Purchases of equipment under operating leases | | | 610 | | | | 1,367 | | | | 1,390 | | | | 1,605 | | | | 844 | | | | 3,282 | | | | 2,234 | | | | 4,887 | |
| Total capital expenditures | | $ | 1,565 | | | $ | 2,279 | | | $ | 3,436 | | | $ | 3,169 | | | $ | 2,862 | | | $ | 4,131 | | | $ | 3,436 | | | $ | 7,300 | |
| (1) | We define Adjusted gross billings of product and services as our sales of product and services calculated in accordance with USU.S. GAAP, adjusted to exclude the costs incurred related to sales of third party software assurance, subscription licenses, maintenance and services. We have provided below a reconciliation of Adjusted gross billings of product and services to Sales of product and services, which is the most directly comparable financial measure to this non-GAAP financial measure. |
We use Adjusted gross billings of product and services as a supplemental measure of our performance to gain insight into the volume of business generated by our technology segment, and to analyze the changes to our accounts receivable and accounts payable. Our use of Adjusted gross billings of product and services as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under USU.S. GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted gross billings of product and services or similarly titled measures differently, which may reduce their usefulness as comparative measures.
| | | Three Months Ended
September 30, | | | Six Months Ended
September 30, | | | Three Months Ended
December 31, | | | Nine Months Ended
December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| Sales of products and services | | $ | 357,759 | | | $ | 361,227 | | | $ | 714,839 | | | $ | 651,408 | | | $ | 330,953 | | | $ | 317,391 | | | $ | 1,045,792 | | | $ | 968,799 | |
| Costs incurred related to sales of third party software assurance, maintenance and services | | | 145,822 | | | | 126,081 | | | | 270,427 | | | | 233,373 | | | | 133,152 | | | | 115,016 | | | | 403,579 | | | | 348,389 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted gross billings of product and services | | $ | 503,581 | | | $ | 487,308 | | | $ | 985,266 | | | $ | 884,781 | | | $ | 464,105 | | | $ | 432,407 | | | $ | 1,449,371 | | | $ | 1,317,188 | |
| (2) | Non-GAAP net earnings per common share are based on net earnings calculated in accordance with USU.S. GAAP, adjusted to exclude other income and acquisition related amortization expense, and related effects on income tax, and the tax (benefit) expense recognized due to the vesting of shared based compensation.compensation, the tax benefit associated with the re-measurement of deferred tax assets and liabilities at the new tax rates, as well as an adjustment to our tax expense in the prior year assuming a 31.5% effective annual income tax rate for U.S. operations due to changes in U.S. tax rates. We use non-GAAPNon-GAAP net earnings per common share as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of these items in calculating non-GAAPNon-GAAP net earnings per common share provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that non-GAAP net earnings per common share provide useful information to investors and others in understanding and evaluating our operating results. However, our use of non-GAAPNon-GAAP net earnings per common share as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under USU.S. GAAP. In addition, other companies, including companies in our industry, might calculate non-GAAPNon-GAAP net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures. |
| | | Three Months Ended
September 30, | | | Six Months Ended
September 30, | | | Three Months Ended
December 31, | | | Nine Months Ended
December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| GAAP: Earnings before tax | | $ | 28,687 | | | $ | 28,583 | | | $ | 49,465 | | | $ | 46,069 | | | $ | 16,259 | | | $ | 21,307 | | | $ | 65,724 | | | $ | 67,376 | |
| Acquisition related amortization expense | | | 1,186 | | | | 974 | | | | 2,307 | | | | 2,063 | | | | 1,871 | | | | 1,035 | | | | 4,178 | | | | 3,098 | |
| Other (income) expense | | | 141 | | | | (380 | ) | | | (130 | ) | | | (380 | ) | | | 131 | | | | - | | | | 1 | | | | (380 | ) |
| Non-GAAP: Earnings before provision for income taxes | | | 30,014 | | | | 29,177 | | | | 51,642 | | | | 47,752 | | | | 18,261 | | | | 22,342 | | | | 69,903 | | | | 70,094 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GAAP: Provision for income taxes | | | 11,466 | | | | 11,808 | | | | 18,821 | | | | 18,623 | | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | |
| Acquisition related amortization expense | | | 450 | | | | 324 | | | | 874 | | | | 689 | | | | 547 | | | | 267 | | | | 1,421 | | | | 956 | |
| Other (income) expense | | | 59 | | | | (157 | ) | | | (55 | ) | | | (157 | ) | | | 55 | | | | 13 | | | | - | | | | (144 | ) |
| Remeasurement of deferred taxes | | | | 3,407 | | | | - | | | | 3,407 | | | | - | |
| Adjustment to FY17 US Federal tax rate to 31.5% | | | | - | | | | (2,252 | ) | | | - | | | | (2,252 | ) |
| Tax benefit on restricted stock | | | 204 | | | | 72 | | | | 1,563 | | | | 508 | | | | - | | | | 6 | | | | 1,563 | | | | 514 | |
| Non-GAAP: Provision for income taxes | | | 12,179 | | | | 12,047 | | | | 21,203 | | | | 19,663 | | | | 4,687 | | | | 6,721 | | | | 25,890 | | | | 26,384 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-GAAP: Net earnings | | $ | 17,835 | | | $ | 17,130 | | | $ | 30,439 | | | $ | 28,089 | | | $ | 13,574 | | | $ | 15,621 | | | $ | 44,013 | | | $ | 43,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GAAP: Net earnings per common share - diluted | | $ | 1.23 | | | $ | 1.21 | | | $ | 2.19 | | | $ | 1.95 | | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | |
| Non-GAAP: Net earnings per common share - diluted | | $ | 1.27 | | | $ | 1.23 | | | $ | 2.17 | | | $ | 2.00 | | | $ | 0.97 | | | $ | 1.12 | | | $ | 3.14 | | | $ | 3.12 | |
| (3) | We define Adjusted EBITDA as net earnings calculated in accordance with USU.S GAAP, adjusted for the following: interest expense, depreciation and amortization, provision for income taxes, and other income. We consider the interest on notes payable from our financing segment and depreciation expense presented within cost of sales, which includes depreciation on assets financed as operating leases, to be operating expenses. As such, they are not included in the amounts added back to net earnings in the Adjusted EBITDA calculation. We provide below a reconciliation of Adjusted EBITDA to net earnings, which is the most directly comparable financial measure to this non-GAAP financial measure. Adjusted EBITDA margin is our calculation of Adjusted EBITDA divided by net sales. |
We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income in calculating Adjusted EBITDA and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Adjusted EBITDA and Adjusted EBITDA margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under USU.S. GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as comparative measures.
| | | Three Months Ended
September 30, | | | Six Months Ended
September 30, | | | Three Months Ended
December 31, | | | Nine Months Ended
December 31, | |
Consolidated | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| Net earnings | | $ | 17,221 | | | $ | 16,775 | | | $ | 30,644 | | | $ | 27,446 | | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | |
| Provision for income taxes | | | 11,466 | | | | 11,808 | | | | 18,821 | | | | 18,623 | | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | |
| Depreciation and amortization | | | 2,129 | | | | 1,723 | | | | 4,192 | | | | 3,498 | | | | 2,894 | | | | 1,910 | | | | 7,086 | | | | 5,408 | |
| Other (income) expense | | | 141 | | | | (380 | ) | | | (130 | ) | | | (380 | ) | | | 131 | | | | - | | | | 1 | | | | (380 | ) |
| Adjusted EBITDA | | $ | 30,957 | | | $ | 29,926 | | | $ | 53,527 | | | $ | 49,187 | | | $ | 19,284 | | | $ | 23,217 | | | $ | 72,811 | | | $ | 72,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Technology Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 21,218 | | | $ | 24,488 | | | $ | 37,288 | | | $ | 39,114 | | | $ | 11,415 | | | $ | 16,889 | | | $ | 48,704 | | | $ | 56,003 | |
| Depreciation and amortization | | | 2,128 | | | | 1,721 | | | | 4,190 | | | | 3,492 | | | | 2,893 | | | | 1,908 | | | | 7,084 | | | | 5,400 | |
| Adjusted EBITDA | | $ | 23,346 | | | $ | 26,209 | | | $ | 41,478 | | | $ | 42,606 | | | $ | 14,308 | | | $ | 18,797 | | | $ | 55,788 | | | $ | 61,403 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financing Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 7,610 | | | $ | 3,715 | | | $ | 12,047 | | | $ | 6,575 | | | $ | 4,975 | | | $ | 4,418 | | | $ | 17,021 | | | $ | 10,993 | |
| Depreciation and amortization | | | 1 | | | | 2 | | | | 2 | | | | 6 | | | | 1 | | | | 2 | | | | 2 | | | | 8 | |
| Adjusted EBITDA | | $ | 7,611 | | | $ | 3,717 | | | $ | 12,049 | | | $ | 6,581 | | | $ | 4,976 | | | $ | 4,420 | | | $ | 17,023 | | | $ | 11,001 | |
Consolidated Results of Operations
During the three months ended September 30,December 31, 2017, net sales decreased 0.2%increased 4.9%, or $0.6$15.9 million to $370.8$342.6 million, compared to $371.5$326.7 million for the same period in the prior fiscal year. For the sixnine months ended September 30,December 31, 2017, net sales increased 10.2%8.4%, or $68.0$83.9 million to $738.0$1,080.6 million, compared to $670.0$996.6 million for the same period in the prior fiscal year.
Adjusted gross billings of product and services increased 3.3%7.3%, or $16.3$31.7 million to $503.6$464.1 million, for the three months ended September 30,December 31, 2017 from $487.3$432.4 million for the same period in the prior fiscal year. For the sixnine months ended September 30,December 31, 2017, adjusted gross billings of product and services increased 11.4%10.0%, or $100.5$132.2 million to $985.3$1,449.4 million, from $884.8$1,317.2 million for the same period in the prior fiscal year. Both the three month and sixnine month increase in demand was from commercial customers primarily in the technology, industry.financial services and health care industries, partially offset by SLED and other industries.
Consolidated gross profit rose 6.9%3.9% to $87.6$76.7 million, compared with $81.9$73.8 million for the three months ended September 30,December 31, 2016. Consolidated gross margins were 23.6%22.4% for the three months ended September 30,December 31, 2017 an increasea decrease of 15020 basis points compared to 22.1%22.6% for the same period in the prior fiscal year, due tolower product margins, including a shiftdecrease in product mix, as we sold a higher proportion of third party software assurance, maintenance and services forvendor incentives earned, which the revenues are presented on a net basis, andwas offset by an increase in revenues from our services. For the six months ended September 30, 2017, consolidatedservice revenues.
Consolidated gross profit rose 10.4%8.3% to $165.2$241.9 million, compared with $149.6$223.4 million for the same period in the prior fiscal year.
nine months ended December 31, 2016. Consolidated gross margins were 22.4% for both the sixnine months ended September 30,December 31, 2017 an increase of 10 basis points compared to 22.3% for the same period in the prior fiscal year. The smaller increase inand 2016. Consolidated gross margins for the six month periods is due to a shift inwere impacted by lower product mix sold to a higher proportion of third party software assurance, maintenance and services in the current quarter mostly offset by a large competitively bid project which partially shipped during the six month period. Also contributing to the lower margins, wasincluding a decrease in vendor incentives earned.earned, which was offset by higher service and financing revenues.
Our operating expenses increased 9.3%14.9% to $58.7$60.3 million, or 67.1%78.6% of gross profits for the three months ended September 30,December 31, 2017 as compared to $53.7$52.5 million, representing 65.6%71.1% of gross profits in the same period prior year. For the sixnine months ended September 30,December 31, 2017, our operating expenses increased 11.5%12.6% to $115.8$176.6 million, or 70.1%72.5% of gross profits as compared to $103.9$156.4 million, representing 69.5%70.0% of gross profits in the same prior year period. The majority of this increase reflects increased salary expense due to an increase in headcount, as well as variable compensation as a result of the increase in gross profit, as well as additional employees, and an increase in employee healthcare costs. Our headcount increased by 186120 employees or 17.0%10.3% to 1,2821,284 from 1,0961,164 a year ago, 15598 of which were from the acquisitions of Consolidated IT Services,IDS and OneCloud and IDS. The net additions in personnel compared to the prior year include 162105 sales and engineering positions, with the remaining additions being administrative, IT, and finance positions.
Operating income for the three months ended September 30,December 31, 2017 increased 2.2%decreased 23.1% to $28.8$16.4 million, as compared to $28.2$21.3 million for the same period in the prior year. For the three months ended September 30,December 31, 2017, the operating income margin increased 20decreased 170 basis points to 7.8%4.8% from 7.6%6.5% for the same period in the prior year. Operating income for the sixnine months ended September 30,December 31, 2017 increased 8.0%decreased 1.9% to $49.3 million,$65.7million, as compared to $45.7$67.0 million for the same period in the prior year. For the sixnine months ended September 30,December 31, 2017, the operating income margin decreased 1060 basis points to 6.7%6.1% from 6.8%6.7% for the same period in the prior year.
Consolidated net earnings for the three months ended September 30,December 31, 2017 were $17.2$15.6 million, an increase of 2.7%23.5%, or $0.4$3.0 million, compared to the prior year’s results.results of $12.6 million. For the sixnine months ended September 30,December 31, 2017, consolidated net earnings were $30.6$46.2 million, an increase of 11.7%15.4%, or $3.2$6.2 million, compared to the prior year’s results.results of $40.1 million.
Adjusted EBITDA increased $1.0decreased $3.9 million, or 3.4%16.9% to $31.0$19.3 million and Adjusted EBITDA margin increased 20decreased 150 basis points to 8.3%5.6% for the three months ended September 30,December 31, 2017, as compared to the prior period of 8.1%7.1%. For the sixnine months ended September 30,December 31, 2017, Adjusted EBITDA increased $4.3$0.4 million, or 8.8%0.6% to $53.5$72.8 million and Adjusted EBITDA margin remained stable at 7.3%decreased 60 basis points to 6.7% for the sixnine months ended September 30,December 31, 2017, and 2016.as compared to prior period of 7.3%.
Diluted earnings per share increased 1.7%22.0%, or $0.02$0.20 to $1.23$1.11 per share for the three months ended September 30,December 31, 2017, as compared to $1.21$0.91 per share for the three months ended September 30,December 31, 2016. Our effective tax rate for the three months ended September 30,December 31, 2017 was 40.0%4.2%, which includes a tax benefit $3.4 million from the re-measurement of $0.2 million relateddeferred tax assets and liabilities due to the vesting of share based compensation duringchange in the quarter.U.S. statutory rate. Non-GAAP diluted earnings per share increased 3.3%decreased 13.4% to $1.27$0.97 for the three months ended September 30,December 31, 2017, as compared to $1.23$1.12 for the three months ended September 30,December 31, 2016.
For the sixnine months ended September 30,December 31, 2017, diluted earnings per share increased 12.3%15.4%, or $0.24$0.44 to $2.19$3.30 per share, as compared to $1.95$2.86 per share for the threenine months ended September 30,December 31, 2016. Our effective tax rate for the sixnine months ended September 30,December 31, 2017 was 38.0%29.7%, which includes a tax benefit of $1.6 million related to the vesting of share based compensation duringand a tax benefit $3.4 million from the quarter.re-measurement of deferred tax assets and liabilities due to the change in the U.S. statutory rate. Non-GAAP diluted earnings per share increased 8.5%0.6% to $2.17$3.14 for the sixnine months ended September 30,December 31, 2017, as compared to $2.00$3.12 for the sixnine months ended September 30,December 31, 2016.
Cash and cash equivalents decreased $49.6$33.7 million or 45.2%30.7% to $60.2$76.1 million at September 30,December 31, 2017 compared with $109.8 million as of March 31, 2017. The decrease is primarily the result of investments in our financing portfolio, working capital required for the growth in our technology segment, $28.4$29.8 million paid in cash at closing of our acquisition of IDS and $7.9 million paid in cash at closing for our acquisition of OneCloud. Our cash on hand, funds generated from operations, amounts available under our credit facility and the possible monetization of our investment portfolio provide sufficient liquidity for our business.
Segment Overview
Our operations are conducted through two segments: technology and financing.
Technology Segment
The technology segment sells IT equipment and software and related services primarily to corporate customers, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating to our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for information technology products.
Our technology segment derives revenue from the sales of new equipment and service engagements. Included in the sales of product and services are revenues derived from performing advanced IT professional and managed services that may be sold together with and integral to third-party products and software. Our service engagements are generally governed by statements of work, and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials.
Customers who purchase IT equipment and services from us may have customer master agreements, or CMAs, with our company, which stipulate the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Our other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with state and local governments is based on public bids and our written bid responses
We endeavor to minimize our cost of sales through incentive programs provided by vendors and distributors. The programs we qualify for are generally set by our reseller authorization level with the vendor. The authorization level we achieve and maintain governs the types of products we can resell as well as such items as pricing received, funds provided for the marketing of these products and other special promotions. These authorization levels are achieved by us through purchase volume, certifications held by sales executives or engineers and/or contractual commitments by us. The authorization levels are costly to maintain and these programs continually change and, therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.
Financing Segment
Our financing segment offers financing solutions to corporations, governmental entities, and educational institutions nationwide and also in the United Kingdom, Canada and Iceland. The financing segment derives revenue from leasing IT and medical equipment and the disposition of that equipment at the end of the lease. The financing segment also derives revenues from the financing of third-party software licenses, software assurance, maintenance and other services.
Financing revenue generally falls into the following three categories:
| · | Portfolio income: Interest income from financing receivables and rents due under operating leases; |
| · | Transactional gains: Net gains or losses on the sale of financial assets; and |
| · | Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and net gains on the sale of off-lease (used) equipment. |
Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. We also recognize revenue from events that occur after the initial sale of a financial asset and remarketing fees from certain residual value investments.
Fluctuations in Revenues
Our results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, changes in vendor incentive programs, interest rate fluctuations, general economic conditions, and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of a sale prior to the expiration of the lease term to the lessee or to a third-party or from post-term events.
We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas in the near future whenever we can find both experienced personnel and desirable geographic areas. These investments may reduce our results from operations in the short term.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with USU.S. GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that alternative accounting policies would have been applied, resulting in a change in financial results. On an ongoing basis, we reevaluate our estimates, including those related to revenue recognition, residual values, vendor incentives, lease classification, goodwill and intangibles, reserves for credit losses and income taxes specifically relating to uncertain tax positions. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For all such estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates may require adjustment.
Our critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017Annual2017 annual Report.
SEGMENT RESULTS OF OPERATIONS
The three and sixnine months ended September 30,December 31, 2017 compared to the three and sixnine months ended September 30,December 31, 2016
Technology Segment
The results of operations for our technology segment for the three and sixnine months ended September 30,December 31, 2017 and 2016 were as follows (dollars in thousands):
| | | Three Months Ended September 30, | | | | | Six Months Ended September 30, | | | | | Three Months Ended December 31, | | | | | | | | | Nine Months Ended December 31, | | | | | | | |
| | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
| Sales of product and services | | $ | 357,759 | | | $ | 361,227 | | | $ | (3,468 | ) | | | (1.0 | %) | | $ | 714,839 | | | $ | 651,408 | | | $ | 63,431 | | | | 9.7 | % | | $ | 330,953 | | | $ | 317,391 | | | $ | 13,562 | | | | 4.3 | % | | $ | 1,045,792 | | | $ | 968,799 | | | $ | 76,993 | | | | 7.9 | % |
| Fee and other income | | | 1,043 | | | | 1,488 | | | | (445 | ) | | | (29.9 | %) | | | 2,029 | | | | 2,764 | | | | (735 | ) | | | (26.6 | %) | | | 1,678 | | | | 915 | | | | 763 | | | | 83.4 | % | | | 3,707 | | | | 3,679 | | | | 28 | | | | 0.8 | % |
| Net sales | | | 358,802 | | | | 362,715 | | | | (3,913 | ) | | | (1.1 | %) | | | 716,868 | | | | 654,172 | | | | 62,696 | | | | 9.6 | % | | | 332,631 | | | | 318,306 | | | | 14,325 | | | | 4.5 | % | | | 1,049,499 | | | | 972,478 | | | | 77,021 | | | | 7.9 | % |
| Cost of sales, product and services | | | 281,953 | | | | 288,204 | | | | (6,251 | ) | | | (2.2 | %) | | | 570,386 | | | | 518,051 | | | | 52,335 | | | | 10.1 | % | | | 264,487 | | | | 251,729 | | | | 12,758 | | | | 5.1 | % | | | 834,873 | | | | 769,780 | | | | 65,093 | | | | 8.5 | % |
| Gross profit | | | 76,849 | | | | 74,511 | | | | 2,338 | | | | 3.1 | % | | | 146,482 | | | | 136,121 | | | | 10,361 | | | | 7.6 | % | | | 68,144 | | | | 66,577 | | | | 1,567 | | | | 2.4 | % | | | 214,626 | | | | 202,698 | | | | 11,928 | | | | 5.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general, and administrative expenses | | | 53,503 | | | | 48,302 | | | | 5,201 | | | | 10.8 | % | | | 105,004 | | | | 93,515 | | | | 11,489 | | | | 12.3 | % | | | 53,836 | | | | 47,780 | | | | 6,056 | | | | 12.7 | % | | | 158,838 | | | | 141,295 | | | | 17,543 | | | | 12.4 | % |
| Depreciation and amortization | | | 2,128 | | | | 1,721 | | | | 407 | | | | 23.6 | % | | | 4,190 | | | | 3,492 | | | | 698 | | | | 20.0 | % | | | 2,893 | | | | 1,908 | | | | 985 | | | | 51.6 | % | | | 7,084 | | | | 5,400 | | | | 1,684 | | | | 31.2 | % |
| Operating expenses | | | 55,631 | | | | 50,023 | | | | 5,608 | | | | 11.2 | % | | | 109,194 | | | | 97,007 | | | | 12,187 | | | | 12.6 | % | | | 56,729 | | | | 49,688 | | | | 7,041 | | | | 14.2 | % | | | 165,922 | | | | 146,695 | | | | 19,227 | | | | 13.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 21,218 | | | $ | 24,488 | | | $ | (3,270 | ) | | | (13.4 | %) | | $ | 37,288 | | | $ | 39,114 | | | $ | (1,826 | ) | | | (4.7 | %) | | $ | 11,415 | | | $ | 16,889 | | | $ | (5,474 | ) | | | (32.4 | %) | | $ | 48,704 | | | $ | 56,003 | | | $ | (7,299 | ) | | | (13.0 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key business metrics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted gross billings of product and services | | $ | 503,581 | | | $ | 487,308 | | | $ | 16,273 | | | | 3.3 | % | | $ | 985,266 | | | $ | 884,781 | | | $ | 100,485 | | | | 11.4 | % | | $ | 464,105 | | | $ | 432,407 | | | $ | 31,698 | | | | 7.3 | % | | $ | 1,449,371 | | | $ | 1,317,188 | | | $ | 132,183 | | | | 10.0 | % |
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| Adjusted EBITDA | | $ | 23,346 | | | $ | 26,209 | | | $ | (2,863 | ) | | | (10.9 | %) | | $ | 41,478 | | | $ | 42,606 | | | $ | (1,128 | ) | | | (2.6 | %) | | $ | 14,308 | | | $ | 18,797 | | | $ | (4,489 | ) | | | (23.9 | %) | | $ | 55,788 | | | $ | 61,403 | | | $ | (5,615 | ) | | | (9.1 | %) |
Net sales: Net sales for the three months ended September 30,December 31, 2017 were $358.8$332.6 million compared to $362.7$318.3 million during the three months ended September 30,December 31, 2016, a decreasean increase of 1.1%4.5%, or $3.9$14.3 million. For the sixnine months ended September 30,December 31, 2017, net sales were $716.9$1,049.5 million compared to $654.2$972.5 million during the same period in the prior year, an increase of 9.6%7.9%, or $62.7$77.0 million.
Adjusted gross billings of product and services for the three months ended September 30,December 31, 2017 were $503.6$464.1 million compared to $487.3$432.4 million during the three months ended September 30,December 31, 2016, an increase of 3.3%7.3%, or $16.3$31.7 million. Sales of product and services for the three months ended September 30,December 31, 2017 were $357.8$331.0 million compared to $361.2317.4 million during the same period in the prior year, a decreasean increase of 1.0%4.3%, or $3.5$13.6 million. The decrease in sales of product and services is due to a shift in product mix, as we sold a higher proportion of third party software assurance, maintenance and services for which the revenues are presented on a net basis.
The decreaseincrease in net sales of product and services during the three months ended September 30,December 31, 2017 was also due, in part, to an increase in demand for products and services from customers in the health care andtechnology, financial services and healthcare industries, more thanpartially offset by reductions in sales to state and local government and educational customers (“SLED”), technology, and telecom, media and entertainment customers.customers, and other industries.
For the sixnine months ended September 30,December 31, 2017, adjusted gross billings of product and services were $985.3$1,449.4 million compared to $884.8$1,317.2 million during the sixnine months ended September 30,December 31, 2016, an increase of 11.4%10.0%, or $100.5$132.2 million. For the sixnine months ended September 30,December 31, 2017, sales of product and services were $714.8$1,045.8 million compared to $651.4968.8 million during the same period in the prior year, an increase of 9.7%7.9%, or $63.4$77.0 million. The increase in net sales of product and services during the sixnine month period was due in part, to an increase in demand for products and services from customers in the financial services industries, technology, and health care and telecom, media and entertainment industries, which include sales relating to several large projects by majorfor large customers.
Summarized below are the sequential and year-over-year changes in net sales of product and services:
| Quarter Ended | | Sequential | | | Year over Year | | | Sequential | | | Year over Year | |
| December 31, 2017 | | | | (7.5 | %) | | | 4.3 | % |
| September 30, 2017 | | | 0.2 | % | | | (1.0 | %) | | | 0.2 | % | | | (1.0 | %) |
| June 30, 2017 | | | 11.1 | % | | | 23.1 | % | | | 11.1 | % | | | 23.1 | % |
| March 31, 2017 | | | 1.3 | % | | | 10.3 | % | | | 1.3 | % | | | 10.3 | % |
| December 31, 2016 | | | (12.1 | %) | | | 10.3 | % | | | (12.1 | %) | | | 10.3 | % |
| September 30, 2016 | | | 24.5 | % | | | 11.4 | % | |
We rely on our vendors to fulfill a large majority of shipments to our customers. As of September 30,December 31, 2017, we had open orders of $152.7$170.0 million and deferred revenue of $52.8$59.6 million. As of September 30,December 31, 2016, we had open orders of $166.6$238.5 million and deferred revenues of $23.966.3 million.
We analyze sales of products and services by customer end market and by manufacturer, as opposed to discrete product and service categories. The percentage of sales of product and services by industry and vendor are summarized below:
| | | Twelve Months Ended September 30, | | | | | | Twelve Months Ended December 31, | | | | |
| | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Revenue by customer end market: | | | | | | | | | | | | | | | | | | |
| Technology | | | 24 | % | | | 23 | % | | | 1 | % | | | 25 | % | | | 22 | % | | | 3 | % |
| SLED | | | 18 | % | | | 22 | % | | | (4 | %) | | | 17 | % | | | 21 | % | | | (4 | %) |
| Telecom, Media & Entertainment | | | 15 | % | | | 15 | % | | | - | | | | 14 | % | | | 16 | % | | | (2 | %) |
| Financial Services | | | 14 | % | | | 12 | % | | | 2 | % | | | 16 | % | | | 12 | % | | | 4 | % |
| Healthcare | | | 12 | % | | | 10 | % | | | 2 | % | | | 13 | % | | | 11 | % | | | 2 | % |
| Other | | | 17 | % | | | 18 | % | | | (1 | %) | | | 15 | % | | | 18 | % | | | (3 | %) |
| Total | | | 100 | % | | | 100 | % | | | | | | | 100 | % | | | 100 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue by vendor: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cisco Systems | | | 48 | % | | | 49 | % | | | (1 | %) | | | 44 | % | | | 49 | % | | | (5 | %) |
| HP Inc. & HPE | | | 5 | % | | | 6 | % | | | (1 | %) | | | 7 | % | | | 6 | % | | | 1 | % |
| NetApp | | | 6 | % | | | 5 | % | | | 1 | % | | | 4 | % | | | 5 | % | | | (1 | %) |
| Sub-total | | | 59 | % | | | 60 | % | | | (1 | %) | | | 55 | % | | | 60 | % | | | (5 | %) |
| Other | | | 41 | % | | | 40 | % | | | 1 | % | | | 45 | % | | | 40 | % | | | 5 | % |
| Total | | | 100 | % | | | 100 | % | | | | | | | 100 | % | | | 100 | % | | | | |
Our revenues by customer end market have remained consistent over the year with over 80% of our revenues generated from customers within the five end markets identified above. During the trailing twelve months ended September 30,December 31, 2017 we had an increase in the percentage total revenues from customers in the technology, financial services, and health care industries, which were partially offset by decreases in the percentage of total revenues from SLED compared to the prior year period. These changes were driven by changes in customer buying cycles and specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers.
The majority of our revenues by vendor are derived from Cisco Systems, a combined HP Inc. and HPE, and NetApp, which, in total,collectively, declined to 59%55% for the twelve months ended September 30,December 31, 2017 from approximately 60% in the prior year trailing twelve month period, with the greatest decline in the proportional percentage of total revenues in Cisco product sales. The decrease in the percentage of revenues from the top three vendors is due in part to substantial competition and rapid developments in the IT industry. None of the vendors included within the “other” category exceeded 4% of total revenues.
Cost of sales, product and services: Cost of sales, product and services decreased 2.2%increased 5.1% for the three months ended September 30,December 31, 2017 as compared to the prior year period, due to the 1.0% decrease4.3% increase in sales of product and services, and an increase in the sales of higher margin products during the quarter.services. For the sixnine months ended September 30,December 31, 2017, cost of sales, product and services increased 10.1% was8.5% due to the increase in sales of product and services. Our gross margin on the sales of product and services increased 100decreased 60 basis points to 21.2%20.1% for the three months ended September 30,December 31, 2017, from 20.2%20.7% in the same period in the prior year due to a shift in product mix, as we sold a higher proportion of third party software assurance, maintenance and services for which the revenues are presented on a net basis, and an increase in revenues from our services.year.
For the sixnine months ended September 30,December 31, 2017, our gross margin on the sales of product and services decreased 30 basis points to 20.2%, from 20.5%, due to lower product margins from a large competitively bid project which partially shipped during the sixnine month period as well as reduction in vendor incentives earned as a percentage of sales of product services. Vendor incentives earned as a percentage of sales of product services remained stable for the three months while decreasing 20and the nine months ended December 31, 2017 decreased 50 and 30 basis points for the six months ended September 30, 2017,respectively, as compared to same periods in the prior year.
There are ongoing changes to the incentive programs offered to us by our vendors. Accordingly, if we are unable to maintain the level of vendor incentives we are currently receiving, gross margins may decrease.
Selling, general, and administrative expenses: Selling, general, and administrative expenses were $53.5$53.8 million for the three months ended September 30,December 31, 2017, an increase of $5.2$6.0 million, or 10.8%12.7% compared to $48.3$47.8 million for the prior year period. Salaries and benefits increased $2.8$4.3 million, or 7.0%10.8% to $43.0$44.5 million, compared to $40.2 million during the prior year. All most allMost of the increase was due to higher salaries and benefits expenses related to the increase in the number of employees from both acquisitions and internal growth.
Selling, general, and administrative expenses were $105.0$158.8 million for the sixnine months ended September 30,December 31, 2017, an increase of $11.5$17.5 million, or 12.3%12.4% compared to $93.5$141.3 million for the prior year period. Salaries and benefits increased $8.4$12.8 million, or 10.9%10.8% to $86.1$130.6 million, compared to $77.7$117.8 million during the prior year. Approximately 20.7%20.8% of this increase was due to higher variable compensation due to the increase in gross profit, 25.5%18.6% of the increase was due to higher employee benefits, and the remaining increase was primarily due salary expense related to an increase in the number of employees. Our technology segment had 1,2331,236 employees as of September 30,December 31, 2017, an increase of 186,123, or 17.8%11.1%, from 1,0471,113 at September 30, 2016, of which theDecember 31, 2016. The acquisitions ofConsolidated IT Services, OneCloud and IDS accounted for 15598 of the added positions. There were 162107 positions added in the past year related to sales, marketing, and professional services personnel.
General and administrative expenses increased $2.0$1.5 million, or 30.0%23.9% to $8.7$7.9 million during the three months ended September 30,December 31, 2017 compared to $6.7$6.4 million the prior year, due to an adjustment of $0.7 million to the fair value of contingent consideration for acquisitions, higher advertising and marketing expense, and travel expense,expenses, including travel expense related to acquisitions, and software license and maintenance expense. Professional and other fees increased 25.9% to $1.8 million, primarily due to acquisition related expenses.acquisitions. For the sixnine months ended September 30,December 31, 2017, general and administrative expenses increased $2.4$3.9 million, or 18.5%20.3% to $15.3$23.3 million compared to $12.9$19.3 million the prior year, due to the incremental adjustment of $0.8 million to the fair value of contingent consideration for acquisitions, and higher travel expense, including travel expense related to acquisitions, and software license and maintenance expense.acquisitions. Professional and other fees increased $0.7$0.9 million, or 22.3%20.7% to $3.6$5.0 million primarily due to legal fees related to the IDS and OneCloud acquisitions.
Depreciation and amortization expense increased $0.4$1.0 million, or 23.6%51.6% to $2.1$2.9 million during the three months ended September 30,December 31, 2017 compared to $1.7$1.9 million in the prior year. For the sixnine months ended September 30,December 31, 2017, depreciation and amortization expense increased $0.7$1.7 million, or 20.0%31.2% to $4.2$7.1 million compared to $3.5$5.4 million in the prior year. The increase in depreciation and amortization expense is related to the acquisitions of Consolidated IT Services in December 2016, OneCloud in May 2017, and IDS in September 2017.
Segment operating income: As a result of the foregoing, operating income was $21.2$11.4 million, a decrease of $3.3$5.5 million, or 13.4%32.4% for the three months ended September 30,December 31, 2017 compared to $24.5$16.9 million in the prior year period. For the three months ended September 30,December 31, 2017, Adjusted EBITDA was $23.3$14.3 million, a decrease of $2.9$4.5 million, or 10.9%23.9% compared to $26.2$18.8 million in the prior year period. For the sixnine months ended September 30,December 31, 2017, operating income was $37.3$48.7 million, a decrease of $1.8$7.3 million, or 4.7%13.0% compared to $39.1$56.0 million in the prior year period. The Adjusted EBITDA for the sixnine months ended September 30,December 31, 2017, was $41.5$55.8 million, a decrease of $1.1$5.6 million, or 2.6%9.1% compared to $42.6$61.4 million in the prior year period.
Financing Segment
The results of operations for our financing segment for the three and sixnine months ended September 30,December 31, 2017 and 2016 were as follows (dollars in thousands):
| | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | | | Three Months Ended December 31, | | | | | | | | | Nine Months Ended December 31, | | | | | | | |
| | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
| Financing revenue | | $ | 12,035 | | | $ | 8,722 | | | $ | 3,313 | | | | 38.0 | % | | $ | 21,106 | | | $ | 15,709 | | | $ | 5,397 | | | | 34.4 | % | | $ | 9,592 | | | $ | 8,190 | | | $ | 1,402 | | | | 17.1 | % | | $ | 30,698 | | | $ | 23,899 | | | $ | 6,799 | | | | 28.4 | % |
| Fee and other income | | | 8 | | | | 25 | | | | (17 | ) | | | (68.0 | %) | | | 28 | | | | 84 | | | | (56 | ) | | | (66.7 | %) | | | 346 | | | | 161 | | | | 185 | | | | 114.9 | % | | | 374 | | | | 245 | | | | 129 | | | | 52.7 | % |
| Net sales | | | 12,043 | | | | 8,747 | | | | 3,296 | | | | 37.7 | % | | | 21,134 | | | | 15,793 | | | | 5,341 | | | | 33.8 | % | | | 9,938 | | | | 8,351 | | | | 1,587 | | | | 19.0 | % | | | 31,072 | | | | 24,144 | | | | 6,928 | | | | 28.7 | % |
| Direct lease costs | | | 1,321 | | | | 1,325 | | | | (4 | ) | | | (0.3 | %) | | | 2,452 | | | | 2,317 | | | | 135 | | | | 5.8 | % | | | 1,394 | | | | 1,142 | | | | 252 | | | | 22.1 | % | | | 3,846 | | | | 3,459 | | | | 387 | | | | 11.2 | % |
| Gross profit | | | 10,722 | | | | 7,422 | | | | 3,300 | | | | 44.5 | % | | | 18,682 | | | | 13,476 | | | | 5,206 | | | | 38.6 | % | | | 8,544 | | | | 7,209 | | | | 1,335 | | | | 18.5 | % | | | 27,226 | | | | 20,685 | | | | 6,541 | | | | 31.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general, and administrative expenses | | | 2,837 | | | | 3,305 | | | | (468 | ) | | | (14.2 | %) | | | 6,000 | | | | 6,146 | | | | (146 | ) | | | (2.4 | %) | | | 3,298 | | | | 2,380 | | | | 918 | | | | 38.6 | % | | | 9,300 | | | | 8,526 | | | | 774 | | | | 9.1 | % |
| Depreciation and amortization | | | 1 | | | | 2 | | | | (1 | ) | | | (50.0 | %) | | | 2 | | | | 6 | | | | (4 | ) | | | (66.7 | %) | | | 1 | | | | 2 | | | | (1 | ) | | | (50.0 | %) | | | 2 | | | | 8 | | | | (6 | ) | | | (75.0 | %) |
| Interest and financing costs | | | 274 | | | | 400 | | | | (126 | ) | | | (31.5 | %) | | | 633 | | | | 749 | | | | (116 | ) | | | (15.5 | %) | | | 270 | | | | 409 | | | | (139 | ) | | | (34.0 | %) | | | 903 | | | | 1,158 | | | | (255 | ) | | | (22.0 | %) |
| Operating expenses | | | 3,112 | | | | 3,707 | | | | (595 | ) | | | (16.1 | %) | | | 6,635 | | | | 6,901 | | | | (266 | ) | | | (3.9 | %) | | | 3,569 | | | | 2,791 | | | | 778 | | | | 27.9 | % | | | 10,205 | | | | 9,692 | | | | 513 | | | | 5.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 7,610 | | | $ | 3,715 | | | $ | 3,895 | | | | 104.8 | % | | $ | 12,047 | | | $ | 6,575 | | | $ | 5,472 | | | | 83.2 | % | | $ | 4,975 | | | $ | 4,418 | | | $ | 557 | | | | 12.6 | % | | $ | 17,021 | | | $ | 10,993 | | | $ | 6,028 | | | | 54.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key business metrics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | 7,611 | | | $ | 3,717 | | | $ | 3,894 | | | | 104.8 | % | | $ | 12,049 | | | $ | 6,581 | | | $ | 5,468 | | | | 83.1 | % | | $ | 4,976 | | | $ | 4,420 | | | $ | 556 | | | | 12.6 | % | | $ | 17,023 | | | $ | 11,001 | | | $ | 6,022 | | | | 54.7 | % |
Net sales: Net sales increased by $3.3$1.6 million, or 37.7%19.0% to $12.0$9.9 million for the three months ended September 30,December 31, 2017, as compared to $8.7$8.4 million prior year results due to higher post-contract earnings and other financing revenues. During the quarters ended September 30,December 31, 2017 and 2016, we recognized net gains on sales of financial assets of $1.2 million and $1.7$0.9 million, respectively, and the fair value of assets received from these sales were $48.3$32.8 million and $75.4$55.8 million, respectively. Post contract earnings increased $3.4$1.4 million due to the gain on sale of equipmentn associated with early lease terminations, of several large leases, and other financing revenues increased $0.4decreased $0.3 million mainly due to earnings on consumption based financing arrangements.
For the sixnine months ended September 30,December 31, 2017, net sales increased by $5.3$6.9 million, or 33.8%28.7% to $21.1$31.1 million as compared to $15.8$24.1 million prior year results due to higher transactional gains and other financing revenues. During the sixnine months ended September 30,December 31, 2017 and 2016, we recognized net gains on sales of financial assets of $3.5$4.6 million and $3.2$4.1 million, respectively, and the fair value of assets received from these sales were $134.1$166.9 million and $129.6$185.4 million, respectively. Post contract earnings increased $3.5$4.9 million due to the gain on sale of equipment associated with early lease terminations, of several large leases, and other financing revenues increased $1.2$1.0 million mainly due to earnings on consumption based financing arrangements.
At September 30,December 31, 2017, we had $131.8$147.2 million in financing receivables and operating leases, compared to $150.7$140.4 million as of September 30,December 31, 2016, a decreasean increase of $18.9$6.8 million or 12.6%4.8%.
Gross Profit: Gross profit increased by $3.3$1.3 million, or 44.5%18.5% to $10.7$8.5 million for the three months ended September 30,December 31, 2017, compared to the same period in the prior year. For the sixnine months ended September 30,December 31, 2017, gross profit increased $5.2$6.5 million, or 38.6%31.6% to $18.7$27.2 million compared to the same period of the prior year, as a result of higher revenues. Direct lease costs remained constantincreased $0.3 million and $0.4 million for the three and nine months ended September 30,December 31, 2017, and 2016, while direct lease costs increased $0.1 million for the six months ended September 30, 2017,respectively, which primarily consists of depreciation expense from operating leasesleases.
Selling, general, and administrative expenses: For the three months ended September 30,December 31, 2017 selling, general, and administrative expenses decreasedincreased by $0.5$0.9 million or 14.2%38.6%, which was due primarily to a decreasean increase in our reserves for credit lossessalaries and benefits expense of $0.4 million.$0.7 million resulting from an increase in variable compensation related to the increase in gross profit. Selling, general, and administrative expenses decreasedincreased by $0.1$0.8 million or 2.4%9.1%, due to an increase in our salaries and benefits expense of $1.1 million resulting from an increase in variable compensation related to the increase in gross profit, partially offset by lower professional fees and credit loss expenses for the sixnine months ended September 30, 2017, compared to the prior year period.December 31, 2017. Our financing segment had 4948 employees as of both September 30,December 31, 2017, andcompared to 51 employees as of December 31, 2016.
Interest and financing costs decreased $0.1 million to $0.3 million for the three months ended September 30,December 31, 2017, compared to the prior year, due to a decrease in the average total notes payable outstanding compared to the three months ended September 30,December 31, 2017. For the sixnine months ended September 30,December 31, 2017, interest and financing costs decreased by $0.1$0.3 million to $0.6$0.9 million, or 15.5%22.0%. Total notes payable were $37.1$31.5 million as of September 30,December 31, 2017, a decrease of $20.3$22.5 million or 35.3%41.7% compared to $57.4$54.0 million as of September 30,December 31, 2016. Our weighted average interest rate for non-recourse notes payable was 3.62%3.73% and 2.94%3.38%, as of September 30,December 31, 2017 and September 30,December 31, 2016, respectively.
Segment operating income: As a result of the foregoing, both operating income and Adjusted EBITDA increased $0.6 million or 12.6% to $5.0 million for both the three months ended December 31, 2017 and 2016. For the nine months ended December 31, 2017, operating income and Adjusted EBITDA each increased $3.9$6.0 million or 104.8%,54.8% and 54.7% to $7.6$17.0 million, for both the three months ended September 30, 2017 and 2016. For the six months ended September 30, 2017, operating income and Adjusted EBITDA increased $5.5 million or 83.2% and 83.1%, respectively.
Consolidated
Other income: Other income and expense during the three months ended September 30,December 31, 2017 was a net expense of $0.1 million, which consists of interest income on cash and cash equivalents, more than offset by foreign currency transaction losses. For the six months ended September 30, 2017, other income and expense was $0.1 million in net income, as a result of interest income on cash and cash equivalents partially offset by foreign currency transaction losses.
Income taxes: Our provision for income tax expense was $11.5$0.7 million and $18.8$19.5 million for the three and sixnine months ended September 30,December 31, 2017, as compared to $11.8$8.7 million and $18.6$27.3 million for the same periods in the prior year. Our effective income tax rate for the three and sixnine months ended September 30,December 31, 2017 was 40.0%4.2% and 38.0%29.7%, compared to 41.3%40.8% and 40.4%40.5% for the three and sixnine months ended September 30,December 31, 2016. The favorable change in our effective income tax rate was due primarily to a tax benefit of $3.4 million from the re-measurement of deferred tax assets and liabilities due to the change in the U.S. statutory rate for the three and nine months ended December 31, 2017, and a tax benefit of $1.6 million on the vesting of restricted stock of $0.2 and $1.6 million in the three and sixnine months ended September 30,December 31, 2017, respectively, compared to a tax benefit of $0.1 and $0.5 million in the three and sixnine months ended September 30, 2016 respectively.December 31, 2016.
Net earnings: The foregoing resulted in net earnings of $17.2$15.6 million and $30.6$46.2 million for the three and sixnine months ended September 30,December 31, 2017, an increase of 2.7%23.5% and 11.7%15.4%, as compared to $16.8$12.6 million and $27.4$40.1 million during the three and sixnine months ended September 30,December 31, 2016, respectively.
Basic and fully diluted earnings per common share were $1.24$1.12 and $1.23,$1.11 for the three months ended September 30,December 31, 2017, an increase of 2.5%21.7% and 1.7%22.0% as compared to $1.21$0.92 and $1.21,$0.91, respectively, for the three months ended September 30,December 31, 2016. For the sixnine months ended September 30,December 31, 2017, basic and fully diluted earnings per common share were $2.21$3.34 and $2.19,$3.30, an increase of 12.2%16.0% and 12.3%15.4% as compared to $1.97$2.88 and $1.95,$2.86, respectively, for the same period in the prior year.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ended September 30,December 31, 2017 was 13.9 million and 14.0 million, respectively. Weighted average common shares outstanding used in the calculation of the basic and diluted earnings per common share for the three months ended September 30,December 31, 2016 was 13.8 million and 13.9 million, respectively.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the sixnine months ended September 30,December 31, 2017 was 13.8 million and 14.0 million, respectively. Weighted average common shares outstanding used in the calculation of the basic and diluted earnings per common share for the sixnine months ended September 30,December 31, 2016 was 13.9 million and 14.114.0 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
Our primary sources of liquidity have historically been cash and cash equivalents, internally generated funds from operations, and borrowings, both non-recourse and recourse. We have used those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock.
Our subsidiary ePlus Technology, inc., part of our technology segment, finances its operations with funds generated from operations, and with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). ePlus Technology, inc’sinc.’s agreement with WFCDF has an aggregate credit limit of $325$250 million as of September 30,December 31, 2017.
On July 27, 2017, we executed an amendment to the WFCDF credit facility which temporarily increases the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017, and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election or October 31 of that same year.
There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component. After a customer places a purchase order with us and we have completed our credit check, we place an order for the equipment with one of our vendors. Generally, most purchase orders from us to our vendors are first financed under the floor plan component and reflected in “accounts payable—floor plan” in our consolidated balance sheets. Payments on the floor plan component are due on three specified dates each month, generally 30-60 days from the invoice date. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no outstanding balance at September 30, 2017 orDecember 31, 2017or March 31, 2017, while the maximum credit limit was $30.0 million for both periods. The borrowings and repayments under the floor plan component are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows.
Most customer payments in our technology segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically transferred to our operating account on a daily basis. On the due dates of the floor plan component, we make cash payments to WFCDF. These payments from the accounts receivable component to the floor plan component and repayments from our cash are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows. We engage in this payment structure in order to minimize our interest expense and bank fees in connection with financing the operations of our technology segment.
We believe that cash on hand, and funds generated from operations, together with available credit under our credit facility, will be sufficient to finance our working capital, capital expenditures and other requirements for at least the next twelve calendar months.
Our ability to continue to fund our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, our cash flows from operations may be substantially affected.
Cash Flows
The following table summarizes our sources and uses of cash over the periods indicated (in thousands):
| | | Six Months Ended September 30, | |
| | | 2017 | | | 2016 | |
| Net cash provided by (used in) operating activities | | $ | 13,330 | | | $ | (43,806 | ) |
| Net cash used in investing activities | | | (52,891 | ) | | | (18,648 | ) |
| Net cash provided by (used in) financing activities | | | (10,046 | ) | | | 15,330 | |
| Effect of exchange rate changes on cash | | | 32 | | | | 393 | |
| | | | | | | | | |
| Net Decrease in Cash and Cash Equivalents | | $ | (49,575 | ) | | $ | (46,731 | ) |
| | | Nine Months Ended December 31, | |
| | | 2017 | | | 2016 | |
| Net cash provided by operating activities | | $ | 48,824 | | | $ | 29,702 | |
| Net cash used in investing activities | | | (54,793 | ) | | | (47,040 | ) |
| Net cash used in financing activities | | | (27,758 | ) | | | (8,205 | ) |
| Effect of exchange rate changes on cash | | | 72 | | | | 454 | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | $ | (33,655 | ) | | $ | (25,089 | ) |
Cash flows from operating activities. Cash provided by operating activities totaled $13.348.8 million during the sixnine months ended September 30,December 31, 2017. Net earnings adjusted for the impact of non-cash items was $30.7$46.1million. Net changes in assets and liabilities resulted in a increase of cash and cash equivalents of $2.7 million, primarily due to net reductions in inventories of $43.3 million and increased in accounts payable of $18.4 million, mostly offset by additions to deferred costs, other intangible assets and other assets of $26.2 financing receivables of $13.0, accounts receivables of $10.3 million, and salaries and commissions payable and deferred revenues and other liabilities of $9.5 million.
Cash provided by operating activities totaled $29.7 million during the nine months ended December 31, 2016. Net earnings adjusted for the impact of non-cash items was $45.0 million. Net changes in assets and liabilities resulted in a decrease of cash and cash equivalents of $17.4$15.3 million, primarily due to net additions to accounts receivables of $21.7$62.0 million, inventories of $77.4 million, partially offset by increased in accounts payable of $53.2 million, and salaries and commissions payable, and deferred revenues and other liabilities of $21.6 million, deferred costs, other intangible assets and other assets of $13.0 million, and accounts payable of $6.9 million, partially offset by reductions in inventories of $43.0 million and financing receivables of $2.7$51.2 million.
Cash used in operating activities totaled $43.7 million during the six months ended September 30, 2016. Net earnings adjusted for the impact of non-cash items was $30.9 million. Net changes in assets and liabilities resulted in a decrease of cash and cash equivalents of $74.6 million, primarily due to additions to accounts receivables of $61.8 million, inventories of $47.3 million, partially offset by increases accounts payable of $14.8 million.
In order to manage our working capital, we monitor our cash conversion cycle for our Technology segment, which is defined as days sales outstanding (“DSO”) in accounts receivable plus days of supply in inventory (“DIO”) minus days of purchases outstanding in accounts payable (“DPO”). The following table presents the components of the cash conversion cycle for our Technology segment:
| | | As of September 30, | | | As of December 31, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | |
| (DSO) Days sales outstanding (1) | | | 52 | | | | 54 | | | | 52 | | | | 52 | |
| (DIO) Days inventory outstanding (2) | | | 15 | | | | 13 | | | | 12 | | | | 23 | |
| (DPO) Days payable outstanding (3) | | | (44 | ) | | | (51 | ) | | | (40 | ) | | | (48 | ) |
| Cash conversion cycle | | | 23 | | | | 16 | | | | 24 | | | | 27 | |
| (1) | Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our Technology segment at the end of the period divided by Adjusted gross billings of product and services for the same three-month period. |
| (2) | Represents the rolling three-month average of the balance of inventory, net for our Technology segment at the end of the period divided by Cost of adjusted gross billings of product and services for the same three-month period. |
| (3) | Represents the rolling three-month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our Technology segment at the end of the period divided by Cost of adjusted gross billings of product and services for the same three-month period. |
Our cash conversion cycle increaseddecreased to 2324 days at September 30,December 31, 2017, compared to 1627 days at September 30,December 31, 2016, primarily driven by an increasea decrease in DPO of 78 days due to DPO timing of payments. The higher cash conversion cycle for December 31, 2016 was due mainly to a significant increase in our inventories due to large projects for several of our major customers in the prior year’s quarter.
Cash flows related to investing activities. Cash used in investing activities was $52.9$54.8 million during the sixnine months ended September 30,December 31, 2017. Cash used in investing activities during the sixnine months ended September 30,December 31, 2017 was primarily driven by acquisitions of $37.7 million, net issuance and repayment of financing receivables of $59.7$79.1 million, purchases of assets to be leased or financed of $3.8$5.7 million, and purchases of property, equipment, software, and operating lease equipment of $3.4$6.3 million, which was partially offset by the sale of financing receivables of $43.8$64.1 million, and proceeds from sale of property, equipment and operating leases of $8.0$10.0 million.
Cash used in investing activities was $18.6$47.0 million during the sixnine months ended September 30,December 31, 2016. Cash used in investing activities during the sixnine months ended September 30,December 31, 2016 was primarily driven by issuance of financing receivables of $64.0$114.7 million, cash used in acquisitions of $9.5 million, purchases of property, equipment and operating lease equipment of $7.3 million, and purchases of assets to be leased or financed of $4.5$5.9 million, which was partially offset by cash proceeds from the repayment financing receivable of $44.1 million, the sale of financing receivables of $25.4 million, the repayment financing receivable of $24.0$39.9 million, and proceeds from the sale of property, equipment and operating lease equipment of $3.6$6.4 million.
Cash flows from financing activities. Cash used in financing activities was $10.0$27.8 million during the sixnine months ended September 30,December 31, 2017, which was primarily due to net borrowingrepayment on floor plan facility of $12.4$24.9 million, cash used for the repurchase of common stock of $4.4$13.4 million, and repayment of financing of acquisitions of $1.1$1.6 million, partially offset by net borrowings of non-recourse and recourse notes payable of $7.8$12.1 million. Cash provided byused in financing activities was $15.2$8.2 million during the sixnine months ended September 30,December 31, 2016, which was primarily due to net borrowings on the floor plan facility of $28.2 million and net borrowings of non-recourse and recourse notes payable of $17.5 million, which was offset by $30.5 million in cash used for the repurchase of common stock.stock, and net repayment on the floor plan facility of $5.6 million, partially offset by to net borrowings of non-recourse and recourse notes payable of $28.6 million.
Non-Cash Activities
We assign contractual payments due under lease and financing agreements to third-party financial institutions, which are accounted for as non-recourse notes payable. As a condition to the assignment agreement, certain financial institutions may request that the customer remit their contractual payments to a trust; rather than to us, and the trust pays the financial institution. Alternatively, if the structure of the agreement does not require a trustee, the customer will continue to make payments to us, and we will remit the payment to the financial institution. The economic impact to us under either assignment structure is similar, in that the assigned contractual payments are paid by the customer and remitted to the lender to pay down the corresponding non-recourse notes payable. However, these assignment structures are classified differently within our consolidated statements of cash flows. More specifically, we are required to exclude non-cash transactions from our consolidated statement of cash flows, so certain contractual payments made by the customer to the trust are excluded from our operating cash receipts and the corresponding repayment of the non-recourse notes payable from the trust to the third-party financial institution are excluded from our cash flows from financing activities. Contractual payments received by the trust and paid to the lender on our behalf are disclosed as a non-cash financing activity.
Liquidity and Capital Resources
We may utilize non-recourse notes payable to finance approximately 80% to 100% of the purchase price of the assets being leased or financed by our customers. Any balance of the purchase price remaining after non-recourse funding and any upfront payments received from the customer (our equity investment in the equipment) must generally be financed by cash flows from our operations, the sale of the equipment leased to third parties, or other internal means. Although we expect that the credit quality of our financing arrangements and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all.
The financing necessary to support our lease and financing activities has been provided by our cash and non-recourse borrowings. We monitor our exposure closely. We are able to obtain financing through our traditional lending sources which is primarily non-recourse borrowings from third party banks and finance companies. Non-recourse financings are loans whose repayment is the responsibility of a specific customer, although we may make representations and warranties to the lender regarding the specific contract or have ongoing loan servicing obligations. Under a non-recourse loan, we borrow from a lender an amount based on the present value of the contractually committed payments at a fixed rate of interest, and the lender secures a lien on the financed assets. When the lender is fully repaid, the lien is released and all further proceeds are ours. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk, and the lender’s only recourse, upon default, is against the customer and the specific equipment.
At September 30,December 31, 2017, our non-recourse notes payable decreased 0.2%13.8% to $36.4$31.5 million, as compared to $36.5 million at March 31, 2017. Recourse notes payable decreased 24.2% to $0.7 millionwas zero as of September 30,December 31, 2017 compared to $0.9 million as of March 31, 2017.
Whenever desirable, we arrange for equity investment financing, which includes selling lease payments, including the residual portions, to third parties and financing the equity investment on a non-recourse basis. We generally retain customer control and operational services, and have minimal residual risk. We usually reserve the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed-to return on its investment.
Credit Facility — Technology
Our subsidiary, ePlus Technology, inc., has a financing facility from WFCDF to finance its working capital requirements for inventories and accounts receivable. There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component. This facility has full recourse to ePlus Technology, inc. and is secured by a blanket lien against all its assets, such as chattel paper, receivables and inventory. As of September 30,December 31, 2017, the facility had an aggregate limit of the two components of $325.0$250.0 million with an accounts receivable sub-limit of $30.0 million.
On July 27, 2017, we executed an amendment to the WFCDF credit facility which temporarily increased the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017, and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election and October 31 of that same year.
Availability under the facility may be limited by the asset value of equipment we purchase or accounts receivable, and may be further limited by certain covenants and terms and conditions of the facility. These covenants include but are not limited to a minimum excess availability of the facility and minimum earnings before interest, taxes, depreciation and amortization of ePlus Technology, inc. We were in compliance with these covenants as of September 30,December 31, 2017. Interest on the facility is assessed at a rate of the One Month LIBOR plus two and one half percent if the payments are not made on the three specified dates each month. The facility also requires that financial statements of ePlus Technology, inc. be provided within 45 days of each quarter and 90 days of each fiscal year end and also requires other operational reports be provided on a regular basis. Either party may terminate the facility with 90 days advance written notice.
We are not, and do not believe that we are reasonably likely to be, in breach of the WFCDF credit facility. In addition, we do not believe that the covenants of the WFCDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, ePlus Technology, inc. This credit facility is secured by the assets of only ePlus Technology, inc. and the guaranty as described below.
The facility provided by WFCDF requires a guaranty of $10.5 million by ePlus inc. The guaranty requires ePlus inc. to deliver its annual audited financial statements by a certain date. We have delivered the annual audited financial statements for the year ended March 31, 2017, as required. The loss of the WFCDF credit facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology segment and as an operational function of our accounts payable process.
On July 27, 2017, we executed an amendment to the WFCDF credit facility which temporarily increased the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017, and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election and October 31 of that same year.
Floor Plan Component
Purchases by ePlus Technology, inc. including computer technology products, software, maintenance and services, are in part financed through a floor plan component in which interest expense for the first thirty to sixtyninety days, in general, is not charged. The floor plan liabilities are recorded as accounts payable—floor plan on our consolidated balance sheets, as they are normally repaid within the fifteen to sixty-dayninety-day time frame and represent assigned accounts payable originally generated with the manufacturer/distributor. In some cases we are able to pay invoices early and receive a discount, but if the fifteen to sixty-dayninety-day obligation is not paid timely, interest is then assessed at stated contractual rates.
The respective floor plan component credit limits and actual outstanding balance payables for the dates indicated were as follows (in thousands):
Maximum Credit Limit
at September 30, 2017 | | | Balance as of
September 30, 2017 | | | Maximum Credit Limit
at March 31, 2017 | | | Balance as of
March 31, 2017 | | |
Maximum Credit Limit
at December 31, 2017 | | Maximum Credit Limit
at December 31, 2017 | | | Balance as of
December 31, 2017 | | | Maximum Credit Limit
at March 31, 2017 | | | Balance as of
March 31, 2017 | |
| $ | 325,000 | | | $ | 120,217 | | | $ | 250,000 | | | $ | 132,612 | | 250,000 | | | $ | 107,761 | | | $ | 250,000 | | | $ | 132,612 | |
Accounts Receivable Component
Included within the credit facility, ePlus Technology, inc. has an accounts receivable component from WFCDF, which has a revolving line of credit. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no balance outstanding for the accounts receivable component at September 30, 2017 orDecember 31, 2017or March 31, 2017, while the maximum credit limit was $30.0 million for both periods.
Performance Guarantees
In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations. We are in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements as defined in Item 303(a) (4) (ii) of Regulation S-K or other contractually narrow or limited purposes. As of September 30,December 31, 2017, we were not involved in any unconsolidated special purpose entity transactions.
Adequacy of Capital Resources
The continued implementation of our business strategy will require a significant investment in both resources and managerial focus. In addition, we may selectively acquire other companies that have attractive customer relationships and skilled sales and/or engineering forces. We may also start offices in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance the platform of bundled solutions to provide additional functionality and value-added services. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivables due from our customers. These actions may result in increased working capital needs as the business expands. As a result, we may require additional financing to fund our strategy, implementation, potential future acquisitions, and working capital needs which may include additional debt and equity financing.
Inflation
For the periods presented herein, inflation has been relatively low and we believe that inflation has not had a material effect on our results of operations.
Potential Fluctuations in Quarterly Operating Results
Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, major customers or vendors of ours.
Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to currency fluctuations, reduction in IT spending, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio at the expiration of a lease term or prior to such expiration, to a lessee or to a third party and the transfer of financial assets. Sales of equipment and transfers of financial assets may have the effect of increasing revenues and net income during the quarter in which the sale occurs, and reducing revenues and net income otherwise expected in subsequent quarters. See Part I, Item 1A, “Risk Factors,” in our 2017 Annual Report.
We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in our quantitative and qualitative disclosures about market risk during the sixnine months ended September 30,December 31, 2017 from our 2017 Annual Report on Form 10-K for the fiscal year ended March 31, 2017.Report. For a discussion of the Company's exposure to market risk, reference is made to disclosures set forth in Part II, Item 7A of our above-mentioned 2017 Annual Report on Form 10-K.Report.
Although a substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, we utilize our lines of credit and other financing facilities which are subject to fluctuations in short-term interest rates. These instruments, which are denominated in U.S. dollars, were entered into for other than trading purposes and, with the exception of amounts drawn under the WFCDF facility, bear interest at a fixed rate. Because the interest rate on these instruments is fixed, changes in interest rates will not directly impact our cash flows. Borrowings under the WFCDF facility bear interest at a market-based variable rate. As of September 30,December 31, 2017, the aggregate fair value of our recourse and non-recourse borrowings approximated their carrying value.
We have transactions in foreign currencies, primarily in British Pounds and in Euros. There is a potential for exposure to fluctuations in foreign currency rates resulting primarily from the translation exposure associated with the preparation of our consolidated financial statements. In addition, we have foreign currency exposure when transactions are not denominated in the subsidiary’s functional currency. To date, our foreign operations are insignificant in relation to total consolidated operations and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.
The UK referendum (“Brexit”) on whether to remain in, or leave, the European Union could impact revenue items, cost items, tax, goodwill impairments and liquidity, among others. The most obvious immediate impact is the effect of foreign exchange fluctuations on revenue and cost items. We have determined that our foreign currency exposure for our United Kingdom operations is insignificant in relation to total consolidated operations and we believe those potential fluctuations in currency exchange rates and other Brexit related economic and operational risks will not have a material effect on our results of operations and financial position.
We evaluate Brexit-related developments on a regular basis to determine if such developments are anticipated to have a material impact on the Company’s results on operations and financial position.
We have assets in Canada and Iceland. As a lessor, we have entered into lease contracts and non-recourse, fixed-interest-rate financing denominated in Canadian dollars and in Icelandic krona. In our fiscal year beginning April 1, 2016, we began entering in financing transactions and non-recourse, fixed-interest-rate financing denominated in British Pounds in the United Kingdom. To date, our foreign operations have been insignificant and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” as defined in the Exchange Act Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30,December 31, 2017.
Changes in Internal Controls
There have not been any changes in our internal control over financial reporting during the quarter ended September 30,December 31, 2017, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process; therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
PART II. OTHER INFORMATION
We are not currently a party to any legal proceedings with loss contingencies that are expected to be material. From time to time, we may be a plaintiff or a defendantsubject to legal proceedings that arise in legal actions arising from our normal business activities, nonethe ordinary course of which has had a material effect on our business, results of operations or financial condition.business. Legal proceedings which may arise in the ordinary course of business include preference payment claims asserted in customer bankruptcy proceedings, tax audits, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, claims of alleged non-compliance with contract provisions, employment-related claims, claims by competitors, vendors or customers, claims related to alleged violations of laws and regulations, and claims relating to alleged security or privacy breaches. We attempt to ameliorate the effect of potential litigation through insurance coverage and contractual protections such as rights to indemnifications and limitations of liability. We do not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on our financial condition or results of operations, however, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements entered that could adversely affect our results of operations or cash flows in a particular period.
We provide for costs relatedrelating to contingencies when a loss is probable and the amount is reasonably determinable. In the opinion of management, there was not at least a reasonable possibility that the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
There has not been any material change in the risk factors previously disclosed in Part I, Item 1A of our 2017 Annual Report.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information regarding our purchases of ePlus inc. common stock during the sixnine months ended September 30,December 31, 2017.
| Period | | Total number of shares purchased (1) | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs | | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | | | Total number of shares purchased (1) | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs | | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | |
| April 1, 2017 through April 30, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | | | | (2 | ) | | | - | | | $ | - | | | | - | | | | 1,000,000 | (2 | ) |
| May 1, 2017 through May 31, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | | | | (3 | ) | | | - | | | $ | - | | | | - | | | | 1,000,000 | (3 | ) |
| June 1, 2017 through June 30, 2017 | | | 54,546 | | | $ | 75.72 | | | | - | | | | 1,000,000 | | | | (4 | ) | | | 54,546 | | | $ | 75.72 | | | | - | | | | 1,000,000 | (4 | ) |
| July 1, 2017 through July 31, 2017 | | | 3,179 | | | $ | 79.50 | | | | - | | | | 1,000,000 | | | | (5 | ) | | | 3,179 | | | $ | 79.50 | | | | - | | | | 1,000,000 | (5 | ) |
| August 1, 2017 through August 18, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | | | | (6 | ) | | | - | | | $ | - | | | | - | | | | 1,000,000 | (6 | ) |
| August 19, 2017 through August 31, 2017 | | | - | | | $ | - | | | | - | | | | 500,000 | | | | (7 | ) | | | - | | | $ | - | | | | - | | | | 500,000 | (7 | ) |
| September 1, 2017 through September 30, 2017 | | | - | | | $ | - | | | | - | | | | 500,000 | | | | (8 | ) | | | - | | | $ | - | | | | - | | | | 500,000 | (8 | ) |
| October 1, 2017 through October 31, 2017 | | | | - | | | $ | - | | | | - | | | | 500,000 | (9 | ) |
| November 1, 2017 through November 30, 2017 | | | | 56,707 | | | $ | 78.21 | | | | - | | | | 443,293 | (10 | ) |
| December 1, 2017 through December 31, 2017 | | | | 68,898 | | | $ | 77.61 | | | | - | | | | 374,395 | (11 | ) |
| (1) | Any shares acquired were in open-market purchases, except for 54,546 shares, which were repurchased in June 2017, and 3,179 shares which were repurchased in July 2017, to satisfy tax withholding obligations that arose due to the vesting of shares of restricted stock. |
| (2) | The share purchase authorization in place for the month ended April 30, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares. As of April 30, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (3) | The share purchase authorization in place for the month ended May 31, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares. As of May 31, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (4) | The share purchase authorization in place for the month ended June 30, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares. As of June 30, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (5) | The share purchase authorization in place for the month ended July 31, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares. As of July 31, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (6) | As of August 18, 2017 the authorization under the then existing share purchase plan expired. |
| (7) | On August 15, 2017, the board of directors authorized the company to repurchase up to 500,000 shares of our outstanding common stock commencing on August 19, 2017 through August 18, 2018. As of August 31, 2017, the remaining authorized shares to be purchased were 500,000. |
| (8) | The share purchase authorization in place for the month ended September 30, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of September 30, 2017, the remaining authorized shares to be purchased were 500,000. |
| (9) | The share purchase authorization in place for the month ended October 31, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of October 31, 2017, the remaining authorized shares to be purchased were 500,000. |
| (10) | The share purchase authorization in place for the month ended November 30, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of November 30, 2017, the remaining authorized shares to be purchased were 443,293. |
| (11) | The share purchase authorization in place for the month ended December 31, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of December 31, 2017, the remaining authorized shares to be purchased were 374,395. |
The timing and expiration date of the current stock repurchase authorizations are included in Note 10,
“Stockholders’ Equity”“Stockholders’ Equity” to our unaudited condensed consolidated financial statements included elsewhere in this report.
| Item 3. | Defaults Upon Senior Securities |
Not Applicable.
Not Applicable.
None.
| Item 6. | Amended and Restated Employment Agreement effective September 6, 2017 , by and between ePlus inc. and Mark P. Marron, (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 7, 2017).Exhibits |
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| Amended and Restated Employment Agreement effective September 6, 2017, by and between ePlus inc. and Mark P. Marron. |
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| Amended and Restated Employment Agreement effective December 12, 2017, by and between ePlus inc. and Phillip G. Norton, (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on September 7, 2017).Norton. |
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| Amended and Restated Employment Agreement effective September 6, 2017, by and between ePlus inc. and Elaine D. Marion, (Incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on September 7, 2017). |
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| Amendment No. 5, dated July 27, 2017, to Amended and Restated Agreement for Wholesale Financing between ePlus Technology, inc. and Wells Fargo Commercial Distribution Finance, LLC (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 3, 2017). |
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| Amendment No. 5, dated July 27, 2017, to Amended and Restated Agreement for Business Financing between ePlus Technology, inc. and Wells Fargo Commercial Distribution Finance, LLC (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on August 3, 2017). |
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| 2017 Non-Employee Director Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 14, 2017).Marion. |
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| Certification of the Chief Executive Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
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| Certification of the Chief Financial Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
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| Certification of the Chief Executive Officer and Chief Financial Officer of ePlus inc. pursuant to 18 U.S.C. § 1350. |
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| 101.INS | XBRL Instance Document |
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| 101.SCH | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.