| ePlus inc. AND SUBSIDIARIES
| | | Part I. Financial Information: | | | | | Item 1. | | | | | | | | 5 | | | | | | 6 | | | | | | 7 | | | | | | 8 | | | | | | 10 | | | | | | 11 | | | | Item 2. | | 26 | | | | Item 3. | | 4143 | | | | Item 4. | | 4243 | | | | Part II. Other Information: | | | | | Item 1. | | 4344 | | | | Item 1A. | | 4344 | |
| | Item 2. | | 44 | | | | Item 3. | | 45 | | | | Item 4. | | 45 | | | | Item 5. | | 45 | | | | Item 6. | | 4546 | | | | | 46 | 47 |
CAUTIONARY STATEMENT CONCERNINGLANGUAGE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “would,” “intend,” “estimate,” “will,” “potential,” “possible,” “could,” “believe,” “expect,” “intend,” “plan,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions, or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:
national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuation in foreign currency rates, interest rates, and inflation, including increases in our costs and our ability to increase prices to our customers which may result in adverse changes in our gross profit; significant and rapid inflation may cause price, wage, and interest rate increases, as well as increases in operating costs which may impact the arrangements that have pricing commitments over the term of the agreement; significant adverse changes in, reductions in, or loss of one or more of our larger volume customers or vendors; supply chain issues, including a shortage of IT products, may increase our costs or cause a delay in fulfilling customer orders, or increase our need for working capital, or completing professional services, or purchasing IT products or services needed to support our internal infrastructure or operations, resulting in an adverse impact on our financial results; the duration and ongoing impact of the novel coronavirus (“COVID-19”) pandemic, including but not limited to the impact and severity of new variants, vaccine efficacy, and immunization rates, the closure of non-essential businesses and other associated governmental containment actions, and the increase in cyber-security attacks that have occurred while employees work remotely; maintaining and increasing advanced professional services by recruiting and retaining highly skilled, competent personnel, and vendor certifications; our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train, and retain sufficient qualified personnel; our ability to secure our own and our customers’ electronic and other confidential information, while maintaining compliance with evolving data privacy and regulatory laws and regulations; our ability to remain secure during a cybersecurity attack, including both disruptions in our or our vendors’ IT systems and data and audio communication networks; reliance on third-parties to perform some of our service obligations to our customers, and the reliance on a small number of key vendors in our supply chain with whom we do not have long-term supply agreements, guaranteed price agreements, or assurance of stock availability; the creditworthiness of our customers and our ability to reserve adequately for credit losses; loss of our credit facility or credit lines with our vendors may restrict our current and future operations; a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us;
| · | national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuation in foreign currency rates, and downward pressure on prices; |
| · | significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large volume customers, or vendors; |
| · | exposure to changes in, interpretations of, or enforcement trends in legislation and regulatory matters; |
| · | the creditworthiness of our customers and our ability to reserve adequately for credit losses; |
| · | reduction of vendor incentives provided to us; |
| · | we offer a comprehensive set of solutions — integrating information technology (IT) product sales, third-party software assurance and maintenance, our advanced professional and managed services, our proprietary software, and financing, and encounter the following challenges, risks, difficulties and uncertainties: |
| o | managing a diverse product set of solutions in highly competitive markets with a number of key vendors; |
| o | increasing the total number of customers utilizing integrated solutions by up-selling within our customer base and gaining new customers; |
| o | adapting to meet changes in markets and competitive developments; |
| o | maintaining and increasing advanced professional services by retaining highly skilled, competent, personnel and vendor certifications; |
| o | increasing the total number of customers who utilize our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace; |
| o | performing professional and managed services competently; |
| o | maintaining our proprietary software and updating our technology infrastructure to remain competitive in the marketplace; and |
| o | reliance on third parties to perform some of our service obligations to our customers; |
| · | changes in the IT industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service and software as a service; |
| · | our dependency on continued innovations in hardware, software, and services offerings by our vendors and our ability to partner with them; |
| · | future growth rates in our core businesses; |
| · | failure to comply with public sector contracts or applicable laws; |
| · | changes to or loss of members of our senior management team and/or failure to successfully implement succession plans; |
| · | our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train, and retain sufficient qualified personnel; |
| · | our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies; |
| · | a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us; |
| · | our contracts may not be adequate to protect us, and we are subject to audit in which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim; |
| · | disruptions or a security breach in our IT systems and data and audio communication networks; |
| · | our ability to secure our customers’ electronic and other confidential information, and remain secure during a cyber-security attack; |
| ·• | our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain debt for our financing transactions, or the effect of those changes on our common stock or its holders;price; |
reduction of vendor incentives provided to us; changes in the Information Technology (“IT”) industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service (“IaaS”), software as a service (“SaaS”) and platform as a service (“PaaS”); our dependency on continued innovations in hardware, software, and services offerings by our vendors and our ability to partner with them; future growth rates in our core businesses; rising interest rates or the loss of key lenders or the constricting of credit markets;
the possibility of goodwill impairment charges in the future; adapting to meet changes in markets and competitive developments; increasing the total number of customers using integrated solutions by up-selling within our customer base and gaining new customers; managing a diverse product set of solutions in highly competitive markets with a number of key vendors; increasing the total number of customers who use our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace; performing professional and managed services competently; our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration, and other key strategies; exposure to changes in, interpretations of, or enforcement trends in, and customer and vendor actions in anticipation of or response to, legislation and regulatory matters;
| ·• | our ability to realize our investment in leased equipment;domestic and international economic regulations uncertainty (e.g., tariffs, sanctions, and trade agreements); |
our contracts may not be adequate to protect us, and we are subject to audit which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim; | · | our ability to successfully perform due diligence and integrate acquired businesses; | failure to comply with public sector contracts, or applicable laws or regulations; | · | the possibility of goodwill impairment charges in the future; | maintaining our proprietary software and updating our technology infrastructure to remain competitive in the marketplace; | · | our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents or allegations that we are infringing upon any third party patents, and the costs associated with those actions, and, when appropriate, license required technology; and | our ability to realize our investment in leased equipment; | · | significant changes in accounting standards including changes to the financial reporting of leases which could impact the demand for our leasing services, or misclassification of products and services we sell resulting in the misapplication of revenue recognition policies or inaccurate costs and completion dates for our services which could affect our estimates. | our ability to successfully perform due diligence and integrate acquired businesses; our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents or allegations that we are infringing upon any third-party patents, and the costs associated with those actions, and, when appropriate, license required technology.
We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks, and uncertainties. For a further list and description of various risks, relevant factors, and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see Item 1A, “Risk Factors”Factors” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” sections contained elsewhere in this report, as well as other reports that we file with the Securities and Exchange Commission (“SEC”).
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
e Plus inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
| | September 30, 2022 | | | March 31, 2022 | | ASSETS | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 99,531 | | | $ | 155,378 | | Accounts receivable—trade, net | | | 525,176 | | | | 430,380 | | Accounts receivable—other, net | | | 44,278 | | | | 48,673 | | Inventories | | | 274,863 | | | | 155,060 | | Financing receivables—net, current | | | 65,010 | | | | 61,492 | | Deferred costs | | | 36,085 | | | | 32,555 | | Other current assets | | | 24,970 | | | | 13,944 | | Total current assets | | | 1,069,913 | | | | 897,482 | | | | | | | | | | | Financing receivables and operating leases—net | | | 75,093 | | | | 64,292 | | Deferred tax asset—net | | | 5,058 | | | | 5,050 | | Property, equipment, and other assets | | | 55,033 | | | | 45,586 | | Goodwill | | | 135,907 | | | | 126,543 | | Other intangible assets—net | | | 30,336 | | | | 27,250 | | TOTAL ASSETS | | $ | 1,371,340 | | | $ | 1,166,203 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | LIABILITIES | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 192,511 | | | $ | 136,161 | | Accounts payable—floor plan | | | 136,215 | | | | 145,323 | | Salaries and commissions payable | | | 34,304 | | | | 39,602 | | Deferred revenue | | | 108,004 | | | | 86,469 | | Recourse notes payable—current | | | 92,744 | | | | 7,316 | | Non-recourse notes payable—current | | | 10,346 | | | | 17,070 | | Other current liabilities | | | 33,187 | | | | 28,095 | | Total current liabilities | | | 607,311 | | | | 460,036 | | | | | | | | | | | Recourse notes payable - long-term | | | 1,947 | | | | 5,792 | | Non-recourse notes payable - long-term | | | 10,446 | | | | 4,108 | | Other liabilities | | | 45,991 | | | | 35,529 | | TOTAL LIABILITIES | | | 665,695 | | | | 505,465 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES ( Note 9) | | | | | | | | | | | | | | | | | | STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | Preferred stock, $0.01 per share par value; 2,000 shares authorized; none outstanding | | | - | | | | - | | Common stock, $0.01 per share par value; 50,000 shares authorized; 26,906 outstanding at September 30, 2022 and 26,886 outstanding at March 31, 2022 | | | 272 | | | | 270 | | Additional paid-in capital | | | 163,211 | | | | 159,480 | | Treasury stock, at cost, 258 shares at September 30, 2022 and 130 shares at March 31, 2022 | | | (13,958 | ) | | | (6,734 | ) | Retained earnings | | | 558,654 | | | | 507,846 | | Accumulated other comprehensive income—foreign currency translation adjustment | | | (2,534 | ) | | | (124 | ) | Total Stockholders’ Equity | | | 705,645 | | | | 660,738 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,371,340 | | | $ | 1,166,203 | |
See Notes to Unaudited Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS (in thousands, except per share amounts)
| | As of December 31, 2017 | | | As of March 31, 2017 | | ASSETS | | (in thousands, except per share data) | | | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 76,105 | | | $ | 109,760 | | Accounts receivable—trade, net | | | 285,820 | | | | 266,029 | | Accounts receivable—other, net | | | 30,690 | | | | 24,987 | | Inventories | | | 51,295 | | | | 93,557 | | Financing receivables—net, current | | | 74,598 | | | | 51,656 | | Deferred costs | | | 24,740 | | | | 7,971 | | Other current assets | | | 25,970 | | | | 43,364 | | Total current assets | | | 569,218 | | | | 597,324 | | | | | | | | | | | Financing receivables and operating leases—net | | | 72,575 | | | | 71,883 | | Deferred tax assets—net | | | 1,268 | | | | - | | Property, equipment and other assets | | | 17,632 | | | | 11,956 | | Goodwill | | | 76,546 | | | | 48,397 | | Other intangible assets—net | | | 27,414 | | | | 12,160 | | TOTAL ASSETS | | $ | 764,653 | | | $ | 741,720 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | LIABILITIES | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 125,850 | | | $ | 113,518 | | Accounts payable—floor plan | | | 107,761 | | | | 132,612 | | Salaries and commissions payable | | | 20,568 | | | | 18,878 | | Deferred revenue | | | 50,739 | | | | 65,312 | | Recourse notes payable—current | | | - | | | | 908 | | Non-recourse notes payable—current | | | 27,649 | | | | 26,085 | | Other current liabilities | | | 26,116 | | | | 19,179 | | Total current liabilities | | | 358,683 | | | | 376,492 | | | | | | | | | | | Non-recourse notes payable—long term | | | 3,840 | | | | 10,431 | | Deferred tax liability—net | | | - | | | | 1,799 | | Other liabilities | | | 18,518 | | | | 7,080 | | TOTAL LIABILITIES | | | 381,041 | | | | 395,802 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES (Note 8) | | | | | | | | | | | | | | | | | | STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | Preferred stock, $.01 per share par value; 2,000 shares authorized; none outstanding | | | - | | | | - | | Common stock, $.01 per share par value; 25,000 shares authorized;14,046 outstanding at December 31, 2017 and 14,161 outstanding at March 31, 2017 | | | 142 | | | | 142 | | Additional paid-in capital | | | 128,392 | | | | 123,536 | | Treasury stock, at cost | | | (14,165 | ) | | | - | | Retained earnings | | | 269,048 | | | | 222,823 | | Accumulated other comprehensive income—foreign currency translation adjustment | | | 195 | | | | (583 | ) | Total Stockholders' Equity | | | 383,612 | | | | 345,918 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 764,653 | | | $ | 741,720 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022
| | | 2021 | | | 2022 | | | 2021 | | | | | | | | | | | | | | | Net sales | | | | | | | | | | | | | Product | | $ | 428,545 | | | $ | 397,160 | | | $ | 823,795 | | | $ | 758,217 | | Services | | | 65,161 | | | | 60,857 | | | | 128,270 | | | | 116,449 | | Total | | | 493,706 | | | | 458,017 | | | | 952,065 | | | | 874,666 | | Cost of sales | | | | | | | | | | | | | | | | | Product | | | 317,127 | | | | 297,629 | | | | 621,337 | | | | 574,856 | | Services | | | 43,275 | | | | 37,386 | | | | 83,901 | | | | 71,296 | | Total | | | 360,402 | | | | 335,015 | | | | 705,238 | | | | 646,152 | | | | | | | | | | | | | | | | | | | Gross profit | | | 133,304 | | | | 123,002 | | | | 246,827 | | | | 228,514 | | | | | | | | | | | | | | | | | | | Selling, general, and administrative | | | 84,704 | | | | 74,504 | | | | 161,471 | | | | 143,279 | | Depreciation and amortization | | | 3,568 | | | | 3,853 | | | | 6,778 | | | | 7,779 | | Interest and financing costs | | | 925 | | | | 342 | | | | 1,288 | | | | 701 | | Operating expenses | | | 89,197 | | | | 78,699 | | | | 169,537 | | | | 151,759 | | | | | | | | | | | | | | | | | | | Operating income | | | 44,107 | | | | 44,303 | | | | 77,290 | | | | 76,755 | | | | | | | | | | | | | | | | | | | Other income (expense) | | | (3,866 | ) | | | (325 | ) | | | (6,019 | ) | | | (202 | ) | | | | | | | | | | | | | | | | | | Earnings before tax | | | 40,241 | | | | 43,978 | | | | 71,271 | | | | 76,553 | | | | | | | | | | | | | | | | | | | Provision for income taxes | | | 11,772 | | | | 12,565 | | | | 20,463 | | | | 21,622 | | | | | | | | | | | | | | | | | | | Net earnings | | $ | 28,469 | | | $ | 31,413 | | | $ | 50,808 | | | $ | 54,931 | | Net earnings per common share—basic | | $ | 1.07 | | | $ | 1.18 | | | $ | 1.91 | | | $ | 2.06 | | Net earnings per common share—diluted | | $ | 1.07 | | | $ | 1.17 | | | $ | 1.91 | | | $ | 2.04 | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding—basic | | | 26,578 | | | | 26,664 | | | | 26,546 | | | | 26,666 | | Weighted average common shares outstanding—diluted | | | 26,623 | | | | 26,864 | | | | 26,671 | | | | 26,862 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME (in thousands)
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | | | (in thousands, except per share data) | | | | | | | | | | | | | | | Net sales | | $ | 342,569 | | | $ | 326,657 | | | $ | 1,080,571 | | | $ | 996,622 | | Cost of sales | | | 265,881 | | | | 252,871 | | | | 838,719 | | | | 773,239 | | Gross profit | | | 76,688 | | | | 73,786 | | | | 241,852 | | | | 223,383 | | | | | | | | | | | | | | | | | | | Selling, general, and administrative expenses | | | 57,134 | | | | 50,160 | | | | 168,138 | | | | 149,821 | | Depreciation and amortization | | | 2,894 | | | | 1,910 | | | | 7,086 | | | | 5,408 | | Interest and financing costs | | | 270 | | | | 409 | | | | 903 | | | | 1,158 | | Operating expenses | | | 60,298 | | | | 52,479 | | | | 176,127 | | | | 156,387 | | | | | | | | | | | | | | | | | | | Operating income | | | 16,390 | | | | 21,307 | | | | 65,725 | | | | 66,996 | | | | | | | | | | | | | | | | | | | Other income (expense) | | | (131 | ) | | | - | | | | (1 | ) | | | 380 | | | | | | | | | | | | | | | | | | | Earnings before tax | | | 16,259 | | | | 21,307 | | | | 65,724 | | | | 67,376 | | | | | | | | | | | | | | | | | | | Provision for income taxes | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | | | | | | | | | | | | | | | | | | | Net earnings | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | | | | | | | | | | | | | | | | | | | Net earnings per common share—basic | | $ | 1.12 | | | $ | 0.92 | | | $ | 3.34 | | | $ | 2.88 | | Net earnings per common share—diluted | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding—basic | | | 13,851 | | | | 13,791 | | | | 13,845 | | | | 13,891 | | Weighted average common shares outstanding—diluted | | | 13,990 | | | | 13,920 | | | | 14,022 | | | | 14,026 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | | | | | | | | | | | | | NET EARNINGS | | $ | 28,469 | | | $ | 31,413 | | | $ | 50,808 | | | $ | 54,931 | | | | | | | | | | | | | | | | | | | OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | (1,071 | ) | | | (506 | ) | | | (2,410 | ) | | | (440 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income (loss)
| | | (1,071 | ) | | | (506 | ) | | | (2,410 | ) | | | (440 | ) | | | | | | | | | | | | | | | | | | TOTAL COMPREHENSIVE INCOME | | $ | 27,398 | | | $ | 30,907 | | | $ | 48,398 | | | $ | 54,491 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | (amounts in thousands) | | | | | | | | | | | | | | | NET EARNINGS | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | | | | | | | | | | | | | | | | | | | OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | 75 | | | | (145 | ) | | | 778 | | | | (240 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) | | | 75 | | | | (145 | ) | | | 778 | | | | (240 | ) | | | | | | | | | | | | | | | | | | TOTAL COMPREHENSIVE INCOME | | $ | 15,656 | | | $ | 12,475 | | | $ | 47,003 | | | $ | 39,826 | |
(in thousands)
See Notes to Unaudited Condensed Consolidated Financial Statements.
| | Six Months Ended September 30, | | | | 2022 | | | 2021 | | Cash flows from operating activities: | | | | | | | Net earnings | | $ | 50,808 | | | $ | 54,931 | | | | | | | | | | | Adjustments to reconcile net earnings to net cash used in operating activities: | | | | | | | | | Depreciation and amortization | | | 9,539 | | | | 12,044 | | Provision for credit losses | | | 1,739 | | | | 98 | | Share-based compensation expense | | | 3,731 | | | | 3,575 | | Deferred taxes | | | - | | | | (1 | ) | Payments from lessees directly to lenders—operating leases | | | - | | | | (32 | ) | Gain on disposal of property, equipment, and operaing lease equipment | | | (3,052 | ) | | | (525 | ) | Changes in: | | | | | | | | | Accounts receivable | | | (93,103 | ) | | | (85,463 | ) | Inventories-net | | | (122,182 | ) | | | (64,661 | ) | Financing receivables—net | | | (23,164 | ) | | | (18,019 | ) | Deferred costs and other assets | | | (24,711 | ) | | | (6,115 | ) | Accounts payable-trade | | | 49,626 | | | | (43,375 | ) | Salaries and commissions payable, deferred revenue, and other liabilities | | | 31,098 | | | | 12,539 | | Net cash used in operating activities | | | (119,671 | ) | | | (135,004 | ) | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Proceeds from sale of property, equipment, and operating lease equipment | | | 3,114 | | | | 2,553 | | Purchases of property, equipment and operating lease equipment | | | (2,410 | ) | | | (16,243 | ) | Cash used in acquisitions, net of cash acquired | | | (12,998 | ) | | | - | | Net cash used in investing activities | | | (12,294 | ) | | | (13,690 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Borrowings of non-recourse and recourse notes payable | | | 142,271 | | | | 64,815 | | Repayments of non-recourse and recourse notes payable | | | (54,597 | ) | | | (29,386 | ) | Repurchase of common stock | | | (7,224 | ) | | | (6,874 | ) | Net borrowings (repayments) on floor plan facility | | | (9,108 | ) | | | 47,227 | | Net cash provided by financing activities | | | 71,342 | | | | 75,782 | | | | | | | | | | | Effect of exchange rate changes on cash | | | 4,776 | | | | 300 | | | | | | | | | | | Net decrease in cash and cash equivalents | | | (55,847 | ) | | | (72,612 | ) | | | | | | | | | | Cash and cash equivalents, beginning of period | | | 155,378 | | | | 129,562 | | | | | | | | | | | Cash and cash equivalents, end of period | | $ | 99,531 | | | $ | 56,950 | |
ePlus inc. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | | (in thousands) | | Cash Flows From Operating Activities: | | | | | | | Net earnings | | $ | 46,225 | | | $ | 40,066 | | | | | | | | | | | Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: | | | | | | | | | Depreciation and amortization | | | 11,324 | | | | 8,758 | | Reserve for credit losses, inventory obsolescence and sales returns | | | 286 | | | | 926 | | Share-based compensation expense | | | 4,856 | | | | 4,520 | | Deferred taxes | | | (3,058 | ) | | | - | | Payments from lessees directly to lenders—operating leases | | | (1,325 | ) | | | (1,831 | ) | Gain on disposal of property, equipment and operating lease equipment | | | (7,555 | ) | | | (3,742 | ) | Gain on sale of financing receivables | | | (4,625 | ) | | | (3,968 | ) | Other | | | 1 | | | | 316 | | Changes in: | | | | | | | | | Accounts receivable—trade | | | (8,295 | ) | | | (57,732 | ) | Accounts receivable—other | | | (1,976 | ) | | | (4,232 | ) | Inventories | | | 43,332 | | | | (77,422 | ) | Financing receivables—net | | | (13,045 | ) | | | 17,797 | | Deferred costs, other intangible assets and other assets | | | (26,188 | ) | | | 1,838 | | Accounts payable | | | 18,406 | | | | 53,208 | | Salaries and commissions payable, deferred revenue and other liabilities | | | (9,539 | ) | | | 51,200 | | Net cash provided by operating activities | | $ | 48,824 | | | $ | 29,702 | | | | | | | | | | | Cash Flows From Investing Activities: | | | | | | | | | Proceeds from sale of property, equipment and operating lease equipment | | | 9,967 | | | | 6,380 | | Purchases of property, equipment, software, and operating lease equipment | | | (6,298 | ) | | | (7,300 | ) | Purchases of assets to be leased or financed | | | (5,716 | ) | | | (5,897 | ) | Issuance of financing receivables | | | (138,160 | ) | | | (114,671 | ) | Repayments of financing receivables | | | 59,029 | | | | 44,091 | | Proceeds from sale of financing receivables | | | 64,103 | | | | 39,857 | | Cash used in acquisitions, net of cash acquired | | | (37,718 | ) | | | (9,500 | ) | Net cash used in investing activities | | $ | (54,793 | ) | | $ | (47,040 | ) |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (in thousands)
| | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | | (in thousands) | | Cash Flows From Financing Activities: | | | | | | | Borrowings of non-recourse and recourse notes payable | | $ | 39,365 | | | $ | 34,020 | | Repayments of non-recourse and recourse notes payable | | | (27,269 | ) | | | (5,412 | ) | Repurchase of common stock | | | (13,399 | ) | | | (30,493 | ) | Payment of contingent consideration | | | - | | | | (718 | ) | Repayments of financing of acquisitions | | | (1,604 | ) | | | - | | Net borrowings (repayments) on floor plan facility | | | (24,851 | ) | | | (5,602 | ) | 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 and Cash Equivalents, Beginning of Period | | | 109,760 | | | | 94,766 | | | | | | | | | | | Cash and Cash Equivalents, End of Period | | $ | 76,105 | | | $ | 69,677 | | | | | | | | | | | Supplemental Disclosures of Cash Flow Information: | | | | | | | | | Cash paid for interest | | $ | 421 | | | $ | 38 | | Cash paid for income taxes | | $ | 29,987 | | | $ | 23,381 | | | | | | | | | | | Schedule of Non-Cash Investing and Financing Activities: | | | | | | | | | Proceeds from sale of property, equipment, and operating lease equipment | | $ | 3,463 | | | $ | 429 | | Purchases of property, equipment, software, and operating lease equipment | | $ | (751 | ) | | $ | (2,442 | ) | Purchase of assets to be leased or financed | | $ | (7,225 | ) | | $ | (12,700 | ) | Issuance of financing receivables | | $ | (74,907 | ) | | $ | (110,120 | ) | Repayment of financing receivables | | $ | 9,572 | | | $ | 16,454 | | Proceeds from sale of financing receivables | | $ | 83,954 | | | $ | 104,430 | | Financing of acquisitions | | $ | (12,050 | ) | | $ | - | | Borrowing of non-recourse and recourse notes payable | | $ | 8,904 | | | $ | 33,651 | | Repayments of non-recourse and recourse notes payable | | $ | (14,465 | ) | | $ | (20,438 | ) | Vesting of share-based compensation | | $ | 12,010 | | | $ | 7,982 | | Repurchase of common stock included in accounts payable | | $ | (766 | ) | | $ | - | |
| | Six Months Ended September 30, | | | | 2022 | | | 2021 | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid for interest | | $ | 1,111 | | | $ | 683 | | Cash paid for income taxes | | $ | 28,878 | | | $ | 24,511 | | Cash paid for amounts included in the measurement of lease liabilities | | $ | 2,300 | | | $ | 2,280 | | | | | | | | | | | Schedule of non-cash investing and financing activities: | | | | | | | | | Proceeds from sale of property, equipment, and leased equipment | | $ | 35 | | | $ | 100 | | Purchases of property, equipment, and operating lease equipment | | $ | (720 | ) | | $ | (2,386 | ) | Consideration for acquisitions | | $
| (290 | ) | | $
| - | | Borrowing of non-recourse and recourse notes payable | | $ | 15,532 | | | $ | 41,195 | | Repayments of non-recourse and recourse notes payable | | $ | - | | | $ | (32 | ) | Vesting of share-based compensation | | $ | 9,811 | | | $ | 8,398 | | New operating lease assets obtained in exchange for lease obligations | | $ | 2,353 | | | $ | 1,070 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands)
| | Common Stock | | | | | | Treasury | | | Retained | | | Accumulated Other Comprehensive | | | | | | | Shares | | | Par Value | | | Capital | | | Stock | | | Earnings | | | Income | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Balance, April 1, 2017 | | | 14,161 | | | $ | 142 | | | $ | 123,536 | | | $ | - | | | $ | 222,823 | | | $ | (583 | ) | | $ | 345,918 | | Issuance of restricted stock awards | | | 68 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | - | | | | 4,856 | | | | - | | | | - | | | | - | | | | 4,856 | | Repurchase of common stock | | | (183 | ) | | | - | | | | - | | | | (14,165 | ) | | | - | | | | - | | | | (14,165 | ) | Net earnings | | | - | | | | - | | | | - | | | | - | | | | 46,225 | | | | - | | | | 46,225 | | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | 778 | | | | 778 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2017 | | | 14,046 | | | $ | 142 | | | $ | 128,392 | | | $ | (14,165 | ) | | $ | 269,048 | | | $ | 195 | | | $ | 383,612 | |
| | Six Months Ended September 30, 2022 | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | Additional | | | | | | | | | Other | | | | | | | Common Stock | | | Paid-In | | | Treasury | | | Retained | | | Comprehensive | | | | | | | Shares | | | Par Value | | | Capital | | | Stock | | | Earnings | | | Income | | | Total | | Balance, March 31, 2022 | | | 26,886 | | | $ | 270 | | | $ | 159,480 | | | $ | (6,734 | ) | | $ | 507,846 | | | $ | (124 | ) | | $ | 660,738 | | Issuance of restricted stock awards | | | 135 | | | | 1 | | | | - | | | | - | | | | - | | | | - | | | | 1 | | Share-based compensation | | | - | | | | - | | | | 1,773 | | | | - | | | | - | | | | - | | | | 1,773 | | Repurchase of common stock | | | (128 | ) | | | - | | | | - | | | | (7,224 | ) | | | - | | | | - | | | | (7,224 | ) | Net earnings | | | - | | | | - | | | | - | | | | - | | | | 22,339 | | | | - | | | | 22,339 | | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,339 | ) | | | (1,339 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, June 30, 2022 | | | 26,893 | | | $ | 271 | | | $ | 161,253 | | | $ | (13,958 | ) | | $ | 530,185 | | | $ | (1,463 | ) | | $ | 676,288 | | Issuance of restricted stock awards | | | 13 | | | | 1 | | | | - | | | | - | | | | - | | | | - | | | | 1 | | Share-based compensation | | | - | | | | - | | | | 1,958 | | | | - | | | | - | | | | - | | | | 1,958 | | Repurchase of common stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Net earnings | | | - | | | | - | | | | - | | | | - | | | | 28,469 | | | | - | | | | 28,469 | | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,071 | ) | | | (1,071 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2022 | | | 26,906 | | | $ | 272 | | | $ | 163,211 | | | $ | (13,958 | ) | | $ | 558,654 | | | $ | (2,534 | ) | | $ | 705,645 | |
| | Six Months Ended September 30, 2021 | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | Additional | | | | | | | | | Other | | | | | | | Common Stock | | | Paid-In | | | Treasury | | | Retained | | | Comprehensive | | | | | | | Shares | | | Par Value | | | Capital | | | Stock | | | Earnings | | | Income | | | Total | | Balance, March 31, 2021 | | | 27,006 | | | $ | 145 | | | $ | 152,366 | | | $ | (75,372 | ) | | $ | 484,616 | | | $ | 655 | | | $ | 562,410 | | Issuance of restricted stock awards | | | 156 | | | | 1 | | | | - | | | | - | | | | - | | | | - | | | | 1 | | Share-based compensation | | | - | | | | - | | | | 1,735 | | | | - | | | | - | | | | - | | | | 1,735 | | Repurchase of common stock | | | (90 | ) | | | - | | | | - | | | | (4,111 | ) | | | - | | | | - | | | | (4,111 | ) | Net earnings | | | - | | | | - | | | | - | | | | - | | | | 23,518 | | | | - | | | | 23,518 | | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | 66 | | | | 66 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, June 30, 2021 | | | 27,072 | | | $ | 146 | | | $ | 154,101 | | | $ | (79,483 | ) | | $ | 508,134 | | | $ | 721 | | | $ | 583,619 | | Issuance of restricted stock awards | | | 12 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | - | | | | 1,840 | | | | - | | | | - | | | | - | | | | 1,840 | | Repurchase of common stock | | | (64 | ) | | | - | | | | - | | | | (2,763 | ) | | | - | | | | - | | | | (2,763 | ) | Net earnings | | | - | | | | - | | | | - | | | | - | | | | 31,413 | | | | - | | | | 31,413 | | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | (506 | ) | | | (506 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2021 | | | 27,020 | | | $ | 146 | | | $ | 155,941 | | | $ | (82,246 | ) | | $ | 539,547 | | | $ | 215 | | | $ | 613,603 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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,"“we,” “our,” “us,” “ourselves,” or "“ePlus." ” ePlus inc. is a holding company that through its subsidiaries provides information technology solutions whichthat 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 marketselling to medium and large enterprises in North America, and the United Kingdom.Kingdom (“UK”), and other European countries.
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.
INTERIM FINANCIAL STATEMENTS — The unaudited condensed consolidated financial statements for the three and ninesix months ended December 31, 2017September 30, 2022, and 20162021, were prepared by us without audit, and include all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income, and cash flows for such periods. Operating results for the three and ninesix months ended December 31, 2017September 30, 2022, and 20162021, are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year endingended March 31, 20182023, or any other future period. These unaudited condensed consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States (“U.S.US GAAP”) for annual financial statements. Our audited consolidated financial statements are contained in our annual report on Form 10-K for the year ended March 31, 20172022 (“20172022 Annual Report”), which should be read in conjunction with these interim condensed consolidated financial statements.
USE OF ESTIMATES — The preparation of financial statements in conformity with U.S.US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities atas of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, vendor consideration, lease classification, goodwill and intangible assets, reservesallowance for credit losses, inventory obsolescence, and the recognition and measurement of income tax assets and other provisions and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
The notes to the consolidated financial statements contained in the 2017 Annual Report include additional discussion of the significant accounting policies and estimates used in the preparationCONCENTRATIONS OF RISK — A substantial portion of our consolidated financial statements. There have been no material changes tosales are products from Cisco Systems, which were 39% and 40% of our significant accounting policies and estimates duringtechnology segment’s net sales for the ninethree months ended December 31, 2017.September 30, 2022, and 2021, respectively, and 37% and 41% of our technology segment’s net sales for the six months ended September 30, 2022, and 2021, respectively.
STOCK SPLIT — On March 31, 2017,December 13, 2021, 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.
SIGNIFICANT ACCOUNTING POLICIES — The number of authorized sharessignificant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected on the consolidated balance sheets was not affected by the stock split.
CONCENTRATIONS OF RISK — A substantial portion ofin our sales of product and services are from sales of Cisco Systems, Hewlett Packard Enterprise (“HPE”) and HP, Inc. (collectively “Hewlett Packard companies”), and NetApp products, which represented approximately 39%, 5% and 7%, and 45%, 7%, and 5%, respectively,Consolidated Financial Statements for the three and nine monthsyear ended DecemberMarch 31, 2017. Sales of Cisco Systems, Hewlett Packard companies, and NetApp represented approximately 45%, 6% and 6%, and 49%, 6% and 5%, respectively,2022, except for the three and nine months ended December 31, 2016. Any changes provided 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.Note 2, “Recent Accounting Pronouncements”.
2. | RECENT ACCOUNTING PRONOUNCEMENTS |
RECENTLY ISSUEDADOPTED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED — In May 2014,October 2021, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2021-08, Business combinations (Topic 805): Accounting for contract assets and contract liabilities from contracts with customers (“ASU 2014-09, Revenue from 2021-08”) that requires companies to apply Accounting Standards Codification Topic 606, Contracts with Customers (Topic 606), which, alongcustomers (“ASC Topic 606”) to recognize and measure contract assets and contract liabilities from contracts with amendments issuedcustomers acquired in 2015a business combination. We early adopted this accounting standard update beginning in the second quarter of our fiscal year 2023 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).
Wedid not have established a cross-functional implementation team and utilized a bottom-up approach to analyze thematerial 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:
· | We will adopt the guidance in our quarter ending June 30, 2018. We currently prefer to adopt the standard using the full retrospective method; however, our ability to do so is dependent on many factors, including the completion of our analysis of information necessary to recast prior period financial statements. Based on these and other factors, we may decide to use the modified retrospective method. |
· | Substantially all of our revenue within our technology segment is contractual and is within the scope of ASU No. 2014-09, as amended. The majority of our revenues within our financing segment are scoped out of this update. |
· | The majority of our revenues within our technology segment are derived from sales of third-party products, third-party software, third-party services, such as maintenance and software assurance, and sales of ePlus professional and managed services.
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| o | We recognize revenue on sales of third party product and third-party software on a gross basis upon delivery and we are still assessing whether we are acting as a principal or an agent in these transactions under the update. |
| o | We recognize sales of third party maintenance and software assurance on a net basis at the date of sale and sales of ePlus professional and managed services on a gross basis as the services are performed. We do not anticipate a material impact to our revenue recognition for these transactions under the update.
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· | We expect that our disclosures in our notes to our consolidated financial statements related to revenue recognition will be significantly expanded under the new standard. |
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.
In November 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current U.S. GAAP on this topic.Consolidated Financial Statements. The core principle of this update is that a lessee should recognize the assets and liabilities that arise from leases. This update requires adoption under the modified retrospective approach and becomes effective for us in our quarter ending June 30, 2019. Early adoption is permitted. We are currently evaluating theongoing impact of this updatestandard will be fact dependent on our financial statements.the transactions within its scope.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update requires adoption under a modified retrospective approach and becomes effective for us in our quarter ending June 30, 2020. Early adoption is permitted beginning in our quarter ending June 30, 2019. We are currently evaluating the impact of this update on our financial statements.
CONTRACT BALANCES
Accounts receivable – trade consists entirely of amounts due from contracts with customers. In addition, we had $62.3 million and $47.5 million of receivables from contracts with customers included within financing receivables as of September 30, 2022, and March 31, 2022, respectively. The following table provides the balance of contract liabilities from contracts with customers (in thousands):
| | September 30, 2022 | | | March 31, 2022 | | Current (included in deferred revenue) | | $ | 107,802 | | | $ | 85,826 | | Non-current (included in other liabilities) | | $ | 40,119 | | | $ | 30,086 | |
Revenue recognized from the beginning contract liability balance was $17.5 million and $42.4 million for the three and six months ended September 30, 2022, respectively, and $14.6 million and $36.1 million for the three and six months ended September 30, 2021, respectively.
PERFORMANCE OBLIGATIONS
The following table includes revenue expected to be recognized in the future related to performance obligations, primarily non-cancelable contracts for ePlus managed services, that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):
Remainder of the year ending March 31, 2023 | | $ | 33,299 | | Year ending March 31, 2024 | | | 34,681 | | Year ending March 31, 2025 | | | 17,839 | | Year ending March 31, 2026 | | | 5,470 | | Year ending March 31, 2027 and thereafter | | | 2,354 | | Total remaining performance obligations | | $ | 93,643 | |
The table does not include the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, and (ii) contracts where we recognize revenue at the amount that we have the right to invoice for services performed.
4. | FINANCING RECEIVABLES AND OPERATING LEASES |
Our financing receivables and operating leases consist primarily of assets that we finance for our customers, which we manage as a portfolioleases of investments. Equipment financed for our customers is accounted for as investments in directIT and communication equipment and notes receivable from financing sales-type or operating leases in accordance with Accounting Standards Codification (“ASC”) Topic 840, Leases. We also finance third-partycustomer purchases of third-party software, maintenance, and servicesservices. Our leases often include elections 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 termslessee to purchase the underlying asset at the end of the leased products.lease term. Often, our leases provide the lessee a bargain purchase option.
The following table provides the profit recognized for sales-type leases at their commencement date, including modifications that are recognized on a net basis, for the three and six months ended September 30, 2022, and 2021 (in thousands):
| | Three months ended September 30, | | | Six months ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Net sales | | $ | 4,506 | | | $ | 5,962 | | | $ | 9,489 | | | $ | 9,779 | | Cost of sales | | | 3,769 | | | | 4,926 | | | | 7,836 | | | | 8,291 | | Gross profit | | $ | 737 | | | $ | 1,036 | | | $ | 1,653 | | | $ | 1,488 | |
The following table provides interest income in aggregate on our sales-type leases and lease income on our operating leases for the three and six months ended September 30, 2022, and 2021 (in thousands):
| | Three months ended September 30, | | | Six months ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Interest income on sales-type leases | | $ | 819 | | | $ | 1,000 | | | $ | 1,680 | | | $ | 2,290 | | Lease income on operating leases | | $ | 4,659 | | | $ | 6,634 | | | $ | 9,241 | | | $ | 11,844 | |
FINANCING RECEIVABLES—NET
OurThe following tables provide a disaggregation of our financing receivables – net consist of the following (in thousands) thousands):
December 31, 2017 | | Notes Receivables | | | Lease-Related Receivables | | | Total Financing Receivables | | | Minimum payments | | $ | 59,444 | | | $ | 73,022 | | | $ | 132,466 | | | Estimated unguaranteed residual value (1) | | | - | | | | 13,358 | | | | 13,358 | | | Initial direct costs, net of amortization (2) | | | 369 | | | | 321 | | | | 690 | | | | | | Notes | | | Lease | | | Financing | | September 30, 2022 | | | Receivable | | | Receivables | | | Receivables | | Gross receivables | | | $ | 89,717 | | | $ | 50,714 | | | $ | 140,431 | | Unguaranteed residual value (1) | | | | - | | | | 8,385 | | | | 8,385 | | Unearned income | | | - | | | | (6,034 | ) | | | (6,034 | ) | | | (5,795 | ) | | | (5,104 | ) | | | (10,899 | ) | Reserve for credit losses (3) | | | (451 | ) | | | (621 | ) | | | (1,072 | ) | | Allowance for credit losses (2) | | | | (976 | ) | | | (1,207 | ) | | | (2,183 | ) | Total, net | | $ | 59,362 | | | $ | 80,046 | | | $ | 139,408 | | | $ | 82,946 | | | $ | 52,788 | | | $ | 135,734 | | Reported as: | | | | | | | | | | | | | | | | | | | | | | | | | Current | | $ | 33,109 | | | $ | 41,489 | | | $ | 74,598 | | | $ | 45,443 | | | $ | 19,567 | | | $ | 65,010 | | Long-term | | | 26,253 | | | | 38,557 | | | | 64,810 | | | | 37,503 | | | | 33,221 | | | | 70,724 | | Total, net | | $ | 59,362 | | | $ | 80,046 | | | $ | 139,408 | | | $ | 82,946 | | | $ | 52,788 | | | $ | 135,734 | |
| (1) | Includes estimated unguaranteed residual values of $7,753$4,830 thousand for direct financing leases, which have been sold and accounted for as sales.that we retained after selling the related lease receivable. |
| (2) | Initial direct costs are shown net of amortization of $334 thousand. |
| (3) | For details on reserve for credit losses, referRefer to Note 5, “Reserves7, “Allowance for Credit Losses.”Losses” for details. |
| | Notes | | | Lease | | | Financing | | March 31, 2022 | | Receivable | | | Receivables | | | Receivables | | Gross receivables | | $ | 80,517 | | | $ | 38,788 | | | $ | 119,305 | | Unguaranteed residual value (1) | | | - | | | | 9,141 | | | | 9,141 | | Unearned income | | | (2,728 | ) | | | (3,604 | ) | | | (6,332 | ) | Allowance for credit losses (2) | | | (708 | ) | | | (681 | ) | | | (1,389 | ) | Total, net | | $ | 77,081 | | | $ | 43,644 | | | $ | 120,725 | | Reported as: | | | | | | | | | | | | | Current | | $ | 45,415 | | | $ | 16,077 | | | $ | 61,492 | | Long-term | | | 31,666 | | | | 27,567 | | | | 59,233 | | Total, net | | $ | 77,081 | | | $ | 43,644 | | | $ | 120,725 | |
March 31, 2017 | | Notes Receivables | | | Lease-Related Receivables | | | Total Financing Receivables | | Minimum payments | | $ | 48,524 | | | $ | 57,872 | | | $ | 106,396 | | Estimated unguaranteed residual value (1) | | | - | | | | 18,273 | | | | 18,273 | | Initial direct costs, net of amortization (2) | | | 279 | | | | 341 | | | | 620 | | Unearned income | | | - | | | | (5,913 | ) | | | (5,913 | ) | Reserve for credit losses (3) | | | (3,434 | ) | | | (679 | ) | | | (4,113 | ) | Total, net | | $ | 45,369 | | | $ | 69,894 | | | $ | 115,263 | | Reported as: | | | | | | | | | | | | | Current | | $ | 23,780 | | | $ | 27,876 | | | $ | 51,656 | | Long-term | | | 21,589 | | | | 42,018 | | | | 63,607 | | Total, net | | $ | 45,369 | | | $ | 69,894 | | | $ | 115,263 | |
| (1) | Includes estimated unguaranteed residual values of $12,677$6,424 thousand for direct financing leases which have been sold and accounted for as sales. that we retained after selling the related lease receivable. |
| (2) | Initial direct costs are shown net of amortization of $510 thousand. |
| (3)
| For details on reserve for credit losses, referRefer to Note 5, “Reserves7, “Allowance for Credit Losses.”Losses” for details. |
OPERATING LEASES—NET
Operating leases—net represents leases that do not qualify as direct financingsales-type leases. The components of the operating leases—net are as follows (in thousands):
| | | September 30, | | | March 31, | | | | December 31, 2017 | | | March 31, 2017 | | | 2022 | | | 2022 | | Cost of equipment under operating leases | | $ | 16,804 | | | $ | 16,725 | | | $ | 14,121 | | | $ | 13,044 | | Accumulated depreciation | | | (9,039 | ) | | | (8,449 | ) | | | (9,752 | ) | | | (7,985 | ) | Investment in operating lease equipment—net (1) | | $ | 7,765 | | | $ | 8,276 | | | $ | 4,369 | | | $ | 5,059 | |
| (1) | These totalsAmounts include estimated unguaranteed residual values of $2,077 thousand$1.8 million and $1,117 thousand$1.7 million as of December 31, 2017September 30, 2022, and March 31, 2017,2022, respectively. |
TRANSFERS OF FINANCIAL ASSETS
We enter into arrangements to transfer the contractual payments due under financing receivables and operating lease agreements, which are accounted for as sales or secured borrowings in accordance with ASC Topic 860, Transfers and Servicing. borrowings.
For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. As of December 31, 2017September 30, 2022, and March 31, 2017,2022, we had financing receivables of $37.2$20.2 million and $33.1$21.1 million, respectively, and operating leases of $5.9$1.7 million and $6.6$2.0 million, respectively, which were collateral for non-recourse notes payable. See Note 7, "Notes Payable and 8, ‘‘Credit Facility ." and Notes Payable.’’
For transfers accounted for as sales,a sale, we derecognize the carrying value of the asset transferred plus any liability 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 December 31, 2017September 30, 2022, and 2016,2021, we recognized net gains of $1.2$8.1 million and $0.9$10.1 million, respectively, and total proceeds from these sales were $32.8$376.4 million and $55.8$615.0 million, respectively. DuringFor the nine monthsyear to date periods ended December 31, 2017September 30, 2022, and 2016,2021, we recognized net gains of $4.6$9.9 million and $4.1$13.3 million, respectively, and total proceeds from these sales were $166.9$428.9 million and $185.4$690.3 million, respectively.
For certain assignments of financial assets,When we retain a servicing obligation. For assignmentsobligations in transfers accounted for as sales, we allocate a portion of the proceeds to deferred revenues,revenue, which is recognized as we perform the services. As of both December 31, 2017September 30, 2022, and March 31, 2017,2022, we had deferred revenue of $0.5 million, for servicing. servicing obligations.
In a limited number of suchtransfers accounted for as sales, we indemnified the assignee in the event thatif the lessee electedelects to early terminate the lease. As of DecemberSeptember 30, 2022, and March 31, 2017, our maximum2022, the total potential future payments related to such guaranteesthat could result from these indemnities is $0.6 million. We believe the possibility of making any payments to be remote.immaterial.
We lease office and warehouse space for periods generally between one to five years and, in some instances, for longer periods up to ten years. We recognize our right-of-use assets as part of property, equipment, and other assets. We recognize the current and long-term portions of our lease liability as part of other current liabilities and other liabilities, respectively. We recognized rent expense as part of selling, general and administrative expenses. We recognized rent expense of $1.2 million as part of selling, general and administrative expenses for the three months ended September 30, 2022, and $1.3 million for the three months ending September 30, 2021, and $2.5 million and $2.6 million for the six months ended September 30, 2022, and 2021, respectively.
6. | GOODWILL AND OTHER INTANGIBLE ASSETS |
GOODWILL
The following table summarizes the changes in the carrying amount of goodwill for the ninesix months ended December 31, 2017September 30, 2022 (in thousands):
| | Six months ended September 30, 2022 | | | | Goodwill | | | Accumulated Impairment Loss | | | Net Carrying Amount | | Beginning balance | | $ | 135,216 | | | $ | (8,673 | ) | | $ | 126,543 | | Acquisitions
| | | 9,694 | | | | - | | | | 9,694 | | Foreign currency translations | | | (330 | ) | | | - | | | | (330 | ) | Ending balance | | $ | 144,580 | | | $ | (8,673 | ) | | $ | 135,907 | |
Goodwill represents the premium paid over the fair value of the net tangible and 2016, (in thousands):
| | Nine Months Ended December 31, 2017 | | | Nine Months Ended December 31, 2016 | | | | Goodwill | | | Accumulated Amortization / Impairment Loss | | | Net Carrying Amount | | | Goodwill | | | Accumulated Amortization / Impairment Loss | | | Net Carrying Amount | | | | | | | | | | | | | | | | | | | | | Balance as of March 31 | | $ | 57,070 | | | $ | (8,673 | ) | | $ | 48,397 | | | $ | 50,824 | | | $ | (8,673 | ) | | $ | 42,151 | | Acquisitions | | | 27,996 | | | | - | | | | 27,996 | | | | 7,636 | | | | - | | | | 7,636 | | Foreign currency translations | | | 153 | | | | - | | | | 153 | | | | (315 | ) | | | - | | | | (315 | ) | Balance as of December 31 | | $ | 85,219 | | | $ | (8,673 | ) | | $ | 76,546 | | | $ | 58,145 | | | $ | (8,673 | ) | | $ | 49,472 | |
All of our goodwillintangible assets that are individually identified and separately recognized in business combinations. Our entire balance as of December 31, 2017 and March 31, 2017 was assignedSeptember 30, 2022, relates to our technology segment, which iswe also a singledetermined to be one reporting unit. See unit. The carrying value of goodwill was $135.9 and $126.5 million as of September 30, 2022, and March 31, 2022, respectively. Our goodwill balance increased by $9.4 million over the six months ended September 30, 2022, due to $9.7 million in goodwill additions from our acquisition of Future Com, Ltd., offset by foreign currency translation of $0.3 million. Please refer toNote 15 "Business Combinations", “Business Combinations” for additional information regardingdetails of our acquisitions.acquisition.
We performedtest goodwill for impairment on an annual basis, as of the first day of our third fiscal quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value. In our prior year annual test for goodwill impairment for fiscal year 2018 as of October 1, 2017. We2021, we performed a qualitative assessment of goodwill and concluded that, more likely than not, the fair value of our technology reporting unit more likely than not, exceeded its respective carrying value as of October 1, 2017.
We performed our annual test for goodwill impairment for fiscal year 2017 as of October 1, 2016. We electedcontinued to bypass the qualitative assessment of goodwill and estimate the fair value of our reporting units. The fair value of our technology reporting unit substantially exceededexceed its carrying value as of October 1, 2016. Our conclusions would not be impacted by a ten percent change in our estimate of the fair value of the reporting unit. .
OTHER INTANGIBLE ASSETS
OurOur other intangible assets consist of the following at December 31, 2017on September 30, 2022, and March 31, 20172022 (in thousands):
| | December 31, 2017 | | | March 31, 2017 | | | September 30, 2022 | | | March 31, 2022 | | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | | | | | | | | | | | | | | | | | | | | Customer relationships & other intangibles | | $ | 41,777 | | | $ | (16,792 | ) | | $ | 24,985 | | | $ | 23,373 | | | $ | (12,553 | ) | | $ | 10,820 | | | Purchased intangibles | | | $ | 85,218 | | | $ | (56,425 | ) | | $ | 28,793 | | | $ | 77,224 | | | $ | (52,087 | ) | | $ | 25,137 | | Capitalized software development | | | 4,908 | | | | (2,479 | ) | | | 2,429 | | | | 3,649 | | | | (2,310 | ) | | | 1,339 | | | | 10,516 | | | | (8,973 | ) | | | 1,543 | | | | 10,517 | | | | (8,404 | ) | | | 2,113 | | Total | | $ | 46,685 | | | $ | (19,271 | ) | | $ | 27,414 | | | $ | 27,022 | | | $ | (14,863 | ) | | $ | 12,159 | | | $ | 95,734 | | | $ | (65,398 | ) | | $ | 30,336 | | | $ | 87,741 | | | $ | (60,491 | ) | | $ | 27,250 | |
CustomerPurchased intangibles, consisting mainly of customer relationships and capitalized intangibles, are generally amortized between 5 to 10 years.Capitalizedsoftware development costs areis generally amortized over an estimated useful life, which is generally between 3 to 8 years. Trade names and trademarks are amortized over an estimated useful life of 105 years.
Customer relationships and other intangibles increased for the nine months ended December 31, 2017 due to business acquisitions by $18.4 million, of which $2.4 million is internally developed processes, $15.7 million is customer relationships, $0.2 million is due to foreign exchange translation, and $0.1 million in capitalized software development costs. Total amortization expense for other intangible assetspurchased intangibles was $1.9 million and $1.1$2.5 million for the three months ended September 30, 2022, and $4.2 million and $3.4$2.7 million for the ninethree months ended December 31, 2017September 30, 2021, and 2016,$4.7 million and $5.4 million for the six months ended September 30, 2022, and 2021, respectively.
See Note 15 “Business Combinations” for additional information regarding acquired intangibles.
5.7. | RESERVESALLOWANCE FOR CREDIT LOSSES |
ActivityThe following table provides the activity in our reservesallowance for credit losses for the ninesix months ended December 31, 2017September 30, 2022, and 2016 were as follows2021 (in thousands):
| | Accounts Receivable | | | Notes Receivable | | | Lease-Related Receivables | | | Total | | | Accounts Receivable | | | Notes Receivable | | | Lease Receivables | | | Total | | Balance April 1, 2017 | | $ | 1,279 | | | $ | 3,434 | | | $ | 679 | | | $ | 5,392 | | | Balance April 1, 2022 | | | $ | 2,411 | | | $ | 708 | | | $ | 681 | | | $ | 3,800 | | Provision for credit losses | | | 165 | | | | 37 | | | | 106 | | | | 308 | | | | 943 | | | | 269 | | | | 527 | | | | 1,739 | | Write-offs and other | | | - | | | | (3,020 | ) | | | (164 | ) | | | (3,184 | ) | | | (71 | ) | | | (1 | ) | | | (1 | ) | | | (73 | ) | Balance December 31, 2017 | | $ | 1,444 | | | $ | 451 | | | $ | 621 | | | $ | 2,516 | | | Balance September 30, 2022 | | | $ | 3,283 | | | $ | 976 | | | $ | 1,207 | | | $ | 5,466 | |
| | Accounts Receivable | | | Notes Receivable | | | Lease-Related Receivables | | | Total | | | Accounts Receivable | | | Notes Receivable | | | Lease Receivables | | | Total | | Balance April 1, 2016 | | $ | 1,127 | | | $ | 3,381 | | | $ | 685 | | | $ | 5,193 | | | Balance April 1, 2021 | | | $ | 2,064 | | | $ | 1,212 | | | $ | 1,171 | | | $ | 4,447 | | Provision for credit losses | | | 229 | | | | 139 | | | | 93 | | | | 461 | | | | 116 | | | | 479 | | | | (497 | ) | | | 98 | | Write-offs and other | | | (32 | ) | | | (12 | ) | | | - | | | | (44 | ) | | | (64 | ) | | | (4 | ) | | | (2 | ) | | | (70 | ) | Balance December 31, 2016 | | $ | 1,324 | | | $ | 3,508 | | | $ | 778 | | | $ | 5,610 | | | Balance September 30, 2021 | | | $ | 2,116 | | | $ | 1,687 | | | $ | 672 | | | $ | 4,475 | |
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):
| | December 31, 2017 | | | March 31, 2017 | | | | Notes Receivable | | | Lease- Related Receivables | | | Notes Receivable | | | Lease- Related Receivables | | Reserves for credit losses: | | | | | | | | | | | | | Ending balance: collectively evaluated for impairment | | $ | 389 | | | $ | 621 | | | $ | 348 | | | $ | 556 | | Ending balance: individually evaluated for impairment | | | 62 | | | | - | | | | 3,086 | | | | 123 | | Ending balance | | $ | 451 | | | $ | 621 | | | $ | 3,434 | | | $ | 679 | | | | | | | | | | | | | | | | | | | Minimum payments: | | | | | | | | | | | | | | | | | Ending balance: collectively evaluated for impairment | | $ | 59,382 | | | $ | 73,022 | | | $ | 45,438 | | | $ | 57,730 | | Ending balance: individually evaluated for impairment | | | 62 | | | | - | | | | 3,086 | | | | 142 | | Ending balance | | $ | 59,444 | | | $ | 73,022 | | | $ | 48,524 | | | $ | 57,872 | |
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 nine months ended December 31, 2017, after the bankruptcy case was substantially complete.
The age of the recorded minimum lease payments and net credit exposure associated withevaluate our investment in direct financing and sales-type leases that are past due disaggregated based on ourcustomers using an internally assigned credit quality rating (“CQR”) were as follows“CQR”. The CQR categories of our financing receivables are:
• | High CQR: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. Loss rates in this category are generally less than 1%. |
• | Average CQR: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. Loss rates in this category are generally in the range of 2% to 10%. |
• | Low CQR: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. The loss rates in this category in the normal course are generally in the range of 10% to 100%. |
The following table provides the amortized cost basis of our financing receivables by CQR and by credit origination year as of DecemberSeptember 30, 2022 (in thousands):
| | Amortized cost basis by origination year ending March 31, | | | | | | | | | | | | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Total | | | Non-recourse debt (2) | | | Net credit exposure | | Notes receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 37,200 | | | $ | 14,436 | | | $ | 18,494 | | | $ | 791 | | | $ | 452 | | | $ | - | | | $ | 71,373 | | | $ | (16,450 | ) | | $ | 54,923 | | Average CQR | | | 8,039 | | | | 2,655 | | | | 1,220 | | | | 508 | | | | 123 | | | | 4 | | | | 12,549 | | | | (493 | ) | | | 12,056 | | Low CQR | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Total | | $ | 45,239 | | | $ | 17,091 | | | $ | 19,714 | | | $ | 1,299 | | | $ | 575 | | | $ | 4 | | | $ | 83,922 | | | $ | (16,943 | ) | | $ | 66,979 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Lease receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 11,271 | | | $ | 5,513 | | | $ | 2,879 | | | $ | 2,754 | | | $ | 317 | | | $ | 32 | | | $ | 22,766 | | | $ | (1,965 | ) | | $ | 20,801 | | Average CQR | | | 16,625 | | | | 7,802 | | | | 1,584 | | | | 330 | | | | 33 | | | | 25 | | | | 26,399 | | | | (1,248 | ) | | | 25,151 | | Low CQR | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Total | | $ | 27,896 | | | $ | 13,315 | | | $ | 4,463 | | | $ | 3,084 | | | $ | 350 | | | $ | 57 | | | $ | 49,165 | | | $ | (3,213 | ) | | $ | 45,952 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total amortized cost (1) | | $ | 73,135 | | | $ | 30,406 | | | $ | 24,177 | | | $ | 4,383 | | | $ | 925 | | | $ | 61 | | | $ | 133,087 | | | $ | (20,156 | ) | | $ | 112,931 | |
(1) | Unguaranteed residual values of $4,830 thousand that we retained after selling the related lease receivable is excluded from amortized cost. |
(2) | Transfers consist of receivables that have been transferred to third-party financial institutions on a non-recourse basis. |
The following table provides the amortized cost basis of our financing receivables by CQR and by credit origination year as of March 31, 20172022 (in thousands):
| | Amortized cost basis by origination year ending March 31, | | | | | | | | | | |
| | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | Total | | | Transfers (2) | | | Net credit exposure | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notes receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 35,264 | | | $ | 28,005 | | | $ | 1,297 | | | $ | 345 | | | $ | 2 | | | $ | 4 | | | $ | 64,917 | | | $ | (30,274 | ) | | $
| 34,643 | | Average CQR | | | 8,922 | | | | 2,976 | | | | 758 | | | | 213 | | | | 3 | | | | - | | | | 12,872 | | | | (4,763 | ) | | | 8,109 | | Low CQR | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Total | | $ | 44,186 | | | $ | 30,981 | | | $ | 2,055 | | | $ | 558 | | | $ | 5 | | | $ | 4 | | | $ | 77,789 | | | $ | (35,037 | ) | | $
| 42,752 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Lease receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 14,549 | | | $ | 5,002 | | | $ | 2,499 | | | $ | 902 | | | $ | 50 | | | $ | 11 | | | $ | 23,013 | | | $ | (3,385 | ) | | $
| 19,628 | | Average CQR | | | 10,936 | | | | 3,092 | | | | 741 | | | | 47 | | | | 72 | | | | - | | | | 14,888 | | | | (347 | ) | | | 14,541 | | Low CQR | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Total | | $ | 25,485 | | | $ | 8,094 | | | $ | 3,240 | | | $ | 949 | | | $ | 122 | | | $ | 11 | | | $ | 37,901 | | | $ | (3,732 | ) | | $
| 34,169 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total amortized cost (1) | | $ | 69,671 | | | $ | 39,075 | | | $ | 5,295 | | | $ | 1,507 | | | $ | 127 | | | $ | 15 | | | $ | 115,690 | | | $ | (38,769 | ) | | $
| 76,921 | |
(1) | Unguaranteed residual values of $6,424 thousand that we retained after selling the related lease receivable is excluded from amortized cost. |
| (2) | Transfers consist of receivables that have been transferred to third-party financial institutions on a non-recourse basis and receivables that are in the process of being transferred to third-party financial institutions. |
The following table provides an aging analysis of our financing receivables as of September 30, 2022 (in thousands):
| | | | | | | | Days Past
Due | | | Total Past Due | | | Current | | | Total Billed | | | Unbilled | | | Amortized Cost | | Notes receivable | | $ | 268 | | | $ | 425 | | | $ | 97 | | | $ | 790 | | | $ | 5,623 | | | $ | 6,413 | | | $ | 77,509 | | | $ | 83,922 | | Lease receivables | | | 240 | | | | 154 | | | | 551 | | | | 945 | | | | 905 | | | | 1,850 | | | | 47,315 | | | | 49,165 | | Total | | $ | 508 | | | $ | 579 | | | $ | 648 | | | $ | 1,735 | | | $ | 6,528 | | | $ | 8,263 | | | $ | 124,824 | | | $ | 133,087 | |
The following table provides an aging analysis of our financing receivables as of March 31, 2022 (in thousands):
| | | | | | | | Days Past Due | | | Total Past Due | | | Current | | | Total Billed | | | Unbilled | | | Amortized Cost | | Notes receivable | | $ | 187 | | | $ | 37 | | | $ | 23 | | | $ | 247 | | | $ | 5,307 | | | $ | 5,554 | | | $ | 72,235 | | | $ | 77,789 | | Lease receivables | | | 115 | | | | 325 | | | | 430 | | | | 870 | | | | 639 | | | | 1,509 | | | | 36,392 | | | | 37,901 | | Total | | $ | 302 | | | $ | 362 | | | $ | 453 | | | $ | 1,117 | | | $ | 5,946 | | | $ | 7,063 | | | $ | 108,627 | | | $ | 115,690 | |
Our financial assets on nonaccrual status were not significant as of September 30, 2022, and March 31, 2017 (in thousands):2022.
| | 31-60 Days Past Due | | | 61-90 Days Past Due | | | Greater than 90 Days Past Due | | | Total Past Due | | | Current | | | Unbilled Minimum Lease Payments | | | Total Minimum Lease Payments | | | Unearned Income | | | Non- Recourse Notes Payable | | | Net Credit Exposure | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 188 | | | $ | 90 | | | $ | 907 | | | $ | 1,185 | | | $ | 18,238 | | | $ | 30,496 | | | $ | 49,919 | | | $ | (3,027 | ) | | $ | (14,420 | ) | | $ | 32,472 | | Average CQR | | | 30 | | | | 36 | | | | 216 | | | | 282 | | | | 124 | | | | 22,697 | | | | 23,103 | | | | (1,385 | ) | | | (11,413 | ) | | | 10,305 | | Low CQR | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Total | | $ | 218 | | | $ | 126 | | | $ | 1,123 | | | $ | 1,467 | | | $ | 18,362 | | | $ | 53,193 | | | $ | 73,022 | | | $ | (4,412 | ) | | $ | (25,833 | ) | | $ | 42,777 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 379 | | | $ | 224 | | | $ | 230 | | | $ | 833 | | | $ | 406 | | | $ | 32,532 | | | $ | 33,771 | | | $ | (2,362 | ) | | $ | (12,924 | ) | | $ | 18,485 | | Average CQR | | | 113 | | | | 20 | | | | 113 | | | | 246 | | | | 91 | | | | 23,622 | | | | 23,959 | | | | (1,556 | ) | | | (13,353 | ) | | | 9,050 | | Low CQR | | | - | | | | - | | | | 142 | | | | 142 | | | | - | | | | - | | | | 142 | | | | (19 | ) | | | - | | | | 123 | | Total | | $ | 492 | | | $ | 244 | | | $ | 485 | | | $ | 1,221 | | | $ | 497 | | | $ | 56,154 | | | $ | 57,872 | | | $ | (3,937 | ) | | $ | (26,277 | ) | | $ | 27,658 | |
8. | CREDIT FACILITY AND NOTES PAYABLE |
We finance the operations of our subsidiaries ePlus Technology, inc., ePlus Technology Services, inc., and SLAIT Consulting, LLC (collectively, the “Borrowers”) in our technology segment through a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). The WFCDF credit facility has an accounts payable floor plan facility component and a revolving credit facility component. The age On October 13, 2021, the Borrowers amended, restated, and replaced in entirety their then-existing credit agreements with WFCDF. Under this agreement, the credit facility is provided by a syndicate of banks for which WFCDF acts as administrative agent and consists of a discretionary senior secured floorplan facility in favor of the recorded notes receivableBorrowers in the aggregate principal amount of up to $375.0 million, together with a sublimit for a revolving credit facility for up to $100.0 million (collectively, the “WFCDF Credit Facility”).
Under the accounts payable floor plan facility, we had an outstanding balance disaggregated based on our internally assigned CQR wereof $136.2 million and $145.3 million as follows as December 31, 2017of September 30, 2022, and March 31, 2017 (in thousands):2022, respectively. On our balance sheet, our liability under the accounts payable floor plan facility is presented as accounts payable – floor plan.
| | 31-60 Days Past Due | | | 61-90 Days Past Due | | | Greater than 90 Days Past Due | | | Total Past Due | | | Current | | | Unbilled Notes Receivable | | | Total Notes Receivable | | | Non- Recourse Notes Payable | | | Net Credit Exposure | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 4 | | | $ | - | | | $ | 833 | | | $ | 837 | | | $ | 2,071 | | | $ | 35,001 | | | $ | 37,909 | | | $ | (21,971 | ) | | $ | 15,938 | | Average CQR | | | 1,086 | | | | 4 | | | | 599 | | | | 1,689 | | | | 8 | | | | 19,776 | | | | 21,473 | | | | (15,555 | ) | | | 5,918 | | Low CQR | | | - | | | | - | | | | 62 | | | | 62 | | | | - | | | | - | | | | 62 | | | | - | | | | 62 | | Total | | $ | 1,090 | | | $ | 4 | | | $ | 1,494 | | | $ | 2,588 | | | $ | 2,079 | | | $ | 54,777 | | | $ | 59,444 | | | $ | (37,526 | ) | | $ | 21,918 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High CQR | | $ | 183 | | | $ | 663 | | | $ | 755 | | | $ | 1,601 | | | $ | 1,165 | | | $ | 23,359 | | | $ | 26,125 | | | $ | (12,003 | ) | | $ | 14,122 | | Average CQR | | | 28 | | | | 5 | | | | - | | | | 33 | | | | 555 | | | | 18,725 | | | | 19,313 | | | | (13,732 | ) | | | 5,581 | | Low CQR | | | - | | | | - | | | | 3,086 | | | | 3,086 | | | | - | | | | - | | | | 3,086 | | | | - | | | | 3,086 | | Total | | $ | 211 | | | $ | 668 | | | $ | 3,841 | | | $ | 4,720 | | | $ | 1,720 | | | $ | 42,084 | | | $ | 48,524 | | | $ | (25,735 | ) | | $ | 22,789 | |
We estimate losses onUnder the revolving credit facility, we had $85.0 million outstanding as of September 30, 2022, and no balance outstanding as of March 31, 2022. On our netbalance sheet, our liability under the revolving credit exposurefacility is presented as part of recourse notes payable – current.
The fair value of the outstanding balances under the WFCDF Credit Facility were approximately equal to be between 0% - 5% for customers with highest CQR,their carrying value as these customers are investment grade orof September 30, 2022, and March 31, 2022.
The amount of principal available is subject to a borrowing base determined by, among other things, the equivalentBorrowers’ accounts receivable and inventory, each pursuant to a formula and subject to certain reserves. Loans accrue interest at a rate per annum equal to LIBOR plus 1.75%. The LIBOR rate is based upon one-month, three-month, six-month, and 12-month LIBOR periods, as selected by the Borrowers, and subject to a floor 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.0.00%.
6. | PROPERTY, EQUIPMENT, OTHER ASSETS AND LIABILITIES |
Our property, equipment,borrowings under the WFCDF Credit Facility are secured by the assets of the Borrowers. Additionally, the WFCDF Credit Facility requires a guaranty of $10.5 million by ePlus inc.
Under the WFCDF Credit Facility, the Borrowers are restricted in their ability to pay dividends to ePlus inc. unless their available borrowing meets or met certain thresholds. As of September 30, 2022, and March 31, 2022, their available borrowing met the thresholds such that there were no restrictions on their ability to pay dividends.
The WFCDF Credit Facility has an initial one-year term, which automatically renews for successive one-year terms thereafter. However, either the Borrowers or WFCDF may terminate by providing a written termination notice to the other assetsparty no less than 90 days prior to such termination.
On October 31, 2022, the Borrowers executed an amendment to the WFCDF Credit Facility that increased the limit on the aggregate principal amount to $425.0 million and liabilitiesincreased the sublimit on the revolving credit facility up to $150.0 million. Additionally, this amendment converted all of the Borrower’s loans from a LIBOR rate to a Term SOFR rate.
RECOURSE NOTES PAYABLE
Recourse notes payable consist of borrowings that the following (in thousands):
| | December 31, 2017 | | | March 31, 2017 | | Other current assets: | | | | | | | Deposits & funds held in escrow | | $ | 14,819 | | | $ | 39,161 | | Prepaid assets | | | 10,429 | | | | 3,388 | | Other | | | 722 | | | | 815 | | Total other current assets | | $ | 25,970 | | | $ | 43,364 | | | | | | | | | | | Property, equipment and other assets | | | | | | | | | Property and equipment, net | | $ | 8,013 | | | $ | 6,690 | | Deferred costs | | | 7,326 | | | | 3,536 | | Other | | | 2,293 | | | | 1,730 | | Total other assets - long term | | $ | 17,632 | | | $ | 11,956 | |
| | December 31, 2017 | | | March 31, 2017 | | Other current liabilities: | | | | | | | Accrued expenses | | $ | 7,907 | | | $ | 7,450 | | Accrued income taxes payable | | | 170 | | | | 1,761 | | Contingent consideration | | | 5,360 | | | | 554 | | Other | | | 12,679 | | | | 9,414 | | Total other current liabilities | | $ | 26,116 | | | $ | 19,179 | | | | | | | | | | | Other liabilities: | | | | | | | | | Deferred revenue | | $ | 10,064 | | | $ | 4,704 | | Contingent consideration long-term | | | 7,765 | | | | 1,500 | | Other | | | 689 | | | | 876 | | Total other liabilities - long term | | $ | 18,518 | | | $ | 7,080 | |
lender has recourse against us. As of September 30, 2022, we had $94.7 million in recourse notes payable consisting of $85.0 million outstanding under the revolving credit facility component of our WFCDF Credit Facility, and $9.7 million arising from one installment payment arrangement within our technology segment. As of March 31, 2022, we had $13.1 million in recourse notes payable arising entirely from one installment payment arrangement within our technology segment. Our payments under this installment agreement are due quarterly in amounts that are correlated to the payments due to us from a customer under a related notes receivable. We discounted our payments due under this installment agreement to calculate our payable balance using an interest rate of 3.50% as of both September 30, 2022, and March 31, 2022. NON-RECOURSE NOTES PAYABLE
Non-recourse notes payable consists of borrowings that, in the event of a default by a customer, the lender generally only has recourse against the customer, and the assets serving as collateral, but not against us. As of DecemberSeptember 30, 2022, and March 31, 20172022, we had current$20.8 million and long-term contingent consideration liability balance of $5.4 and $7.8$21.2 million, respectively, of which $10.0 million relates to a recent acquisition. For details on the contingent consideration liability, refer to Note 15, “Business Combinations.”
As of December 31, 2017 and March 31, 2017 we had customer deposits and funds held in escrow of $14.8 million and $39.2 million, respectively. These balances relate to financial assetsnon-recourse borrowings that were sold to third-party banks. In conjunction with those sales, a portion of the proceeds were placedcollateralized by investments in escrownotes and will be released to us upon payment of outstanding invoices related to the underlying financing arrangements that were sold.
7. | NOTES PAYABLE AND CREDIT FACILITY |
Non-recourse and recourse obligations consist of the following (in thousands):
| | December 31, 2017 | | | March 31, 2017 | | Recourse notes payable with interest rates ranging from 3.20% to 4.13% as of March 31, 2017. | | | | | | | Current | | $ | - | | | $ | 908 | | | | | | | | | | | Non-recourse notes payable secured by financing receivables and investment in operating leases with interest rates ranging from 2.00% to 8.45% December 31, 2017, and ranging from 2.00% to 7.75% as of March 31, 2017. | | | | | | | | | Current | | $ | 27,649 | | | $ | 26,085 | | Long-term | | | 3,840 | | | | 10,431 | | Total non-recourse notes payable | | $ | 31,489 | | | $ | 36,516 | |
leases. Principal and interest payments on non-recourse notes payable are generally due monthly in amounts that are approximately equal to the total payments due from the customer under the leases or notes receivable that collateralize the notes payable. The weighted average interest rate for our non-recourse notes payable was 3.73%4.09% and 3.59%, as of both December 31, 2017September 30, 2022, and March 31, 2017. The weighted average interest rate for our recourse notes payable was 3.45%, as of March 31, 2017. Under recourse financing, in the event of a default by a customer, the lender has recourse to the customer, the assets serving as collateral, and us. Under non-recourse financing, in the event of a default by a customer, the lender generally only has recourse against the customer, and the assets serving as collateral, but not against us.2022, respectively.
Our technology segment, through our subsidiary ePlus Technology, inc., finances its operations with funds generated from operations, and with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). This facility provides short-term capital for our technology segment. There are two components of the WFCDF credit facility: (1) a floor plan component, and (2) an accounts receivable component. Under the floor plan component, we had outstanding balances of $107.8 million and $132.6 million as of December 31, 2017 and March 31, 2017, respectively. Under the accounts receivable component, we had no outstanding balances as of December 31, 2017 and March 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.
As of December 31, 2017, the facility agreement had an aggregate limit of the two components of $250 million, and the accounts receivable component had a sub-limit of $30 million, which bears interest assessed at a rate of the One Month LIBOR plus two and one half percent.
The credit facility has full recourse to ePlus Technology, inc. and is secured by a blanket lien against all its assets, such as receivables and inventory. 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 (“EBITDA”) of ePlus Technology, inc. We were in compliance with these covenants as of December 31, 2017. In addition, the facility restricts the ability of ePlus Technology, inc. to transfer funds to its affiliates in the form of dividends, loans or advances with certain exceptions for dividends to ePlus inc. 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 includes that other operational reports be provided on a regular basis. Either party may terminate with 90 days’ advance 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 certain dates. 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.
Fair Value
As of December 31, 2017 and March 31, 2017, the fair value of our long-term recourse and non-recourse notes payable approximated their carrying value.
8.9. | COMMITMENTS AND CONTINGENCIES |
Legal Proceedings
LEGAL PROCEEDINGS
From time to time, we may be
We are subject to various legal proceedings, as well as demands, claims and threatened litigation, that arise in the ordinarynormal course of business. In the opinion of management, there wasour business and have 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, thebeen fully resolved. The ultimate outcome of any litigation or any other legal proceedingsdispute is uncertain. When a loss related to a legal proceeding or claim is probable and claims brought against us is subject to significant uncertainty. Therefore, although management considersreasonably estimable, we accrue our best estimate for the likelihoodultimate resolution of such an outcome to be remote, ifthe matter. If one or more of these legal matters wereare resolved against the Companyus in a reporting period for amounts in excess ofabove management’s expectations, the Company’s consolidatedour financial statementscondition and operating results for that reporting period could be materially adversely affected. As of September 30, 2022, we do not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these proceedings and matters, if any, has been incurred. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against the us in the future, and these matters could relate to prior, current, or future transactions or events.
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 unaudited consolidated statements of operations for the three and ninesix months ended December 31, 2017September 30, 2022, and 20162021, respectively (in thousands, except per share data).
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Net earnings attributable to common shareholders - basic and diluted | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | | | | | | | | | | | | | | | | | | | Basic and diluted common shares outstanding: | | | | | | | | | | | | | | | | | Weighted average common shares outstanding — basic | | | 13,851 | | | | 13,791 | | | | 13,845 | | | | 13,891 | | Effect of dilutive shares | | | 139 | | | | 129 | | | | 177 | | | | 135 | | Weighted average shares common outstanding — diluted | | | 13,990 | | | | 13,920 | | | | 14,022 | | | | 14,026 | | | | | | | | | | | | | | | | | | | Earnings per common share - basic | | $ | 1.12 | | | $ | 0.92 | | | $ | 3.34 | | | $ | 2.88 | | | | | | | | | | | | | | | | | | | Earnings per common share - diluted | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | | | | | | | | | | | | | Net earnings attributable to common shareholders - basic and diluted | | $ | 28,469 | | | $ | 31,413 | | | $ | 50,808 | | | $ | 54,931 | | | | | | | | | | | | | | | | | | | Basic and diluted common shares outstanding: | | | | | | | | | | | | | | | | | Weighted average common shares outstanding — basic | | | 26,578 | | | | 26,664 | | | | 26,546 | | | | 26,666 | | Effect of dilutive shares | | | 45 | | | | 200 | | | | 125 | | | | 196 | | Weighted average shares common outstanding — diluted | | | 26,623 | | | | 26,864 | | | | 26,671 | | | | 26,862 | | | | | | | | | | | | | | | | | | | Earnings per common share - basic | | $ | 1.07 | | | $ | 1.18 | | | $ | 1.91 | | | $ | 2.06 | | | | | | | | | | | | | | | | | | | Earnings per common share - diluted | | $ | 1.07 | | | $ | 1.17 | | | $ | 1.91 | | | $ | 2.04 | |
Share Repurchase PlanSHARE REPURCHASE PLAN
On August 15, 2017, March 24, 2022, our board of directors authorized the repurchase of up to 500,0001,000,000 shares of our outstanding common stock, over a 12-month period beginning on August 19, 2017 through AugustMay 28, 2022. On March 18, 2018. The plan2021, our board of directors authorized the repurchase of up to 1,000,000 shares of our outstanding common stock, over a 12-month period beginning May 28, 2021. Under both authorized programs, purchases tomay be made from time to time in the open market, or in privately negotiated transactions, subject to availability. Any repurchased shares will have the status of treasury shares and may be used, when needed, for general corporate purposes.The former repurchase plan expired on August 18, 2017.
During the ninesix months ended December 31, 2017,September 30, 2022, we purchased 125,60570,473 shares of our outstanding common stock at an average costa value of $77.88 per share for a total purchase price of $9.8$3.9 million under the share repurchase plan. Weplan; we also acquired 57,725purchased 58,080 shares of common stock at a value of $4.4$3.3 million to satisfy tax withholding obligations relating to the vesting of employees’ restricted stock.
During the ninesix months ended December 31, 2016,September 30, 2021, we purchased 656,96298,056 shares of our outstanding common stock at an average costa value of $40.81 per share for a total purchase price of $26.8$4.3 million under the share repurchase plan. Weplan; we also purchased 59,47255,430 shares of common stock at a value of $2.6 million to satisfy tax withholding obligations relating to the vesting of employees’ restricted stock.
11.12. | SHARE-BASED COMPENSATION |
SHARE-BASED PLANS
Share-Based Plans
As of December 31, 2017,September 30, 2022, we had share-based awards outstanding under the following plans: (1) the 2008 Non-Employee Director Long-Term Incentive Plan (“2008 Director LTIP”), (2) the 2017 Non-Employee Director Long-Term Incentive Plan (“2017 Director LTIP”) and (3), (2) the 2012 Employee Long-Term Incentive Plan ("(“2012 Employee LTIP"LTIP”), and (3) the 2021 Employee Long-Term Incentive Plan (“2021 Employee LTIP”).
The 2021 Employee LTIP was approved by our shareholders on September 16, 2021, and became effective October 1, 2021. The 2021 Employee LTIP replaced the 2012 Employee LTIP that had previously been approved by our stockholders on September 13, 2012. Beginning September 16, 2021, we permanently ceased issuing any additional shares under the 2012 Employee LTIP.
These share-based plans define fair market value as the previousclosing sales price of a share of common stock as quoted on any established stock exchange for such date or the most recent trading day's closing price when the grantday preceding such date fallsif there were no trades on a date the stock was not traded.such date.
20RESTRICTED STOCK ACTIVITY
Restricted Stock Activity
For the ninesix months ended December 31, 2017,September 30, 2022, we granted 535 restricted15,954 shares under the 2008 Director LTIP, 5,310 restricted sharesof our stock under the 2017 Director LTIP, and 66,530138,643 restricted shares of our stock under the 20122021 Employee LTIP. For the ninesix months ended December 31, 2016,September 30, 2021, we granted 11,384 restricted12,786 shares of our stock under the 20082017 Director LTIP, and 134,538155,722 restricted shares of our stock under the 2012 Employee LTIP. A summary of theour restricted sharesstock activity, is as follows:
| | Number of Shares | | | Weighted Average Grant-date Fair Value | | | Number of Shares | | | Weighted Average Grant-date Fair Value | | | | | | | | | | | | | | | Nonvested April 1, 2017 | | | 371,689 | | | $ | 40.45 | | | Nonvested April 1, 2022 | | | | 343,806 | | | $ | 41.01 | | Granted | | | 72,375 | | | $ | 80.25 | | | | 154,597 | | | $ | 56.82 | | Vested | | | (156,240 | ) | | $ | 38.52 | | | | (177,360 | ) | | $ | 39.44 | | Forfeited | | | (4,108 | ) | | $ | 39.37 | | | | (6,399 | ) | | $ | 41.51 | | Nonvested December 31, 2017 | | | 283,716 | | | $ | 51.68 | | | Nonvested September 30, 2022 | | | | 314,644 | | | $
| 49.58 | |
Upon each vesting period of
EMPLOYEE STOCK PURCHASE PLAN
On September 15, 2022, our shareholders approved the restricted stock awards,2022 Employee Stock Purchase Plan (“2022 ESPP”) through which eligible 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 nine months ended December 31, 2017, the Company had acquired 57,725 shares of commonour stock at a valuediscounted purchase price of $4.4 millionup to satisfy tax withholding obligations relating to85% of the vestinglesser of employees’ restricted stock, which was included in treasury stock.the closing price on the offering date or closing price on the purchase date. As of September 30, 2022, we have not had any offerings under the 2022 ESPP.
Compensation ExpenseCOMPENSATION EXPENSE
We recognize compensation cost for awards of restricted stock with graded vesting on a straight linestraight-line basis over the requisite service period. There are no additional conditions for vesting other than service conditions. During the three months ended December 31, 2017September 30, 2022, and 2016,2021, we recognized $1.7$2.0 million and $1.5$1.8 million respectively, of total share-based compensation expense.expense, respectively. During the ninesix months ended December 31, 2017September 30, 2022, and 2016,2021, we recognized $4.9$3.7 million and $4.5$3.6 million respectively, of total share-based compensation expense.expense, respectively. Unrecognized compensation expense related to non-vestedunvested restricted stock was $11.1$13.5 million as of December 31, 2017,September 30, 2022, which will be fully recognized over the next thirty (30)33 months.
We also provide our employees with a contributory 401(k) profit sharing plan. Weplan, to which we may make contributionscontribute from time to the plan. These contributions are not required and whether or not we choose to make them is entirely withintime at our sole discretion. Our employerEmployer contributions to the plan are always fully vested at all times. Forvested. Our estimated contribution expense to the plan was $1.0 million for both the three months ended December 31, 2017September 30, 2022, and 2016,2021. For the six months ended September 30, 2022, and 2021, our estimated contribution expense for the plan was $0.5$2.0 million and $0.5$1.8 million, respectively. For the nine months ended December 31, 2017 and 2016, our estimated contribution expense for the plan was $1.6 million and $1.2 million, respectively.
Income Taxes – Provision
Our provision for income tax expense was $0.7$11.8 million and $19.5$20.5 million for the three and ninesix months ended December 31, 2017,September 30, 2022, as compared to $8.7$12.6 million and $27.3 million$21.6 for the same period in the prior year. Our effective tax rate for the three and six months ended September 30, 2022, was 29.3% and 28.7% respectively, compared with 28.6% and 28.2%, respectively, for the same periods in the prior year. The effective tax rate for the three and six months ended September 30, 2022, and September 30, 2021, differed from the US federal statutory rate of 21.0% primarily due to state and local income taxes. Our effective income tax rate for the three and ninesix months ended December 31, 2017,September 30,2022, was 4.2% and 29.7%, respectively,higher compared to 40.8% and 40.5% for the three and nine months ended December 31, 2016, respectively. In the third quarter, the Company revised its estimated annual effective tax rate to reflect a changesame periods in the federal statutory rate from 35%prior year primarily due to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our current fiscal year, using a blended rate for the annual period. As a result, the blended statutoryforeign currency losses incurred in lower tax rate for our current year is 31.5%jurisdictions. In addition, we recognized an estimated tax benefit in our tax provision for the period related to adjusting our deferred tax balance to reflect the new corporate tax rate. As a result, income tax expense reported for the first nine months was adjusted to reflect the effects of the change in the tax law and resulted in a decrease in income tax expense of $2.6 million during the third quarter. In addition we estimated the tax effect of originating items occurring in the fourth quarter that are expected to reverse at a rate of 21%. This resulted in an additional tax benefit of $0.8 million. The accounting for the effects of the rate change on deferred tax balances is provisional and we will finalize these estimates during our fourth quarter of fiscal year 2018. We re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the new tax law and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
Income Taxes – Uncertain Tax Positions
We account for our tax positions in accordance with ASC Topic 740, Income Taxes. Under the guidance, we evaluate uncertain tax positions based on the two-step approach. The first step is to evaluate each uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in an audit, including resolution of related appeals or litigation processes, if any. For tax positions that are not likely of being sustained upon audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement.
Our total gross unrecognized tax benefits recorded for uncertain income tax, and interest and penalties thereon, were negligible as of December 31, 2017, and December 31, 2016. We had no additions or reductions to our gross unrecognized tax benefits during the three and nine months ended December 31, 2017. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
13.14. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
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 December 31, 2017September 30, 2022, and March 31, 20172022 (in thousands):
| | | | | Fair Value Measurement Using | | | | Recorded Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | Money market funds | | $ | 21,596 | | | $ | 21,596 | | | $ | - | | | $ | - | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Contingent consideration | | $ | 13,125 | | | $ | - | | | $ | - | | | $ | 13,125 | | | | | | | | | | | | | | | | | | | March 31, 2017 | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | Money market funds | | $ | 50,866 | | | $ | 50,866 | | | $ | - | | | $ | - | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Contingent consideration | | $ | 554 | | | $ | - | | | $ | - | | | $ | 554 | |
| | | | | Fair Value Measurement Using | | | | Recorded Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs(Level 3) | | September 30, 2022 | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | Money market funds | | $ | 10,204 | | | $ | 10,204 | | | $ | - | | | $ | - | | | | | | | | | | | | | | | | | | | March 31, 2022 | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | Money market funds | | $ | 18,138 | | | $ | 18,138 | | | $ | - | | | $ | - | |
For
FUTURE COM
On July 15, 2022, our subsidiary, ePlus Technology, inc., acquired certain assets and liabilities of Future Com, Ltd., a Texas-based provider of cybersecurity solutions, cloud security and security consulting services throughout the threeUS. Our acquisition provides access to enhanced engineering, sales, and nine months ended December 31, 2017, we recorded adjustments that increasedservices delivery capabilities in the fair value of our liability for contingent consideration by $0.7 million, and $12.6 million due to business acquisitions. For the nine months ended December 31, 2017, we made $0.6 million in payments to satisfy the current obligationsSouth-Central region of the contingent consideration arrangement from our earlier acquisition of Consolidated IT Services.
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 professionalUnited States, as well as bolstering the skills 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.
expertise surrounding ePlus’ growing cybersecurity practice.
Our reportable segment information was as follows (in thousands):
| | Three Months Ended | | | | December 31, 2017 | | | December 31, 2016 | | | | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | | | | | | | | | | | | | | | | | | | | | Sales of product and services | | $ | 330,953 | | | $ | - | | | $ | 330,953 | | | $ | 317,391 | | | $ | - | | | $ | 317,391 | | Financing revenue | | | - | | | | 9,592 | | | | 9,592 | | | | - | | | | 8,190 | | | | 8,190 | | Fee and other income | | | 1,678 | | | | 346 | | | | 2,024 | | | | 915 | | | | 161 | | | | 1,076 | | Net sales | | | 332,631 | | | | 9,938 | | | | 342,569 | | | | 318,306 | | | | 8,351 | | | | 326,657 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of sales, product and services | | | 264,487 | | | | - | | | | 264,487 | | | | 251,729 | | | | - | | | | 251,729 | | Direct lease costs | | | - | | | | 1,394 | | | | 1,394 | | | | - | | | | 1,142 | | | | 1,142 | | Cost of sales | | | 264,487 | | | | 1,394 | | | | 265,881 | | | | 251,729 | | | | 1,142 | | | | 252,871 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general, and administrative expenses | | | 53,836 | | | | 3,298 | | | | 57,134 | | | | 47,780 | | | | 2,380 | | | | 50,160 | | Depreciation and amortization | | | 2,893 | | | | 1 | | | | 2,894 | | | | 1,908 | | | | 2 | | | | 1,910 | | Interest and financing costs | | | - | | | | 270 | | | | 270 | | | | - | | | | 409 | | | | 409 | | Operating expenses | | | 56,729 | | | | 3,569 | | | | 60,298 | | | | 49,688 | | | | 2,791 | | | | 52,479 | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | $ | 11,415 | | | $ | 4,975 | | | $ | 16,390 | | | $ | 16,889 | | | $ | 4,418 | | | $ | 21,307 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 3,157 | | | $ | 1,422 | | | $ | 4,579 | | | $ | 1,941 | | | $ | 985 | | | $ | 2,926 | | Purchases of property, equipment and operating lease equipment | | $ | 2,018 | | | $ | 844 | | | $ | 2,862 | | | $ | 849 | | | $ | 3,282 | | | $ | 4,131 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Balance Sheet | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 595,584 | | | $ | 169,069 | | | $ | 764,653 | | | $ | 546,728 | | | $ | 189,950 | | | $ | 736,678 | |
| | Nine Months Ended | | | | December 31, 2017 | | | December 31, 2016 | | | | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | | | | | | | | | | | | | | | | | | | | | Sales of product and services | | $ | 1,045,792 | | | $ | - | | | $ | 1,045,792 | | | $ | 968,799 | | | $ | - | | | $ | 968,799 | | Financing revenue | | | - | | | | 30,698 | | | | 30,698 | | | | - | | | | 23,899 | | | | 23,899 | | Fee and other income | | | 3,707 | | | | 374 | | | | 4,081 | | | | 3,679 | | | | 245 | | | | 3,924 | | Net sales | | | 1,049,499 | | | | 31,072 | | | | 1,080,571 | | | | 972,478 | | | | 24,144 | | | | 996,622 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of sales, product and services | | | 834,873 | | | | - | | | | 834,873 | | | | 769,780 | | | | - | | | | 769,780 | | Direct lease costs | | | - | | | | 3,846 | | | | 3,846 | | | | - | | | | 3,459 | | | | 3,459 | | Cost of sales | | | 834,873 | | | | 3,846 | | | | 838,719 | | | | 769,780 | | | | 3,459 | | | | 773,239 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general, and administrative expenses | | | 158,838 | | | | 9,300 | | | | 168,138 | | | | 141,295 | | | | 8,526 | | | | 149,821 | | Depreciation and amortization | | | 7,084 | | | | 2 | | | | 7,086 | | | | 5,400 | | | | 8 | | | | 5,408 | | Interest and financing costs | | | - | | | | 903 | | | | 903 | | | | - | | | | 1,158 | | | | 1,158 | | Operating expenses | | | 165,922 | | | | 10,205 | | | | 176,127 | | | | 146,695 | | | | 9,692 | | | | 156,387 | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | $ | 48,704 | | | $ | 17,021 | | | $ | 65,725 | | | $ | 56,003 | | | $ | 10,993 | | | $ | 66,996 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 7,413 | | | $ | 3,911 | | | $ | 11,324 | | | $ | 5,494 | | | $ | 3,264 | | | $ | 8,758 | | Purchases of property, equipment and operating lease equipment | | $ | 4,064 | | | $ | 2,234 | | | $ | 6,298 | | | $ | 2,413 | | | $ | 4,887 | | | $ | 7,300 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Balance Sheet | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 595,584 | | | $ | 169,069 | | | $ | 764,653 | | | $ | 546,728 | | | $ | 189,950 | | | $ | 736,678 | |
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’ 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 totalfor consideration transferred is $38.4$13.3 million consisting of $29.8$13.0 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$0.3 million equalthat is owed 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 modelsellers based on adjustments to our projections of future gross profits. The maximum payoutdetermination of the contingent consideration is $15.0 million paid over 3 years. total net assets delivered. 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 | | $ | 14,353 | | Property and equipment | | | 1,620 | | Identified intangible assets | | | 13,650 | | Accounts payable and other current liabilities | | | (12,313 | ) | Total identifiable net assets | | | 17,310 | | Goodwill | | | 21,088 | | Total purchase consideration | | $ | 38,398 | |
| | Acquisition Date Amount | | Accounts receivable | | $ | 4,033 | | Other assets | | | 129 | | Identified intangible assets | | | 8,360 | | Accounts payable and other current liabilities | | | (8,714 | ) | Contract liabilities | | | (214 | ) | Total identifiable net assets | | | 3,594 | | Goodwill | | | 9,694 | | Total purchase consideration | | $ | 13,288 | |
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 $13.7$8.4 million consistconsists of customer relationships with an estimated useful life of 8seven 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 $21.1$9.7 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 throughas though the acquisition date had the acquisition date been April 1, 2017,2022, is not material.
OneCloud Consulting Inc. acquisition
On May 17, 2017,As of our subsidiary ePlus Technology, inc., acquired 100% offiling date, our accounting for this business combination is incomplete in respect to determining the stock of OneCloud Consulting, Inc. (“OneCloud”). Based in Milpitas, CA, OneCloud is a versatile team of highly trained technology consultants, architects, developersfinal consideration transferred 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 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 allocation of the purchase consideration to the assets acquired, and liabilities assumed is presentedassumed.
Our operations are conducted through two operating segments that are also both reportable segments. Our technology segment includes sales of IT 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.
Our reportable segment information for the three-and six-month periods ended September 30, 2022, and 2021 are summarized in the following table (in thousands):
| | Three Months Ended | | | | September 30, 2022 | | | September 30, 2021 | | | | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | | | | | | | | | | | | | | | | | | | | | Net Sales | | | | | | | | | | | | | | | | | | | Product | | $ | 406,317 | | | $ | 22,228 | | | $ | 428,545 | | | $ | 375,444 | | | $ | 21,716 | | | $ | 397,160 | | Service | | | 65,161 | | | | - | | | | 65,161 | | | | 60,857 | | | | - | | | | 60,857 | | Total
| | | 471,478 | | | | 22,228 | | | | 493,706 | | | | 436,301 | | | | 21,716 | | | | 458,017 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of Sales | | | | | | | | | | | | | | | | | | | | | | | | | Product | | | 311,928 | | | | 5,199 | | | | 317,127 | | | | 293,837 | | | | 3,792 | | | | 297,629 | | Service | | | 43,275 | | | | - | | | | 43,275 | | | | 37,386 | | | | - | | | | 37,386 | | Total
| | | 355,203 | | | | 5,199 | | | | 360,402 | | | | 331,223 | | | | 3,792 | | | | 335,015 | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | 116,275 | | | | 17,029 | | | | 133,304 | | | | 105,078 | | | | 17,924 | | | | 123,002 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general, and administrative | | | 80,161 | | | | 4,543 | | | | 84,704 | | | | 70,803 | | | | 3,701 | | | | 74,504 | | Depreciation and amortization | | | 3,540 | | | | 28 | | | | 3,568 | | | | 3,825 | | | | 28 | | | | 3,853 | | Interest and financing costs | | | 671 | | | | 254 | | | | 925 | | | | 199 | | | | 143 | | | | 342 | | Operating expenses | | | 84,372 | | | | 4,825 | | | | 89,197 | | | | 74,827 | | | | 3,872 | | | | 78,699 | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | 31,903 | | | | 12,204 | | | | 44,107 | | | | 30,251 | | | | 14,052 | | | | 44,303 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income (expense) | | | | | | | | | | | (3,866 | ) | | | | | | | | | | | (325 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings before tax | | | | | | | | | | $ | 40,241 | | | | | | | | | | | $ | 43,978 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | Contracts with customers | | $ | 466,972 | | | $ | 6,923 | | | $ | 473,895 | | | $ | 430,339 | | | $ | 1,776 | | | $ | 432,115 | | Financing and other | | | 4,506 | | | | 15,305 | | | | 19,811 | | | | 5,962 | | | | 19,940 | | | | 25,902 | | Total
| | $ | 471,478 | | | $ | 22,228 | | | $ | 493,706 | | | $ | 436,301 | | | $ | 21,716 | | | $ | 458,017 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 3,871 | | | $ | 1,196 | | | $ | 5,067 | | | $ | 4,074 | | | $ | 1,888 | | | $ | 5,962 | | Purchases of property, equipment and operating lease equipment | | $ | 611 | | | $ | 22 | | | $ | 633 | | | $ | 948 | | | $ | 8,301 | | | $ | 9,249 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 1,167,532 | | | $ | 203,808 | | | $ | 1,371,340 | | | $ | 902,070 | | | $ | 237,875 | | | $ | 1,139,945 | |
| | Six Months Ended | | | | September 30, 2022 | | | September 30, 2021 | | | | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | | | | | | | | | | | | | | | | | | | | | Net Sales | | | | | | | | | | | | | | | | | | | Product | | $ | 791,993 | | | $ | 31,802 | | | $ | 823,795 | | | $ | 720,210 | | | $ | 38,007 | | | $ | 758,217 | | Service | | | 128,270 | | | | - | | | | 128,270 | | | | 116,449 | | | | - | | | | 116,449 | | Total
| | | 920,263 | | | | 31,802 | | | | 952,065 | | | | 836,659 | | | | 38,007 | | | | 874,666 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of Sales | | | | | | | | | | | | | | | | | | | | | | | | | Product | | | 614,436 | | | | 6,901 | | | | 621,337 | | | | 564,852 | | | | 10,004 | | | | 574,856 | | Service | | | 83,901 | | | | - | | | | 83,901 | | | | 71,296 | | | | - | | | | 71,296 | | Total
| | | 698,337 | | | | 6,901 | | | | 705,238 | | | | 636,148 | | | | 10,004 | | | | 646,152 | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | 221,926 | | | | 24,901 | | | | 246,827 | | | | 200,511 | | | | 28,003 | | | | 228,514 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general, and administrative | | | 153,273 | | | | 8,198 | | | | 161,471 | | | | 136,956 | | | | 6,323 | | | | 143,279 | | Depreciation and amortization | | | 6,722 | | | | 56 | | | | 6,778 | | | | 7,723 | | | | 56 | | | | 7,779 | | Interest and financing costs | | | 809 | | | | 479 | | | | 1,288 | | | | 358 | | | | 343 | | | | 701 | | Operating expenses | | | 160,804 | | | | 8,733 | | | | 169,537 | | | | 145,037 | | | | 6,722 | | | | 151,759 | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | 61,122 | | | | 16,168 | | | | 77,290 | | | | 55,474 | | | | 21,281 | | | | 76,755 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income (expense) | | | | | | | | | | | (6,019 | ) | | | | | | | | | | | (202 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings before tax | | | | | | | | | | $ | 71,271 | | | | | | | | | | | $ | 76,553 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | Contracts with customers | | $ | 910,774 | | | $ | 7,868 | | | $ | 918,642 | | | $ | 826,880 | | | $ | 7,194 | | | $ | 834,074 | | Financing and other | | | 9,489 | | | | 23,934 | | | | 33,423 | | | | 9,779 | | | | 30,813 | | | | 40,592 | | Total
| | $ | 920,263 | | | $ | 31,802 | | | $ | 952,065 | | | $ | 836,659 | | | $ | 38,007 | | | $ | 874,666 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 7,386 | | | $ | 2,153 | | | $ | 9,539 | | | $ | 8,177 | | | $ | 3,867 | | | $ | 12,044 | | Purchases of property, equipment and operating lease equipment | | $ | 1,897 | | | $ | 513 | | | $ | 2,410 | | | $ | 2,255 | | | $ | 13,988 | | | $ | 16,243 | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Financial Data - Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 1,167,532 | | | $ | 203,808 | | | $ | 1,371,340 | | | $ | 902,070 | | | $ | 237,875 | | | $ | 1,139,945 | |
TECHNOLOGY SEGMENT DISAGGREGATION OF REVENUE
We analyze net sales for our technology segment by customer end market and by vendor, as opposed to discrete product and service categories, which are summarized for the three- and six-month periods ended September 30, 2022, and 2021 in the tables 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 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Customer end market: | | | | | | | | | | | | | Telecom, media & entertainment | | $ | 118,454 | | | $ | 115,784 | | | $ | 246,731 | | | $ | 227,976 | | Technology | | | 96,160 | | | | 53,752 | | | | 166,021 | | | | 122,892 | | Healthcare | | | 66,959 | | | | 88,237 | | | | 135,471 | | | | 142,925 | | State and local government and educational institutions | | | 70,491 | | | | 68,662 | | | | 135,092 | | | | 134,077 | | Financial services | | | 37,611 | | | | 37,036 | | | | 70,910 | | | | 67,047 | | All others | | | 81,803 | | | | 72,830 | | | | 166,038 | | | | 141,742 | | Net sales | | | 471,478 | | | | 436,301 | | | | 920,263 | | | | 836,659 | | | | | | | | | | | | | | | | | | | Less: Revenue from financing and other | | | (4,506 | ) | | | (5,962 | ) | | | (9,489 | ) | | | (9,779 | ) | | | | | | | | | | | | | | | | | | Revenue from contracts with customers | | $ | 466,972 | | | $ | 430,339 | | | $ | 910,774 | | | $ | 826,880 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Vendor: | | | | | | | | | | | | | Cisco systems | | $ | 185,318 | | | $ | 174,072 | | | $ | 342,196 | | | $ | 340,974 | | Juniper networks | | | 39,580 | | | | 18,438 | | | | 62,089 | | | | 43,152 | | HPE
| | | 32,330 | | | | 8,965 | | | | 39,129 | | | | 21,301 | | NetApp | | | 16,710 | | | | 29,536 | | | | 30,695 | | | | 39,993 | | Dell EMC
| | | 15,221 | | | | 43,498 | | | | 77,094 | | | | 69,838 | | Arista networks | | | 8,933 | | | | 8,047 | | | | 20,105 | | | | 19,545 | | All others | | | 173,386 | | | | 153,745 | | | | 348,955 | | | | 301,856 | | Net sales | | | 471,478 | | | | 436,301 | | | | 920,263 | | | | 836,659 | | | | | | | | | | | | | | | | | | | Less: Revenue from financing and other | | | (4,506 | ) | | | (5,962 | ) | | | (9,489 | ) | | | (9,779 | ) | | | | | | | | | | | | | | | | | | Revenue from contracts with customers | | $ | 466,972 | | | $ | 430,339 | | | $ | 910,774 | | | $ | 826,880 | |
FINANCING SEGMENT DISAGGREGATION OF REVENUE
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 toanalyze our technology reporting unit. The goodwill recognized inrevenues within our financing segment based on 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 earningsnature of the acquiree sincearrangement. Our financing revenue generally consists of portfolio income, transactional gains, and post-contract earnings including month-to-month rents and the acquisition date are not material. Likewise, the impact to the revenue and earningssales of the combined entity for the current reporting period through the acquisition date had the acquisition date been April 1, 2017,off-lease equipment. All of our revenues from contracts with customers within our financing segment 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 nine months ended December 31, 2017, we increased identified intangible assets and decreased goodwill by $280 thousand from the provisional amounts recorded assales of March 31, 2017.off-lease equipment.
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 OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT 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 (“20172022 Annual Report”).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“Risk Factors,” in our 20172022 Annual Report.
EXECUTIVE OVERVIEW
Business DescriptionBUSINESS DESCRIPTION
We are a leading solutions provider that deliversin the areas of security, cloud, networking, data center, collaboration, and emerging technologies. We deliver actionable outcomes for organizations by utilizingusing information technology (IT)(“IT”) and consulting solutions to drive business agility and innovation. Leveraging world-classour engineering talent, we assess, plan, deliver, and secure solutions comprised of leading technologies and consumption models aligned with our customers’ needs. Our expertise and experience enables ePlusenable us to craft optimized solutions that take advantage of the cost, scale, and efficiency of private, public and hybrid cloud in an evolving market. We alsoAs part of our solutions, we provide consulting, professional services, managed services, IT staff augmentation, and complete lifecycle management services includingmanagement. Additionally, we offer flexible financing solutions.for purchases from us and from third-parties. We have been in the business of selling, leasing, financing, and managing information technologyIT and other assets for more than 2730 years.
Our primary focus is to deliver integrated technology solutions that address our customers’ Cloud, Security and Digital Infrastructurebusiness needs, forleveraging the appropriate technologies, both on-premise and in the cloud. Our Hybrid IT frameworkapproach is a lifecycle approach that includesto lead with advisory consulting assessment, architecture, testing, implementation, managed services, maintenanceto understand our customers’ needs, and periodic consultative reviews. In additionthen design, deploy, and manage solutions aligned to cloud, our portfoliotheir objectives. Underpinning the broader areas of expertise includes software defined, security, IoT,Cloud, Security, Networking, Data Center, and Collaboration are specific skills in orchestration and automation, application modernization, DevOps, data andmanagement, data visualization, analytics, mobility, hyper-converged infrastructure,network modernization, edge compute and other advanced and emerging technologies. We design, implement and manage an arrayThese solutions are comprised of IT solutionsclass-leading technologies from multiple leading IT vendors. We are an authorized reseller from over 1,000 vendors, but primarily from approximately 100 vendors, including Artistapartners such as Amazon Web Services, Arista Networks, Check Point, Cisco Systems, Citrix, Commvault, Dell EMC, F5 Networks, Fortinet, Gigamon, HP Inc., HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nimble Storage,Nutanix, NVIDIA, Oracle, Palo Alto Networks, Pure Storage, Quantum,Rubrik, Splunk, Varonis, 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 andto stay current with emergingon the forefront of technology trends. By delivering leading edge Hybrid IT solutions, Our expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services, has enabled ePlus has becometo remain a trusted advisor tofor 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 and financing, asset management and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a uniquecustomized customer experience that spans the continuum from fast delivery of competitively priced products and services to subsequent management and upkeep,maintenance, and through to end-of-life disposal services. This approach also permits usePlus to accommodatedeploy sophisticated solutions enabling our customers’ business requirements and deliver ever-more-sophisticated hybrid IT solutions, thus solidifying our relationships and value.outcomes.
Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. For the twelve months ended December 31, 2017, the percentage of revenue by customer end market within ourWe serve customers in markets including telecom, media and entertainment, technology, segment includes technology industry 25%, state and local government and educational institutions 17%(“SLED”), telecommunications, mediahealthcare, and entertainment 14%financial services. We sell to customers in the United States (“US”), financial services 16%, and healthcare 13%. The majoritywhich accounts for most of our sales, were generated within the United States; however, we have the abilityand to support our customers nationally and internationallyin select international markets including a presence in the United Kingdom (“U.K.”UK”), the European Union (“EU”), India, and Singapore.Singapore. Our technology segment accounted for 97% of our net sales and 70%79% of our operating income, while our financing segment accounted for 3% of our net sales and 30%21% of our operating income, for the ninesix months ended December 31, 2017.September 30, 2022.
Key Business MetricsBUSINESS TRENDS
We believe the following key factors are impacting our business performance and our ability to achieve business results:
General economic concerns including inflation, rising interest rates, staffing shortages, COVID variants, and global unrest may impact our customers’ willingness to spend on technology and services.
A worldwide shortage of certain IT products is resulting from, among other things, shortages in semiconductors and other product components. Like others, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of products, our having to carry more inventory for longer periods, the costs of products, vendor return and cancellation policies, and our ability to meet customer demands. We continue to work closely with our suppliers to further mitigate disruptions outside our control. Despite these actions, we believe extended lead times will likely persist for at least the next few quarters.
We are experiencing increases in prices from our suppliers as well as rising wages and interest rates. We generally have been able to pass price increases to our customers. Our labor costs related to services we perform will take longer to pass to customers that have services engagements where prices may be set. Our financing quotes are generally indexed to market changes to enable us to change rates from time of quote to funding. Financing transactions funded with our cash flows, not debt, are subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds and lock in our profit on the transaction. There can be no assurances that inflation will not have a material impact on our sales, gross profit, or operating costs in the future.
Customers’ top focus areas include security, cloud solutions, hybrid work environments (work from home and return to office) as well as digital transformation and modernization. We have developed advisory services, solutions, and professional and managed services to meet these priorities and help our customers attain and maintain their desired state.
Modernizing legacy applications, data modernization, reducing operational complexity, securing workloads, the cost and performance of IT operations, and agility are changing the way companies are purchasing and consuming technology. These are fueling deployments of solutions on cloud, managed services and hybrid platforms and licensing models.
KEY BUSINESS METRICS
Our management monitors a number ofseveral 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 net sales, 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 netNon-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 U.S.US GAAP and presented in our unaudited condensed consolidated financial statements, as well as non-GAAPNon-GAAP performance measurement tools. Generally, a non-GAAPNon-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 excluded or included in the most directly comparable measure calculated and presented in accordance with U.SUS 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 for the three- and results from those metrics six-month periods ended September 30, 2022, and 2021 are as follows,summarized in the following tables (dollars in thousands):
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Sales of products and services | | $ | 330,953 | | | $ | 317,391 | | | $ | 1,045,792 | | | $ | 968,799 | | | | | | | | | | | | | | | | | | | Adjusted gross billings of product and services (1) | | $ | 464,105 | | | $ | 432,407 | | | $ | 1,449,371 | | | $ | 1,317,188 | | | | | | | | | | | | | | | | | | | Gross margin | | | 22.4 | % | | | 22.6 | % | | | 22.4 | % | | | 22.4 | % | Gross margin, product and services | | | 20.1 | % | | | 20.7 | % | | | 20.2 | % | | | 20.5 | % | Operating income margin | | | 4.8 | % | | | 6.5 | % | | | 6.1 | % | | | 6.7 | % | | | | | | | | | | | | | | | | | | Net earnings | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | | Net earnings margin | | | 4.5 | % | | | 3.9 | % | | | 4.3 | % | | | 4.0 | % | Net earnings per common share - diluted | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | | | | | | | | | | | | | | | | | | | Non-GAAP: Net earnings (2) | | $ | 13,574 | | | $ | 15,621 | | | $ | 44,013 | | | $ | 43,710 | | Non-GAAP: Net earnings per common share - diluted (2) | | $ | 0.97 | | | $ | 1.12 | | | $ | 3.14 | | | $ | 3.12 | | | | | | | | | | | | | | | | | | | Adjusted EBITDA (3) | | $ | 19,284 | | | $ | 23,217 | | | $ | 72,811 | | | $ | 72,404 | | Adjusted EBITDA margin (3) | | | 5.6 | % | | | 7.1 | % | | | 6.7 | % | | | 7.3 | % | | | | | | | | | | | | | | | | | | Purchases of property and equipment used internally | | $ | 2,018 | | | $ | 849 | | | $ | 4,064 | | | $ | 2,413 | | Purchases of equipment under operating leases | | | 844 | | | | 3,282 | | | | 2,234 | | | | 4,887 | | Total capital expenditures | | $ | 2,862 | | | $ | 4,131 | | | $ | 3,436 | | | $ | 7,300 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | Consolidated | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Net sales | | $ | 493,706 | | | $ | 458,017 | | | $ | 952,065 | | | $ | 874,666 | | | | | | | | | | | | | | | | | | | Gross profit | | $ | 133,304 | | | $ | 123,002 | | | $ | 246,827 | | | $ | 228,514 | | Gross margin | | | 27.0 | % | | | 26.9 | % | | | 25.9 | % | | | 26.1 | % | Operating income margin | | | 8.9 | % | | | 9.7 | % | | | 8.1 | % | | | 8.8 | % | | | | | | | | | | | | | | | | | | Net earnings | | $ | 28,469 | | | $ | 31,413 | | | $ | 50,808 | | | $ | 54,931 | | Net earnings margin | | | 5.8 | % | | | 6.9 | % | | | 5.3 | % | | | 6.3 | % | Net earnings per common share - diluted | | $ | 1.07 | | | $ | 1.17 | | | $ | 1.91 | | | $ | 2.04 | | | | | | | | | | | | | | | | | | | Non-GAAP: Net earnings (1) | | $ | 34,396 | | | $ | 34,806 | | | $ | 60,909 | | | $ | 61,159 | | Non-GAAP: Net earnings per common share - diluted (1) | | $ | 1.29 | | | $ | 1.30 | | | $ | 2.28 | | | $ | 2.28 | | | | | | | | | | | | | | | | | | | Adjusted EBITDA (2) | | $ | 50,304 | | | $ | 50,195 | | | $ | 88,608 | | | $ | 88,467 | | Adjusted EBITDA margin | | | 10.2 | % | | | 11.0 | % | | | 9.3 | % | | | 10.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Technology Segment | | | | | | | | | | | | | | | | | Net sales | | $ | 471,478 | | | $ | 436,301 | | | $ | 920,263 | | | $ | 836,659 | | Adjusted gross billings (3) | | $ | 765,762 | | | $ | 664,124 | | | $ | 1,467,705 | | | $ | 1,297,131 | | | | | | | | | | | | | | | | | | | Gross profit | | $ | 116,275 | | | $ | 105,078 | | | $ | 221,926 | | | $ | 200,511 | | Gross margin | | | 24.7 | % | | | 24.1 | % | | | 24.1 | % | | | 24.0 | % | | | | | | | | | | | | | | | | | | Operating income | | $ | 31,903 | | | $ | 30,251 | | | $ | 61,122 | | | $ | 55,474 | | Adjusted EBITDA (2) | | $ | 38,012 | | | $ | 36,059 | | | $ | 72,266 | | | $ | 67,017 | | | | | | | | | | | | | | | | | | | Financing Segment | | | | | | | | | | | | | | | | | Net sales | | $ | 22,228 | | | $ | 21,716 | | | $ | 31,802 | | | $ | 38,007 | | | | | | | | | | | | | | | | | | | Gross profit | | $ | 17,029 | | | $ | 17,924 | | | $ | 24,901 | | | $ | 28,003 | | | | | | | | | | | | | | | | | | | Operating income | | $ | 12,204 | | | $ | 14,052 | | | $ | 16,168 | | | $ | 21,281 | | Adjusted EBITDA (2) | | $ | 12,292 | | | $ | 14,136 | | | $ | 16,342 | | | $ | 21,450 | |
(1) | We define Adjusted gross billings of productNon-GAAP Net earnings and services as our sales of product and servicesNon-GAAP Net earnings per common share – diluted is based on net earnings calculated in accordance with U.S. GAAP, adjusted to exclude other income (expense), share-based compensation, and acquisition and integration expenses, and 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.tax effects. |
We use Adjusted gross billings of product and servicesNon-GAAP Net earnings per common share as a supplemental measure of our performance to gain insight into our operating performance and performance trends. We believe that the volumeexclusion of other income and acquisition-related amortization expense in calculating Non-GAAP Net earnings per common share provides management and investors a useful measure for period-to-period comparisons of our business generatedand operating results by excluding items that management believes are not reflective of our technology segment,underlying operating performance. Accordingly, we believe that Non-GAAP Net earnings per common share provide useful information to investors and to analyze the changes toothers in understanding and evaluating our accounts receivable and accounts payable. Ouroperating results. However, our use of Adjusted gross billings of product and servicesNon-GAAP information 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 U.S. GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted gross billings of productsimilar Non-GAAP Net earnings and servicesNon-GAAP Net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures.
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Sales of products and services | | $ | 330,953 | | | $ | 317,391 | | | $ | 1,045,792 | | | $ | 968,799 | | Costs incurred related to sales of third party software assurance, maintenance and services | | | 133,152 | | | | 115,016 | | | | 403,579 | | | | 348,389 | | | | | | | | | | | | | | | | | | | Adjusted gross billings of product and services | | $ | 464,105 | | | $ | 432,407 | | | $ | 1,449,371 | | | $ | 1,317,188 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | GAAP: Earnings before tax | | $ | 40,241 | | | $ | 43,978 | | | $ | 71,271 | | | $ | 76,553 | | Share based compensation | | | 1,958 | | | | 1,840 | | | | 3,731 | | | | 3,575 | | Acquisition related amortization expense | | | 2,494 | | | | 2,661 | | | | 4,677 | | | | 5,357 | | Other expense | | | 3,866 | | | | 325 | | | | 6,019 | | | | 202 | | Non-GAAP: Earnings before provision for income taxes | | | 48,559 | | | | 48,804 | | | | 85,698 | | | | 85,687 | | | | | | | | | | | | | | | | | | | GAAP: Provision for income taxes | | | 11,772 | | | | 12,565 | | | | 20,463 | | | | 21,622 | | Share based compensation | | | 572 | | | | 528 | | | | 1,080 | | | | 1,024 | | Acquisition related amortization expense | | | 720 | | | | 750 | | | | 1,337 | | | | 1,507 | | Other expense | | | 1,128 | | | | 93 | | | | 1,744 | | | | 58 | | Tax benefit (expense) on restricted stock | | | (29 | ) | | | 62 | | | | 165 | | | | 317 | | Non-GAAP: Provision for income taxes | | | 14,163 | | | | 13,998 | | | | 24,789 | | | | 24,528 | | | | | | | | | | | | | | | | | | | Non-GAAP: Net earnings | | $ | 34,396 | | | $ | 34,806 | | | $ | 60,909 | | | $ | 61,159 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | GAAP: Net earnings per common share - diluted | | $ | 1.07 | | | $ | 1.17 | | | $ | 1.91 | | | $ | 2.04 | | | | | | | | | | | | | | | | | | | Share based compensation | | | 0.05 | | | | 0.05 | | | | 0.09 | | | | 0.10 | | Acquisition related amortization expense | | | 0.07 | | | | 0.07 | | | | 0.13 | | | | 0.14 | | Other expense | | | 0.10 | | | | 0.01 | | | | 0.16 | | | | 0.01 | | Tax expense on restricted stock | | | - | | | | - | | | | (0.01 | ) | | | (0.01 | ) | Total non-GAAP adjustments - net of tax | | | 0.22 | | | | 0.13 | | | | 0.37 | | | | 0.24 | | | | | | | | | | | | | | | | | | | Non-GAAP: Net earnings per common share - diluted | | $ | 1.29 | | | $ | 1.30 | | | $ | 2.28 | | | $ | 2.28 | |
(2) | Non-GAAP net earnings per common share are based on net earnings calculated in accordance with U.S. GAAP, adjusted to exclude other income and acquisition related amortization expense, and related effects on income tax, the tax (benefit) expense recognized due to the vesting of shared based 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-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-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-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 U.S. GAAP. In addition, other companies, including companies in our industry, might calculate Non-GAAP net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures. |
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | GAAP: Earnings before tax | | $ | 16,259 | | | $ | 21,307 | | | $ | 65,724 | | | $ | 67,376 | | Acquisition related amortization expense | | | 1,871 | | | | 1,035 | | | | 4,178 | | | | 3,098 | | Other (income) expense | | | 131 | | | | - | | | | 1 | | | | (380 | ) | Non-GAAP: Earnings before provision for income taxes | | | 18,261 | | | | 22,342 | | | | 69,903 | | | | 70,094 | | | | | | | | | | | | | | | | | | | GAAP: Provision for income taxes | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | | Acquisition related amortization expense | | | 547 | | | | 267 | | | | 1,421 | | | | 956 | | Other (income) expense | | | 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 | | | - | | | | 6 | | | | 1,563 | | | | 514 | | Non-GAAP: Provision for income taxes | | | 4,687 | | | | 6,721 | | | | 25,890 | | | | 26,384 | | | | | | | | | | | | | | | | | | | Non-GAAP: Net earnings | | $ | 13,574 | | | $ | 15,621 | | | $ | 44,013 | | | $ | 43,710 | | | | | | | | | | | | | | | | | | | GAAP: Net earnings per common share - diluted | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | | Non-GAAP: Net earnings per common share - diluted | | $ | 0.97 | | | $ | 1.12 | | | $ | 3.14 | | | $ | 3.12 | |
(3) | We define Adjusted EBITDA as net earnings calculated in accordance with U.S GAAP, adjusted for the following: interest expense, depreciation and amortization, share-based compensation, acquisition and integration expenses, provision for income taxes, and other income. Segment Adjusted EBITDA is defined as operating income calculated in accordance with GAAP, adjusted for interest expense, share-based compensation, acquisition and integration expenses, and depreciation and amortization. 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-GAAPNon-GAAP financial measure. Adjusted EBITDA margin is our calculation of Adjusted EBITDA divided by net sales. The presentation of Adjusted EBITDA has been changed from prior period presentations to include adjustments for expenses related to acquisitions such as legal, accounting, tax, and adjustments to the fair value of contingent purchase price consideration as well as stock compensation. |
We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance.performance and performance trends. 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 U.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 December 31, | | | Nine Months Ended December 31, | | Consolidated | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Net earnings | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | | Provision for income taxes | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | | Depreciation and amortization | | | 2,894 | | | | 1,910 | | | | 7,086 | | | | 5,408 | | Other (income) expense | | | 131 | | | | - | | | | 1 | | | | (380 | ) | Adjusted EBITDA | | $ | 19,284 | | | $ | 23,217 | | | $ | 72,811 | | | $ | 72,404 | | | | | | | | | | | | | | | | | | | Technology Segment | | | | | | | | | | | | | | | | | Operating income | | $ | 11,415 | | | $ | 16,889 | | | $ | 48,704 | | | $ | 56,003 | | Depreciation and amortization | | | 2,893 | | | | 1,908 | | | | 7,084 | | | | 5,400 | | Adjusted EBITDA | | $ | 14,308 | | | $ | 18,797 | | | $ | 55,788 | | | $ | 61,403 | | | | | | | | | | | | | | | | | | | Financing Segment | | | | | | | | | | | | | | | | | Operating income | | $ | 4,975 | | | $ | 4,418 | | | $ | 17,021 | | | $ | 10,993 | | Depreciation and amortization | | | 1 | | | | 2 | | | | 2 | | | | 8 | | Adjusted EBITDA | | $ | 4,976 | | | $ | 4,420 | | | $ | 17,023 | | | $ | 11,001 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | Consolidated | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Net earnings | | $ | 28,469 | | | $ | 31,413 | | | $ | 50,808 | | | $ | 54,931 | | Provision for income taxes | | | 11,772 | | | | 12,565 | | | | 20,463 | | | | 21,622 | | Share based compensation | | | 1,958 | | | | 1,840 | | | | 3,731 | | | | 3,575 | | Interest and financing costs | | | 671 | | | | 199 | | | | 809 | | | | 358 | | Depreciation and amortization | | | 3,568 | | | | 3,853 | | | | 6,778 | | | | 7,779 | | Other income | | | 3,866 | | | | 325 | | | | 6,019 | | | | 202 | | Adjusted EBITDA | | $ | 50,304 | | | $ | 50,195 | | | $ | 88,608 | | | $ | 88,467 | | | | | | | | | | | | | | | | | | | Technology Segment | | | | | | | | | | | | | | | | | Operating income | | $ | 31,903 | | | $ | 30,251 | | | $ | 61,122 | | | $ | 55,474 | | Depreciation and amortization | | | 3,540 | | | | 3,825 | | | | 6,722 | | | | 7,723 | | Share based compensation | | | 1,898 | | | | 1,784 | | | | 3,613 | | | | 3,462 | | Interest and financing costs | | | 671 | | | | 199 | | | | 809 | | | | 358 | | Adjusted EBITDA | | $ | 38,012 | | | $ | 36,059 | | | $ | 72,266 | | | $ | 67,017 | | | | | | | | | | | | | | | | | | | Financing Segment | | | | | | | | | | | | | | | | | Operating income | | $ | 12,204 | | | $ | 14,052 | | | $ | 16,168 | | | $ | 21,281 | | Depreciation and amortization | | | 28 | | | | 28 | | | | 56 | | | | 56 | | Share based compensation | | | 60 | | | | 56 | | | | 118 | | | | 113 | | Adjusted EBITDA | | $ | 12,292 | | | $ | 14,136 | | | $ | 16,342 | | | $ | 21,450 | |
(3) | We define Adjusted gross billings as our technology segment net sales calculated in accordance with US GAAP, adjusted to exclude the costs incurred related to sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. We have provided below a reconciliation of Adjusted gross billings to technology segment net sales, which is the most directly comparable financial measure to this Non-GAAP financial measure. |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Technology segment net sales | | $ | 471,478 | | | $ | 436,301 | | | $ | 920,263 | | | $ | 836,659 | | Costs incurred related to sales of third party maintenance, software assurance and subscription/SaaS licenses, and services | | | 294,284 | | | | 227,823 | | | | 547,442 | | | $ | 460,472 | | Adjusted gross billings | | $ | 765,762 | | | $ | 664,124 | | | $ | 1,467,705 | | | $ | 1,297,131 | |
During the three months ended December 31, 2017, net sales increased 4.9%, or $15.9 million to $342.6 million, compared to $326.7 million for the same period in the prior fiscal year. For the nine months ended December 31, 2017, net sales increased 8.4%, or $83.9 million to $1,080.6 million, compared to $996.6 million for the same period in the prior fiscal year.
We use Adjusted gross billings as a supplemental measure of productour performance to gain insight into the volume of business generated by our technology segment, and services increased 7.3%,to analyze the changes to our accounts receivable and accounts payable. Our use of Adjusted gross billings as an analytical tool has limitations, and you should not consider them in isolation or $31.7 million to $464.1 million,as substitutes for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted gross billings or a similarly titled measure differently, which may reduce its usefulness as a comparative measure.
CONSOLIDATED RESULTS OF OPERATIONS
Net sales for the three months ended December 31, 2017 from $432.4 million for the same period in the prior fiscal year. For the nine months ended December 31, 2017, adjusted gross billings of product and services increased 10.0%, or $132.2 million to $1,449.4 million, from $1,317.2 million for the same period in the prior fiscal year. Both the three month and nine monthSeptember 30, 2022, increase in demand was from commercial customers primarily in the technology, financial services and health care industries, partially offset by SLED and other industries.
Consolidated gross profit rose 3.9% to $76.7 million, compared with $73.8 million for the three months ended December 31, 2016. Consolidated gross margins were 22.4% for the three months ended December 31, 2017 a decrease of 20 basis points compared to 22.6% for the same period in the prior fiscal year, due lower product margins, including a decrease in vendor incentives earned, which was offset by an increase in service revenues.
Consolidated gross profit rose 8.3% to $241.9 million, compared with $223.4 million for the nine months ended December 31, 2016. Consolidated gross margins were 22.4% for both the nine months ended December 31, 2017 and 2016. Consolidated gross margins were impacted by lower product margins, including a decrease in vendor incentives earned, which was offset by higher service and financing revenues.
Our operating expenses increased 14.9% to $60.3d $35.7 million, or 78.6% of gross profits for the three months ended December 31, 20177.8%, to $493.7 million, as compared to $52.5 million, representing 71.1% of gross profits in the same period prior year. For the nine months ended December 31, 2017, our operating expenses increased 12.6% to $176.6 million, or 72.5% of gross profits as compared to $156.4 million, representing 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, and an increase in employee healthcare costs. Our headcount increased by 120 employees or 10.3% to 1,284 from 1,164 a year ago, 98 of which were from the acquisitions of IDS and OneCloud. The net additions in personnel compared to the prior year include 105 sales and engineering positions, with the remaining additions being administrative, IT, and finance positions.
Operating income for the three months ended December 31, 2017 decreased 23.1% to $16.4 million, as compared to $21.3$458.0 million for the same period in the prior year. ForProduct sales for the three months ended December 31, 2017,September 30, 2022, increased $31.4 million, or 7.9% to $428.6 million, as compared to $397.2 million for the operating income margin decreased 170same period in the prior year, due to increased demand and higher prices for some products in our technology segment. Service sales for the three months ended September 30, 2022, increased $4.3 million, or 7.1%, to $65.2 million, as compared to $60.9 million for the same period in the prior year, primarily due to growth in managed services volume. In the technology segment, we had increases in net sales to customers in technology, telecom, media, and entertainment, and SLED due to increases in demand and the timing of fulfilling orders from existing customers, which were partially offset by decreases in net sales to customers in healthcare due to the timing of fulfilling orders from existing customers during the three months ended September 30, 2022, compared to the same period in the prior year.
Net sales for the six months ended September 30, 2022, increased $77.4 million, or 8.8%, to $952.1 million, as compared to $874.7 million for the same period in the prior year. Product sales for the six months ended September 30, 2022, increased $65.6 million, or 8.6%, to $823.8 million, as compared to $758.2 million for the same period in the prior year, due to increased demand and higher prices for some products in our technology segment. Service sales for the six months ended September 30, 2022, increased $11.9 million, or 10.2%, to $128.3 million, as compared to $116.4 million for the same period in the prior year, primarily due to growth in managed services volume and increases in professional services volume and rates. In the technology segment, we had increases in net sales to customers in technology, telecom, media, and entertainment, and professional services due to increases in demand and the timing of fulfilling orders from existing customers, which were partially offset by decreases in net sales to customers in healthcare and manufacturing due to the timing of fulfilling orders from existing customers during the six months ended September 30, 2022, compared to the same period in the prior year.
Adjusted gross billings for the three months ended September 30, 2022, increased $101.7 million, or 15.3%, to $765.8 million, as compared to $664.1 million for the same period in the prior year. We had increases in adjusted gross billings to customers in technology, telecom, media and entertainment, financial services, and SLED, which were partially offset by decreases in adjusted gross billings to customers in the healthcare market.
Adjusted gross billings for the six months ended September 30, 2022, increased $170.6 million, or 13.2%, to $1,467.7 million, as compared to $1,297.1 million for the same period in the prior year. We had increases in adjusted gross billings to customers in technology, telecom, media and entertainment, financial services, and SLED, which were partially offset by decreases in adjusted gross billings to customers in the healthcare market.
Consolidated gross profit for the three months ended September 30, 2022, increased $10.3 million, or 8.4%, to $133.3 million, as compared to $123.0 million for the same period in the prior year. Our increase in gross margins was due to an increase in product margins, due to a higher volume of sales of third-party maintenance, software assurance and subscription/SaaS licenses, and services, offset by lower service margins due to increases in third-party costs. Consolidated gross margins for the three months ended September 30, 2022, increased 10 basis points to 4.8%27.0%, as compared to 26.9% for the same period in the prior year. Our increase in gross margins was primarily due to an increase in product margins, partially offset by a decrease in service margins.
Consolidated gross profit for the six months ended September 30, 2022, increased $18.3 million, or 8.0%, to $246.8 million, as compared to $228.5 million for the same period in the prior year. Our increase in gross margins was due to an increase in product margins, due to a higher volume of sales of third-party maintenance, software assurance and subscription/SaaS licenses, and services, offset by lower service margins due to increases in third party costs. Consolidated gross margins for the six months ended September 30, 2022, decreased 20 basis points to 25.9%, as compared to the same period in the prior year. Our decrease in gross margins was primarily due to a decrease in service margins.
Operating expenses for the three months ended September 30, 2022, increased $10.5 million, or 13.3%, to $89.2 million, as compared to $78.7 million for the same period in the prior year. Our increase in operating expenses was primarily due to $5.8 million in higher salaries and benefits, $3.7 million in higher general and administrative expenses including higher advertising and marketing fees and higher travel and entertainment costs, $0.7 million in a higher provision for credit losses caused by an increase in our receivables over this period compared to a decrease in our receivables over the same period in the prior year, $0.6 million in higher interest and financing costs, and partially offset by a $0.3 million decrease in depreciation and amortization. As of September 30, 2022, we had 1,729 employees, an increase of 175 from 6.5%1,554 as of September 30, 2021.
Operating expenses for the six months ended September 30, 2022, increased $17.8 million, or 11.7%, to $169.6 million, as compared to $151.8 million for the same period in the prior year. Our increase in operating expenses was primarily due to $9.8 million in salaries and benefits, $6.8 million in higher general and administrative expenses including higher advertising and marketing fees and higher travel and entertainment costs, $1.6 million in a higher provision for credit losses caused by an increase in our receivables over this period compared to a decrease in our receivables over the same period in the prior year, $0.6 million in higher interest and financing costs, and partially offset by a $1.0 million decrease in depreciation and amortization.
As a result of the foregoing, operating income for the three months ended September 30, 2022, decreased $0.2 million, or 0.4%, to $44.1 million, as compared to $44.3 million for the same period in the prior year. Operating income for the ninesix months ended December 31, 2017 decreased 1.9%September 30, 2022, increased $0.5 million, or 0.7%, to $65.7million,$77.3 million, as compared to $67.0$76.8 million for the same period in the prior year.
Our effective tax rate for the three and six months ended September 30, 2022, was 29.3% and 28.7% respectively, compared with 28.6% and 28.2%, respectively, for the same periods in the prior year. The change in our effective income tax rate for the three and six months ended September 30, 2022, compared to the same periods in the prior year was primarily due to foreign currency losses incurred in lower tax jurisdictions.
Consolidated net earnings for the three months ended September 30, 2022, decreased $2.9 million, or 9.4%, to $28.5million, as compared to $31.4 million for the same period in the prior year, due to the increase in operating expenses and foreign exchange losses, partially offset by an increase in gross profit. Consolidated net earnings for the six months ended September 30, 2022, decreased $4.1 million, or 7.5%, to $50.8million, as compared to $54.9 million for the same period in the prior year, due to the increase in operating expenses and foreign exchange losses, partially offset by an increase in gross profit.
Adjusted EBITDA for the three months ended September 30, 2022, increased $0.1 million, or 0.2%, to $50.3 million, as compared to $50.2 million for the same period in the prior year. ForAdjusted EBITDA margin for the ninethree months ended December 31, 2017,September 30, 2022, decreased 80 basis points to 10.2%, as compared to the operating incomeprior year period of 11.0%.
Adjusted EBITDA for the six months ended September 30, 2022, increased $0.1 million, or 0.2%, to $88.6 million, as compared to $88.5 million for the same period in the prior year. Adjusted EBITDA margin for the six months ended September 30, 2022, decreased 80 basis points to 9.3%, as compared to the prior year period of 10.1%.
Diluted earnings per share for the three months ended September 30, 2022, decreased 60 basis points$0.10, or 8.5%, to 6.1% from 6.7%$1.07 per share, as compared to $1.17 per share for same period in the prior year. Non-GAAP diluted earnings per share for the three months ended September 30, 2022, decreased $0.01, or 0.8%, to $1.29, as compared to $1.30 for the same period in the prior year.
Consolidated net earnings for the three months ended December 31, 2017 were $15.6 million, an increase of 23.5%, or $3.0 million, compared to the prior year’s results of $12.6 million. For the nine months ended December 31, 2017, consolidated net earnings were $46.2 million, an increase of 15.4%, or $6.2 million, compared to the prior year’s results of $40.1 million.
Adjusted EBITDA decreased $3.9 million, or 16.9% to $19.3 million and Adjusted EBITDA margin decreased 150 basis points to 5.6% for the three months ended December 31, 2017, as compared to the prior period of 7.1%. For the nine months ended December 31, 2017, Adjusted EBITDA increased $0.4 million, or 0.6% to $72.8 million and Adjusted EBITDA margin decreased 60 basis points to 6.7% for the nine months ended December 31, 2017, as compared to prior period of 7.3%.
Diluted earnings per share increased 22.0%for the six months ended September 30, 2022, decreased $0.13, or 6.4%, or $0.20 to $1.11$1.91 per share, as compared to $2.04 per share for the three months ended December 31, 2017, as compared to $0.91 per share for the three months ended December 31, 2016. Our effective tax rate for the three months ended December 31, 2017 was 4.2%, which includes a tax benefit $3.4 million from the re-measurement of deferred tax assets and liabilities due to the changesame period in the U.S. statutory rate.prior year. Non-GAAP diluted earnings per share decreased 13.4% to $0.97 for the threesix months ended December 31, 2017,September 30, 2022, remained flat at $2.28, as compared to $1.12 for the three months ended December 31, 2016.
For the nine months ended December 31, 2017, diluted earnings per share increased 15.4%, or $0.44 to $3.30 per share, as compared to $2.86 per share for the nine months ended December 31, 2016. Our effective tax rate for the nine months ended December 31, 2017 was 29.7%, which includes a tax benefit of $1.6 million related to the vesting of share based compensation and a tax benefit $3.4 million from the re-measurement of deferred tax assets and liabilities due to the changesame period in the U.S. statutory rate. Non-GAAP diluted earnings per share increased 0.6% to $3.14 for the nine months ended December 31, 2017, as compared to $3.12 for the nine months ended December 31, 2016.prior year.
Cash and cash equivalents decreased $33.7$55.8 million, or 30.7%35.9%, to $76.1$99.5 million at December 31, 2017as of September 30, 2022, as compared with $109.8to $155.4 million as of March 31, 2017. The2022. Our decrease is primarily the result of investmentsin cash and cash equivalents was due to increases in our financing portfolio, working capital requiredaccounts receivable and inventory, and $13.0 million paid for the growth inacquisition of Future Com, Ltd, partially offset by borrowings on our technology segmentrevolving credit facility. Additional uses of cash during the six months ended September 30, 2022, $29.8 included cash paid of $7.2 million paid in cash at closingto repurchase outstanding shares 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 monetizationcommon stock as part of our investment portfolio provide sufficient liquidity for our business.share repurchase plan and to satisfy the minimum tax withholding requirements on employee stock awards.
Segment OverviewSEGMENT OVERVIEW
Our operations are conducted through two segments: technology and financing.
Technology SegmentTECHNOLOGY SEGMENT
TheOur technology segment earns revenues from sales of IT products, professional services, managed services, and staff augmentation. Our technology segment sells IT equipment and software and related services primarily to corporate customers,corporations, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating toinstitutions. We sell across the US, which accounts for most of our physical locations. Thesales, and in select international markets. Our technology segment also provides Internet-based business-to-business supply chain management solutions for information technologyIT 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 arecustomers 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 equipmentproducts and services from us may have customer master agreements, or CMAs, with our company, which stipulateunder the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses.a customer master agreement (“CMA”). Our other customers generally place orders for IT products using purchase orders. Customer orders without a CMA in place or with other documentation customary for the business. Often, our work withfrom state and local governments is based onmay involve public bids and our written bid responsesresponses. Our customers generally purchase services from us under the terms of statements of work. Our charges for services may be fixed price or determined on time and materials.
We purchase IT products for resale from vendors and distributors. Our relationships with vendors are generally governed by our reseller authorization level. We achieve these authorization levels through purchase volume, certifications held by sales executives or engineers, and though contractual commitments. Our authorization level determines the types of products we can resell, variable discounts applied against the list price, funds provided for the marketing, and other special promotions.
We endeavor to minimize our cost of sales through vendor incentive programs. Our benefit from these programs provided by vendors and distributors. The programs we qualify for are generally setis also determined 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.level. 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 vendors often change their incentive programs. As such, our ability to continue to reduce our costs of sales through participating in these programs continually change and, therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.not guaranteed.
Financing SegmentFINANCING SEGMENT
Our financing segment offers financing solutions to corporations, governmental entities,state and educational institutions nationwidelocal governments, and alsohigher education institutions. We provide financing across the US, which accounts for most of our sales, and in the United Kingdom, Canada and Iceland. Theselect international markets. Our financing segment derives revenueearns revenues from leasing IT and medical equipment, and the disposition of that equipment at the end of the lease. Thefrom financing segment also derives revenues from the financingpurchases 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 theservices, and from selling IT 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 revenuesa lease.
Our financing revenue is generally earned from the following three sources:
Portfolio income: Interest income from financing receivables and rents due under operating leases Transactional gains: Net gains on the sale of financial assets Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and 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.off-lease equipment.
Fluctuations in RevenuesFLUCTUATIONS IN OPERATING RESULTS
Our operating results of operations are susceptiblemay fluctuate due to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, wage costs, product availability, changes in vendor incentive programs, interest rate fluctuations, the timing of sales of financial assets, 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.
for leased equipment. 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 investmentsareas over the longer term and opening new facilities, which may reduceimpact our results from operations in the short term.operating results. CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statementsAs disclosed in conformityNote 2, “Recent Accounting Pronouncements,” we adopted a new standard on accounting for contract assets and contract liabilities from contracts with U.S. GAAP requires management to use judgmentcustomers in a business combination in the applicationsecond quarter of accounting policies, including making estimatesour fiscal year 2023. Under this new standard, we apply Accounting Standards Codification Topic 606, Contracts with customers, to recognize 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 ofmeasure contract assets and contract 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.
Ourcontracts with customers. Other than this change, 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 2017 annual2022 Annual Report.
SEGMENT RESULTS OF OPERATIONS
The three and ninesix months ended December 31, 2017September 30, 2022, compared to the three and ninesix months ended December 31, 2016September 30, 2021
Technology SegmentTECHNOLOGY SEGMENT
The results of operations for our technology segment for the three and nine months ended December 31, 2017 and 2016 were as follows (dollars in thousands):
| | Three Months Ended December 31, | | | | | | | | | Nine Months Ended December 31, | | | | | | | | | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Sales of product and services | | $ | 330,953 | | | $ | 317,391 | | | $ | 13,562 | | | | 4.3 | % | | $ | 1,045,792 | | | $ | 968,799 | | | $ | 76,993 | | | | 7.9 | % | | Fee and other income | | | 1,678 | | | | 915 | | | | 763 | | | | 83.4 | % | | | 3,707 | | | | 3,679 | | | | 28 | | | | 0.8 | % | | Net sales | | | 332,631 | | | | 318,306 | | | | 14,325 | | | | 4.5 | % | | | 1,049,499 | | | | 972,478 | | | | 77,021 | | | | 7.9 | % | | | | | | | | | | | | | Cost of sales, product and services | | | 264,487 | | | | 251,729 | | | | 12,758 | | | | 5.1 | % | | | 834,873 | | | | 769,780 | | | | 65,093 | | | | 8.5 | % | | Product | | | $ | 406,317 | | | $ | 375,444 | | | $ | 791,993 | | | $ | 720,210 | | Services | | | | 65,161 | | | | 60,857 | | | | 128,270 | | | | 116,449 | | Total | | | | 471,478 | | | | 436,301 | | | | 920,263 | | | | 836,659 | | | | | | | | | | | | | | | | Cost of sales | | | | | | | | | | | | | | Product | | | 311,928 | | 293,837 | | 614,436 | | 564,852 | | Services | | | | 43,275 | | | 37,386 | | | 83,901 | | | 71,296 | | Total | | | | 355,203 | | | 331,223 | | | 698,337 | | | 636,148 | | | | | | | | | | | | | | | | Gross profit | | | 68,144 | | | | 66,577 | | | | 1,567 | | | | 2.4 | % | | | 214,626 | | | | 202,698 | | | | 11,928 | | | | 5.9 | % | | 116,275 | | | 105,078 | | | 221,926 | | | 200,511 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general, and administrative expenses | | | 53,836 | | | | 47,780 | | | | 6,056 | | | | 12.7 | % | | | 158,838 | | | | 141,295 | | | | 17,543 | | | | 12.4 | % | | Selling, general, and administrative | | | 80,161 | | | 70,803 | | | 153,273 | | | 136,956 | | Depreciation and amortization | | | 2,893 | | | | 1,908 | | | | 985 | | | | 51.6 | % | | | 7,084 | | | | 5,400 | | | | 1,684 | | | | 31.2 | % | | 3,540 | | | 3,825 | | | 6,722 | | | 7,723 | | Interest and financing costs | | | | 671 | | | | 199 | | | | 809 | | | | 358 | | Operating expenses | | | 56,729 | | | | 49,688 | | | | 7,041 | | | | 14.2 | % | | | 165,922 | | | | 146,695 | | | | 19,227 | | | | 13.1 | % | | 84,372 | | | 74,827 | | | 160,804 | | | 145,037 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | $ | 11,415 | | | $ | 16,889 | | | $ | (5,474 | ) | | | (32.4 | %) | | $ | 48,704 | | | $ | 56,003 | | | $ | (7,299 | ) | | | (13.0 | %) | | $ | 31,903 | | | $ | 30,251 | | | $ | 61,122 | | | $ | 55,474 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Key business metrics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted gross billings of product and services | | $ | 464,105 | | | $ | 432,407 | | | $ | 31,698 | | | | 7.3 | % | | $ | 1,449,371 | | | $ | 1,317,188 | | | $ | 132,183 | | | | 10.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted gross billings | | | $ | 765,762 | | | $ | 664,124 | | | $ | 1,467,705 | | | $ | 1,297,131 | | Adjusted EBITDA | | $ | 14,308 | | | $ | 18,797 | | | $ | (4,489 | ) | | | (23.9 | %) | | $ | 55,788 | | | $ | 61,403 | | | $ | (5,615 | ) | | | (9.1 | %) | | $ | 38,012 | | | $ | 36,059 | | | $ | 72,266 | | | $ | 67,017 | |
Net sales: Net sales for the three months ended December 31, 2017 were $332.6September 30, 2022, increased $35.2 million, or 8.1%, to $471.5 million, as compared to $318.3 million during$436.3 million for the same period in the prior year, due to increases in net sales from customers in technology, telecom, media, and entertainment, and SLED, which were partially offset by decreases in net sales to customers in healthcare. Product sales for the three months ended December 31, 2016,September 30, 2022, increased $30.9 million, or 8.2%, to $406.3 million. Service sales for the three months ended September 30, 2022, increased $4.3 million, or 7.1%, to $65.2 million, as compared to $60.9 million for the same period in the prior year, due to an increase of 4.5%in managed services.
Net sales for the six months ended September 30, 2022, increased $83.6 million, or 10.0%, to $920.3 million, as compared to $836.7 million for the same period in the prior year. Product sales for the six months ended September 30, 2022, increased 10.0%, or $14.3 million. For the nine months ended December 31, 2017, net sales were $1,049.5$71.8 million to $792.0 million, as compared to $972.5$720.2 million for the same period in the prior year, and service revenue increased by 10.2%, or $11.9 million, to $128.3 million, as compared to $116.4 million during the same period in the prior year, an increase of 7.9%, or $77.0 million.year.
Adjusted gross billings of product and services for the three months ended December 31, 2017 were $464.1September 30, 2022, increased $101.7 million, or 15.3%, to $765.8 million, as compared to $432.4$664.1 million during the three months ended December 31, 2016, an increase of 7.3%, or $31.7 million. Sales of product and services for the three months ended December 31, 2017 were $331.0 million compared to $317.4 million during the same period in the prior year, anyear. Our increase of 4.3%, or $13.6 million.
The increase in net sales of product and services during the three months ended December 31, 2017 was also due, in part, to an increase in demand for products and services from customers in the technology, financial services and healthcare industries, partially offset by reductions in sales to state and local government and educational customers (“SLED”), technology, and telecom, media and entertainment customers, and other industries.
For the nine months ended December 31, 2017, adjusted gross billings was due to higher demand from our current customers and higher prices for some products.
Adjusted gross billings for the six months ended September 30, 2022, increased $170.6 million, or 13.2%, to $1,467.7 million, as compared to $1,317.2$1,297.1 million during the nine months ended December 31, 2016, an increase of 10.0%, or $132.2 million. For the nine months ended December 31, 2017, sales of product and services were $1,045.8 million compared to $968.8 million duringfor the same period in the prior year, an increase of 7.9%, or $77.0 million.year. The increase in net sales of product and services during the nine month period wasadjusted gross billings is due to anhigher demand from the same customer end markets that were previously identified for the increase in demand for products and services from customers in the financial services industries, technology, and health care industries, which include sales relating to several large projects for large customers.net sales.
Summarized below are the sequential and year-over-year changes in net sales of product and services:
Quarter Ended | | Sequential | | | Year over Year | | December 31, 2017 | | | (7.5 | %) | | | 4.3 | % | September 30, 2017 | | | 0.2 | % | | | (1.0 | %) | June 30, 2017 | | | 11.1 | % | | | 23.1 | % | March 31, 2017 | | | 1.3 | % | | | 10.3 | % | December 31, 2016 | | | (12.1 | %) | | | 10.3 | % |
We rely on our vendors to fulfill a large majority of shipments to our customers. As of December 31, 2017,September 30, 2022, we had open orders of $170.0$1.0 billion and deferred revenue of $148.5 million. As of September 30, 2021, we had open orders of $707.1 million and deferred revenue of $59.6$110.0 million. As of December 31, 2016, we had open orders of $238.5 million and deferred revenues of $66.3 million.
We analyze net sales of products and services by customer end market and by manufacturer,vendor, as opposed to discrete product and service categories. The percentage of net sales of product and services by industry and vendor for the twelve month periods ended September 30, 2022, and 2021 are summarized below:
| | Twelve Months Ended December 31, | | | | | | | 2017 | | | 2016 | | | Change | | Revenue by customer end market: | | | | | | | | | | Technology | | | 25 | % | | | 22 | % | | | 3 | % | SLED | | | 17 | % | | | 21 | % | | | (4 | %) | Telecom, Media & Entertainment | | | 14 | % | | | 16 | % | | | (2 | %) | Financial Services | | | 16 | % | | | 12 | % | | | 4 | % | Healthcare | | | 13 | % | | | 11 | % | | | 2 | % | Other | | | 15 | % | | | 18 | % | | | (3 | %) | Total | | | 100 | % | | | 100 | % | | | | | | | | | | | | | | | | | | Revenue by vendor: | | | | | | | | | | | | | Cisco Systems | | | 44 | % | | | 49 | % | | | (5 | %) | HP Inc. & HPE | | | 7 | % | | | 6 | % | | | 1 | % | NetApp | | | 4 | % | | | 5 | % | | | (1 | %) | Sub-total | | | 55 | % | | | 60 | % | | | (5 | %) | Other | | | 45 | % | | | 40 | % | | | 5 | % | Total | | | 100 | % | | | 100 | % | | | | |
| | Twelve Months Ended September 30, | | | | | Net sales by customer end market: | | 2022 | | | 2021 | | | Change | | Telecom, Media & Entertainment | | | 29 | % | | | 28 | % | | | 1 | % | Technology | | | 16 | % | | | 14 | % | | | 2 | % | Healthcare | | | 14 | % | | | 15 | % | | | (1 | %) | SLED | | | 13 | % | | | 15 | % | | | (2 | %) | Financial Services | | | 9 | % | | | 11 | % | | | (2 | %) | All others | | | 19 | % | | | 17 | % | | | 2 | % | Total | | | 100 | % | | | 100 | % | | | | |
| | Twelve Months Ended September 30, | | | | | Net sales by vendor: | | 2022 | | | 2021 | | | Change | | Cisco Systems | | | 37 | % | | | 36 | % | | | 1 | % | Dell EMC | | | 9 | % | | | 8 | % | | | 1 | % | Juniper Networks | | | 6 | % | | | 6 | % | | | 0 | % | NetApp | | | 5 | % | | | 5 | % | | | 0 | % | HPE | | | 3 | % | | | 2 | % | | | 1 | % | Arista Networks | | | 2 | % | | | 3 | % | | | (1 | %) | All others | | | 38 | % | | | 40 | % | | | (2 | %) | Total | | | 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 monthsmonth period ended December 31, 2017September 30, 2022, we had an increase in the percentage of total revenues from customers in the telecom, media and entertainment, and technology financial services,industry, and health care industries, which were partially offset by decreases in the percentage of total revenues fromin healthcare, SLED, compared toand the prior year period.financial services industry. These changes were driven by changes in customer buying cycles, and the timing of specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers. The majority of our revenues by vendor areis derived from Cisco Systems, a combined HP Inc. and HPE, and NetApp, which, collectively, declined to 55% for the twelve months ended 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 theour top three vendors is due in part to substantial competition and rapid developments in the IT industry.six suppliers. None of the vendors included within the “other”“All others” category exceeded 4%5% of total revenues.
Cost of sales product and services:: Cost of sales product and services increased 5.1% for the three months ended December 31, 2017September 30, 2022, increased $24.0 million, or 7.2%, to $355.2 million, as compared to the prior year period, due to the 4.3% increase in sales of product and services. For the nine months ended December 31, 2017, cost of sales, product and services increased 8.5% due to the increase in sales of product and services. Our gross margin on the sales of product and services decreased 60 basis points to 20.1%$331.2 million for the three months ended December 31, 2017, from 20.7% in the same period in the prior year.
For the nine months ended December 31, 2017, our Our gross margin on the sales of product and services decreased 30 basisincreased 60 basis points to 20.2%, from 20.5%, due to lower product margins from a large competitively bid project which partially shipped during the nine 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 services24.7% for the three months and the nine months ended December 31, 2017 decreased 50 andSeptember 30, basis points respectively, as2022, compared to 24.1% for thesame periodsperiod in the prior year. Our increase in gross margins was primarily due to higher product gross margin primarily from a higher proportion of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services which are recognized on a net basis, partially offset by lower service gross margin from higher third-party costs.
Cost of sales for the six months ended September 30, 2022, increased 9.8% or $62.2 million which is in-line with the increase in net sales. Our gross margin increased 10 basis points to 24.1% for the six months ended September 30, 2022, compared to 24.0% for the same period in the prior year, primarily due to higher product margin primarily from a higher proportion of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services which are recognized on a net basis, partially offset by lower service margin driven by higher third-party costs.
Selling, general, and administrative expenses:: Selling, general, and administrative expenses were $53.8 million for the three months ended December 31, 2017,September 30, 2022, increased $9.4 million, or 13.2%, to $80.2 million, as compared to $70.8 million for the same period in the prior year. Salaries and benefits for the three months ended September 30, 2022, increased $5.5million, or 9.0% to $66.3million, as compared to $60.8 million for the same period in the prior year, mainly due to an increase in salaries and variable compensation that was driven by increases in headcount. Our technology segment had 1,693 employees as of September 30, 2022, an increase of $6.0171 from 1,522as of September 30, 2021, driven by increased demand for our services and the acquisition of Future Com, Ltd. We added 145 additional customer facing employees, of which 100 were professional services and technical support personnel. General and administrative expenses for the three months ended September 30, 2022, increased $3.3 million, or 12.7%33.2%, to $13.2 million, as compared to $47.8$9.9 million for the same period in the prior year, period. Salaries and benefits increased $4.3 million, or 10.8% to $44.5 million, compared to $40.2 million during the prior year. Most of the increase was due to higher salariesadvertising and benefits expenses related to the increase in the number of employees from both acquisitionsmarketing fees, professional service fees, and internal growth.higher travel and entertainment costs.
Selling, general, and administrative expenses were $158.8for the six months ended September 30, 2022, increased by $16.3 million, or 11.9%, to $153.3 million, as compared to $137.0 million for the nine months ended December 31, 2017, an increase of $17.5 million, or 12.4% compared to $141.3 million forsame period in the prior year period.year. Salaries and benefits for the six months ended September 30, 2022,increased $12.8$9.2 million, or 10.8%7.8% to $130.6$128.0 million, compared to $117.8$118.8 million during the same period in the prior year. Approximately 20.8% of this increase wasyear, mainly due to higher variable compensation due to the increase in gross profit, 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 1,236 employees as of December 31, 2017, an increase of 123, or 11.1%, from 1,113 at December 31, 2016. The acquisitions of OneCloudsalaries and IDS accounted for 98 of the added positions. There were 107 positions addedvariable compensation that was driven by increases in the past year related to sales, marketing, and professional services personnel.
headcount. General and administrative expenses for the six months ended September 30, 2022,increased $1.5$6.2 million, or 23.9%33.8%, to $7.9$24.3 million, during the three months ended December 31, 2017as compared to $6.4$18.1 million for the same period in 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,fees, professional service fees, software license and travel expenses, including travel expense related to acquisitions. For the nine months ended December 31, 2017, general and administrative expenses increased $3.9 million, or 20.3% to $23.3 million compared to $19.3 million the prior year, due to the incremental adjustment of $0.8 million to the fair value of contingent consideration for acquisitions,maintenance fees and higher travel expense, including travel expense related to acquisitions. Professional and other fees increased $0.9 million, or 20.7% to $5.0 million primarily due to legal fees related to the IDSentertainment costs.
Depreciation and OneCloud acquisitions.
amortization:Depreciation and amortization expense increased $1.0 million, or 51.6% to $2.9 million duringfor the three months ended December 31, 2017 comparedSeptember 30, 2022, decreased $0.3 million, or 7.5%, to $1.9$3.5 million, as compared to $3.8 million for the same period in the prior year, primarily due to less amortization from intangible assets acquired in past acquisitions as the rate of amortization declines each year. ForDepreciation and amortization for the ninesix months ended December 31, 2017, depreciation and amortization expense increased $1.7September 30, 2022, decreased $1.0 million, or 31.2%13.0%, to $7.1$6.7 million, as compared to $7.7 million for the same period in the prior year.
Interest and financing costs: Interest and financing costs for the three and six months ended September 30, 2022, were $0.7 million and $0.8 million, respectively, an increase of $0.5 million and $0.4 million, respectively, as compared to $5.4$0.2 million and $0.4 million, respectively, for the same periods in the prior year. The increase in depreciation and amortizationinterest expense is relatedprimarily due to the acquisitionsan increase in borrowings from our revolving credit facility, partially offset by a decrease in borrowings on an installment payment arrangement. We had $94.7 million of Consolidated IT Servicesrecourse debt in December 2016, OneCloud in May 2017, and IDS inour technology segment as of September 2017.30, 2022, compared to $44.9 million as of September 30, 2021.
Segment operating income:income:As a result of the foregoing, operating income was $11.4 million, a decrease of $5.5 million, or 32.4% for the three months ended December 31, 2017September 30, 2022, increased $1.6 million, or 5.5%, to $31.9 million, as compared to $16.9$30.3 million for the same period in the prior year. Operating income for the six months ended September 30, 2022, increased $5.6 million, or 10.2%, to $61.1 million, as compared to $55.5 million for the same period in the prior year period. Foryear.
Adjusted EBITDA for the three months ended December 31, 2017, Adjusted EBITDA was $14.3 million, a decrease of $4.5September 30, 2022, increased $1.9 million, or 23.9%5.4%, to $38.0 million, as compared to $18.8$36.1 million for the same period in the prior year period. For the nine months ended December 31, 2017, operating income was $48.7 million, a decrease of $7.3 million, or 13.0% compared to $56.0 million in the prior year period. year. Adjusted EBITDA for the ninesix months ended December 31, 2017, was $55.8 million, a decrease of $5.6September 30, 2022, increased $5.3 million, or 9.1%7.8%, to $72.3 million, as compared to $61.4$67.0 million for the same period in the prior year period.year.
Financing SegmentFINANCING SEGEMENT
The results of operations for our financing segment for the three and nine months ended December 31, 2017 and 2016 were as follows (dollars in thousands):
| | Three Months Ended December 31, | | | | | | | | | Nine Months Ended December 31, | | | | | | | | | Three Months Ended September 30, | | | Six Months Ended September 30, | | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Financing revenue | | $ | 9,592 | | | $ | 8,190 | | | $ | 1,402 | | | | 17.1 | % | | $ | 30,698 | | | $ | 23,899 | | | $ | 6,799 | | | | 28.4 | % | | Fee and other income | | | 346 | | | | 161 | | | | 185 | | | | 114.9 | % | | | 374 | | | | 245 | | | | 129 | | | | 52.7 | % | | Net sales | | | 9,938 | | | | 8,351 | | | | 1,587 | | | | 19.0 | % | | | 31,072 | | | | 24,144 | | | | 6,928 | | | | 28.7 | % | | $ | 22,228 | | | $ | 21,716 | | | $ | 31,802 | | | $ | 38,007 | | Direct lease costs | | | 1,394 | | | | 1,142 | | | | 252 | | | | 22.1 | % | | | 3,846 | | | | 3,459 | | | | 387 | | | | 11.2 | % | | | | | | | | | | | | | Cost of sales | | | | 5,199 | | | | 3,792 | | | | 6,901 | | | | 10,004 | | | | | | | | | | | | | | | | Gross profit | | | 8,544 | | | | 7,209 | | | | 1,335 | | | | 18.5 | % | | | 27,226 | | | | 20,685 | | | | 6,541 | | | | 31.6 | % | | 17,029 | | | 17,924 | | | 24,901 | | | 28,003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general, and administrative expenses | | | 3,298 | | | | 2,380 | | | | 918 | | | | 38.6 | % | | | 9,300 | | | | 8,526 | | | | 774 | | | | 9.1 | % | | Selling, general, and administrative | | | 4,543 | | | 3,701 | | | 8,198 | | | 6,323 | | Depreciation and amortization | | | 1 | | | | 2 | | | | (1 | ) | | | (50.0 | %) | | | 2 | | | | 8 | | | | (6 | ) | | | (75.0 | %) | | 28 | | | 28 | | | 56 | | | 56 | | Interest and financing costs | | | 270 | | | | 409 | | | | (139 | ) | | | (34.0 | %) | | | 903 | | | | 1,158 | | | | (255 | ) | | | (22.0 | %) | | | 254 | | | | 143 | | | | 479 | | | | 343 | | Operating expenses | | | 3,569 | | | | 2,791 | | | | 778 | | | | 27.9 | % | | | 10,205 | | | | 9,692 | | | | 513 | | | | 5.3 | % | | 4,825 | | | 3,872 | | | 8,733 | | | 6,722 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | $ | 4,975 | | | $ | 4,418 | | | $ | 557 | | | | 12.6 | % | | $ | 17,021 | | | $ | 10,993 | | | $ | 6,028 | | | | 54.8 | % | | $ | 12,204 | | | $ | 14,052 | | | $ | 16,168 | | | $ | 21,281 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Key business metrics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA | | $ | 4,976 | | | $ | 4,420 | | | $ | 556 | | | | 12.6 | % | | $ | 17,023 | | | $ | 11,001 | | | $ | 6,022 | | | | 54.7 | % | | $ | 12,292 | | | $ | 14,136 | | | $ | 16,342 | | | $ | 21,450 | |
Net sales: Net sales increased by $1.6 million, or 19.0% to $9.9 million for the three months ended December 31, 2017,September 30, 2022, increased $0.5 million, or 2.4%, to $22.2 million, as compared to $8.4$21.7 million for the same period in the prior year resultsyear. The increase in net sales was due to higher post-contractpost contract earnings partially offset by lower portfolio earnings and other financing revenues. Duringtransactional gains. For the quartersthree months ended December 31, 2017 and 2016,September 30, 2022, we recognized net gains on sales of financial assets of $1.2 million $8.1 million and $0.9 million, respectively, and the fair value of assets receivedproceeds from these sales were $32.8$376.4 million. For the three months ended September 30, 2021, net gains on the sale of financial assets were $10.1 million and $55.8 million, respectively. Post contract earnings increased $1.4 million due to the gain on sale of equipmentn associated with early lease terminations, and other financing revenues decreased $0.3 million mainly due to earnings on consumption based financing arrangements.proceeds from these sales were $615.0 million.
ForNet sales for the ninesix months ended December 31, 2017, net sales increased by $6.9 million,September 30, 2022, decreased $6.2 million, or 28.7%16.3%, to $31.1 million$31.8 million, as compared to $24.1$38.0 million for the same period in the prior year resultsyear. The decrease in net sales was due to higherlower portfolio earnings and transactional gains and other financing revenues. Duringgains. For the ninesix months ended December 31, 2017 and 2016,September 30, 2022, we recognized net gains on sales of financial assets of $4.6 million $9.9 million and $4.1 million, respectively, and the fair value of assets receivedproceeds from these sales were $166.9$428.9 million. For the six months ended September 30, 2021, net gains on the sale of financial assets were $13.3 million and $185.4 million, respectively. Post contract earnings increased $4.9 million due to the gain on saleproceeds from these sales were $690.3 million.
As of equipment associated with early lease terminations, and otherSeptember 30, 2022, our financing revenues increased $1.0 million mainly due to earnings on consumption based financing arrangements.
At December 31, 2017, wesegment had $147.2$128.1 million in financing receivables and operating leases, compared to $140.4$166.9 million as of December 31, 2016, an increaseSeptember 30, 2021, a decrease of $6.8$38.8 million, or 4.8%23.2%.
Gross Profit: Gross profit increased by $1.3 million, or 18.5% to $8.5 millionCost of sales: Cost of sales for the three months ended December 31, 2017,September 30, 2022, increased $1.4 million, or 37.1%, to $5.2 million, as compared to $3.8 million for the same period in the prior year, due to higher cost of sales on off-lease equipment offset by lower depreciation expense from operating leases. Gross profit for the three months ended September 30, 2022, decreased by 5.0% to $17.0 million, as compared to the same period in the prior year.For
Cost of sales for the ninesix months ended December 31, 2017, gross profit increased $6.5September 30, 2022, decreased $3.1 million, or 31.6%31.0%, to $27.2$6.9 million, as compared to $10.0 million for the same period in the prior year, due to lower cost of sales on off-lease equipment and depreciation expense from operating leases. Gross profit for the six months ended September 30, 2022, decreased by 11.1% to $24.9 million, as compared to the same period ofin the prior year, as a result of higher revenues. Direct lease costs increased $0.3 million and $0.4 million for the three and nine months ended December 31, 2017, respectively, which primarily consists of depreciation expense from operating leases.year.
Selling, general and administrative expenses: For the three months ended December 31, 2017 selling, general, and administrative expenses increased by $0.9 million or 38.6%, which was due primarily to an increase in our salaries and benefits expense of $0.7 million resulting from an increase in variable compensation related to the increase in gross profit. :Selling, general, and administrative expenses increased by $0.8 million or 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 nine months ended December 31, 2017. Our financing segment had 48 employees as of December 31, 2017, compared 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 December 31, 2017,September 30, 2022, increased $0.8 million, or 22.8%, to $4.5 million, as compared to $3.7 million for the same period in the prior year, due to higher salaries and benefits consisting mostly of higher variable compensation, and higher general and administrative expenses consisting mostly of higher software, license and maintenance fees driven by the deployment of newly hosted software in August 2022.
Selling, general, and administrative expenses for the six months ended September 30, 2022, increased $1.9 million, or 29.7%, to $8.2 million, as compared to $6.3 million for the same period in the prior year, due to higher salaries and benefits consisting mostly of higher variable compensation, higher general and administrative expenses consisting mostly of higher software, license and maintenance fees driven by the deployment of newly hosted software in August 2022, and a higher provision for credit losses caused by changes in our net credit exposure.
In August 2022, we completed the deployment of a new hosted software to manage our financing portfolio. As a result, we anticipate higher general and administrative costs of approximately $1.5 million per year related to amortizing the cost to implement the hosted software and annual fees paid to license the hosted software.
Interest and financing costs: Interest and financing costs for the three months ended September 30, 2022, increased by 77.6% to $0.3 million, and increased by 39.7% to $0.5 million for the six months ended September 30, 2022, compared to the prior year, due toyear. As of September 30, 2022, our notes payable was $20.8 million, a decrease in the average totalof $4.6 million, or 18.1% compared to notes payable outstanding compared to the three months ended December 31, 2017. For the nine months ended December 31, 2017, interest and financing costs decreased by $0.3 million to $0.9 million, or 22.0%. Total notes payable were $31.5of $25.4 million as of December 31, 2017, a decreaseSeptember 30, 2021. As of $22.5 million or 41.7% compared to $54.0 million asSeptember 30, 2022, and 2021, our notes payable consisted entirely of December 31, 2016.non-recourse notes payable. Our weighted average interest rate for non-recourse notes payable was 3.73%4.09% and 3.38%3.59%, asas of December 31, 2017September 30, 2022, and December 31, 2016,2021, respectively.
Segment operating income: As a result of the foregoing, both operating income and Adjusted EBITDA increased $0.6decreased $1.8 million or 12.6% to $5.0 $12.2 million and $12.3 million, respectively, for the three months ended September 30, 2022, as compared to the prior year period. Operating income and Adjusted EBITDA for the six months ended September 30, 2022, decreased by $5.1 million to $16.2 million and $16.3 million, respectively, as compared to the same period in the prior year.
CONSOLIDATED
Other income: Other income and expense increased for both the three and six months ended December 31, 2017September 30, 2022 to $3.9 million and 2016. For the nine months ended December 31, 2017, operating income and Adjusted EBITDA each increased $6.0 million, or 54.8% and 54.7%respectively, due to $17.0 million, respectively.
Consolidated
Other income: Other income and expense during the three months ended December 31, 2017 was a netforeign exchange losses, compared to expense of $0.1$0.3 million which consists of interest income on cash and cash equivalents, more than offset by foreign currency transaction losses.$0.2 million, respectively, in the prior year.
Income taxes:taxes: Our provision for income tax expense was $0.7$11.8 million and $19.5$20.5 million for the three and ninesix months ended December 31, 2017,September 30, 2022, as compared to $8.7$12.6 million and $27.3$21.6 million for the same periods in the prior year. Our effective income tax raterates for the three and ninesix months ended December 31, 2017 was 4.2%September 30, 2022, were 29.3% and 29.7%28.7%, compared to 40.8%28.6% and 40.5%28.2% for the three and ninesix months ended December 31, 2016.September 30, 2021, respectively. 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 foreign currency losses incurred in lower tax jurisdictions.
Net earnings: As a result of the change in the U.S. statutory rateforegoing, our net earnings for the three and nine months ended December 31, 2017, and a tax benefit of $1.6September 30, 2022, decreased $2.9 million, on the vesting of restricted stock in the nine months ended December 31, 2017, comparedor 9.4%, to a tax benefit of $0.5$28.5 million, in the nine months ended December 31, 2016.
Net earnings: The foregoing resulted in net earnings of $15.6 million and $46.2 million for the three and nine months ended December 31, 2017, an increase of 23.5% and 15.4%, as compared to $12.6 million and $40.1$31.4 million during the three and ninesame period in the prior year. Net earnings for the six months ended December 31, 2016, respectively.September 30, 2022, decreased $4.1 million, or 7.5%, to $50.8 million, as compared to $54.9 million during the same period in the prior year.
Basic and fully diluted earnings per common share were $1.12 and $1.11both $1.07 for the three months ended December 31, 2017, an increaseSeptember 30, 2022, a decrease of 21.7%9.3% and 22.0%8.5%, respectively, as compared to $0.92$1.18 and $0.91,$1.17, respectively, for the three months ended December 31, 2016. For the nine months ended December 31, 2017, basicSeptember 30, 2021. Basic and fully diluted earnings per common share were $3.34both $1.91 for the six months ended September 30, 2022, a decrease of 7.3% and $3.30, an increase of 16.0% and 15.4%6.4%, respectively, as compared to $2.88$2.06 and $2.86,$2.04, respectively, for the same periodsix months ended September 30, 2021.
Non-GAAP diluted earnings per share for the three months ended September 30, 2022, decreased $0.01, or 0.8%, to $1.29, as compared to $1.30 for the three months ended September 30, 2021. Non-GAAP diluted earnings per share for the six months ended September 30, 2022, remained flat at $2.28, as compared to the six months ended September 30, 2021.
Weighted average common shares outstanding was 26.6 million in the prior year.
calculation of both basic earnings per common share and diluted earnings per common share for the three-months ending September 30, 2022. Weighted average common shares outstanding was 26.5 million in the calculation of basic earnings per common share for the six-months ending September 30, 2022, and 26.7 million in the calculation of diluted earnings per common share for the six-months ending September 30, 2022. Weighted average common shares outstanding used in the calculation of basic earnings per common share, was 26.7 million for both the three- and six-months ending September 30, 2021, and 26.9 million in the calculation of diluted earnings per common share for both the three months ended December 31, 2017 was 13.9 millionthree- 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 December 31, 2016 was 13.8 million and 13.9 million, respectively.six-months ending September 30, 2021.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the nine months ended 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 nine months ended December 31, 2016 was 13.9 million and 14.0 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity OverviewLIQUIDITY OVERVIEW
Our primary sources of liquidity have historically been cash and cash equivalents, internallyWe finance our operations through funds generated funds from operations and borrowings, both non-recourse and recourse.through borrowings. We have useduse 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 ofborrowings in our technology segment finances its operations with funds generated from operations, and withare primarily through a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”(the “WFCDF Credit Facility”). ePlus Technology, inc.’s agreement withThe WFCDF Credit Facility has an aggregate credit limit of $250 million as of December 31, 2017.
On July 27, 2017, we executed an amendment to the WFCDFaccounts payable floor plan facility component and a revolving credit facility which temporarily increases the aggregate limitcomponent. Our borrowings in our financing segment are primarily through secured borrowings that involve transferring all or part of the two components from $250.0 millioncontractual payments due 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 December 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 fromthird-party financing activities section of our consolidated statements of cash flows.institutions.
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,WFCDF Credit Facility, will be sufficientenough to finance our working capital, capital expenditures, and other standard business requirements for at least the next twelve calendar months.year.
Our ability to continue to fund our planned growth,expand, both internallyorganically and externally,through acquisitions, is dependent upon our ability to generate sufficientenough cash flow from operations or to obtain additional funds through equityfrom borrowing 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):
| | Nine Months Ended December 31, | | | Six Months Ended September 30, | | | | 2017 | | | 2016 | | | 2022 | | 2021 | | Net cash provided by operating activities | | $ | 48,824 | | | $ | 29,702 | | | Net cash used in operating activities | | | $ | (119,671 | ) | | $ | (135,004 | ) | Net cash used in investing activities | | | (54,793 | ) | | | (47,040 | ) | | (12,294 | ) | | (13,690 | ) | Net cash used in financing activities | | | (27,758 | ) | | | (8,205 | ) | | Net cash provided by financing activities | | | 71,342 | | 75,782 | | Effect of exchange rate changes on cash | | | 72 | | | | 454 | | | | 4,776 | | | 300 | | | | | | | | | | | | Net decrease in cash and cash equivalents | | $ | (33,655 | ) | | $ | (25,089 | ) | | $ | (55,847 | ) | | $ | (72,612 | ) |
Cash flows from operating activities. Cash provided: We used $119.7 million in operating activities during the six months ended September 30, 2022, compared to $135.0 million used by operating activities totaled $48.8 million duringfor the ninesix months ended December 31, 2017. Net earnings adjustedSeptember 30, 2021. See below for a breakdown of operating cash flows by segment (in thousands):
| | Six Months Ended September 30, | | | | 2022 | | | 2021 | | Technology segment | | $ | (120,746 | ) | | $ | (127,361 | ) | Financing segment | | | 1,075 | | | | (7,643 | ) | Net cash provided by (used in) operating activities | | $ | (119,671 | ) | | $ | (135,004 | ) |
Technology segment: For the impact of non-cash items was $46.1million. Net changes in assets and liabilities resulted in a increase of cash and cash equivalents of $2.7six months ended September 30, 2022, our technology segment used $120.7 million from operating activities primarily due to net reductionsincreases in our accounts receivable and inventories, of $43.3 million and increased in accounts payable of $18.4 million, mostlypartially 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.net earnings.
Cash provided by operating activities totaled $29.7 million duringIn the ninesix 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 $15.3September 30, 2021, our technology segment used $127.4 million from operating activities primarily due to net additions toincreases in our accounts receivables of $62.0 million,receivable and inventories, of $77.4 million, partially offset by increasednet earnings and a decrease in accounts payablepayable-trade.
In order toTo manage our working capital, we monitor our cash conversion cycle for our Technologytechnology 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 Technologytechnology segment:
| | As of December 31, | | | | | 2017 | | | 2016 | | | As of Sepember 30, | | | | | | | | | | 2022 | | 2021 | | (DSO) Days sales outstanding (1) | | | 52 | | | | 52 | | | 65 | | 64 | | (DIO) Days inventory outstanding (2) | | | 12 | | | | 23 | | | 36 | | 18 | | (DPO) Days payable outstanding (3) | | | (40 | ) | | | (48 | ) | | | (47 | ) | | | (47 | ) | Cash conversion cycle | | | 24 | | | | 27 | | | | 54 | | | 35 | |
(1) | Represents the rolling three-monththree month average of the balance of trade accounts receivable-trade, net for our Technologytechnology segment at the end of the period divided by Adjustedadjusted gross billings of product and services for the same three-monththree month period. |
(2) | Represents the rolling three-monththree month average of the balance of inventory, net for our Technologytechnology segment at the end of the period divided by Costcost of adjusted gross billings of product and services for the same three-monththree month period. |
(3) | Represents the rolling three-monththree month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our Technologytechnology segment at the end of the period divided by Costcost of adjusted gross billings of product and services for the same three-monththree month period. |
Our cash conversion cycle decreasedincreased to 2454 days at December 31, 2017,as of September 30, 2022, as compared to 2735 days as of September 30, 2021. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DPO remained the same at December 31, 2016, primarily driven47 days. Invoices processed through the accounts payable floor plan facility, are typically paid within 45-60 days from the invoice date, while accounts payable trade invoices are typically paid within 30 days from the invoice date. Our DSO increased by a decrease in DPO of 81 day to 65 days. The DSO for both September 30, 2022, and 2021, reflects higher sales to customers with terms greater than or equal to net 60 days. Our DIO increased to 36 days due to DPO timinghigher inventory balance. Inventory, which represents equipment ordered by customers but not yet delivered, increased 77.3% to $274.9 million as of payments. The higher cash conversion cycle for DecemberSeptember 30, 2022, up from $155.1 million as of March 31, 2016 was due mainly to a significant increase in our inventories2022, due to largeongoing projects with customers and supply constraints that lengthen the time over which we receive all the parts in an order for several ofa completed delivery to our major customerscustomers.
Financing segment: For the six months ended September 30, 2022, our financing segment provided $1.1 million from operating activities, primarily due to net earnings, decreases in accounts receivable, and increases in accounts payable-trade offset by increases in financing receivables.
In the prior year’s quarter.six months ended September 30, 2021, our financing segment used $7.6 million from operating activities, primarily due to increases in accounts receivable and financing receivables, offset by net earnings.
Cash flows related to investing activities. Cash: For the six months ended September 30, 2022, we used in$12.3 million from investing activities, was $54.8consisting of $13.0 million during the nine months ended December 31, 2017. Cash used in investing activities during the nine months ended December 31, 2017 was primarily driven by acquisitions of $37.7 million, net issuance and repayment of financing receivables of $79.1 million, purchases of assets to be leased or financed of $5.7 million, and purchases of property, equipment, software, and operating lease equipment of $6.3 million, which was partially offset by the sale of financing receivables of $64.1 million, and proceeds from sale of property, equipment and operating leases of $10.0 million. Cash used in investing activities was $47.0 million during the nine months ended December 31, 2016. Cash used in investing activities during the nine months ended December 31, 2016 was primarily driven by issuance of financing receivables of $114.7 million, cash used in acquisitions of $9.5 acquiring Future Com, Ltd and $2.4 million for purchases of property, equipment, and operating lease equipment, of $7.3 million, and purchases of assets to be leased or financed of $5.9 million, which was partially offset by cash proceeds from the repayment financing receivable$3.1 million of $44.1 million, the sale of financing receivables of $39.9 million, and proceeds from the sale of property, equipment, and operating lease equipment.
In the six months ended September 30, 2021, we used $13.7 million from investing activities, consisting of $16.2 million for purchases of property, equipment and operating lease equipment offset by $2.6 million of $6.4 million.proceeds from the sale of property, equipment, and operating lease equipment.
Cash flows from financing activities. Cash used in: For the six months ended September 30, 2022, cash provided by financing activities was $27.8$71.3 million, during the nine months ended December 31, 2017, which was primarily due to net repayment on floor plan facilityconsisting of $24.9 million, cash used for the repurchase of common stock of $13.4 million, and repayment of financing of acquisitions of $1.6 million, partially offset by net borrowings of non-recourse and recourse notes payable of $12.1$87.7 million,. Cash used in financing activities was $8.2 million during the nine months ended December 31, 2016, which was primarily due to $30.5 partially offset by $7.2 million in cash used for theto repurchase outstanding shares of our common stock and $9.1 million in net repaymentrepayments on the accounts payable floor plan facility.
For the six months ended September 30, 2021, cash provided by financing activities was $75.8 million, consisting of net borrowings on the accounts payable floor plan facility of $5.6$47.2 million partially offset by toand net borrowingsrepayments of non-recourse and recourse notes payable of $28.6 million.$35.4 million, partially offset by $6.9 million in cash used to repurchase outstanding shares of our common stock.
Non-Cash Activities
We assignOur borrowing of non-recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under lease and financing agreements to third-party financial institutions, which are accountedinstitutions. When the transfers do not meet the requirements for asa sale, the proceeds paid to us represent borrowings of non-recourse or recourse notes payable.
Non-cash activities: We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. As a condition to the assignment agreement,of these agreements, certain financial institutions may request that the customer remit their contractual payments to a trust;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.lender. However, thesewhen our customer makes payments through a trust, such payments represent non-cash transactions. Also, in certain assignment structures are classified differently within our consolidated statements of cash flows. More specifically,agreements, 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 tomay direct the third-party financial institution are excludedto pay some of the proceeds from our cash flows from financing activities. Contractual payments received by the trust and paidassignment directly 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 ofvendor or vendors that have supplied the assets being leased and or financed by our customers. Any balancefinanced. In these situations, the portion of the purchase price remaining afterproceeds paid directly to our vendors are non-cash transactions.
SECURED BORROWINGS – FINANCING SEGMENT
We may finance all or most of the cost of the assets that we finance for customers by transferring all or part of the contractual payments due to us to third-party financing institutions. When we account for the transfer as a secured borrowing, we recognize the proceeds as either recourse or non-recourse fundingnotes payable. Our customers are responsible for repaying the debt from a secured borrowing. The lender typically secures a lien on the financed assets at the time the financial assets are transferred and any upfront payments received fromreleases it upon collecting all the transferred payments. 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 their only recourse, upon default by the customer, (our equity investment inis against the equipment) must generally be financed by cash flows from our operations,customer and the sale of thespecific equipment leased to third parties, or other internal means. Althoughunder lease. While 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 supportCREDIT FACILITY – TECHNOLOGY SEGMENT
We finance the operations of 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 December 31, 2017, our non-recourse notes payable decreased 13.8% to $31.5 million, as compared to $36.5 million at March 31, 2017. Recourse notes payable was zero as of 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, subsidiaries ePlus Technology, inc., ePlus Technology Services, inc. and SLAIT Consulting, LLC (collectively, the “Borrowers”) in our technology segment through the WFCDF Credit Facility. The WFCDF Credit Facility has a financing facility from WFCDF to finance its working capital requirements for inventories andan accounts receivable. There are two components of this facility: (1) apayable floor plan component;facility component and (2) an accounts receivablea revolving credit facility component. This facility has full recourse
Please refer to ePlus Technology, inc.Note 8 “Credit Facility and is secured by a blanket lien against all its assets, such as chattel paper, receivables and inventory. As of December 31, 2017, the facility had an aggregate limit of the two components of $250.0 million with an accounts receivable sub-limit of $30.0 million.
On July 27, 2017, we executed an amendmentNotes Payable” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” for additional information concerning our WFCDF Credit Facility.
Accounts payable floor plan facility: We finance most purchases of products for sale to our customers through the accounts payable floor plan facility. Once our customer places a purchase order with us and we have approved their credit, facility which temporarily increasedwe place an order for the aggregate limitdesired products with one 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 limitedour vendors. Our vendors are generally paid 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 thefloor plan facility and minimum earnings before interest, taxes, depreciation and amortization of ePlus Technology, inc. We wereour liability is reflected in compliance with these covenants as of 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“accounts payable—floor plan” in our consolidated balance sheets.
Most customer payments to us are remitted to our lockbox accounts. Once payments are not madecleared, the monies in the lockbox accounts are automatically and daily transferred to our operating account. We pay down the floor plan facility on the three specified dates each month. The facility requires that financialmonth, generally 30-60 days from the invoice date. Our borrowings and repayments under the floor plan component are included in “net borrowings (repayments) on floor plan facility” within cash flows from the financing activities in our consolidated statements of ePlus Technology, inc. be provided within 45 dayscash flows.
As of September 30, 2022, and 90 daysMarch 31, 2022, we had a maximum credit limit of each fiscal year end$375.0 million, and also requires other operational reports be providedan outstanding balance on a regular basis. Either party may terminate the floor plan facility with 90 days advance written notice.of $136.2 million and $145.3 million, respectively. On our balance sheet, our liability under the floor plan facility is presented as part of accounts payable – floor plan.
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 WFCDFRevolving credit facility materially limit our ability to undertake financing. In this regard,: The outstanding balance under the covenants apply only to our subsidiary, ePlus Technology, inc. Thisrevolving credit facility is secured bypresented as part of recourse notes payable- current on our consolidated balance sheets. Our borrowings and repayments under the assetsrevolving credit facility are included in “borrowings of only ePlus Technology, inc.non-recourse and recourse notes payable” and “repayments of non-recourse and recourse notes payable,” respectively, within cash flows from the guaranty as described below.financing activities in our consolidated statements of cash flows.
TheAs of September 30, 2022, the outstanding balance under the revolving credit facility provided by WFCDF requires a guarantywas $85.0 million. As 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, 2017,2022, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $100.0 million as required. of both September 30, 2022, and March 31, 2022.
The loss of the WFCDF credit facilityCredit 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.
Floor Plan ComponentPERFORMANCE GUARANTEES
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 ninety 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 ninety-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 ninety-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 December 31, 2017 | | | Balance as of December 31, 2017 | | | Maximum Credit Limit at March 31, 2017 | | | Balance as of March 31, 2017 | | $ | 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 December 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 thematerial 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 ArrangementsOFF-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 December 31, 2017,September 30, 2022, we were not involved in any unconsolidated special purpose entity transactions.
Adequacy of Capital ResourcesADEQUACY 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 officesopen facilities 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. The impacts of COVID-19 may limit or eliminate our access to capital. While the future is uncertain, we do not believe our WFCDF Credit Facility will be terminated by WFCDF or us. Additionally, while our lending partners in our financing segment have become more discerning in their approval processes, we currently have funding resources available for our transactions.
InflationPOTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
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, or our major customers or vendorsvendors.
Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to the worldwide impacts from COVID-19, currency fluctuations, reduction in IT spending, shortages of product from our vendors due to material shortages, 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 to a lessee or third-party 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“Risk Factors,” in our 20172022 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 RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changesOur cash flow may be adversely affected by the risks related to the COVID-19 pandemic, which may result in our quantitative and qualitative disclosures about market risk duringdelays in the nine months ended December 31, 2017 from our 2017 Annual Report. For a discussion of the Company's exposure to market risk, reference is made to disclosures set forth in Part II, Item 7Acollections of our above-mentioned 2017 Annual Report.accounts receivables or non-payment.
Although a substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, we utilize our lines of credit and other financing facilities whichthat are subject to fluctuations in short-term interest rates. TheseOur non-recourse instruments, which are denominated in U.S.US 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. Financing transactions funded with our cash flows, not debt, are subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds. Borrowings under the WFCDF facilityCredit Facility bear interest at a market-based variable rate. As of December 31, 2017,September 30, 2022, 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 our subsidiaries’ functional currency, which include purchases and sales of the subsidiary’s functional currency.products and services we provide, as well as loans with other ePlus entities. Additionally, we lease assets in foreign countries, including Canada, the UK, and several other European countries. As a lessor, we lease assets for amounts denominated in British Pounds, Euros, and Canadian dollars. To date, our foreign operations are insignificantcurrency exposure associated with purchases and sales of the products and services we provide has not been significant. We have incurred foreign currency transaction gains and losses in relation to total consolidated operations and we believe that potential fluctuationscertain foreign subsidiaries on US dollar denominated loans. Fluctuations in currency exchange rates will not have a material effect on our financial position.
The UK referendum (“Brexit”) to leave, the European Union couldmay 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.
| Controls and ProceduresCONTROLS AND PROCEDURES |
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 December 31, 2017.September 30, 2022.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter, we completed the implementation of a new ERP system within our Financing segment. As a result of this implementation, certain internal controls over financial reporting have been automated or modified to align with the new ERP system. While we believe this new system will strengthen our internal controls, there are inherent risks in Internal Controlsimplementing any new system, and we will continue to evaluate these control changes as part of our assessment of internal control over financial reporting throughout Fiscal 2023.
There have not been any other changes in our internal control over financial reporting during the quarter ended December 31, 2017, whichSeptember 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
42LIMITATIONS AND EFFECTIVENESS OF CONTROLS
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, doesdo 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
Please refer to Note 9, “Commitment and Contingencies” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements”. From time to time, we may be subject to legal proceedings that arise in the ordinary course of 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 provide for costs relating 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“Part I, Item 1A1A. Risk Factors” of our 2017 Annual Report.Report on Form 10-K for the fiscal year ended March 31, 2022.
Item 2. | Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table provides information regarding our total purchases of 128,553 shares of ePlus inc. common stock during the ninesix months ended December 31, 2017.September 30, 2022, including a total of 70,473 shares purchased as part of the publicly announced share repurchase plans or programs.
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 | | April 1, 2017 through April 30, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (2 | ) | May 1, 2017 through May 31, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (3 | ) | June 1, 2017 through June 30, 2017 | | | 54,546 | | | $ | 75.72 | | | | - | | | | 1,000,000 | (4 | ) | July 1, 2017 through July 31, 2017 | | | 3,179 | | | $ | 79.50 | | | | - | | | | 1,000,000 | (5 | ) | August 1, 2017 through August 18, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (6 | ) | August 19, 2017 through August 31, 2017 | | | - | | | $ | - | | | | - | | | | 500,000 | (7 | ) | September 1, 2017 through September 30, 2017 | | | - | | | $ | - | | | | - | | | | 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 | ) |
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 | | April 1, 2022 through April 30, 2022 | | | 34,961 | | | $ | 56.02 | | | | 34,961 | | | | 737,049 | (2 | ) | May 1, 2022 through May 27, 2022 | | | 35,512 | | | $ | 55.86 | | | | 35,512 | | | | 701,537 | (3 | ) | May 28, 2022 through May 31, 2022 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (4 | ) | June 1, 2022 through June 30, 2022 | | | 58,080 | | | $ | 56.51 | | | | - | | | | 1,000,000 | (5 | ) | July 1, 2022 through July 31, 2022 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (6 | ) | August 1, 2022 through August 31, 2022 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (7 | ) | September 1, 2022 through September 30, 2022 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (8 | ) |
| (1) | AnyAll shares acquired were in open-market purchases, except for 54,54658,080 shares, which were repurchased in June 2017, and 3,179 shares which were repurchased in July 2017,2022 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, 20172022, had purchase limitations on the number of shares of up to 1,000,000 shares. As of April 30, 2017,2022, the remaining authorized shares to be purchased were 1,000,000.737,049. |
| (3) | TheAs of May 27, 2022, the authorization under the then-existing share purchase authorization in place forrepurchase plan expired. |
| (4) | On March 24, 2022, the month ended May 31, 2017 had purchase limitations onboard of directors authorized the number of shares ofcompany to repurchase up to 1,000,000 shares.shares of our outstanding common stock commencing on May 28, 2022, and continuing to May 27, 2023. As of May 31, 2017,2022, the remaining authorized shares to be purchased were 1,000,000. |
| (4)(5) | The share purchase authorization in place for the month ended June 30, 20172022, had purchase limitations on the number of shares of up to 1,000,000 shares. As of June 30, 2017,2022, the remaining authorized shares to be purchased were 1,000,000. |
| (5)(6) | The share purchase authorization in place for the month ended July 31, 20172022, had purchase limitations on the number of shares of up to 1,000,000 shares. As of July 31, 2017,2022, the remaining authorized shares to be purchased were 1,000,000. |
| (6)(7) | As of August 18, 2017 the authorization under the then existingThe share purchase plan expired. |
| (7) | Onauthorization in place for the month ended August 15, 2017,31, 2022, had purchase limitations on the boardnumber of directors authorized the company to repurchaseshares of up to 500,000 shares of our outstanding common stock commencing on August 19, 2017 through August 18, 2018.1,000,000 shares. As of August 31, 2017,2022, the remaining authorized shares to be purchased were 500,000.1,000,000. |
| (8) | The share purchase authorization in place for the month ended September 30, 20172022, had purchase limitations on the number of shares of up to 500,0001,000,000 shares. As of September 30, 2017,2022, the remaining authorized shares to be purchased were 500,000.1,000,000. |
| (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. |
Item 3. | Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES |
Not Applicable.
Item 4. | Mine Safety DisclosuresMINE SAFETY DISCLOSURES |
Not Applicable.
Item 5. | Other InformationOTHER INFORMATION |
None.Because this Quarterly Report on Form 10-Q is being filed within four business days from the date of the reportable event, we have elected to make the following disclosure in this Quarterly Report on Form 10-Q instead of in a Current Report on Form 8-K under Items 1.01 and 2.03.
Entry into a Material Definitive Agreement
ePlus Technology, inc., ePlus Technology Services, inc. and SLAIT Consulting, LLC (collectively, the “Borrowers”) are parties to that certain First Amended and Restated Credit Agreement, dated as of October 13, 2021 (the “Credit Agreement”) by and among the Borrowers, the various lenders who are parties thereto (collectively, the “Lenders”) and Wells Fargo Commercial Distribution Finance, LLC, acting as Administrative Agent thereunder (in such capacity, “Administrative Agent”), pursuant to which, among other things, the Lenders severally established in favor of the Borrowers a discretionary senior secured floorplan facility in the original aggregate principal amount of up to $375,000,000 (the “Floorplan Facility"), together with a submit thereunder for a discretionary senior secured revolving credit facility in the original aggregate principal amount of up to $100,000,000 (the “Revolving Facility”).
On October 31, 2022, the Borrowers entered into a certain First Amendment to Credit Agreement by and among the Borrowers, the Lenders who are parties thereto and the Administrative Agent (the “First Amendment to Credit Agreement”) (all capitalized terms not defined in this paragraph but defined in the First Amendment to Credit Agreement shall have the meanings given to such terms in the First Amendment to Credit Agreement) which amended the Credit Agreement to (a) increase the maximum aggregate amount of principal available under the Floorplan Facility from $375,000,000 to $425,000,000, (b) increase the maximum aggregate amount of principal available under the Revolving Facility from $100,000,000 to $150,000,000, (c) increase the maximum aggregate amount of principal available under the Swingline Loans from $25,000,000 to $35,000,000, and (d) change the interest rate on any Loans accruing interest at a rate per annum equal to the LIBOR Rate plus an Applicable Margin of 1.75%, with a rate per annum equal to the Term SOFR Rate plus a Term SOFR Adjustment of 0.10% plus an Applicable Margin of 1.75%.
The Administrative Agent, certain of the Lenders and their respective affiliates, have performed, and may in the future perform, various commercial banking, investment banking, brokerage, and other financial advisory services for ePlus and its subsidiaries for which they have received, and will receive, customary fees and expenses.
The foregoing description of the Amendment is a summary and is qualified in its entirety by reference to such agreement, a copy of which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q, and incorporated herein by reference.
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
The information described above under “Entry into a Material Definitive Agreement" is incorporated herein by reference.
Number | Amended and Restated Employment Agreement effective September 6, 2017, by and between ePlus inc. and Mark P. Marron. | Exhibit Description | | | | | | ePlus inc. Amended and Restated Employment Agreement effectiveCertificate of Incorporation, as last amended November 9, 2021 (Incorporated herein by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the period ended December 12, 2017, by and between ePlus inc. and Phillip G. Norton.31, 2021). | | | | | | Amended and Restated Employment Agreement effective September 6, 2017,Bylaws of ePlus inc., as of March 2, 2022. (Incorporated herein by and between ePlus inc. and Elaine D. Marion.reference to Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended March 31, 2022). | | | | | | ePlus inc. 2022 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 10.1 to our Current Report in Form 8-K filed on September 20, 2022). | | | | | | First Amendment to First Amended and Restated Credit Agreement, dated as of October 31, 2022, by and among ePlus Technology, inc., ePlus Technology Services inc., SLAIT Consulting, LLC, certain of ePlus inc. subsidiaries as guarantors, Wells Fargo Commercial Distribution Finance, LLC as administrative agent and the Lenders party thereto.* | | | | | | Certification of the Chief Executive Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). | | | | | | Certification of the Chief Financial Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). | | | | | | Certification of the Chief Executive Officer and Chief Financial Officer of ePlus inc. pursuant to 18 U.S.C. § 1350. | | | | 99.1
| | 101.INS | XBRL Instance DocumentPress Release dated November 1, 2022, issued by ePlus inc. | | | | 101.SCH101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | 104 | | Cover Page Interactive Data File (embedded within the Exhibit 101 Inline XBRL document) |
45* Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K.
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.
| ePlus inc. |
| | |
| Date: February 7, 2018November 3, 2022 | /s/ MARK P. MARRON |
| | By: Mark P. Marron | | Chief Executive Officer and President |
| | (Principal Executive Officer) |
| | |
| Date: February 7, 2018November 3, 2022 | /s/ ELAINE D. MARION |
| | By: Elaine D. Marion |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
|