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.
Upon each vesting period of the restricted stock awards, employees are subject to minimum tax withholding obligations. Under the 2012 Employee LTIP, we may purchase a sufficient number of shares due to the participant to satisfy their minimum tax withholding on employee stock awards. To satisfy this tax withholding obligation,For the three months ended June 30, 2019, the Company purchased 40,092had withheld 38,811 shares of the awarded common stock shares at a value of $3.9$2.8 million, which wewas included in treasury stock, during the six months ended September 30, 2018,.stock.
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 SeptemberJune 30, 20182019 and 2017,2018, we recognized $1.9 million and $1.5$1.7 million respectively, of total share-based compensation expense. During the six months ended September 30, 2018 and 2017, we recognized $3.6 million and $3.0 million, respectively, of total share-based compensation expense.expense, respectively. Unrecognized compensation expense related to non-vested restricted stock was $13.2$13.6 million as of SeptemberJune 30, 2018,2019, which will be fully recognized over the next thirty three (33)36 months.
We also provide our employees with a contributory 401(k) profit sharing plan, to which we may contribute from time to time at our sole discretion. Employer contributions to the plan are fully vested at all times. For both the three months ended SeptemberJune 30, 20182019 and 2017,2018, our estimated contribution expense for the plan was $0.5 million. For the six months ended September 30, 2018 and 2017, our estimated contribution expense for the plan was $1.0$0.7 million and $1.1$0.5 million, respectively.
Our total gross unrecognized tax benefits recorded for uncertain income tax, and interest and penalties thereon, were negligible as of SeptemberJune 30, 20182019 and SeptemberJune 30, 2017.2018. We had no additions or reductions to our gross unrecognized tax benefits during the three and six months ended SeptemberJune 30, 2018.2019. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
For both the three and six months ended SeptemberJune 30, 2019, and 2018, we recorded adjustments to operating expenses that increased the fair value of our liability for contingent consideration by $0.7 million and $1.1 million, respectively. For both the three and six months ended September 30, 2018, we$0.4 million. There were no payments made payments of $1.1 million to satisfy the current obligations of the contingent consideration arrangements.
Forarrangements for both the three months ended SeptemberJune 30, 2017,2019, and 2018.
16. BUSINESS COMBINATIONS
SLAIT Consulting, LLC
On January 18, 2019, our subsidiary, ePlus Technology, inc., acquired 100% of the stock of SLAIT Consulting, LLC. SLAIT is an IT consulting and solutions provider with a focus on security advisory and managed services, managed help desk, specialized IT, staffing, and data center solutions. SLAIT is headquartered in Virginia Beach, Virginia and has locations in Richmond, Virginia, and Charlotte, North Carolina. SLAIT provides consultative services in governance, risk management and compliance; bespoke help desk and managed services solutions; and has relationships with fast-growing emerging vendors and related sales and engineering capabilities.
Our sum of consideration transferred is $50.0 million consisting of $50.7 million paid in cash at closing, less $1.0 million cash acquired, and plus a working capital adjustment of $0.3 million that we increasedpaid in May 2019.Our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed is presented below (in thousands):
| | Acquisition Date Amount | |
Accounts receivable | | $ | 10,208 | |
Other assets | | | 1,050 | |
Identified intangible assets | | | 18,190 | |
Accounts payable and other current liabilities | | | (8,669 | ) |
Performance obligation | | | (5,110 | ) |
| | | | |
Total identifiable net assets | | | 15,669 | |
Goodwill | | | 34,352 | |
| | | | |
Total purchase consideration | | $ | 50,021 | |
As of our filing date the initial accounting for the business combination is incomplete in respect to measuring certain assets acquired and liabilities assumed.
The identified intangible assets of $18.2 million consist of customer relationships with an estimated useful life of 10 years. The fair value of our liability for contingent consideration by $10.3 million consisting of establishing a liability from business combinations of $10.0 million and $0.3 million in adjustments recordedacquired receivables equals the gross contractual amounts receivable. We expect to operating expenses. For the six ended September 30, 2017, we increased the fair value of our liability for contingent consideration by $12.4 million consisting of establishing a liability from business combinations of $12.1 million and $0.3 million in adjustments recorded to operating expense. For the three and six months ended September 30, 2017, we made no payments and payments of $0.3 million, respectively, to satisfy the current obligations of contingent consideration arrangements.collect all acquired receivables.
We recognized goodwill related to this transaction of $34.4million, 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 reporting period ending March 31, 2019 as though the acquisition date had been April 1, 2018, is not material.
17. SEGMENT REPORTING
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 was as follows (in thousands):
| | Three Months Ended | | | Three Months Ended | |
| | September 30, 2018 | | | September 30, 2017 | | | June 30, 2019 | | | June 30, 2018 | |
| | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts with customers | | $ | 329,682 | | | $ | 1,060 | | | $ | 330,742 | | | $ | 352,843 | | | $ | 4,916 | | | $ | 357,759 | | |
Financing and other | | | 5,086 | | | | 9,215 | | | | 14,301 | | | | 5,835 | | | | 7,769 | | | | 13,604 | | |
Sales | | | | | | | | | | | | | | | | | | | |
Product | | | $ | 322,764 | | | $ | 12,837 | | | $ | 335,601 | | | $ | 313,149 | | | $ | 9,668 | | | $ | 322,817 | |
Service | | | | 45,771 | | | | - | | | | 45,771 | | | | 33,715 | | | | - | | | | 33,715 | |
Net sales | | $ | 334,768 | | | $ | 10,275 | | | $ | 345,043 | | | $ | 358,678 | | | $ | 12,685 | | | $ | 371,363 | | | $ | 368,535 | | | $ | 12,837 | | | $ | 381,372 | | | $ | 346,864 | | | $ | 9,668 | | | $ | 356,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales | | | 257,813 | | | | 1,730 | | | | 259,543 | | | | 281,829 | | | | 1,963 | | | | 283,792 | | |
Cost of Sales | | | | | | | | | | | | | | | | | | | | | | | | | |
Product | | | | 258,054 | | | | 2,009 | | | | 260,063 | | | | 254,064 | | | | 1,748 | | | | 255,812 | |
Service | | | | 28,670 | | | | - | | | | 28,670 | | | | 20,017 | | | | - | | | | 20,017 | |
Total cost of sales | | | | 286,724 | | | | 2,009 | | | | 288,733 | | | | 274,081 | | | | 1,748 | | | | 275,829 | |
Gross Profit | | | 76,955 | | | | 8,545 | | | | 85,500 | | | | 76,849 | | | | 10,722 | | | | 87,571 | | | | 81,811 | | | | 10,828 | | | | 92,639 | | | | 72,783 | | | | 7,920 | | | | 80,703 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 55,138 | | | | 2,567 | | | | 57,705 | | | | 53,503 | | | | 2,837 | | | | 56,340 | | | | 62,667 | | | | 3,120 | | | | 65,787 | | | | 54,454 | | | | 2,512 | | | | 56,966 | |
Depreciation and amortization | | | 2,740 | | | | 1 | | | | 2,741 | | | | 2,128 | | | | 1 | | | | 2,129 | | | | 3,407 | | | | 56 | | | | 3,463 | | | | 2,789 | | | | 1 | | | | 2,790 | |
Interest and financing costs | | | - | | | | 484 | | | | 484 | | | | - | | | | 274 | | | | 274 | | | | - | | | | 628 | | | | 628 | | | | - | | | | 476 | | | | 476 | |
Operating expenses | | | 57,878 | | | | 3,052 | | | | 60,930 | | | | 55,631 | | | | 3,112 | | | | 58,743 | | | | 66,074 | | | | 3,804 | | | | 69,878 | | | | 57,243 | | | | 2,989 | | | | 60,232 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 19,077 | | | | 5,493 | | | | 24,570 | | | | 21,218 | | | | 7,610 | | | | 28,828 | | | | 15,737 | | | | 7,024 | | | | 22,761 | | | | 15,540 | | | | 4,931 | | | | 20,471 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | 322 | | | | | | | | | | | | (141 | ) | | | | | | | | | | | (45 | ) | | | | | | | | | | | 97 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings befor tax | | | | | | | | | | $ | 24,892 | | | | | | | | | | | $ | 28,687 | | |
Earnings before tax | | | | | | | | | | | $ | 22,716 | | | | | | | | | | | $ | 20,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts with customers | | | $ | 363,681 | | | $ | 789 | | | $ | 364,470 | | | $ | 341,459 | | | $ | 596 | | | $ | 342,055 | |
Financing and other | | | | 4,854 | | | | 12,048 | | | | 16,902 | | | | 5,405 | | | | 9,072 | | | | 14,477 | |
Net Sales | | | $ | 368,535 | | | $ | 12,837 | | | $ | 381,372 | | | | 346,864 | | | $ | 9,668 | | | $ | 356,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 2,970 | | | $ | 1,397 | | | $ | 4,367 | | | $ | 2,161 | | | $ | 1,359 | | | $ | 3,520 | | | $ | 1,339 | | | $ | 3,625 | | | $ | 4,964 | | | $ | 3,015 | | | $ | 1,485 | | | $ | 4,500 | |
Purchases of property, equipment and operating lease equipment | | $ | 1,796 | | | $ | 3,025 | | | $ | 4,821 | | | $ | 955 | | | $ | 610 | | | $ | 1,565 | | | $ | 1,249 | | | $ | 269 | | | $ | 1,518 | | | $ | 1,180 | | | $ | 450 | | | $ | 1,630 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Financial Data - Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 565,771 | | | $ | 209,425 | | | $ | 775,196 | | | $ | 563,646 | | | $ | 170,641 | | | $ | 734,287 | | | $ | 658,692 | | | $ | 216,121 | | | $ | 874,813 | | | $ | 557,864 | | | $ | 202,535 | | | $ | 760,399 | |
| | Six Months Ended | |
| | September 30, 2018 | | | September 30, 2017 | |
| | Technology | | | Financing | | | Total | | | Technology | | | Financing | | | Total | |
| | | | | | | | | | | | | | | | | | |
Contracts with customers | | $ | 671,141 | | | $ | 1,656 | | | $ | 672,797 | | | $ | 712,204 | | | $ | 7,731 | | | $ | 719,935 | |
Financing and other | | | 10,491 | | | | 18,287 | | | | 28,778 | | | | 9,373 | | | | 15,411 | | | | 24,784 | |
Net sales | | $ | 681,632 | | | $ | 19,943 | | | $ | 701,575 | | | $ | 721,577 | | | $ | 23,142 | | | $ | 744,719 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales | | | 531,894 | | | | 3,478 | | | | 535,372 | | | | 575,095 | | | | 4,460 | | | | 579,555 | |
Gross Profit | | | 149,738 | | | | 16,465 | | | | 166,203 | | | | 146,482 | | | | 18,682 | | | | 165,164 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 109,592 | | | | 5,079 | | | | 114,671 | | | | 105,004 | | | | 6,000 | | | | 111,004 | |
Depreciation and amortization | | | 5,529 | | | | 2 | | | | 5,531 | | | | 4,190 | | | | 2 | | | | 4,192 | |
Interest and financing costs | | | - | | | | 960 | | | | 960 | | | | - | | | | 633 | | | | 633 | |
Operating expenses | | | 115,121 | | | | 6,041 | | | | 121,162 | | | | 109,194 | | | | 6,635 | | | | 115,829 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 34,617 | | | | 10,424 | | | | 45,041 | | | | 37,288 | | | | 12,047 | | | | 49,335 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | 419 | | | | | | | | | | | | 130 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings befor tax | | | | | | | | | | $ | 45,460 | | | | | | | | | | | $ | 49,465 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 5,985 | | | $ | 2,882 | | | $ | 8,867 | | | $ | 4,256 | | | $ | 2,489 | | | $ | 6,745 | |
Purchases of property, equipment and operating lease equipment | | $ | 2,976 | | | $ | 3,475 | | | $ | 6,451 | | | $ | 2,046 | | | $ | 1,390 | | | $ | 3,436 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selected Financial Data - Balance Sheet | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 565,771 | | | $ | 209,425 | | | $ | 775,196 | | | $ | 563,646 | | | $ | 170,641 | | | $ | 734,287 | |
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 below (in thousands):
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three Months Ended June 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
Customer end market: | | | | | | | | | | | | | | | | | | |
Technology | | $ | 75,417 | | | $ | 91,401 | | | $ | 158,234 | | | $ | 180,755 | | | $ | 76,180 | | | $ | 82,817 | |
Telecom, Media & Entertainment | | | 39,412 | | | | 49,508 | | | | 86,280 | | | | 106,913 | | | | 62,466 | | | | 46,868 | |
Financial Services | | | 47,412 | | | | 52,507 | | | | 92,638 | | | | 90,798 | | | | 48,241 | | | | 45,225 | |
SLED | | | 61,391 | | | | 66,493 | | | | 129,596 | | | | 143,656 | | | | 71,190 | | | | 68,205 | |
Healthcare | | | 51,081 | | | | 44,372 | | | | 97,531 | | | | 90,857 | | | | 56,109 | | | | 46,450 | |
All others | | | 60,055 | | | | 54,397 | | | | 117,353 | | | | 108,598 | | | | 54,349 | | | | 57,299 | |
Net sales | | | 334,768 | | | | 358,678 | | | | 681,632 | | | | 721,577 | | | | 368,535 | | | | 346,864 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financing and other | | | (5,086 | ) | | | (5,835 | ) | | | (10,491 | ) | | | (9,373 | ) | | | (4,854 | ) | | | (5,405 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue from contracts with customers | | $ | 329,682 | | | $ | 352,843 | | | $ | 671,141 | | | $ | 712,204 | | | $ | 363,681 | | | $ | 341,459 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three Months Ended June 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
Vendor | | | | | | | | | | | | | | | | | | |
Cisco Systems | | $ | 152,063 | | | $ | 165,690 | | | $ | 291,300 | | | $ | 339,035 | | | $ | 146,181 | | | $ | 139,577 | |
NetApp | | | 9,477 | | | | 10,433 | | | | 25,039 | | | | 25,887 | | | | 13,427 | | | | 15,020 | |
HP Inc. & HPE | | | 16,658 | | | | 28,377 | | | | 36,977 | | | | 56,648 | | | | 23,113 | | | | 20,355 | |
Dell / EMC | | | 19,895 | | | | 17,485 | | | | 32,398 | | | | 30,898 | | | | 13,781 | | | | 12,503 | |
Arista Networks | | | 10,673 | | | | 7,153 | | | | 30,471 | | | | 24,527 | | | | 20,950 | | | | 19,844 | |
Juniper | | | 11,262 | | | | 14,240 | | | | 21,660 | | | | 23,576 | | |
Juniper Networks | | | | 7,054 | | | | 10,431 | |
All others | | | 114,740 | | | | 115,300 | | | | 243,787 | | | | 221,006 | | | | 144,029 | | | | 129,134 | |
Net sales | | | 334,768 | | | | 358,678 | | | | 681,632 | | | | 721,577 | | | | 368,535 | | | | 346,864 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financing and other | | | (5,086 | ) | | | (5,835 | ) | | | (10,491 | ) | | | (9,373 | ) | | | (4,854 | ) | | | (5,405 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue from contracts with customers | | $ | 329,682 | | | $ | 352,843 | | | $ | 671,141 | | | $ | 712,204 | | | $ | 363,681 | | | $ | 341,459 | |
Financing Segment Disaggregation of Revenue
We analyze our revenues within our financing segment based on the nature of the arrangement, and our revenues from contracts with customers consist of proceeds from the sale of off-lease equipment.
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, Illinois and with offices in downtown Chicago, Illinois and Indianapolis, Indiana, IDS brought us 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 expanded 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.25
Our sum of total consideration transferred was $38.4 million, consisting of $29.8 million paid in cash at closing, less $1.4 million paid back as a working capital adjustment, plus an additional $10.0 million equal to the acquisition date fair value of consideration that is contingent on the acquired business’ future gross profit. The contingent consideration was calculated using the Monte Carlo simulation model based on our projections of future gross profits. The maximum payout of the contingent consideration is $15.0 million paid over 3 years. Our 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 | |
The identified intangible assets of $13.7 million consist of customer relationships with an estimated useful life of 8 years. The fair value of acquired receivables equals the gross contractual amounts receivable. We expect to collect all acquired receivables.
We recognized goodwill related to this transaction of $21.1 million, which was assigned to our technology reporting unit. The goodwill recognized in the acquisition is attributable to the acquired assembled workforce and expected synergies, none of which qualify for recognition as a separate intangible asset. The total amount of goodwill is expected to be deductible for tax purposes. The amount of revenues and earnings of the acquiree since the acquisition date are not material. Likewise, the impact to the revenue and earnings of the combined entity for the current reporting period through the acquisition date had the acquisition date been April 1, 2017, is not material.
OneCloud Consulting Inc.
On May 17, 2017, our subsidiary ePlus Technology, inc., acquired 100% of the stock of OneCloud Consulting, Inc. (“OneCloud”). Based in Milpitas, California, and with locations in India, OneCloud brought us a versatile team of highly trained technology consultants, architects, developers and instructors. Though OneCloud, we enable our customers’ cloud and application strategy via professional services, technical education and software development. The acquisition provides us with additional ability to address customers’ need for cloud-based solutions and infrastructure, including DevOps, OpenStack, and other emerging technologies.
Our sum of total consideration 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 presented below (in thousands):
| | Acquisition Date Amount | |
Accounts receivable and other assets | | $ | 488 | |
Identified intangible assets | | | 4,130 | |
Accounts payable and other current liabilities | | | (1,822 | ) |
| | | | |
Total identifiable net assets | | | 2,796 | |
Goodwill | | | 7,189 | |
| | | | |
Total purchase consideration | | $ | 9,985 | |
The identified intangible assets of $4.1 million consist of customer relationships of $1.7 million with an estimated useful life of 8 years, and internally developed processes of $2.4 million with an estimated useful life of 5 years.
We recognized goodwill related to this transaction of $7.2 million, which was assigned to our technology reporting unit. The goodwill recognized in the acquisition is attributable to the acquired assembled workforce and expected synergies, none of which qualify for recognition as a separate intangible asset. The total amount of goodwill is expected to be deductible for tax purposes. The amount of revenues and earnings of the acquiree since the acquisition date are not material. Likewise, the impact to the revenue and earnings of the combined entity for the current reporting period through the acquisition date had the acquisition date been April 1, 2017, is not material.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our 20182019 Annual Report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “Risk Factors,” in our 20182019 Annual Report,Report., and in Part II, and Item 1A. and “Risk Factors” in our Form 10-Q for the three months ended June 30, 2018.this Report.
EXECUTIVE OVERVIEW
Business Description
We are a leading solutions provider that delivers actionable outcomes for organizations by using IT and consulting solutions to drive business agility and innovation. Leveraging our 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 enable ePlus to craft optimized solutions that take advantage of the cost, scale and efficiency of private, public and hybrid cloud in an evolving market. We also provide consulting, staffing, professional, managed, IT staff augmentation, and complete lifecycle management services including flexible financing solutions.and solutions in the areas of security, cloud, networking, data center, collaboration and emerging technologies. We have been in the business of selling, leasing, financing, and managing IT and other assets for more than 2829 years.
Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate Cloud, Security and Digital Infrastructure technologies, both on premiseon-premise and in the cloud. Our approach is to lead with advisory consulting to understand our customers’ needs, and then design, deploy and manage solutions aligned to their objectives. Underpinning the broader areas of Cloud, Security, Networking, Data Center and Digital InfrastructureCollaboration are specific skills in orchestration and automation, application modernization, DevOps, data management, data visualization, analytics, network modernization, edge compute and other advanced and emerging technologies. These solutions are comprised of class leading technologies from partners such as Amazon Web Services, Arista Networks, Check Point, Cisco Systems, Citrix, Commvault, Dell EMC, F5 Networks, Gigamon, HP Inc., HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Pure Storage, Quantum,Rubrik, Splunk, and VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets.
Our scale and financial resources have enabled us to continue investing in engineering and technology resources to stay current with emerging technology trends. Our expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services has enabled ePlus to remain a trusted advisor for our customers. In addition, we offer a wide range of consumption options including leasing and financing for technology and other capital assets. We believe our lifecycle approach offering of integrated solutions, services, financing, and our proprietary supply chain software, isare unique in the industry. This broad portfolio enables us to deliver a unique customer experience that spans the continuum from fast delivery of competitively priced products, services, subsequent management and upkeep, through to end-of-life disposal services. This approach permits ePlus to deploy ever-more-sophisticated solutions enabling our customers’ business outcomes.
Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises in North America and the U.K..enterprises. For the trailing twelve monthtwelve-month period ended SeptemberJune 30, 2018,2019, the percentage of revenue by customer end market within our technology segment includes technology industry 23%21%, state and local government and educational institutions (“SLED”) 17%, financial services 15%, healthcare 15%, and telecommunications, media and entertainment 13%14%. The majority of our sales were generated within the United States (“US”); however, we have the ability to support our customers nationally and internationally, including physical locations in the U.K.United Kingdom (“UK”) and India. Our technology segment accounts for 97% of our net sales, and 77%69% of our operating income, while our financing segment accounts for 3% of our net sales, and 23%31% of our operating income for the sixthree months ended SeptemberJune 30, 2018.2019.
Key Business Metrics
Our management monitors a number of financial and non-financial measures and ratios on a regular basis to track the progress of our business. We believe that the most important of these measures and ratios include net sales, gross margin, operating income margin, net earnings, net earnings per common share, adjusted EBITDA, adjusted EBITDA margin, adjusted gross billings, and non-GAAP net earnings per share. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets.
These key indicators include financial information that is prepared in accordance with US GAAP and presented in our unaudited condensed consolidated financial statements as well as non-GAAP performance measurement tools. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance or financial position that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with US 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 are as follows (dollars in thousands):
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three months ended June 30, | |
Consolidated | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
Net sales | | $ | 345,043 | | | $ | 371,363 | | | $ | 701,575 | | | $ | 744,719 | | | $ | 381,372 | | | $ | 356,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 85,500 | | | $ | 87,571 | | | $ | 166,203 | | | $ | 165,164 | | | $ | 92,639 | | | $ | 80,703 | |
Gross margin | | | 24.8 | % | | | 23.6 | % | | | 23.7 | % | | | 22.2 | % | | | 24.3 | % | | | 22.6 | % |
Operating income margin | | | 7.1 | % | | | 7.8 | % | | | 6.4 | % | | | 6.6 | % | | | 6.0 | % | | | 5.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 18,003 | | | $ | 17,221 | | | $ | 33,276 | | | $ | 30,644 | | | $ | 16,188 | | | $ | 15,273 | |
Net earnings margin | | | 5.2 | % | | | 4.6 | % | | | 4.7 | % | | | 4.1 | % | | | 4.2 | % | | | 4.3 | % |
Net earnings per common share - diluted | | $ | 1.33 | | | $ | 1.23 | | | $ | 2.45 | | | $ | 2.19 | | | $ | 1.20 | | | $ | 1.12 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings (1) | | $ | 20,779 | | | $ | 23,481 | | | $ | 38,211 | | | $ | 40,315 | | | $ | 19,459 | | | $ | 17,432 | |
Non-GAAP: Net earnings per common share - diluted (1) | | $ | 1.53 | | | $ | 1.68 | | | $ | 2.81 | | | $ | 2.88 | | | $ | 1.44 | | | $ | 1.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA (2) | | $ | 29,880 | | | $ | 33,319 | | | $ | 55,250 | | | $ | 57,726 | | | $ | 28,567 | | | $ | 25,370 | |
Adjusted EBITDA margin | | | 8.7 | % | | | 9.0 | % | | | 7.9 | % | | | 7.8 | % | | | 7.5 | % | | | 7.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment used internally | | $ | 1,796 | | | $ | 955 | | | $ | 2,976 | | | $ | 2,046 | | | $ | 1,249 | | | $ | 1,180 | |
Purchases of equipment under operating leases | | | 3,025 | | | | 610 | | | | 3,475 | | | | 1,390 | | | | 269 | | | | 450 | |
Total capital expenditures | | $ | 4,821 | | | $ | 1,565 | | | $ | 6,451 | | | $ | 3,436 | | | $ | 1,518 | | | $ | 1,630 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Technology Segment | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 334,768 | | | $ | 358,678 | | | $ | 681,632 | | | $ | 721,577 | | | $ | 368,535 | | | $ | 346,864 | |
Adjusted gross billings (3) | | $ | 485,856 | | | $ | 504,500 | | | $ | 968,157 | | | $ | 992,004 | | | $ | 548,363 | | | $ | 482,301 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 76,955 | | | $ | 76,849 | | | $ | 149,738 | | | $ | 146,482 | | | $ | 81,811 | | | $ | 72,783 | |
Gross margin | | | 23.0 | % | | | 21.4 | % | | | 22.0 | % | | | 20.3 | % | | | 22.2 | % | | | 21.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | $ | 19,077 | | | $ | 21,218 | | | $ | 34,617 | | | $ | 37,288 | | | $ | 15,737 | | | $ | 15,540 | |
Adjusted EBITDA (2) | | $ | 24,284 | | | $ | 25,613 | | | $ | 44,625 | | | $ | 45,499 | | | $ | 21,419 | | | $ | 20,341 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financing Segment | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 10,275 | | | $ | 12,685 | | | $ | 19,943 | | | $ | 23,142 | | | $ | 12,837 | | | $ | 9,668 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 8,545 | | | $ | 10,722 | | | $ | 16,465 | | | $ | 18,682 | | | $ | 10,828 | | | $ | 7,920 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating Income | | $ | 5,493 | | | $ | 7,610 | | | $ | 10,424 | | | $ | 12,047 | | | $ | 7,024 | | | $ | 4,931 | |
Adjusted EBITDA (2) | | $ | 5,596 | | | $ | 7,706 | | | $ | 10,625 | | | $ | 12,227 | | | $ | 7,148 | | | $ | 5,029 | |
(1) | Non-GAAP net earnings and non-GAAP net earnings per common share – diluted is based on net earnings calculated in accordance with GAAP, adjusted to exclude other income (expense), share based compensation, and acquisition and integration expenses, and the related tax effects. The presentation of non-GAAP net earnings and non-GAAP net earnings per common share – diluted have been updated to include an adjustment to our tax expense assuming a statutory income tax rate of 21.0% for US operations. |
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 other income (expense), share basedshare-based compensation, 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 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 to understand and evaluate our operating results. However, our use of non-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 GAAP. In addition, other companies, including companies in our industry, might calculate similar non-GAAP net earnings and non-GAAP net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures.
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three months ended June 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
GAAP: Earnings before tax | | $ | 24,892 | | | $ | 28,687 | | | $ | 45,460 | | | $ | 49,465 | | | $ | 22,716 | | | $ | 20,568 | |
Share based compensation | | | 1,868 | | | | 1,673 | | | | 3,561 | | | | 3,180 | | | | 1,942 | | | | 1,693 | |
Acquisition and integration expense | | | 701 | | | | 689 | | | | 1,117 | | | | 1,019 | | | | 401 | | | | 416 | |
Acquisition related amortization expense | | | 1,719 | | | | 1,186 | | | | 3,483 | | | | 2,307 | | | | 2,187 | | | | 1,764 | |
Other (income) expense | | | (322 | ) | | | 141 | | | | (419 | ) | | | (130 | ) | | | 45 | | | | (97 | ) |
Non-GAAP: Earnings before provision for income taxes | | | 28,858 | | | | 32,376 | | | | 53,202 | | | | 55,841 | | | | 27,291 | | | | 24,344 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
GAAP: Provision for income taxes | | | 6,889 | | | | 11,466 | | | | 12,184 | | | | 18,821 | | | | 6,528 | | | | 5,295 | |
Share based compensation | | | 525 | | | | 483 | | | | 1,008 | | | | 918 | | | | 559 | | | | 483 | |
Acquisition and integration expense | | | 197 | | | | 199 | | | | 316 | | | | 294 | | | | 115 | | | | 119 | |
Acquisition related amortization expense | | | 455 | | | | 309 | | | | 929 | | | | 600 | | | | 607 | | | | 474 | |
Other (income) expense | | | (90 | ) | | | 41 | | | | (118 | ) | | | (37 | ) | | | 13 | | | | (28 | ) |
Tax benefit on restricted stock | | | 103 | | | | 189 | | | | 672 | | | | 1,444 | | | | 10 | | | | 569 | |
Adjustment to U.S. Federal Income Tax rate to 21% | | | - | | | | (3,792 | ) | | | | | | | (6,514 | ) | |
Non-GAAP: Provision for income taxes | | | 8,079 | | | | 8,895 | | | | 14,991 | | | | 15,526 | | | | 7,832 | | | | 6,912 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings | | $ | 20,779 | | | $ | 23,481 | | | $ | 38,211 | | | $ | 40,315 | | | $ | 19,459 | | | $ | 17,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
GAAP: Net earnings per common share - diluted | | $ | 1.33 | | | $ | 1.23 | | | $ | 2.45 | | | $ | 2.19 | | | $ | 1.20 | | | | 1.12 | |
| | | | | | | | | |
Non-GAAP: Net earnings per common share - diluted | | $ | 1.53 | | | $ | 1.68 | | | $ | 2.81 | | | $ | 2.88 | | | | 1.44 | | | | 1.28 | |
| | Three Months Ended June 30, | |
| | 2019 | | | 2018 | |
GAAP: Net earnings per common share - diluted | | $ | 1.20 | | | $ | 1.12 | |
| | | | | | | | |
Share based compensation | | | 0.10 | | | | 0.09 | |
Acquisition and integration expense | | | 0.02 | | | | 0.02 | |
Acquisition related amortization expense | | | 0.12 | | | | 0.10 | |
Other (income) expense | | | - | | | | (0.01 | ) |
Tax benefit on restricted stock | | | - | | | | (0.04 | ) |
Total non-GAAP adjustments - net of tax | | $ | 0.24 | | | $ | 0.16 | |
| | | | | | | | |
Non-GAAP: Net earnings per common share - diluted | | $ | 1.44 | | | $ | 1.28 | |
(2) | We define adjusted EBITDA as net earnings calculated in accordance with GAAP, adjusted for the following: interest expense, depreciation and amortization, share based compensation, acquisition and integration expenses, provision for income taxes, and other income (expense). 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-GAAP financial measure. Adjusted EBITDA margin is our calculation of adjusted EBITDA divided by net sales. |
We use adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income in calculating adjusted EBITDA and adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that adjusted EBITDA and adjusted EBITDA margin provide useful information to investors and others to understand and evaluate 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 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 a comparative measure.
| | Three Months Ended June 30, | |
Consolidated | | 2019 | | | 2018 | |
Net earnings | | $ | 16,188 | | | $ | 15,273 | |
Provision for income taxes | | | 6,528 | | | | 5,295 | |
Share based compensation | | | 1,942 | | | | 1,693 | |
Acquisition and integration expense | | | 401 | | | | 416 | |
Depreciation and amortization | | | 3,463 | | | | 2,790 | |
Other (income) expense | | | 45 | | | | (97 | ) |
Adjusted EBITDA | | $ | 28,567 | | | $ | 25,370 | |
| | | | | | | | |
Technology Segment | | | | | | | | |
Operating income | | $ | 15,737 | | | $ | 15,540 | |
Depreciation and amortization | | | 3,407 | | | | 2,789 | |
Share based compensation | | | 1,874 | | | | 1,596 | |
Acquisition and integration expense | | | 401 | | | | 416 | |
Adjusted EBITDA | | $ | 21,419 | | | $ | 20,341 | |
| | | | | | | | |
Financing Segment | | | | | | | | |
Operating income | | $ | 7,024 | | | $ | 4,931 | |
Depreciation and amortization | | | 56 | | | | 1 | |
Share based compensation | | | 68 | | | | 97 | |
Adjusted EBITDA | | $ | 7,148 | | | $ | 5,029 | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | |
Consolidated | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Net earnings | | $ | 18,003 | | | $ | 17,221 | | | $ | 33,276 | | | $ | 30,644 | |
Provision for income taxes | | | 6,889 | | | | 11,466 | | | | 12,184 | | | | 18,821 | |
Share based compensation | | | 1,868 | | | | 1,673 | | | | 3,561 | | | | 3,180 | |
Acquisition and integration expense | | | 701 | | | | 689 | | | | 1,117 | | | | 1,019 | |
Depreciation and amortization | | | 2,741 | | | | 2,129 | | | | 5,531 | | | | 4,192 | |
Other (income) expense | | | (322 | ) | | | 141 | | | | (419 | ) | | | (130 | ) |
Adjusted EBITDA | | $ | 29,880 | | | $ | 33,319 | | | $ | 55,250 | | | $ | 57,726 | |
| | | | | | | | | | | | | | | | |
Technology Segment | | | | | | | | | | | | | | | | |
Operating income | | $ | 19,077 | | | $ | 21,218 | | | $ | 34,617 | | | $ | 37,288 | |
Depreciation and amortization | | | 2,740 | | | | 2,128 | | | | 5,529 | | | | 4,190 | |
Share based compensation | | | 1,766 | | | | 1,578 | | | | 3,362 | | | | 3,002 | |
Acquisition and integration expense | | | 701 | | | | 689 | | | | 1,117 | | | | 1,019 | |
Adjusted EBITDA | | $ | 24,284 | | | $ | 25,613 | | | $ | 44,625 | | | $ | 45,499 | |
| | | | | | | | | | | | | | | | |
Financing Segment | | | | | | | | | | | | | | | | |
Operating income | | $ | 5,493 | | | $ | 7,610 | | | $ | 10,424 | | | $ | 12,047 | |
Depreciation and amortization | | | 1 | | | | 1 | | | | 2 | | | | 2 | |
Share based compensation | | | 102 | | | | 95 | | | | 199 | | | | 178 | |
Adjusted EBITDA | | $ | 5,596 | | | $ | 7,706 | | | $ | 10,625 | | | $ | 12,227 | |
(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 partythird-party maintenance, software assurance and 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. The presentation of adjusted gross billings has been updated to align with net sales for our technology segment. |
We use adjusted gross billings as a supplemental measure of our performance to gain insight into the volume of business generated by our technology segment, and to analyze the changes to our accounts receivable and accounts payable. Our use of adjusted gross billings as an analytical tool has limitations, and you should not consider them in isolation or 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.
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three Months Ended June 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
Technology segment net sales | | $ | 334,768 | | | $ | 358,678 | | | $ | 681,632 | | | $ | 721,577 | | | $ | 368,535 | | | $ | 346,864 | |
Costs incurred related to sales of third party maintenance, software assurance and subscription/Saas licenses, and services | | | 151,088 | | | | 145,822 | | | | 286,525 | | | $ | 270,427 | | |
Costs incurred related to sales of third-party maintenance, software assurance and subscription/Saas licenses, and services | | | | 179,828 | | | $ | 135,437 | |
| | | | | | | | | |
Adjusted gross billings | | $ | 485,856 | | | $ | 504,500 | | | $ | 968,157 | | | $ | 992,004 | | | $ | 548,363 | | | $ | 482,301 | |
Consolidated Results of Operations
During the three months ended SeptemberJune 30, 2018,2019, net sales decreased 7.1%increased 7.0%, or $26.3$24.8 million, to $345.0$381.4 million, compared to $371.4 million for the same period in the prior fiscal year. For the six months ended September 30, 2018, netProduct sales decreased 5.8%, or $43.1 million to $701.6 million, compared to $744.7 million for the same period in the prior fiscal year. For the three months ended SeptemberJune 30, 2018, net sales decreased2019 increased 4.0% to $335.6 million, or an increase of $12.8 million from reduced demand from customers primarily$322.8 million in the SLED, technology, telecom, media & entertainment industries, and financial services, which was partially offset by increases in demand fromprior year. Services sales during the healthcare and other industries. For the sixthree months ended SeptemberJune 30, 2018, net2019 increased 35.8% to $45.8 million, or an increase of $12.1 million over prior year services sales decreased due to lower demand from customers primarily in the SLED, technology, and telecom, media & entertainment industries, which was partially offset by increases in demand from the healthcare, financial services, and other industries. Also contributing to the decreaseof $33.7 million. The increase in net sales was due to the acquisition of SLAIT Consulting, LLC in January 2019, as well as organic growth. The greatest increase in demand for products was from our customers in the telecom, media and entertainment, SLED, and healthcare industries; we experienced a declinesmall increase in financing revenues for bothdemand from technology and financial services but had a reduction in demand from all other categories of customers, during the three and six months ended SeptemberJune 30, 2018, as2019 compared to the prior year periods.year.
Adjusted gross billings decreased 3.7%increased 13.7%, or $18.6$66.1 million, to $485.9$548.4 million for the three months ended SeptemberJune 30, 20182019 from $504.5 million for the same period in the prior fiscal year. For the six months ended September 30, 2018, adjusted gross billings decreased 2.4%, or $23.8 million to $968.2 million, from $992.0$482.3 million for the same period in the prior fiscal year. The reductionincrease in adjusted gross billings iswas due, in part, to the decline inSLAIT acquisition, as well as higher demand from the same customer end markets as those previously noted for the declineour current customers. This increase was offset by a shift in mix to third-party maintenance, software assurance, subscriptions/SaaS licenses, and services where we recognize revenue on a net sales.basis. As a result, net sales increased by a smaller percentage than adjusted gross billings.
Consolidated gross profit declined 2.4%for the three months ended June 30, 2019, rose 14.8% to $85.5$92.6 million, compared with $87.6$80.7 million for the three months ended SeptemberJune 30, 2017.2018. Consolidated gross margins were 24.8%24.3% for the three months ended SeptemberJune 30, 2018,2019, which is an increase of 120170 basis points compared to 23.6%22.6% for the same period in the prior fiscal year. The increase in margins for the three-month period was due to a shift in product mix, as we sold a higher proportion of third partythird-party maintenance, software assurance and subscription/SaaS licenses, and services. Also contributing to the gross margin improvement was higher product margins, expanded gross profit and margins of our financing segment, and increased service revenues. For the six months ended September 30, 2018, consolidated gross profit rose 0.6% to $166.2 million, compared with $165.2 million for the same period in the prior fiscal year. Consolidated gross margins were 23.7% for the six months ended September 30, 2018, an increase of 150 basis points compared to 22.2% for the same period in the prior fiscal year.
Our operating expenses for the three months ended
SeptemberJune 30,
2018,2019, increased
3.7%16.0% to
$60.9$69.9 million, as compared to
$58.7$60.2 million for the prior year period.
For the six months ended September 30, 2018, our operating expenses increased 4.6% to $121.2The majority of this increase reflects increase in selling, general, and administrative expense of 15.5% or $8.8 million, as compared to $115.8 million, in the same prior year period. These increases were due, in part to a full period of salariesincreases in variable compensation, software license and benefits frommaintenance, as well as the operating expenses associated with the acquisition of IDS on September 15, 2017.SLAIT. As of June 30, 2019, we had 1,538 employees, an increase of 289, or 23.1%, from 1,249 last year. The increase includes 246 current employees are related to the acquisition of SLAIT, including the employees performing our staffing services. Depreciation and amortization expense increased $0.7 million, due to the SLAIT acquisition, and interest and financing costs increased $0.2 million, due to an increase in the average balance of non-recourse notes payable outstanding during the three months ended June 30, 2019, as compared to the prior year.
OperatingAs a result, operating income increased $2.3 million, or 11.2%, to $22.8 million and operating margin increased by 30 basis points to 6.0%, as compared to the three months ended June 30, 2018.
Consolidated net earnings for the three months ended SeptemberJune 30, 2018, decreased $4.32019 were $16.2 million, an increase of 6.0%, or 14.8%, to $24.6$0.9 million, as compared to $28.8 million. For the three months ended September 30, 2018, the operating income margin decreased 70 basis points to 7.1% from 7.8% for the same period inover the prior year. Operating income foryear’s results, due to the six months ended September 30, 2018, decreased $4.3 million, or 8.7%, to $45.0 million, as compared to $49.3 million for the same periodincrease in the prior year. For the six months ended September 30, 2018, therevenues and gross profit, partially offset by increased operating income margin decreased 20 basis points to 6.4% from 6.6% for the same period in the prior year.
expenses. Our effective tax rate for the current quarter was 27.7%28.7%, compared to 40.0%with 25.7% in the prior year quarter. Due in part
Adjusted EBITDA increased $3.2 million, or 12.6%, to this lower tax rate, consolidated net earnings$28.6 million and adjusted EBITDA margin increased 40 basis points to 7.5% for the three months ended SeptemberJune 30, 2018, were $18.0 million, an increase of 4.5%, or $0.8 million, over the prior year’s results. Our effective tax rate for the six months ending September 30, 2018 was 26.8%, compared to 38.0% for the same period in the prior year, during which time the consolidated net earnings were $33.3 million, an increase of 8.6%, or $2.6 million, compared to the prior year’s results.
Adjusted EBITDA decreased $3.4 million, or 10.3%, to $29.9 million, and adjusted EBITDA margin decreased 30 basis points to 8.7% for the three months ended September 30, 2018,2019, as compared to the prior year period of 9.0%7.1%. For the six months ended September 30, 2018, adjusted EBITDA decreased $2.5 million, or 4.3%, to $55.3 million and the adjusted EBITDA margin increased 10 basis points to 7.9% for the six months ended September 30, 2018, compared to the prior year six month period.
Diluted earnings per share increased 8.1%7.1%, or $0.10,$0.08, to $1.33$1.20 per share for the three months ended SeptemberJune 30, 2018,2019, as compared to $1.23$1.12 per share for the same period in the prior year.three months ended June 30, 2018. Non-GAAP diluted earnings per share decreased 8.8%, or $0.15,increased 12.5% to $1.53$1.44 for the three months ended SeptemberJune 30, 2018,2019, as compared to $1.68$1.28 for the same period in the prior year.
For the sixthree months ended SeptemberJune 30, 2018, diluted earnings per share increased 11.9%, or $0.26, to $2.45 per share, as compared to $2.19 per share for the same period in the prior year. Non-GAAP diluted earnings per share decreased 2.3% to $2.81 for the six months ended September 30, 2018, as compared to $2.88 for the same period in the prior year.2018.
Cash and cash equivalents decreased $42.6$44.2 million or 36.0%,55.4% to $75.6$35.6 million at SeptemberJune 30, 20182019, as compared to $118.2$79.8 million as of March 31, 2018. 2019. The decrease is primarily the result of an increaseshare repurchases, investments in our financing portfolio, working capital required for the growth in our technology segment,, and $9.4 million paid for the purchase of 110,537 shares ofan increase in our common stock during the six months ended September 30, 2018.cash conversion cycle, partially offset by cash flows from operations. Our cash on hand, funds generated from operations, amounts available under our credit facility and the possible monetization of our investment portfolio providehave provided sufficient liquidity for our business.
Segment Overview
Our operations are conducted through two segments: technology and financing.
Technology Segment
The technology segment sells IT equipment and software and related services primarily to corporate customers, state and local governments, and higher education institutions on a nationwide and international basis, with geographic concentrations relating to our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for IT products.
Our technology segment derives revenue from the sales of new equipment and service engagements. Included in net sales are revenues derived from performing advanced IT professional and managed services that may be sold together with and integral to third-party products and software. Our service engagements are generally governed by statements of work and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials.
Customers who purchase IT equipment and services from us may have customer master agreements, or CMAs, with our company, which stipulate the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Our other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with state and local governments is based on public bids and our written bid responses.
We endeavor to minimize our cost of sales through incentive programs provided by vendors and distributors. The programs for which we qualify are generally set by our reseller authorization level with the vendor. The authorization level we achieve and maintain governs the types of products we can resell as well as such items as pricing received, funds provided for the marketing of these products and other special promotions. These authorization levels are achieved by us through purchase volume, certifications held by sales executives or engineers and/or contractual commitments by us. The authorization levels are costly to maintain and these programs continually change and,change; therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.
Financing Segment
Our financing segment offers financing solutions to corporations, governmental entities, and educational institutions nationwide, as well as internationally in the UK, Canada, Iceland, and Spain. The financing segment derives revenue from leasing IT and medical equipment and the disposition of that equipment at the end of the lease. The financing segment also derives revenues from the financing of third-party software licenses, software assurance, maintenance and other services.
Financing revenue generally falls into the following three categories:
| · | Portfolio income: Interest income from financing receivables and rents due under operating leases; |
| · | Transactional gains: Net gains or losses on the sale of financial assets; |
| · | 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. |
Transactional gains: Net gains or losses on the sale of financial assets; and
Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and net gains on the sale of off-lease (used) equipment.
Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. We also recognize revenue from events that occur after the initial sale of a financial asset and remarketing fees from certain residual value investments.
Fluctuations in Revenues
Our results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, changes in vendor incentive programs, interest rate fluctuations, general economic conditions, and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of a sale prior to the expiration of the lease term to the lessee or to a third-party or from post-term events.
We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas in the near future whenever we can find both experienced personnel and desirable geographic areas. These investments may reduce our results from operations in the short term.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with US GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that alternative accounting policies would have been applied, resulting in a change in financial results. On an ongoing basis, we reevaluate our estimates, including those related to revenue recognition, residual values, vendor incentives, lease classification, goodwill and intangibles, and reserves for credit losses and income taxes specifically relating to uncertain tax positions. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For all such estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates may require adjustment.
Our critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20182019 Annual Report.
SEGMENT RESULTS OF OPERATIONS
The three and six months ended SeptemberJune 30, 2018,2019, compared to the three and six months ended SeptemberJune 30, 20172018
Technology Segment
The results of operations for our technology segment for the three months ended June 30, 2019 and 2018 were as follows (dollars in thousands):
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three Months Ended June 30, | | | | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | Change | |
Net sales | | $ | 334,768 | | | $ | 358,678 | | | $ | 681,632 | | | $ | 721,577 | | | | | | | | | | | | | |
Product | | | $ | 322,764 | | | $ | 313,149 | | | $ | 9,615 | | | | 3.1 | % |
Services | | | | 45,771 | | | | 33,715 | | | | 12,056 | | | | 35.8 | % |
Total | | | | 368,535 | | | | 346,864 | | | | 21,671 | | | | 6.2 | % |
| | | | | | | | | | | | | | | | | |
Cost of sales | | | 257,813 | | | | 281,829 | | | | 531,894 | | | | 575,095 | | | | | | | | | | | | | | | | | |
Product | | | | 258,054 | | | | 254,064 | | | | 3,990 | | | | 1.6 | % |
Services | | | | 28,670 | | | | 20,017 | | | | 8,653 | | | | 43.2 | % |
Total | | | | 286,724 | | | | 274,081 | | | | 12,643 | | | | 4.6 | % |
| | | | | | | | | | | | | | | | | |
Gross profit | | | 76,955 | | | | 76,849 | | | | 149,738 | | | | 146,482 | | | | 81,811 | | | | 72,783 | | | | 9,028 | | | | 12.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 55,138 | | | | 53,503 | | | | 109,592 | | | | 105,004 | | | | 62,667 | | | | 54,454 | | | | 8,213 | | | | 15.1 | % |
Depreciation and amortization | | | 2,740 | | | | 2,128 | | | | 5,529 | | | | 4,190 | | | | 3,407 | | | | 2,789 | | | | 618 | | | | 22.2 | % |
Operating expenses | | | 57,878 | | | | 55,631 | | | | 115,121 | | | | 109,194 | | | | 66,074 | | | | 57,243 | | | | 8,831 | | | | 15.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | $ | 19,077 | | | $ | 21,218 | | | $ | 34,617 | | | $ | 37,288 | | | $ | 15,737 | | | $ | 15,540 | | | $ | 197 | | | | 1.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted gross billings | | $ | 485,856 | | | $ | 504,500 | | | $ | 968,157 | | | $ | 992,004 | | | $ | 548,363 | | | $ | 482,301 | | | $ | 66,062 | | | | 13.7 | % |
Adjusted EBITDA | | $ | 24,284 | | | $ | 25,613 | | | $ | 44,625 | | | $ | 45,499 | | | $ | 21,419 | | | $ | 20,341 | | | $ | 1,078 | | | | 5.3 | % |
Net sales: Net sales for the three months ended SeptemberJune 30, 2018,2019, were $334.8368.5 million compared to $358.7346.9 million during the three months ended September 30, 2017, a decrease of 6.7%, or $23.9 million. For the six months ended SeptemberJune 30, 2018, net sales were $681.6an increase of 6.2% or $21.7 million, compareddue to $721.6 million duringincreases from our healthcare, telecom, media and entertainment industries, and all the same period in the prior year, a decreaseother categories of 5.5%, or $39.9 million. The decrease in net salescustomers, which was due, in part, topartially offset by a decrease in demand for productsfrom technology, and services from customers in the SLED telecom, media & entertainment, and technology customer end markets, partially offset by increased demand by the healthcare, financial services customers. Product sales increased 3.1% due to higher demand from our customers. Services revenues increased 35.8%, or $12.1 million due to an increase in staffing and other industries duringprofessional and managed services some of which was from the six months ended September 30, 2018, compared to the prior year. A shift in product mix also contributed to the decrease in net sales for both the three and six months ended September 30, 2018, as we sold a higher proportion of third party software assurance, maintenance and services, which are recognized on a net basis.SLAIT acquisition.
Adjusted gross billings for the three months ended SeptemberJune 30, 2018, were $485.92019 increased to $548.4 million, compared to $504.5or 13.7%, from $482.3 million during the three months ended September 30, 2017, a decrease of 3.7%, or $18.6 million. For the six months ended September 30, 2018, adjusted gross billings were $968.2 million compared to $992.0 million during the same period in the prior year, a decrease of 2.4%, or $23.8 million.year. The decreaseincrease in adjusted gross billings during the six month period was due, in part, to the SLAIT acquisition as well as higher demand from our current customers. This increase was offset by a decreaseshift in demand for productsmix to third-party maintenance, software assurance, subscriptions/SaaS licenses, and services from customers inwhere we recognize revenue on a net basis. As a result, net sales for the telecom, media and entertainment, SLED, and technology industries. Partially offsetting lower demand from these industries was an increase in demand from the healthcare, financial services, and other industries during the sixthree months ended SeptemberJune 30, 2018, compared to the prior year.2019 increased at a lower percentage than adjusted gross billings
We rely on our vendors to fulfill a large majority of shipments to our customers. As of SeptemberJune 30, 2019, we had open orders of $210.6 million and deferred revenue of $60.9 million. As of June 30, 2018, we had open orders of $150.3 million and deferred revenue of $48.5 million. As of September 30, 2017, we had open orders of $152.7$168.7 million and deferred revenues of $52.859.9 million.
We analyze net sales by customer end market and by vendor, as opposed to discrete product and service categories. The percentage of net sales by industry and vendor are summarized below:
|
| Twelve Months Ended September 30, |
|
| Change |
| | Twelve Months Ended June 30, | | | | |
2018 | | | 2017 | | 2019 | | | 2018 | | | Change | |
Revenue by customer end market: | | | | | | | | | | | | | | | | | | |
Technology | | | 23 | % | | | 24 | % | | | (1 | %) | | | 21 | % | | | 24 | % | | | (3 | %) |
SLED | | | | 17 | % | | | 17 | % | | | 0 | % |
Financial Services | | | | 15 | % | | | 15 | % | | | 0 | % |
Healthcare | | | | 15 | % | | | 14 | % | | | 1 | % |
Telecom, Media & Entertainment | | | 13 | % | | | 15 | % | | | (2 | %) | | | 14 | % | | | 14 | % | | | 0 | % |
Financial Services | | | 15 | % | | | 14 | % | | | 1 | % | |
SLED | | | 17 | % | | | 18 | % | | | (1 | %) | |
Healthcare | | | 15 | % | | | 12 | % | | | 3 | % | |
All others | | | 17 | % | | | 17 | % | | | 0 | % | | | 18 | % | | | 16 | % | | | 2 | % |
Total | | | 100 | % | | | 100 | % | | | | | | | 100 | % | | | 100 | % | | | | |
| | | | | | | | | | | | | |
Revenue by vendor: | | | | | | | | | | | | | |
Cisco Systems | | | 40 | % | | | 45 | % | | | (5 | %) | |
NetApp | | | 4 | % | | | 5 | % | | | (1 | %) | |
HP Inc. & HPE | | | 5 | % | | | 7 | % | | | (2 | %) | |
Dell / EMC | | | 4 | % | | | 4 | % | | | 0 | % | |
Juniper Networks | | | 3 | % | | | 5 | % | | | (2 | %) | |
Arista Networks | | | 4 | % | | | 3 | % | | | 1 | % | |
All others | | | 40 | % | | | 31 | % | | | 9 | % | |
Total | | | 100 | % | | | 100 | % | | | | | |
| | Twelve Months Ended June 30, | | | | |
| | 2019 | | | 2018 | | | Change | |
Revenue by vendor: | | | | | | | | | |
Cisco Systems | | | 42 | % | | | 41 | % | | | 1 | % |
NetApp | | | 4 | % | | | 4 | % | | | 0 | % |
HP Inc. & HPE | | | 6 | % | | | 6 | % | | | 0 | % |
Dell/EMC | | | 5 | % | | | 4 | % | | | 1 | % |
Juniper Networks | | | 3 | % | | | 3 | % | | | 0 | % |
Arista Networks | | | 4 | % | | | 4 | % | | | 0 | % |
All others | | | 36 | % | | | 38 | % | | | (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-month period ended SeptemberJune 30, 2018,2019, we had an increase in the percentage total revenues from customers in the healthcarehealth care and financial services industries,the all other customer category, which were roughlywas partially offset by decreasesa decrease in the percentage of total revenues from SLED,in the technology and telecom, media & entertainment end markets over the prior year period.customer market. These changes were driven by changes in customer buying cycles and specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers.
The majority of our revenues by vendor are derived from Cisco Systems and Hewlett Packard companies, which, combined a combined HP Inc.fairly constant percentage of 48% and HPE, and NetApp, which in total, declined to 49% for the trailing twelve-month period ended September 30, 2018 from approximately 57% in the trailing twelve-month period ended September 30, 2017, with the greatest decline in the proportional percentage47% of total revenues in Cisco product sales. The decrease infor the percentage of revenues from the top three vendors is due to substantial competitiontwelve-month periods ending June 30, 2019 and rapid developments in the IT industry.2018, respectively. None of the vendors included within the “other” category exceeded 3%5% of total revenues.
Cost of sales: Cost The 4.6% increase in cost of sales decreased 8.5% and 7.5% for the three and six months ended September 30, 2018,was due to the decreaseincrease in netservice and product sales, combined with a shiftpartially offset by an improvement in product mix, as we sold a higher proportion of third party software assurance, maintenance and services, which are recognized on a net basis. Our gross margin increased 160 basis points to 23.0% for the three months ended September 30, 2018, compared to 21.4% in the same period in the prior yearon product sales, due to a shift in product mix, as we sold a higher proportion of third partythird-party software assurance, maintenance and services, which are recognized on a net basis. Our gross margin increased 100 basis points to 22.2% for the three months ended June 30, 2019, compared to 21.2% in the same period in the prior year due to an increase in our services revenues and a shift in product mix, as we sold a higher proportion of third-party software assurance, maintenance and services for which the revenues are presented on a net basis, as well as lower product margins in the prior year quarter from a large competitively bid project that partially shipped during the period. For the six months ended September 30, 2018, our gross margin increased 170 basis points to 22.0%, compared to 20.3% the prior year period.
basis. Vendor incentives earned as a percentage of sales decreased 3040 basis points for the three months ended SeptemberJune 30, 2018,2019, resulting in a negative impact on gross margin, as compared to same period in the prior year, but remained unchanged as a percentage of sales for the six months ended September 30, 2018, compared to same period in the prior year.
There are ongoing changes to the incentive programs offered to us by our vendors. Accordingly, if we are unable to maintain the level of vendor incentives we are currently receiving, gross marginsmargin may decrease.
Selling, general, and administrative: Selling, general, and administrative expenses of $55.1$62.7 million for the three months ended SeptemberJune 30, 2018,2019, increased $1.6by $8.2 million, or 3.1%,15.1% from $53.5$54.5 million the prior year. Salaries and benefits increased $1.6$6.2 million, or 3.7%,13.6% to $44.6$51.5 million, compared to $43.0 million during the prior year, primarily due to higher salaries and healthcare expenses. The increase in salaries was due, in part, to a full quarter including IDS operations, as we completed this acquisition on September 15, 2017. Our technology segment had 1,213 employees as of September 30, 2018, a decrease of 20, or 1.6%, from 1,233 employees at September 30, 2017. General and administrative expenses increased $0.3 million, or 3.0%, to $9.0 million during the three months ended September 30, 2018, compared to $8.7 million the prior year, due to adjustments to the fair value of contingent consideration of $0.7 million this year, up from $0.4 million last year.
Selling, general, and administrative expenses of $109.6 million for the six months ended September 30, 2018, increased $4.6 million, or 4.4%, from $105.0 million the prior year. Salaries and benefits increased $3.8 million, or 4.4%, to $89.9 million, compared to $86.1$45.3 million during the prior year due to increased costsemployment levels with approximately 29.4% of personnel as well asthis increase due to higher variable compensation as a result ofrelated to the increase in gross profit. TheOur technology segment had 1,505 employees as of June 30, 2019, an increase in salaries was due, in part,of 299, or 24.8%, from 1,206 at June 30, 2018. This increase includes 246 of our current employees are related to a full six monthsthe SLAIT acquisition, including IDS operations, as we completed this acquisition on September 15, 2017.the employees performing our staffing services. General and administrative expenses increased $1.0$2.0 million, or 6.5%22.5%, to $16.3$11.2 million during the sixthree months ended SeptemberJune 30, 2018,2019, compared to $15.3$9.1 million the prior year, due adjustments to the fair valuehigher software licenses and maintenance, office rent, travel expense, and other general expenses.
Depreciation and amortization: Depreciation and amortization increased $0.6 million, or 28.8%22.2%, to $2.7$3.4 million during the three months ended SeptemberJune 30, 2018,2019 as compared to $2.1$2.8 million in the prior year, due to the IDS acquisition of SLAIT in September 2017. For the six months ended September 30, 2018, depreciation and amortization increased $1.3 million, or 32.0%, to $5.5 million, compared to the same period in the prior year.January 2019.
Segment operating income: As a result of the foregoing, operating income was $19.1$15.7 million, a decreasean increase of $2.1$0.2 million, or 10.1%1.3%, for the three months ended SeptemberJune 30, 2018,2019 as compared to $21.2$15.5 million in the prior year period. For the three months ended SeptemberJune 30, 2018,2019, adjusted EBITDA was $24.3$21.4 million, a decreasean increase of $1.3$1.1 million, or 5.2%5.3%, compared to $25.6 million in the prior year period. For the six months ended September 30, 2018, operating income was $34.6 million, a decrease of $2.7 million, or 7.2%, compared to $37.3 million in the prior year period. Adjusted EBITDA was $44.6 million, a decrease of $0.9 million, or 1.9%, for the six months ended September 30, 2018, compared to $45.5$20.3 million in the prior year period.
Financing Segment
The results of operations for our financing segment for the three months ended June 30, 2019 and 2018 were as follows (dollars in thousands):
| | Three Months Ended September 30, | | | Six Months Ended September 30, | | | Three Months Ended June 30, | | | | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | Change | |
Net sales | | $ | 10,275 | | | $ | 12,685 | | | $ | 19,943 | | | $ | 23,142 | | |
Cost of sales | | | 1,730 | | | | 1,963 | | | | 3,478 | | | | 4,460 | | |
Net product sales | | | | 12,837 | | | | 9,668 | | | | 3,169 | | | | 32.8 | % |
Cost of product sales | | | | 2,009 | | | | 1,748 | | | | 261 | | | | 14.9 | % |
| | | | | | | | | | | | | | | | | |
Gross profit | | | 8,545 | | | | 10,722 | | | | 16,465 | | | | 18,682 | | | | 10,828 | | | | 7,920 | | | | 2,908 | | | | 36.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 2,567 | | | | 2,837 | | | | 5,079 | | | | 6,000 | | | | 3,120 | | | | 2,512 | | | | 608 | | | | 24.2 | % |
Depreciation and amortization | | | 1 | | | | 1 | | | | 2 | | | | 2 | | | | 56 | | | | 1 | | | | 55 | | | | 5500.0 | % |
Interest and financing costs | | | 484 | | | | 274 | | | | 960 | | | | 633 | | | | 628 | | | | 476 | | | | 152 | | | | 31.9 | % |
Operating expenses | | | 3,052 | | | | 3,112 | | | | 6,041 | | | | 6,635 | | | | 3,804 | | | | 2,989 | | | | 815 | | | | 27.3 | % |
| | | | | | | | | | | | | | | | | |
Operating income | | $ | 5,493 | | | $ | 7,610 | | | $ | 10,424 | | | $ | 12,047 | | | $ | 7,024 | | | $ | 4,931 | | | $ | 2,093 | | | | 42.4 | % |
| | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 5,596 | | | $ | 7,706 | | | $ | 10,625 | | | $ | 12,227 | | | $ | 7,148 | | | $ | 5,029 | | | $ | 2,119 | | | | 42.1 | % |
Net sales: Net sales decreasedincreased by $2.4$3.2 million, or 19.0%32.8%, to $10.3$12.8 million for the three months ended SeptemberJune 30, 2018,2019, as compared to prior year results due to lowerhigher transactional gains, post contract earnings, and other financing revenues. Post contractportfolio earnings, decreased $3.0 million due to the early termination of several large leases in the prior year. Offsetting this decrease was higher portfolio earnings. During the three months ended September 30, 2018 and 2017, we recognized transactional gains of $1.2 million, and total proceeds from these sales were $47.2 million and $48.3 million, respectively.
For the six months ended September 30, 2018, net sales decreased by $3.2 million, or 13.8%, to $19.9 million as compared to prior year results due to lower post contract earnings, transactional gains, and other financing revenues, which partially were offset by higher portfolio earnings. Post contract earnings decreased $3.6 million due to the early termination of several large leases in the prior year. lower other financing revenues. During the six monthsquarters ended SeptemberJune 30, 20182019 and 2017,2018, we recognized net gains on sales of $2.5financial assets of $3.3 million and $3.5$1.3 million, respectively, and total proceedsthe fair value of assets received from these sales were $94.0$69.9 million and $134.1$46.9 million, respectively.
At SeptemberJune 30, 2018,2019, we had $165.4$169.5 million in financing receivables and operating leases, compared to $131.8$140.7 million as of SeptemberJune 30, 2017,2018, an increase of $33.6$28.8 million, or 25.5%20.5%.
Cost of sales: Cost of sales decreased $0.2 million and $1.0increased $0.3 million for the three and six months ended SeptemberJune 30, 2018, compared to the same periods in the prior year, respectively,2019, which consists of depreciation expense from operating leases and the cost of off-lease equipment sold. leases. Gross profit decreasedincreased by 20.3%36.7% to $8.5$10.8 million, for the three months ended SeptemberJune 30, 2018,2019 as compared to the prior year, and decreased by 11.9% to $16.5 million, for the six months ended September 30, 2018, compared to the prior year.
Selling, general and administrative: For the three months ended SeptemberJune 30, 2018,2019, selling, general, and administrative expenses decreased $0.3increased by $0.6 million or 9.5%24.2%, which was due primarily to an increase variable compensation due to a decrease in variable compensation as a result of the decrease inhigher gross profit. Our financing segment had 42 employees as of September 30, 2018, compared to 49 employees as of September 30, 2017. Selling, general, and administrative expenses decreased by $0.9 million, or 15.4%, for the six months ended September 30, 2018, due to a decrease in variable compensation as a result of the decrease in gross profit, as well as the change in reserves for credit losses.
Interest and financing costs increased by 76.6%31.9% to $0.5$0.6 million for the three months ended June 30, 2019, compared to the prior year, due to an increase in the average total notes payable outstanding and by higher average interest rates over the three months ended SeptemberJune 30, 2018, compared to the same period in the prior year. For the six months ended September 30, 2018, interest and financing costs increased by 51.7% to $1.0 million compared to the same period in the prior year.2018. Total notes payable were $65.3$72.9 million as of SeptemberJune 30, 2018,2019, an increase of $28.2$18.3 million, or 75.9%33.6%, as compared to $37.1$54.6 million as of SeptemberJune 30, 2017.2018. Our weighted average interest rate for non-recourse notes payable was 4.31%4.25% and 3.62%4.31%, as of SeptemberJune 30, 20182019 and 2017,2018, respectively.
Segment operating income: As a result of the foregoing, operating income and adjusted EBITDA decreasedboth increased $2.1 million or 27.8%42.4% and 27.4%42.1%, to $7.0 million and $7.1 million, respectively, for the three months ended SeptemberJune 30, 2018,2019, over the prior year period. For the six months ended September 30, 2018, operating income and adjusted EBITDA decreased $1.6 million or 13.5% and 13.1%, respectively.
Consolidated
Other income:Other income was $0.3(expense) decreased by $0.1 million fordue to reduction in interest income during the three months ended SeptemberJune 30, 2018,2019, compared to other expense of $0.1 million the prior year period. For the six months ended September 30, 2018 and 2017, other income was $0.4 million and $0.1 million, respectively.
Income taxes: Our provision for income tax expense was $6.9 million and $12.2$6.5 million for the three and six months ended SeptemberJune 30, 2018,2019, as compared to $11.5 million and $18.8$5.3 million for the same periodsperiod in the prior year. Our effective income tax raterates for the three and six months ended SeptemberJune 30, 2019 and 2018 was 27.7%were 28.7% and 26.8%25.7%, compared to 40.0% and 38.0% for the three and six months ended September 30, 2017.respectively. The reductionchange in our effective income tax rate was primarily due to a benefit received in the reduction ofprior year for stock which vested during the U.S. corporate income tax rate from 35% to 21% as a result of the 2017 Tax Cut and Jobs Act.quarter.
Net earnings: The foregoing resulted in net earnings of $18.0$16.2 million an increase of $0.8 million, or 4.5%, for the three months ended SeptemberJune 30, 2018,2019, an increase of 6.0%, as compared to $17.2$15.3 million compared toduring the prior year. For the sixthree months ended SeptemberJune 30, 2018, net earnings were $33.3 million, an increase of $2.6 million, or 8.6%, over the same period in the prior year.2018.
Both basicBasic and fully diluted earnings per common share were $1.33$1.21 and $1.20, for the three months ended SeptemberJune 30, 2018,2019, an increase of 7.3%6.1% and 8.1%,7.1% as compared to $1.24$1.14 and $1.23,$1.12, respectively, for the three months ended SeptemberJune 30, 2017. For the six months ended September 30, 2018, basic and fully diluted earnings per common share were $2.47 and $2.42, an increase of 11.8% and 11.9%, as compared to $2.21 and $2.19 for the same period in the prior year, respectively.2018.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for both the three and six months ended SeptemberJune 30, 2018,2019 was 13.513.4 million and 13.613.5 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 SeptemberJune 30, 2017,2018 was 13.913.4 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 six months ended September 30, 2017, was 13.8 million and 14.013.6 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
Our primary sources of liquidity have historically been cash and cash equivalents, internally generated funds from operations, and borrowings, both non-recourse and recourse. We have used those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions, and the repurchase of shares of our common stock.
Our subsidiary ePlus Technology, inc., and certain subsidiaries, part of our technology segment, finances itsfinance their operations with funds generated from operations, and with a credit facility with Wells Fargo Commercial Distribution Finance, LLC or (“WFCDF”). ePlus Technology, inc.’s agreement withWFCDF. 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.
As of June 30, 2019, the facility had an aggregate credit limit of $325$250 million as of September 30, 2018.
On July 27, 2017, we executed an amendment to the WFCDF credit facility that temporarily increases the aggregate limit offor the two components, from $250.0and the accounts receivable component had a sub-limit of $50 million, to $325.0 million from the datewhich bears interest assessed at a rate of the agreement through October 31, 2017. The amendment also provides usOne Month LIBOR plus two- and one-half percent. We have 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. On July 17, 2018, we elected to temporarily increase the aggregate limit to $325.0 million.
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 review, 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 SeptemberJune 30, 2018,2019 or SeptemberJune 30, 2017,2018, while the maximum credit limit was $50.0 million and $30.0 million, for both periods.respectively. The borrowings and repayments under the floor plan component are reflected as “net borrowings (repayments) on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows.
Most customer payments in our technology segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically transferred to our operating account on a daily basis. On the due dates of the floor plan component, we make cash payments to WFCDF. These payments from the accounts receivable component to the floor plan component and repayments from our cash are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows. We engage in this payment structure to minimize our interest expense and bank fees in connection with financing the operations of our technology segment.
We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months.
Our ability to continue to fund our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, or if our supply of products is delayed or interrupted, our cash flows from operations may be substantially affected.
Cash Flows
The following table summarizes our sources and uses of cash over the periods indicated (in thousands):
| | Six Months Ended September 30, | |
| | 2018 | | | 2018 | |
Net cash provided by (used) in operating activities | | $ | (17,085 | ) | | $ | 13,330 | |
Net cash used in investing activities | | | (37,937 | ) | | | (52,891 | ) |
Net cash provided by (used) in financing activities | | | 12,321 | | | | (10,046 | ) |
Effect of exchange rate changes on cash | | | 150 | | | | 32 | |
| | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | $ | (42,551 | ) | | $ | (49,575 | ) |
| | Three Months Ended June 30, | |
| | 2019 | | | 2018 | |
Net cash used in operating activities | | $ | (87,394 | ) | | $ | (49,032 | ) |
Net cash used in investing activities | | | (1,226 | ) | | | (31,815 | ) |
Net cash provided by financing activities | | | 44,327 | | | | 20,037 | |
Effect of exchange rate changes on cash | | | 81 | | | | 92 | |
| | | | | | | | |
Net Decrease in Cash and Cash Equivalents | | $ | (44,212 | ) | | $ | (60,718 | ) |
Cash flows from operating activities. CashWe used $87.4 million in from operating activities during the three months ended June 30, 2019, compared to $49.0 million for the three months ended June 30, 2018. See below for a breakdown of operating cash flows by segment (in thousands):
| | Three Months Ended June 30, | |
| | 2019 | | | 2018 | |
Technology segment | | $ | (42,072 | ) | | $ | (42,497 | ) |
Financing segment | | | (45,322 | ) | | | (6,535 | ) |
Net cash used in operating activities | | $ | (87,394 | ) | | $ | (49,032 | ) |
Technology Segment: In the three months ended June 30, 2019, our technology segment used $42.1 million from operating activities due to changes in working capital exceeding cash generated from earnings. Partially offsetting the cash used in operations were changes in the accounts payable - floor plan balance of $19.9 million. The accounts payable – floor plan is a facility used to manage working capital needs and we are required to present changes in this balance as financing activity in our consolidated statement of cash flows.
In the three months ended June 30, 2018, our technology segment used $42.5 million from operating activities totaled $17.1 million during the six months ended September 30, 2018. Net earnings adjusted for the impact of non-cash items was $42.3 million. Netdue to changes in assets and liabilities resultedworking capital exceeding cash generated from earnings. Partially offsetting the cash used in a decrease of cash and cash equivalents of $59.4 million, primarily due to net additions to accounts receivables of $29.3 million, salaries and commissions payable, deferred revenues and other liabilities of $14.8 million, inventories of $16.7 million, and financing receivables of $5.9 million, partially offset by reductionsoperations were changes in the accounts payable - floor plan balance of $2.4$17.5 million and deferred costs, other intangible assets and other assets of $4.9 million...
Cash provided by operating activities totaled $13.3 million during the six months ended September 30, 2017. Net earnings adjusted for the impact of non-cash items was $30.7 million. Net changes in assets and liabilities resulted in a decrease of cash and cash equivalents of $17.4 million, primarily due to net additions to accounts receivables of $21.7 million, salaries and commissions payable and deferred revenues and other liabilities of $26.3 million, deferred costs, other intangible assets and other assets of $8.3 million, and accounts payable of $6.9 million, partially offset by reductions in inventories of $43.0 million and financing receivables of $2.7 million.
To manage our working capital, we monitor our cash conversion cycle for our Technology segment, which is defined as days sales outstanding (“DSO”) in accounts receivable plus days of supply in inventory (“DIO”) minus days of purchases outstanding in accounts payable (“DPO”). The following table presents the components of the cash conversion cycle for our Technology segment:
| | As of September 30, | | | As of June 30, | | | | |
| | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | |
| | | | | | | | | | | | | | | |
(DSO) Days sales outstanding (1) | | | 60 | | | | 52 | | | | 53 | | | | 53 | | | | 48 | |
(DIO) Days inventory outstanding (2) | | | 11 | | | | 15 | | | | 11 | | | | 10 | | | | 19 | |
(DPO) Days payable outstanding (3) | | | (46 | ) | | | (44 | ) | | | (40 | ) | | | (41 | ) | | | (42 | ) |
Cash conversion cycle | | | 25 | | | | 23 | | | | 24 | | | | 22 | | | | 25 | |
(1) | Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our technology segment at the end of the period divided by adjusted gross billings for the same three-month period. |
(2) | Represents the rolling three-month average of the balance of inventory, net for our technology segment at the end of the period divided by cost of adjusted gross billings for the same three-month period. |
(3) | Represents the rolling three-month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our technology segment at the end of the period divided by Costcost of adjusted gross billings for the same three-month period. |
Our cash conversion cycle increased to 2524 days at SeptemberJune 30, 2019, compared to 22 days at June 30, 2018, compared to 23 days at Septemberresulting from a 1 day increase in DIO and a 1 day decrease in DPO. Our DIO as of June 30, 2017,2019, was primarily drivenimpacted by an increase in DSOaverage inventory balances of 8 days due to19.4%, or $9.1 million, while adjusted gross cost of goods sold for the timing of collections.same period increased 13.9%. The increaseremaining change in our cash conversion cycle was partiallyis due to DPO timing of payments.
Financing Segment: In the three months ended June 30, 2019, our financing segment used $45.3 million from operating activities, primarily due to changes in financing receivables- net of $58.2 million. In the three months ended June 30, 2018, our financing segment used $6.5 million from operating activities, primarily due to changes in working capital. In this period, which we elected not to update using the transition option available when we adopted ASC 842, changes in financing receivables not sourced through us are reflected in cash flows from investing activities. With the adoption of ASC 842, for periods beginning after April 1, 2019, we recognize the change in financing receivables, including the issuance of financing receivables offset by a decrease in DIO asrepayments of September 30, 2018,financing receivables and the proceeds from the transfer of financing receivables when we account for the transfer as a resultsale, as part of a decrease in average inventory balances of 31.2%, or $22.5 million.operating activities.
Cash flows related to investing activities. CashIn the three months ended June 30, 2019, we used $1.2 million from investing activities, consisting of $1.5 million for purchases of property, equipment and operating lease equipment offset by $0.3 million of proceeds from the sale of property, equipment, and operating lease equipment.
In the three months ended June 30, 2018, we used $31.8 million from investing activities, including $1.6 million for purchases of property, equipment and operating lease equipment. In this period, which we elected not to update using the transition option available when we adopted ASC 842, cash used in investing activities was $37.9also included net cash outflows related to financing receivables of $31.2 million, duringconsisting of the six months ended September 30, 2018. Cash used in investing activities during the six months ended September 30, 2018, was primarily driven by issuance of financing receivables of $88.4$49.4 million, purchases of assets to be leased or financed of $8.6$7.2 million, and purchases of property, equipment, and operating lease equipment of $6.5 million , which was partially offset by cash proceeds from the repayment of financing receivablereceivables of $33.3$15.6 million, and the sale of financing receivables of $30.5 million, and sale of property, equipment, and leased equipment of $1.8$9.8 million.
Cash used in investing activities was $52.9 million during the six months ended September 30, 2017. Cash used in investing activities during the six months ended September 30, 2017, was primarily driven by acquisitions of $37.7 million, net issuance and repayment of financing receivables of $59.7 million, purchases of assets to be leased or financed of $3.8 million, and purchases of property, equipment, software, and operating lease equipment of $3.4 million, which was partially offset by the sale of financing receivables of $43.8 million, and proceeds from sale of property, equipment, and operating leases of $8.0 million
Cash flows from financing activities. CashIn the three months ended June 30, 2019, cash provided by financing activities was $12.3$44.3 million during the six months ended September 30, 2018, which was primarily due toconsisting of net borrowings of non-recourse and recourse notes payable of $15.9$38.0 million, net borrowings on floor plan facility of $19.9 million, and offset by $13.3 million in repurchase of common stock and $0.3 million paid to sellers of SLAIT as part of a working capital adjustment.
In the three months ended June 30, 2018, cash provided by financing activities was $20.0 million consisting of net borrowings of non-recourse and recourse notes payable of $12.9 million, and net borrowing on floor plan facility of $8.7$17.5 million, and partially offset by cash used for the repurchase of common stock of $10.1$9.8 million, and repayment of financing of acquisitions of $2.1$0.5 million.Cash used in
Our borrowing of non-recourse and recourse notes payable primarily arises from our financing activities was $10.0 million during the six months ended September 30, 2017, which was primarilysegment when we transfer contractual payments due to net borrowing on floor plan facility of $12.4 million, cash usedus under lease and financing agreements to third-party financial institutions. When the transfers do not meet the requirements for a sale, the repurchase of common stock of $4.4 million, and repayment of financing of acquisitions of $1.1 million, partially offset by netproceeds paid to us represent borrowings of non-recourse and recourse notes payable of $7.8 million.payable.
Non-Cash Activities
We assign contractual payments due to us under lease and financing agreements to third-party financial institutions, which are accounted for as non-recourse notes payable.institutions. As a condition to the assignment agreement, certain financial institutions may request that the customer remit their contractual payments to a trust, rather than to us, and the trust pays the financial institution. Alternatively, if the structure of the agreement does not require a trust, 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 lenderlender. However, when our customer makes payments to pay down the corresponding non-recourse notes payable. However, thesethrough a trust, such payments represent non-cash transactions.
In addition, 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 of directly to the lender onvendor or vendors that have supplied the assets being leased and or financed. In these situations, the portion of the proceeds paid directly to our behalfvendors are disclosed as a non-cash financing activity.transactions.
Liquidity and Capital Resources
We may useutilize non-recourse notes payable to finance approximately 80% to 100% of the purchase price of the assets being leased or financed by our customers. Any balance of the purchase price remaining after non-recourse funding and any upfront payments received from the customer (our equity investment in the equipment) must generally be financed by cash flows from our operations, the sale of the equipment leased to third parties,third-parties, or other internal means. Although we expect that the credit quality of our financing arrangements and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all.
The financing necessary to support our lease and financing activities has been provided by our cash and non-recourse borrowings. We monitor our exposure closely. We are able to obtain financing through our traditional lending sources using primarily non-recourse borrowings from third partythird-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 SeptemberJune 30, 2018,2019, our non-recourse notes payable increased 28.2%50.0% to $65.3$72.9 million, as compared to $50.9$48.6 million at March 31, 2018.2019. There waswere no recourse notes payable as of SeptemberJune 30, 2018,2019, compared to $1.3 million$28 thousand as of March 31, 2018.2019.
Whenever desirable, we arrange for equity investment financing, which includes selling lease payments, including the residual portions, to third partiesthird-parties and financing the equity investment on a non-recourse basis. We generally retain customer control and operational services and have minimal residual risk. We usually reserve the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed-to return on its investment.
Credit Facility — Technology
Our subsidiary, ePlus Technology, inc., and certain subsidiaries. has a financing facility from WFCDF to finance its working capital requirements for inventories and accounts receivable. There are two components of this facility: (1) a floor plan componentcomponent; and (2) an accounts receivable component. This facility has full recourse to ePlus Technology, inc. and certain subsidiaries. and is secured by a blanket lien against all its assets, such as chattel paper, receivables and inventory. As of SeptemberJune 30, 2018,2019, the facility had an aggregate limit of the two components of $325.0$250.0 million with an accounts receivable sub-limit of $30.0 million.
On July 27, 2017, we executed an amendment to the WFCDF credit facility that temporarily increased the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017 and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election orand October 31 of that same year. On July 17, 2018,31, 2019, we elected to temporarily increase the aggregate limit to $325.0 million.
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 ePlus Technology, inc.’s minimum earnings before interest, taxes, depreciation and amortization. We were in compliance with these covenants as of SeptemberJune 30, 2018.2019. Interest on the facility is assessed at a rate of the One Month LIBOR plus twotwo- and one halfone-half percent if the payments are not made on the three specified dates each month. The facility also requires that financial statements of ePlus Technology, inc. and certain subsidiaries. be provided within 45 days of the end of each quarter and 90 days of each fiscal year end and that other operational reports be provided on a regular basis. Either party may terminate the credit facility with 90 days advance written notice.
We are not, and do not believe that we are reasonably likely to be, in breach of the WFCDF credit facility. In addition, we do not believe that the covenants of the WFCDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, ePlus Technology, inc. and certain subsidiaries. This credit facility is secured by the assets of only ePlus Technology, inc. and certain subsidiaries. and the guaranty as described below.
The WFCDF credit facility requires a guaranty of $10.5 million by ePlus inc. The guaranty requires ePlus inc. to deliver its annual audited financial statements by a certain date. We have delivered the annual audited financial statements for the year ended March 31, 2018,2019, 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.
Floor Plan Component
Purchases by ePlus Technology, inc. and certain subsidiaries. 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 sixty days, in general, is not charged. The floor plan liabilities are recorded as accounts payable—floor plan on our consolidated balance sheets, as they are normally repaid within the fifteen to sixty-day time frame and represent assigned accounts payable originally generated with the manufacturer/distributor. In some cases, we are able to pay invoices early and receive a discount, but if the fifteen to sixty-day obligation is not paid timely, interest is then assessed at stated contractual rates.
The respective floor plan component credit limits and actual outstanding balance payables for the dates indicated were as follows (in thousands):
Maximum Credit Limit at September 30, 2018 | | | Balance as of September 30, 2018 | | | Maximum Credit Limit at March 31, 2018 | | | Balance as of March 31, 2018 | |
$ | 325,000 | | | $ | 120,771 | | | $ | 250,000 | | | $ | 112,109 | |
Maximum Credit Limit at June 30, 2019 | | Balance as of June 30, 2019 | | Maximum Credit Limit at March 31, 2019 | | Balance as of March 31, 2019 |
$250,000 | | $136,013 | | $250,000 | | $116,083 |
Accounts Receivable Component
ePlus Technology, inc. and certain subsidiaries. has an accounts receivable component included within the WFCDF credit facility, 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 SeptemberJune 30, 2018,2019, or March 31, 2018,2019, while the maximum credit limit was $30.0$50.0 million for both periods.
Performance Guarantees
In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations. We are in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, or other contractually narrow or limited purposes. As of SeptemberJune 30, 2018,2019, we were not involved in any unconsolidated special purpose entity transactions.
Adequacy of Capital Resources
The continued implementation of our business strategy will require a significant investment in both resources and managerial focus. In addition, we may selectively acquire other companies that have attractive customer relationships and skilled sales and/or engineering forces. We may also open offices in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance the platform of bundled solutions to provide additional functionality and value-added services. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivables due from our customers. These actions may result in increased working capital needs as the business expands. As a result, we may require additional financing to fund our strategy, implementation, potential future acquisitions, and working capital needs, which may include additional debt and equity financing.
Inflation
For the periods presented herein, inflation has been relatively low, and we believe that inflation has not had a material effect on our results of operations.
Potential Fluctuations in Quarterly Operating Results
Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, or our major customers or vendors.
Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to currency fluctuations, reduction in IT spending, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio to a lessee or third partythird-party at the expiration of a lease term or prior to such expiration, and the transfer of financial assets. Sales of equipment and transfers of financial assets may have the effect of increasing revenues and net income during the quarter in which the sale occurs and reducing revenues and net income otherwise expected in subsequent quarters. See Part I, Item 1A, “Risk Factors,” in our 20182019 Annual Report, and subsequent Forms 10-Q for our fiscal year 2019.Report.
We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
A substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, which were aligned with the customer financing rate creating an interest rate spread whichthat is our profit. Should we not fund these transactions with debt at inception and interest rates rise above our interest rate with our customer, we may not be able to fund the transaction without reduced profit or a loss, thus inhibiting our ability to generate proceeds from the transaction. We useutilize our lines of credit and other financing facilities whichthat are subject to fluctuations in short-term interest rates. These instruments, which are generally denominated in 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. Borrowings under the WFCDF facility bear interest at a market-based variable rate. As of SeptemberJune 30, 2018,2019, 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, Euros, and Indian Rupees. 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 subsidiary’s functional currency. To date, our foreign operations are insignificant in relation to total consolidated operations, and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.
We have assets in the UK, Canada, Iceland, and Spain. As a lessor, we have entered into lease contracts and non-recourse, fixed-interest-rate financing denominated in British pounds,Pounds, Canadian dollars,Dollars, Icelandic krona,Krona, and Euros. To date, our foreign operations have been insignificant, in relation to total consolidated operations, and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.
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 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 SeptemberJune 30, 2018.2019.
There have not been any changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2018, which2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our CEO and CFO, do 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