Eplus Inc 10-Q for FY2022 Q1
Eplus Inc (PLUS)
10-Q
2021-08-05
For: 2021-06-30
View Original
Added on
April 12, 2026
About this 10-Q
Eplus Inc filed this 10-Q on August 5, 2021, covering the quarter ended June 30, 2021 (FY2022 Q1).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $416.65M
- up 17.4% from $355.03M a year earlier
- Net income
- $23.52M
- up 35.5% from net income of $17.36M a year earlier
- Diluted EPS
- $1.75
- up 34.6% from $1.30 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from____ to ____.
Commission file number: 1-34167
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address, including zip code, of principal executive offices)
Registrant’s telephone number, including area code: (703 ) 984-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Accelerated filer ☐ |
|
Non-accelerated filer ☐ |
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of common stock outstanding as of August 2, 2021, was 13,505,354 .
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information: |
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Item 1. |
Financial Statements |
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5 |
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6 |
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7 |
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8 |
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10 |
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11 |
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Item 2. |
24 |
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Item 3. |
38 |
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Item 4. |
39 |
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Part II. Other Information: |
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Item 1. |
39 |
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Item 1A. |
39 |
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Item 2. |
40 |
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Item 3. |
40 |
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Item 4. |
40 |
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Item 5. |
40 |
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Item 6. |
41 |
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42 |
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CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “would,” “intend,” “estimate,” “will,” “potential,” “possible,” “could,” “believe,” “expect,” “intend,” “plan,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions, or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:
| • | the duration and ongoing impact of the novel coronavirus (“COVID-19”) pandemic, which could materially adversely affect our financial condition and results of operations and has resulted in governmental authorities imposing numerous unprecedented measures to try to contain the virus that has impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners; |
| • | national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuation in foreign currency rates, interest rates, and pressure on prices; |
| • | significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large volume customers, or vendors; |
| • | the creditworthiness of our customers and our ability to reserve adequately for credit losses; |
| • | loss of our credit facility or credit lines with our vendors may restrict our current and future operations; |
| • | uncertainty regarding the phase out of LIBOR may negatively affect our operating results; |
| • | a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us; |
| • | our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, obtain debt for our financing transactions, or the effect of those changes on our common stock price; |
| • | reliance on third parties to perform some of our service obligations to our customers; |
| • | changes in the Information Technology (“IT”) industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service (“IaaS”), software as a service (“SaaS”) and platform as a service (“PaaS”); |
| • | our dependency on continued innovations in hardware, software, and services offerings by our vendors and our ability to partner with them; |
| • | availability of products from our vendors; |
| • | significant and rapid inflation may cause price and wage increases, as well as increases in operating costs which may impact the arrangements that have pricing commitments over the term of the agreement. |
| • | future growth rates in our core businesses; |
| • | reduction of vendor incentives provided to us; |
| • | rising interest rates or the loss of key lenders or the constricting of credit markets; |
| • | the possibility of goodwill impairment charges in the future; |
| • | maintaining and increasing advanced professional services by recruiting and retaining highly skilled, competent personnel, and vendor certifications; |
| • | adapting to meet changes in markets and competitive developments; |
| • | increasing the total number of customers using integrated solutions by up-selling within our customer base and gaining new customers; |
| • | our ability to secure our own and our customers’ electronic and other confidential information, and remain secure during a cyber-security attack; |
| • | managing a diverse product set of solutions in highly competitive markets with a number of key vendors; |
| • | increasing the total number of customers who use our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace; |
| • | performing professional and managed services competently; |
| • | our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration, and other key strategies; |
| • | changes to or loss of members of our senior management team and/or failure to successfully implement succession plans; |
| • | exposure to changes in, interpretations of, or enforcement trends in legislation and regulatory matters; |
| • | domestic and international economic regulations uncertainty (e.g., tariffs, and trade agreements); |
| • | our contracts may not be adequate to protect us, and we are subject to audit which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim; |
| • | failure to comply with public sector contracts, or applicable laws or regulations; |
| • | our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train, and retain sufficient qualified personnel; |
| • | maintaining our proprietary software and updating our technology infrastructure to remain competitive in the marketplace; |
| • | disruptions or a security breach in our or our vendors’ IT systems and data and audio communication networks; |
| • | our ability to realize our investment in leased equipment; |
| • | our ability to successfully perform due diligence and integrate acquired businesses; |
| • | our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents or allegations that we are infringing upon any third-party patents, and the costs associated with those actions, and, when appropriate, license required technology. |
We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks, and uncertainties. For a further list and description of various risks, relevant factors, and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see Item 1A, “Risk Factors” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as other reports that we file with the Securities and Exchange Commission (“SEC”).
| Item 1. | Financial Statements |
ePlus inc. AND SUBSIDIARIES
(in thousands, except per share amounts)
June 30, 2021 |
March 31, 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
$ |
||||||
Accounts receivable—trade, net |
||||||||
Accounts receivable—other, net |
||||||||
Inventories |
||||||||
Financing receivables—net, current |
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Deferred costs |
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Other current assets |
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Total current assets |
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Financing receivables and operating leases—net |
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Deferred tax asset—net |
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Property, equipment and other assets |
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Goodwill |
||||||||
Other intangible assets—net |
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TOTAL ASSETS |
$ |
$ |
||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
LIABILITIES |
||||||||
Current liabilities: |
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Accounts payable |
$ |
$ |
||||||
Accounts payable—floor plan |
||||||||
Salaries and commissions payable |
||||||||
Deferred revenue |
||||||||
Recourse notes payable—current |
||||||||
Non-recourse notes payable—current |
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Other current liabilities |
||||||||
Total current liabilities |
||||||||
Recourse notes payable - long-term |
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Non-recourse notes payable - long-term |
||||||||
Other liabilities |
||||||||
TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENCIES (Note 9) |
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STOCKHOLDERS' EQUITY |
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Preferred stock, $ |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Treasury stock, at cost, |
( |
) |
( |
) |
||||
Retained earnings |
||||||||
Accumulated other comprehensive income—foreign currency translation adjustment |
||||||||
Total Stockholders' Equity |
||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
$ |
||||||
See Notes to Unaudited Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES
(in thousands, except per share amounts)
Three Months Ended June 30, |
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2021 |
2020 |
|||||||
Net sales |
||||||||
Product |
$ |
$ |
||||||
Services |
||||||||
Total |
||||||||
Cost of sales |
||||||||
Product |
||||||||
Services |
||||||||
Total |
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Gross profit |
||||||||
Selling, general, and administrative |
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Depreciation and amortization |
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Interest and financing costs |
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Operating expenses |
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Operating income |
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Other income |
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Earnings before tax |
||||||||
Provision for income taxes |
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Net earnings |
$ |
$ |
||||||
Net earnings per common share—basic |
$ |
$ |
||||||
Net earnings per common share—diluted |
$ |
$ |
||||||
Weighted average common shares outstanding—basic |
||||||||
Weighted average common shares outstanding—diluted |
||||||||
See Notes to Unaudited Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES
(in thousands)
Three Months Ended June 30, |
||||||||
2021 |
2020 |
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NET EARNINGS |
$ |
$ |
||||||
OTHER COMPREHENSIVE INCOME, NET OF TAX: |
||||||||
Foreign currency translation adjustments |
||||||||
Other comprehensive income |
||||||||
TOTAL COMPREHENSIVE INCOME |
$ |
$ |
||||||
See Notes to Unaudited Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES
(in thousands)
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Cash flows from operating activities: |
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Net earnings |
$ |
$ |
||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
||||||||
Reserve for credit losses |
( |
) |
||||||
Share-based compensation expense |
||||||||
Deferred taxes |
||||||||
Payments from lessees directly to lenders—operating leases |
( |
) |
( |
) |
||||
Gain on disposal of property, equipment, and operaing lease equipment |
( |
) |
( |
) |
||||
Changes in: |
||||||||
Accounts receivable |
( |
) |
( |
) |
||||
Inventories-net |
( |
) |
( |
) |
||||
Financing receivables—net |
( |
) |
||||||
Deferred costs and other assets |
||||||||
Accounts payable-trade |
( |
) |
||||||
Salaries and commissions payable, deferred revenue, and other liabilities |
( |
) |
||||||
Net cash provided by (used in) operating activities |
( |
) |
||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of property, equipment, and operating lease equipment |
||||||||
Purchases of property, equipment and operating lease equipment |
( |
) |
( |
) |
||||
Net cash used in investing activities |
( |
) |
( |
) |
||||
Cash flows from financing activities: |
||||||||
Borrowings of non-recourse and recourse notes payable |
||||||||
Repayments of non-recourse and recourse notes payable |
( |
) |
( |
) |
||||
Repurchase of common stock |
( |
) |
( |
) |
||||
Net borrowings (repayments) on floor plan facility |
||||||||
Net cash provided by financing activities |
||||||||
Effect of exchange rate changes on cash |
( |
) |
||||||
Net increase (decrease) in cash and cash equivalents |
( |
) |
||||||
Cash and cash equivalents, beginning of period |
||||||||
Cash and cash equivalents, end of period |
$ |
$ |
||||||
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ |
$ |
||||||
Cash paid for income taxes |
$ |
$ |
||||||
Cash paid for amounts included in the measurement of lease liabilities |
$ |
$ |
||||||
Schedule of non-cash investing and financing activities: |
||||||||
Proceeds from sale of property, equipment, and leased equipment |
$ |
$ |
||||||
Purchases of property, equipment, and operating lease equipment |
$ |
( |
) |
$ |
( |
) |
||
Borrowing of non-recourse and recourse notes payable |
$ |
$ |
||||||
Repayments of non-recourse and recourse notes payable |
$ |
( |
) |
$ |
( |
) |
||
Vesting of share-based compensation |
$ |
$ |
||||||
Repurchase of common stock |
$ |
( |
) |
$ |
||||
New operating lease assets obtained in exchange for lease obligations |
$ |
$ |
||||||
See Notes to Unaudited Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES
(in thousands)
Three Months Ended June 30, 2021 |
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Common Stock |
Additional Paid-In |
Treasury |
Retained |
Accumulated Other Comprehensive |
||||||||||||||||||||||||
Shares |
Par Value |
Capital |
Stock |
Earnings |
Income |
Total |
||||||||||||||||||||||
Balance, March 31, 2021 |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
||||||||||||||||||||
Issuance of restricted stock awards |
||||||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||
Repurchase of common stock |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Net earnings |
- |
|||||||||||||||||||||||||||
Foreign currency translation adjustment |
- |
|||||||||||||||||||||||||||
Balance, June 30, 2021 |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
||||||||||||||||||||
Three Months Ended June 30, 2020 |
||||||||||||||||||||||||||||
Common Stock |
Additional Paid-In |
Treasury |
Retained |
Accumulated Other Comprehensive |
||||||||||||||||||||||||
Shares |
Par Value |
Capital |
Stock |
Earnings |
Income |
Total |
||||||||||||||||||||||
Balance, March 31, 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||||||||||||
Issuance of restricted stock awards |
||||||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||
Repurchase of common stock |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Net earnings |
- |
|||||||||||||||||||||||||||
Foreign currency translation adjustment |
- |
|||||||||||||||||||||||||||
Balance, June 30, 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
ePlus inc. AND SUBSIDIARIES
| 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
DESCRIPTION OF BUSINESS — Our company was founded in 1990 and is a Delaware corporation. ePlus inc. is sometimes referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” or “ePlus.” ePlus inc. is a holding company that through its subsidiaries provides information technology solutions that enable organizations to optimize their IT environment and supply chain processes. We also provide consulting, professional and managed services and complete lifecycle management services including flexible financing solutions. We focus on selling to medium and large enterprises in North America, the United Kingdom (“UK”), and other European countries.
BASIS OF PRESENTATION — The unaudited consolidated financial statements include the accounts of ePlus inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accounts of businesses acquired are included in the unaudited consolidated financial statements from the dates of acquisition.
INTERIM FINANCIAL STATEMENTS — The unaudited consolidated financial statements for the three months ended June 30, 2021, and 2020, were prepared by us and include all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income, and cash flows for such periods. Operating results for the three months ended June 30, 2021, and 2020 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending March 31, 2022, or any other future period. These unaudited consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States (“US GAAP”) for annual financial statements. Our audited consolidated financial statements are contained in our annual report on Form 10-K for the year ended March 31, 2021 (“2021 Annual Report”), which should be read in conjunction with these interim consolidated financial statements.
USE OF ESTIMATES — The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, vendor consideration, lease classification, goodwill and intangible assets, allowance for credit losses, inventory obsolescence, and the recognition and measurement of income tax assets and other provisions and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
CONCENTRATIONS OF RISK — A substantial portion of our sales are products from Cisco Systems, which were 42 % of our technology segment’s net sales for the three months ended June 30, 2021, and 37 % for the three months ended June 30, 2020.
SIGNIFICANT ACCOUNTING POLICIES — The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in our Consolidated Financial Statements for the year ended March 31, 2021.
| 2. | REVENUES |
CONTRACT BALANCES
Accounts receivable – trade consists entirely of amounts due from contracts with customers. In addition, we had $49.6 million and $54.6 million of receivables from contracts with customers included within financing receivables as of June 30, 2021, and March 31, 2021, respectively. The following table provides the balance of contract liabilities from contracts with customers (in thousands):
June 30, 2021 |
March 31, 2021 |
|||||||
Current (included in deferred revenue) |
$ |
$ |
||||||
Non-current (included in other liabilities) |
$ |
$ |
||||||
Revenue recognized from the beginning contract liability balance was $21.5 million and $15.6 million for the three months ended June 30, 2021, and 2020, respectively.
PERFORMANCE OBLIGATIONS
The following table includes revenue expected to be recognized in the future related to performance obligations, primarily non-cancelable contracts for ePlus managed services, that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands).
$ |
||||
Total remaining performance obligations |
$ |
The table does not include the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where we recognize revenue at the amount that we have the right to invoice for services performed.
| 3. | FINANCING RECEIVABLES AND OPERATING LEASES |
Our financing receivables and operating leases consist primarily of leases of IT and communication equipment and notes receivable from financing customer purchases of third-party software, maintenance, and services. Our leases often include elections for the lessee to purchase the underlying asset at the end of the lease term. Occasionally, our leases provide the lessee a bargain purchase option.
The following table provides the profit recognized for sales-type leases at their commencement date, including modifications that are recognized on a net basis, for the three months ended June 30, 2021, and 2020 (in thousands):
Three months ended June 30, |
||||||||
2021 |
2020 |
|||||||
Net sales |
$ |
$ |
||||||
Cost of sales |
||||||||
Gross profit |
$ |
$ |
||||||
The following table provides interest income in aggregate on our sales-type leases and lease income on our operating leases for the three months ended June 30, 2021, and 2020 (in thousands):
Three months ended June 30, |
||||||||
2021 |
2020 |
|||||||
Interest income on sales-type leases |
$ |
$ |
||||||
Lease income on operating leases |
$ |
$ |
||||||
FINANCING RECEIVABLES—NET
The following tables provide a disaggregation of our financing receivables – net (in thousands):
June 30, 2021 |
Notes Receivable |
Lease Receivables |
Financing Receivables |
|||||||||
Gross receivables |
$ |
$ |
$ |
|||||||||
Unguaranteed residual value (1) |
||||||||||||
Initial direct costs, net of amortization |
||||||||||||
Unearned income |
( |
) |
( |
) |
||||||||
Allowance for credit losses (2) |
( |
) |
( |
) |
( |
) |
||||||
Total, net |
$ |
$ |
$ |
|||||||||
Reported as: |
||||||||||||
Current |
$ |
$ |
$ |
|||||||||
Long-term |
||||||||||||
Total, net |
$ |
$ |
$ |
|||||||||
| (1) |
| (2) |
March 31, 2021 |
Notes Receivable |
Lease Receivables |
Financing Receivables |
|||||||||
Gross receivables |
$ |
$ |
$ |
|||||||||
Unguaranteed residual value (1) |
||||||||||||
Initial direct costs, net of amortization |
||||||||||||
Unearned income |
( |
) |
( |
) |
||||||||
Allowance for credit losses (2) |
( |
) |
( |
) |
( |
) |
||||||
Total, net |
$ |
$ |
$ |
|||||||||
Reported as: |
||||||||||||
Current |
$ |
$ |
$ |
|||||||||
Long-term |
||||||||||||
Total, net |
$ |
$ |
$ |
|||||||||
| (1) |
| (2) |
OPERATING LEASES—NET
Operating leases—net represents leases that do not qualify as sales-type leases. The components of the operating leases—net are as follows (in thousands):
June 30, 2021 |
March 31, 2021 |
|||||||
Cost of equipment under operating leases |
$ |
$ |
||||||
Accumulated depreciation |
( |
) |
( |
) |
||||
Investment in operating lease equipment—net (1) |
$ |
$ |
||||||
| (1) |
TRANSFERS OF FINANCIAL ASSETS
We enter into arrangements to transfer the contractual payments due under financing receivables and operating lease agreements, which are accounted for as sales or secured borrowings.
For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. As of June 30, 2021, and March 31, 2021, we had financing receivables of $12.4 million and $60.5 million, respectively, and operating leases of $5.7 million and $3.3 million, respectively, which were collateral for non-recourse notes payable. See Note 8, "Credit Facility and Notes Payable."
For transfers accounted for as sales, we derecognize the carrying value of the asset transferred plus any liability and recognize a net gain or loss on the sale, which are presented within net sales in the consolidated statement of operations. During the three months ended June 30, 2021, and 2020, we recognized net gains of $3.2 million and $2.5 million, respectively, and total proceeds from these sales were $75.3 million and $73.2 million, respectively.
When we retain servicing obligations in transfers accounted for as sales, we allocate a portion of the proceeds to deferred revenues, which is recognized as we perform the services. As of both June 30, 2021, and March 31, 2021, we had deferred revenue of $0.3
In a limited number of transfers accounted for as sales, we indemnified the assignee if the lessee elects to early terminate the lease. As of June 30, 2021, the total potential payments that could result from these indemnities is immaterial.
| 4. | LESSEE ACCOUNTING |
We lease office space for periods up to six years . We recognize our right-of-use assets as part of property, equipment, and other assets. We recognize the current and long-term portions of our lease liability as part of other current liabilities and other liabilities, respectively. We recognized rent expense of $1.3 million and $1.6 million for the three months ending June 30, 2021, and June 30, 2020, respectively, as part of selling, general, and administrative expenses.
| 5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
GOODWILL
The following table summarizes the changes in the carrying amount of goodwill for the three months ended June 30, 2021 (in thousands):
Three months ended June 30, 2021 |
||||||||||||
Goodwill |
Accumulated Impairment Loss |
Net Carrying Amount |
||||||||||
Beginning balance |
$ |
$ |
( |
) |
$ |
|||||||
Foreign currency translations |
- |
|||||||||||
Ending balance |
$ |
$ |
( |
) |
$ |
|||||||
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets that are individually identified and separately recognized in business combinations. Our entire balance as of June 30, 2021, relates to our technology segment, which we also determined to be one reporting unit. The change in our goodwill balance during the three months ended June 30, 2021, is due solely to foreign currency translation.
We test goodwill for impairment on an annual basis, as of the first day of our third fiscal quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value. In our annual test as of October 1, 2020, we performed a qualitative assessment of goodwill and concluded that, more likely than not, the fair value of our technology reporting unit continued to substantially exceed its carrying value.
OTHER INTANGIBLE ASSETS
Our other intangible assets consist of the following on June 30, 2021, and March 31, 2021 (in thousands):
June 30, 2021 |
March 31, 2021 |
|||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
Customer relationships & other intangibles |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
Capitalized software development |
( |
) |
( |
) |
||||||||||||||||||||
Total |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
Customer relationships and other intangibles are generally amortized between 5 to 10 years. Capitalized software development is generally amortized over 5 years.
Total amortization expense for customer relationships and other intangible assets was $3.0 million and $2.5 million for the three months ended June 30, 2021, and June 30, 2020, respectively.
| 6. | ALLOWANCE FOR CREDIT LOSSES |
The following table provides the activity in our allowance for credit losses for the three months ended June 30, 2021, and 2020 (in thousands):
Accounts Receivable |
Notes Receivable |
Lease Receivables |
Total |
|||||||||||||
Balance April 1, 2021 |
$ |
$ |
$ |
$ |
||||||||||||
Provision for credit losses |
( |
) |
( |
) |
( |
) |
||||||||||
Write-offs and other |
( |
) |
( |
) |
||||||||||||
Balance June 30, 2021 |
$ |
$ |
$ |
$ |
||||||||||||
Accounts Receivable |
Notes Receivable |
Lease Receivables |
Total |
|||||||||||||
Balance April 1, 2020 |
$ |
$ |
$ |
$ |
||||||||||||
Provision for credit losses |
||||||||||||||||
Write-offs and other |
||||||||||||||||
Balance June 30, 2020 |
$ |
$ |
$ |
$ |
||||||||||||
The following table provides the amortized cost basis of our financing receivables by CQR and by credit origination year as of June 30, 2021 (in thousands):
Amortized cost basis by origination year ending March 31, |
||||||||||||||||||||||||||||||||||||
2022 |
2021 |
2020 |
2019 |
2018 |
2017 and prior |
Total |
Transfers (2) |
Net credit exposure |
||||||||||||||||||||||||||||
Notes receivable: |
||||||||||||||||||||||||||||||||||||
High CQR |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||||||
Average CQR |
( |
) |
||||||||||||||||||||||||||||||||||
Low CQR |
||||||||||||||||||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||||||
Lease receivables: |
||||||||||||||||||||||||||||||||||||
High CQR |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||||||
Average CQR |
( |
) |
||||||||||||||||||||||||||||||||||
Low CQR |
||||||||||||||||||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||||||
Total amortized cost (1) |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||||||
| (1) |
| (2) |
We evaluate our customers using an internally assigned credit quality rating (“CQR”):
• |
High CQR: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. Loss rates in this category are generally less than |
• |
Average CQR: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. Loss rates in this category are generally in the range of |
• |
Low CQR: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. The loss rates in this category in the normal course are generally in the range of |
The following table provides the amortized cost basis of our financing receivables by CQR and by credit origination year as of March 31, 2021 (in thousands):
Amortized cost basis by origination year ending March 31, |
||||||||||||||||||||||||||||||||
2021 |
2020 |
2019 |
2018 |
2017 |
Total |
Transfers (2) |
Net credit exposure |
|||||||||||||||||||||||||
Notes receivable: |
||||||||||||||||||||||||||||||||
High CQR |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||||||
Average CQR |
( |
) |
||||||||||||||||||||||||||||||
Low CQR |
||||||||||||||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||||||
Lease receivables: |
||||||||||||||||||||||||||||||||
High CQR |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||||||||
Average CQR |
( |
) |
||||||||||||||||||||||||||||||
Low CQR |
||||||||||||||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||||||
Total amortized cost (1) |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||||||||
| (1) |
| (2) |
The following table provides an aging analysis of our financing receivables as of June 30, 2021 (in thousands):
31-60 Days Past Due |
61-90 Days Past Due |
> 90 Days Past Due |
Total Past Due |
Current |
Total Billed |
Unbilled |
Amortized Cost |
|||||||||||||||||||||||||
Notes receivable |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
Lease receivables |
||||||||||||||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
The following table provides an aging analysis of our financing receivables as of March 31, 2021 (in thousands):
31-60 Days Past Due |
61-90 Days Past Due |
> 90 Days Past Due |
Total Past Due |
Current |
Total Billed |
Unbilled |
Amortized Cost |
|||||||||||||||||||||||||
Notes receivable |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
Lease receivables |
||||||||||||||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
Our financial assets on nonaccrual status were not significant as of June 30, 2021, and March 31, 2021.
| 7. | PROPERTY, EQUIPMENT, OTHER ASSETS AND LIABILITIES |
Our property, equipment, other assets and liabilities consist of the following (in thousands):
June 30, 2021 |
March 31, 2021 |
|||||||
Other current assets: |
||||||||
Deposits & funds held in escrow |
$ |
$ |
||||||
Prepaid assets |
||||||||
Other |
||||||||
Total |
$ |
$ |
||||||
Property and equipment, net |
$ |
$ |
||||||
Deferred costs - non-current |
||||||||
Right-of-use assets |
||||||||
Other |
||||||||
Total |
$ |
$ |
||||||
: |
||||||||
Accrued expenses |
$ |
$ |
||||||
Accrued income taxes payable |
||||||||
Short-term lease liability |
||||||||
Other |
||||||||
Total |
$ |
$ |
||||||
: |
||||||||
Deferred revenue - non-current |
$ |
$ |
||||||
Long-term lease liability |
||||||||
Other |
||||||||
Total |
$ |
$ |
||||||
In the above table, deposits and funds held in escrow relate to financial assets that were sold to third-party banks. In conjunction with those sales, a portion of the proceeds was placed in escrow and will be released to us upon payment of outstanding invoices related to the underlying financing arrangements that were sold.
| 8. | CREDIT FACILITY AND NOTES PAYABLE |
CREDIT FACILITY
Within our technology segment, ePlus Technology, inc. and certain of its subsidiaries finance their operations, in addition to funds generated from operations, with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). This facility provides short-term capital for our technology segment. There are two components of the WFCDF credit facility: (1) a floor plan component, and (2) an accounts receivable component.
The WFCDF credit facility has an aggregate limit for the two components, except during a temporary uplift, of $275 million. We may elect to temporarily increase the aggregate limit to $350 million for a period of not less than 30 days, provided that all such periods shall not exceed 150 days in the aggregate in any calendar year. Additionally, the WFCDF credit facility has a limit on the accounts receivable component of $100 million. WFCDF charges us an interest rate equal to two percent (2.00 %) plus the greater of one month LIBOR or seventy-five hundredths of one percent (0.75 %).
As of June 30, 2021, the limit of the two components of the credit facility was $275 million. On July 2, 2021, we elected to temporarily increase the aggregate limit to $350 million.
Our borrowing availability under the credit facility varies based upon the value of the receivables and inventory of ePlus Technology, inc., and certain of its subsidiaries. We had outstanding balances of $139.6 million and $98.7 million under the floor plan component as of June 30, 2021, and March 31, 2021, respectively. This component is presented as part of as accounts payable – floorplan. We had no
The WFCDF credit facility is secured by the assets of ePlus Technology, inc. and certain of its subsidiaries. Additionally, the credit facility requires a guaranty of $10.5 million by ePlus inc.
The credit facility restricts the ability of ePlus Technology, inc. and certain of its subsidiaries to pay dividends to ePlus inc. unless their available borrowing meets certain thresholds. As of June 30, 2021, and March 31, 2021, their available borrowing met the threshold such that there were no restricted net assets of ePlus Technology, inc.
The credit facility requires that financial statements of ePlus Technology, inc. and certain of its subsidiaries be provided within 45 days of each quarter and 90 days of each fiscal year end, and requires that other operational reports be provided on a regular basis. Either party may terminate with 90 days’ written notice.
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.
RECOURSE NOTES PAYABLE
Recourse notes payable consist of borrowings that, in the event of default, the lender has recourse against us. We had $17.0 million and $18.1 million in recourse borrowings as of June 30, 2021, and March 31, 2021, respectively, that is resulting from one installment payment arrangement. Our payments under this installment agreement are due quarterly in amounts that are correlated to the payments due to us from a customer under a related notes receivable. We discounted our payments to calculate our payable balance using an interest rate of 3.50
NON-RECOURSE NOTES PAYABLE
Non-recourse notes payable consists of borrowings that, in the event of a default by a customer, the lender generally only has recourse against the customer, and the assets serving as collateral, but not against us. As of June 30, 2021, and March 31, 2021, we had $15.3 million and $56.1 million, respectively, of non-recourse borrowings that were collateralized by investments in notes and leases. Principal and interest payments are generally due monthly in amounts that are approximately equal to the total payments due from the customer under the leases or notes receivable that collateralize the notes payable. The weighted average interest rate for our non-recourse notes payable was 3.66 % and 3.35 %, as of June 30, 2021, and March 31, 2021, respectively.
| 9. | COMMITMENTS AND CONTINGENCIES |
LEGAL PROCEEDINGS
We are subject to various legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business and have not been fully resolved. The ultimate outcome of any litigation is uncertain. When a loss related to a legal proceeding or claim is probable and reasonably estimable, we accrue our best estimate for the ultimate resolution of the matter. If one or more legal matters are resolved against us in a reporting period for amounts above management’s expectations, our financial condition and operating results for that period could be adversely affected. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against the us in the future, and these matters could relate to prior, current or future transactions or events.
| 10. | EARNINGS PER SHARE |
Basic earnings per share is calculated by dividing net earnings available to common shareholders by the basic weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is calculated by dividing net earnings available to common shareholders by the basic weighted average number of shares of common stock outstanding plus common stock equivalents during each period.
The following table provides a reconciliation of the numerators and denominators used to calculate basic and diluted net income per common share as disclosed on our unaudited consolidated statements of operations for the three months ended June 30, 2021, and 2020, respectively (in thousands, except per share data).
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Net earnings attributable to common shareholders - basic and diluted |
$ |
$ |
||||||
Basic and diluted common shares outstanding: |
||||||||
Weighted average common shares outstanding — basic |
||||||||
Effect of dilutive shares |
||||||||
Weighted average shares common outstanding — diluted |
||||||||
Earnings per common share - basic |
$ |
$ |
||||||
Earnings per common share - diluted |
$ |
$ |
||||||
| 11. | STOCKHOLDERS’ EQUITY |
SHARE REPURCHASE PLAN
On March 18, 2021, our board of directors authorized the repurchase of up to 500,000 shares of our outstanding common stock over a 12-month period beginning May 28, 2021, and ending on May 27, 2022. The plan authorized purchases to be made from time to time in the open market, or in privately negotiated transactions, subject to availability. Any repurchased shares will have the status of treasury shares and may be used, when needed, for general corporate purposes.
On May 20, 2020, our board of directors authorized the repurchase of up to 500,000 shares of our outstanding common stock over a 12-month period beginning May 28, 2020, and ending on May 27, 2021. The plan authorized purchases to be made from time to time in the open market, or in privately negotiated transactions, subject to availability. Any repurchased shares will have the status of treasury shares and may be used, when needed, for general corporate purposes.
During the three months ended June 30, 2021, we purchased 17,629 shares of our outstanding common stock at a value of $1.6 million under the share repurchase plan; we also purchased 27,715 shares of common stock at a value of $2.6 million to satisfy tax withholding obligations relating to the vesting of employees’ restricted stock.
During the three months ended June 30, 2020, no shares of our outstanding common stock were purchased under the share repurchase plan; we purchased 37,640 shares of common stock at a value of $2.7 million to satisfy tax withholding obligations relating to the vesting of employees’ restricted stock.
| 12. | SHARE-BASED COMPENSATION |
SHARE-BASED PLANS
As of June 30, 2021, we had share-based awards outstanding under the following plans: (1) the 2017 Non-Employee Director Long-Term Incentive Plan (“2017 Director LTIP”), and (2) the 2012 Employee Long-Term Incentive Plan ("2012 Employee LTIP"). These share-based plans define fair market value as the previous trading day's closing price when the grant date falls on a date the stock was not traded.
RESTRICTED STOCK ACTIVITY
For the three months ended June 30, 2021, we granted 414 shares under the 2017 Director LTIP, and 77,861 restricted shares under the 2012 Employee LTIP. For the three months ended June 30, 2020, we granted 716 shares under the 2017 Director LTIP, and 89,873 restricted shares under the 2012 Employee LTIP. A summary of the grants is as follows:
Number of Shares |
Weighted Average Grant-date Fair Value |
|||||||
Nonvested April 1, 2021 |
$ |
|||||||
Granted |
$ |
|||||||
Vested |
( |
) |
$ |
|||||
Nonvested June 30, 2021 |
$ |
|||||||
Upon each vesting period of the restricted stock awards, employees are subject to minimum tax withholding obligations. Under the 2012 Employee LTIP, we may purchase a sufficient number of shares due to the participant to satisfy their minimum tax withholding on employee stock awards. For the three months ended June 30, 2021, we withheld 27,715 shares of common stock at a value of $2.6 million, which was included in treasury stock.
COMPENSATION EXPENSE
We recognize compensation cost for awards of restricted stock with graded vesting on a straight-line basis over the requisite service period. There are no additional conditions for vesting other than service conditions. During the three months ended June 30, 2021, and 2020, we recognized $1.7 million and $1.9 million of total share-based compensation expense, respectively. Unrecognized compensation expense related to non-vested restricted stock was $13.7 million as of June 30, 2021, which will be fully recognized over the next 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 always fully vested. For the three months ended June 30, 2021, and 2020, our estimated contribution expense for the plan was $0.8 million and $0.7 million, respectively.
| 13. | INCOME TAXES |
We account for our tax positions in accordance with Codification Topic 740, Income Taxes. Under the guidance, we evaluate uncertain tax positions based on the two-step approach. The first step is to evaluate each uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in an audit, including resolution of related appeals or litigation processes, if any. For tax positions that are not likely of being sustained upon audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement.
Our total gross unrecognized tax benefits recorded for uncertain income tax, and interest and penalties thereon, were negligible as of June 30, 2021, and June 30, 2020. We had no additions or reductions to our gross unrecognized tax benefits during the three months ended June 30, 2021. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
| 14. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
We account for the fair values of our assets and liabilities in accordance with Codification Topic 820, Fair Value Measurement and Disclosure. The following table summarizes the fair value hierarchy of our financial instruments as of June 30, 2021, and March 31, 2021 (in thousands):
Fair Value Measurement Using |
||||||||||||||||
Recorded Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
June 30, 2021 |
||||||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ |
$ |
$ |
$ |
||||||||||||
March 31, 2021 |
||||||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ |
$ |
$ |
$ |
||||||||||||
| 15. | BUSINESS COMBINATIONS |
SYSTEMS MANAGEMENT PLANNING (SMP)
On December 31, 2020, our subsidiary, ePlus Technology, inc., acquired certain assets and liabilities of SMP, an established provider of technology solutions and services in upstate New York and the Northeast. The acquisition enhances ePlus’ footprint across the region, broadens our technology solution offerings especially in the areas of collaboration and supporting virtual employees, and adds to ePlus’ set of commercial, enterprise and state, local, and education customers.
Our sum of consideration transferred was $27.0 million consisting of $29.0 million paid in cash at closing less $2.0 million that was paid back to us in our quarter ended March 31, 2021, related to a working capital adjustment. Our allocation of the purchase consideration to the assets acquired and liabilities assumed is presented below (in thousands):
Acquisition Date Amount |
||||
Accounts receivable |
$ |
|||
Other assets |
||||
Identified intangible assets |
||||
Accounts payable and other current liabilities |
( |
) |
||
Performance obligations |
( |
) |
||
Total identifiable net assets |
||||
Goodwill |
||||
Total purchase consideration |
$ |
|||
The identified intangible assets of $14.3 million consists of customer relationships with an estimated useful life of seven 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 $8.3 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 as though the acquisition date had been April 1, 2020, is not material.
| 16. | 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 for the three month periods ended June 30, 2021, and 2020 are summarized in the following table (in thousands):
Three Months Ended |
||||||||||||||||||||||||
June 30, 2021 |
June 30, 2020 |
|||||||||||||||||||||||
Technology |
Financing |
Total |
Technology |
Financing |
Total |
|||||||||||||||||||
Sales |
||||||||||||||||||||||||
Product |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Service |
||||||||||||||||||||||||
Net sales |
||||||||||||||||||||||||
Cost of Sales |
||||||||||||||||||||||||
Product |
||||||||||||||||||||||||
Service |
||||||||||||||||||||||||
Total cost of sales |
||||||||||||||||||||||||
Gross Profit |
||||||||||||||||||||||||
Selling, general, and administrative |
||||||||||||||||||||||||
Depreciation and amortization |
||||||||||||||||||||||||
Interest and financing costs |
||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating income |
||||||||||||||||||||||||
Other income |
||||||||||||||||||||||||
Earnings before tax |
$ |
$ |
||||||||||||||||||||||
Net Sales |
||||||||||||||||||||||||
Contracts with customers |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Financing and other |
||||||||||||||||||||||||
Net Sales |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Selected Financial Data - Statement of Cash Flow |
||||||||||||||||||||||||
Depreciation and amortization |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Purchases of property, equipment and operating lease equipment |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Selected Financial Data - Balance Sheet |
||||||||||||||||||||||||
Total assets |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
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 June 30, |
||||||||
2021 |
2020 |
|||||||
Customer end market: |
||||||||
Telecom, Media & Entertainment |
$ |
$ |
||||||
Technology |
||||||||
State and local government and educational institutions |
||||||||
Healthcare |
||||||||
Financial Services |
||||||||
All others |
||||||||
Net sales |
||||||||
Less: Revenue from financing and other |
( |
) |
( |
) |
||||
Revenue from contracts with customers |
$ |
$ |
||||||
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Vendor |
||||||||
Cisco Systems |
$ |
$ |
||||||
Dell / EMC |
||||||||
Juniper Networks |
||||||||
HP Inc. & HPE |
||||||||
Arista Networks |
||||||||
NetApp |
||||||||
All others |
||||||||
Net sales |
||||||||
Less: Revenue from financing and other |
( |
) |
( |
) |
||||
Revenue from contracts with customers |
$ |
$ |
||||||
FINANCING SEGMENT DISAGGREGATION OF REVENUE
We analyze our revenues within our financing segment based on the nature of the arrangement. Our revenues from contracts with customers within our financing segment consist entirely of proceeds from the sale of off-lease equipment.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our 2021 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 2021 Annual Report, and in Part II, Item 1A. “Risk Factors” in 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 us to craft optimized solutions that take advantage of the cost, scale and efficiency of private, public and hybrid cloud in an evolving market. We also provide consulting, staffing, professional, managed, IT staff augmentation, and complete lifecycle management services including flexible financing 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 30 years.
Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate technologies, both on-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 Collaboration 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, Fortinet, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Pure Storage, Rubrik, Splunk, Varonis, and VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets.
Our scale and financial resources have enabled us to continue investing in engineering and technology resources to stay on the forefront of 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 and financing, asset management and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a unique customer experience that spans the continuum from fast delivery of competitively priced products, services, subsequent management and upkeep, through to end-of-life disposal services. This approach permits ePlus to deploy sophisticated solutions enabling our customers’ business outcomes.
Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. For the trailing twelve-month period ended June 30, 2021, the percentage of revenue by customer end market within our technology segment includes telecom, media and entertainment 27%, technology 16%, state and local government and educational institutions (“SLED”) 15%, healthcare 13%, and financial services 12%. We sell to customers in the United States (“US”), which accounts for most of our sales, and to customers in select international markets including the United Kingdom (“UK”), the European Union (“EU”), India, and Singapore. Our technology segment accounts for 96% of our net sales, and 78% of our operating income, while our financing segment accounts for 4% of our net sales, and 22% of our operating income, for the three months ended June 30, 2021.
Business Trends
COVID-19 Pandemic Update
The novel coronavirus (“COVID-19”) pandemic continues to have widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal, state and local governments and public health authorities have required and may in the future require measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, safety-related modifications to workplaces, supply chain logistical changes, and closure of non-essential businesses.
As COVID-19 impacts continue across the country and globe, we have been adjusting our business activities for the safety of our employees and to best serve our customers in this rapidly evolving environment. Most of our offices are open, with required health and safety protocols in place. However, we have implemented a flexible work from home strategy applicable to all offices and operational continuity plans to provide sufficient resources to continue supporting our customers, and we will continue to evaluate returning to the office on an ongoing basis. Our configuration centers have remained open with our employees working in them following required health and safety protocols. In addition, we also have a procedure to review our employees’ business-related travel in accordance with health regulations and guidance. Our managed service teams are distributed across the US with the ability to leverage technology to provide coverage while working from home. While we and many of our customers and vendor partners have restricted travel, we are leveraging video and other collaborative tools to continue to be responsive.
Our account relationship teams are actively engaging with our customers, to ensure they have the support needed in adjusting to changes in the business environment and government directives. Also, we are working closely with our vendor partners to address varying impacts on their supply chain which has been impacted by materials shortages.
We continue to execute against and adjust our business continuity plans to maximize our ability to support our employees and customers in concert with our partners. We have an internal resource page to support specific customer inquiries from security to collaboration to financing options. We remain committed to driving positive business outcomes.
The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic including the impact of variants; governmental, business, and individuals’ actions in response to the pandemic; the efficacy of vaccines, the duration of the vaccination distribution, and the willingness of people to be inoculated; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact business and government spending on technology as well as our customers’ ability to pay for our products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions. Refer to Part I, Item 1A, “Risk Factors,” in our 2021 Annual Report.
Supply Constraints
A worldwide shortage of certain IT products is resulting from shortages in semiconductors and other components of those products. Like others, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of products, the costs of products, and our ability to meet customer demands. We continue to work closely with our suppliers to further mitigate disruptions outside our control. Despite these actions, we believe extended lead times will likely persist for at least the next few quarters.
Key Business Metrics
Our management monitors several 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 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 for the three month periods ended June 30, 2021, and 2020 are summarized in the following tables (dollars in thousands):
Three Months Ended June 30, |
||||||||
Consolidated |
2021 |
2020 |
||||||
Net sales |
$ |
416,649 |
$ |
355,031 |
||||
Gross profit |
$ |
105,512 |
$ |
98,557 |
||||
Gross margin |
25.3 |
% |
27.8 |
% |
||||
Operating income margin |
7.8 |
% |
7.0 |
% |
||||
Net earnings |
$ |
23,518 |
$ |
17,360 |
||||
Net earnings margin |
5.6 |
% |
4.9 |
% |
||||
Net earnings per common share - diluted |
$ |
1.75 |
$ |
1.30 |
||||
Non-GAAP: Net earnings (1) |
$ |
26,353 |
$ |
20,207 |
||||
Non-GAAP: Net earnings per common share - diluted (1) |
$ |
1.96 |
$ |
1.51 |
||||
Adjusted EBITDA (2) |
$ |
38,272 |
$ |
30,714 |
||||
Adjusted EBITDA margin |
9.2 |
% |
8.7 |
% |
||||
Purchases of property and equipment used internally |
$ |
1,307 |
$ |
2,106 |
||||
Purchases of equipment under operating leases |
5,687 |
171 |
||||||
Total capital expenditures |
$ |
6,994 |
$ |
2,277 |
||||
Technology Segment |
||||||||
Net sales |
$ |
400,358 |
$ |
341,224 |
||||
Adjusted gross billings (3) |
$ |
633,007 |
$ |
546,394 |
||||
Gross profit |
$ |
95,433 |
$ |
86,841 |
||||
Gross margin |
23.8 |
% |
25.4 |
% |
||||
Operating income |
$ |
25,223 |
$ |
17,532 |
||||
Adjusted EBITDA (2) |
$ |
30,958 |
$ |
23,161 |
||||
Financing Segment |
||||||||
Net sales |
$ |
16,291 |
$ |
13,807 |
||||
Gross profit |
$ |
10,079 |
$ |
11,716 |
||||
Operating Income |
$ |
7,229 |
$ |
7,465 |
||||
Adjusted EBITDA (2) |
$ |
7,314 |
$ |
7,553 |
||||
| (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. |
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 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 in understanding and evaluating 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 June 30, |
||||||||
2021 |
2020 |
|||||||
GAAP: Earnings before tax |
$ |
32,575 |
$ |
25,095 |
||||
Share based compensation |
1,735 |
1,907 |
||||||
Acquisition and integration expense |
- |
29 |
||||||
Acquisition related amortization expense |
2,696 |
2,228 |
||||||
Other income |
(123 |
) |
(98 |
) |
||||
Non-GAAP: Earnings before provision for income taxes |
36,883 |
29,161 |
||||||
GAAP: Provision for income taxes |
9,057 |
7,735 |
||||||
Share based compensation |
496 |
587 |
||||||
Acquisition and integration expense |
- |
9 |
||||||
Acquisition related amortization expense |
757 |
667 |
||||||
Other income |
(35 |
) |
(30 |
) |
||||
Tax benefit (expense) on restricted stock |
255 |
(14 |
) |
|||||
Non-GAAP: Provision for income taxes |
10,530 |
8,954 |
||||||
Non-GAAP: Net earnings |
$ |
26,353 |
$ |
20,207 |
||||
GAAP: Net earnings per common share - diluted |
$ |
1.75 |
$ |
1.30 |
||||
Non-GAAP: Net earnings per common share - diluted |
$ |
1.96 |
$ |
1.51 |
||||
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
GAAP: Net earnings per common share - diluted |
$ |
1.75 |
$ |
1.30 |
||||
Share based compensation |
0.09 |
0.10 |
||||||
Acquisition related amortization expense |
0.15 |
0.12 |
||||||
Other income |
(0.01 |
) |
(0.01 |
) |
||||
Tax benefit (expense) on restricted stock |
(0.02 |
) |
- |
|||||
Total non-GAAP adjustments - net of tax |
0.21 |
0.21 |
||||||
Non-GAAP: Net earnings per common share - diluted |
$ |
1.96 |
$ |
1.51 |
||||
| (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. 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. The presentation of Adjusted EBITDA has been changed from prior period presentations to include adjustments for expenses related to acquisitions such as legal, accounting, tax, and adjustments to the fair value of contingent purchase price consideration as well as stock compensation. |
We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income in calculating Adjusted EBITDA and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Adjusted EBITDA and Adjusted EBITDA margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as comparative measures.
Three Months Ended June 30, |
||||||||
Consolidated |
2021 |
2020 |
||||||
Net earnings |
$ |
23,518 |
$ |
17,360 |
||||
Provision for income taxes |
9,057 |
7,735 |
||||||
Share based compensation |
1,735 |
1,907 |
||||||
Interest and financing costs |
159 |
265 |
||||||
Acquisition and integration expense |
- |
29 |
||||||
Depreciation and amortization |
3,926 |
3,516 |
||||||
Other income |
(123 |
) |
(98 |
) |
||||
Adjusted EBITDA |
$ |
38,272 |
$ |
30,714 |
||||
Technology Segment |
||||||||
Operating income |
$ |
25,223 |
$ |
17,532 |
||||
Depreciation and amortization |
3,898 |
3,488 |
||||||
Share based compensation |
1,678 |
1,847 |
||||||
Interest and financing costs |
159 |
265 |
||||||
Acquisition and integration expense |
- |
29 |
||||||
Adjusted EBITDA |
$ |
30,958 |
$ |
23,161 |
||||
Financing Segment |
||||||||
Operating income |
$ |
7,229 |
$ |
7,465 |
||||
Depreciation and amortization |
28 |
28 |
||||||
Share based compensation |
57 |
60 |
||||||
Adjusted EBITDA |
$ |
7,314 |
$ |
7,553 |
||||
| (3) | We define Adjusted gross billings as our technology segment net sales calculated in accordance with US GAAP, adjusted to exclude the costs incurred related to sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. We have provided below a reconciliation of Adjusted gross billings to technology segment net sales, which is the most directly comparable financial measure to this Non-GAAP financial measure. |
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Technology segment net sales |
$ |
400,358 |
$ |
341,224 |
||||
Costs incurred related to sales of third party maintenance, software assurance and subscription/Saas licenses, and services |
232,649 |
205,170 |
||||||
Adjusted gross billings |
$ |
633,007 |
$ |
546,394 |
||||
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.
Consolidated Results of Operations
During the three months ended June 30, 2021, net sales increased 17.4%, or $61.6 million, to $416.6 million, as compared to $355.0 million for the same period in the prior fiscal year. Product sales for the three months ended June 30, 2021, increased 17.5% to $361.1 million, an increase of $53.8 million from $307.2 million in the same period in the prior year. Services sales during the three months ended June 30, 2021, increased 16.3% to $55.6 million, an increase of $7.8 million over prior year services sales of $47.8 million due to increases in both managed services and professional services. In the technology segment, we saw increases in net sales from customers in the telecom, media and entertainment, healthcare, and smaller other categories of customers, which was partially offset by decreases in net sales from customers in financial services, SLED, and technology, during the three months ended June 30, 2021, compared to the prior year period.
Adjusted gross billings increased 15.9%, or $86.6 million, to $633.0 million for the three months ended June 30, 2021, from $546.4 million for the same period in the prior fiscal year. There was an increase in adjusted gross billings from our customers in telecom, media and entertainment, healthcare, and all the other categories of customers which was partially offset by decreases in demand from our customers in financial services, SLED, and technology.
Consolidated gross profit for the three months ended June 30, 2021, increased $7.0 million, or 7.1%, to $105.5 million, compared with $98.6 million in the same period in the prior year. Consolidated gross margins were 25.3% for the three months ended June 30, 2021, which is a decrease of 250 basis points compared to 27.8% for the same period in the prior fiscal year. The decrease in margins was primarily due to a shift in product mix, as we sold a higher proportion hardware and third-party licenses which are recognized on a gross basis and a lower proportion of third-party maintenance, software assurance and subscription/SaaS licenses, and services, which are recorded on a net basis.
Our operating expenses for the three months ended June 30, 2021, decreased $0.5 million, or 0.7%, to $73.1 million, as compared to $73.6 million for the prior year period. This decrease is primarily due to a decrease in selling, general, and administrative expense of 1.0% or $0.7 million consisting of decreases in the provision for credit losses and variable compensation, partially offset by an increase in salaries and benefits. As of June 30, 2021, we had 1,547 employees, including 102 employees joining ePlus from our December 31, 2020, acquisition of Systems Management and Planning, Inc. (“SMP”), an increase of 11 from 1,536 as of June 30, 2020. Depreciation and amortization expense increased $0.4 million primarily due to our December 31, 2020, acquisition of SMP and interest and financing costs decreased $0.2 million primarily due to a decrease in the average balance of recourse and non-recourse notes payable outstanding during the three months ended June 30, 2021, as compared to the prior year.
As a result, operating income for the three months ended June 30, 2021, increased $7.5 million, or 29.8%, to $32.5 million as compared to $25.0 million for the same period in the prior year.
Consolidated net earnings for the three months ended June 30, 2021, were $23.5 million, an increase of 35.5%, or $6.2 million, over the prior year’s results, due to the increase in gross profit and the decrease in operating expenses. Our effective tax rate for the current quarter was 27.8%, compared with 30.8% in the prior year quarter. The change in our effective income tax rate was primarily due to an adjustment to the federal benefit from state taxes in the prior year period.
Adjusted EBITDA increased $7.6 million, or 24.6%, to $38.3 million and Adjusted EBITDA margin increased 50 basis points to 9.2% for the three months ended June 30, 2021, as compared to the prior year period of 8.7%.
Diluted earnings per share increased 34.6%, or $0.45, to $1.75 per share for the three months ended June 30, 2021, as compared to $1.30 per share for the three months ended June 30, 2020. Non-GAAP diluted earnings per share increased 29.8%, or $0.45, to $1.96 for the three months ended June 30, 2021, as compared to $1.51 for the three months ended June 30, 2020.
Cash and cash equivalents decreased by 27.6% to $93.8 million as of June 30, 2021, as compared to $129.6 million as of March 31, 2021, primarily due to increases in our accounts receivable and inventories and a decrease in accounts payable—trade, partially offset by net borrowings on the floor plan component of our credit facility. Additional uses of cash during the three months ended June 30, 2021, included cash paid of $3.8 million to repurchase outstanding shares of our common stock. Our cash on hand, funds generated from operations, amounts available under our credit facility, and the ability to monetize our investment portfolio have provided sufficient liquidity for our business.
Segment Overview
Our operations are conducted through two segments: technology and financing.
Technology Segment
The technology segment derives revenue from sales of product, project-related advanced professional services, managed services and staff augmentation. The technology segment sells primarily to corporate customers, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating to our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for information technology products.
Customers who purchase IT equipment and services from us may have a customer master agreement (“CMA”) with our company, which stipulates 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. 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.
We endeavor to minimize the cost of sales through incentive programs provided by vendors and distributors. The programs we qualify for are generally set by our reseller authorization level with the vendor. The authorization level we achieve and maintain governs the types of products we can resell as well as such items as variable discounts applied against the list price, funds provided for the marketing of these products and other special promotions. These authorization levels are achieved by us through purchase volume, certifications held by sales executives or engineers and/or contractual commitments by us. The authorization levels are costly to maintain, and these programs continually change and, therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.
Financing Segment
Our financing segment offers financing solutions to corporations, governmental entities, and educational institutions nationwide and in Canada, the UK, and several other European countries. The financing segment derives revenue from leasing IT and medical equipment and the disposition of that equipment at the end of the lease. The financing segment also derives revenues from the financing of third-party software licenses, software assurance, maintenance and other services.
Financing revenue generally falls into the following three categories:
| • | Portfolio income: Interest income from financing receivables and rents due under operating leases; |
| • | Transactional gains: Net gains or losses on the sale of financial assets; and |
| • | Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and the sale of off-lease (used) equipment. |
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 Operating Results
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, product availability, changes in vendor incentive programs, interest rate fluctuations, decision to sell financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of a sale prior to the expiration of the lease term to the lessee or to a third-party or from other post-term events.
We expect to continue to expand by opening new offices and warehouses and by hiring additional staff for specific targeted market areas whenever we can find both experienced personnel and desirable geographic areas over the longer term, which may reduce our results from operations. COVID-19 may negatively affect market demand, which will likely lower our financial results, and may adversely impact our ability to expand. We are uncertain as to the extent and duration of COVID-19’s impact to the IT market demand for our products and services.
CRITICAL ACCOUNTING ESTIMATES
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 2021 Annual Report.
SEGMENT RESULTS OF OPERATIONS
The three months ended June 30, 2021, compared to the three months ended June 30, 2020
Technology Segment
The results of operations for our technology segment were as follows (dollars in thousands):
Three Months Ended June 30, |
||||||||||||||||
2021 |
2020 |
Change |
||||||||||||||
Net sales |
||||||||||||||||
Product |
$ |
344,766 |
$ |
293,433 |
$ |
51,333 |
17.5 |
% |
||||||||
Services |
55,592 |
47,791 |
7,801 |
16.3 |
% |
|||||||||||
Total |
400,358 |
341,224 |
59,134 |
17.3 |
% |
|||||||||||
Cost of sales |
||||||||||||||||
Product |
271,015 |
224,543 |
46,472 |
20.7 |
% |
|||||||||||
Services |
33,910 |
29,840 |
4,070 |
13.6 |
% |
|||||||||||
Total |
304,925 |
254,383 |
50,542 |
19.9 |
% |
|||||||||||
Gross profit |
95,433 |
86,841 |
8,592 |
9.9 |
% |
|||||||||||
Selling, general, and administrative |
66,153 |
65,556 |
597 |
0.9 |
% |
|||||||||||
Depreciation and amortization |
3,898 |
3,488 |
410 |
11.8 |
% |
|||||||||||
Interest and financing costs |
159 |
265 |
(106 |
) |
(40.0 |
%) |
||||||||||
Operating expenses |
70,210 |
69,309 |
901 |
1.3 |
% |
|||||||||||
Operating income |
$ |
25,223 |
$ |
17,532 |
$ |
7,691 |
43.9 |
% |
||||||||
Adjusted gross billings |
$ |
633,007 |
$ |
546,394 |
$ |
86,613 |
15.9 |
% |
||||||||
Adjusted EBITDA |
$ |
30,958 |
$ |
23,161 |
$ |
7,797 |
33.7 |
% |
||||||||
Net sales: Net sales for the three months ended June 30, 2021, were $400.4 million compared to $341.2 million for the same period in the prior year, an increase of 17.3% or $59.1 million, due to increases in net sales from customers in the telecom, media and entertainment, healthcare, and smaller other categories of customers, which was partially offset by decreases in net sales from customers in financial services, SLED, and technology. Product sales increased 17.5%, or $51.3 million, to $344.8 million due to increased customer demand. Services revenues increased 16.3%, or $7.8 million compared to the same period in the prior year to $55.6 million due to an increase in managed and professional services for the three months ended June 30, 2021.
Adjusted gross billings increased 15.9%, or $86.6 million, to $633.0 million for the three months ended June 30, 2021, from $546.4 million for the same period in the prior fiscal year. The increase in adjusted gross billings was due, in part, to the SMP acquisition as well as higher demand from our current customers.
We rely on our vendors to fulfill a large majority of shipments to our customers. As of June 30, 2021, we had open orders of $565.8 million and deferred revenue of $100.3 million. As of June 30, 2020, we had open orders of $426.8 million and deferred revenues of $71.8 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 for the twelve-month periods ended June 30, 2021, and 2020 are summarized below:
Twelve Months Ended June 30, |
||||||||||||
2021 |
2020 |
Change |
||||||||||
Revenue by customer end market: |
||||||||||||
Telecom, Media & Entertainment |
27 |
% |
19 |
% |
8 |
% |
||||||
Technology |
16 |
% |
21 |
% |
(5 |
%) |
||||||
SLED |
15 |
% |
16 |
% |
(1 |
%) |
||||||
Healthcare |
13 |
% |
15 |
% |
(2 |
%) |
||||||
Financial Services |
12 |
% |
13 |
% |
(1 |
%) |
||||||
All others |
17 |
% |
16 |
% |
1 |
% |
||||||
Total |
100 |
% |
100 |
% |
||||||||
Twelve Months Ended June 30, |
||||||||||||
2021 |
2020 |
Change |
||||||||||
Revenue by vendor: |
||||||||||||
Cisco Systems |
37 |
% |
39 |
% |
(2 |
%) |
||||||
Dell / EMC |
7 |
% |
7 |
% |
0 |
% |
||||||
Juniper Networks |
7 |
% |
5 |
% |
2 |
% |
||||||
HP Inc. & HPE |
4 |
% |
4 |
% |
0 |
% |
||||||
Arista Networks |
4 |
% |
4 |
% |
0 |
% |
||||||
NetApp |
3 |
% |
4 |
% |
(1 |
%) |
||||||
All others |
38 |
% |
37 |
% |
1 |
% |
||||||
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 June 30, 2021, we had an increase in the percentage of total revenues from customers in the telecom, media and entertainment industry, and all other customer category, and decreases in the percentage of total revenues in the technology, SLED, healthcare, and financial services markets. These changes were driven by changes in customer buying cycles, and the timing of specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers.
Most of our revenues by vendor are derived from our top six suppliers, which, when combined, accounted for over 60% of total revenues for the twelve-month periods ended June 30, 2021, and 2020. None of the vendors included within the “other” category exceeded 5% of total revenues.
Cost of sales: Cost of sales for the three months ended June 30, 2021 was $304.9 million compared to $254.4 million for the same period in the prior year, an increase of 19.9% or $50.5 million due to the increases in sales of products and services. Our gross margin decreased 160 basis points to 23.8% for the three months ended June 30, 2021, compared to 25.4% in the same period in the prior year primarily due to a shift in our product mix to a greater portion of our sales from products for which the revenues and cost of sales are presented on a gross basis. Vendor incentives earned as a percentage of sales decreased 10 basis points for the three months ended June 30, 2021, resulting in a reduction to gross margin, as compared to same period in the prior year.
Selling, general, and administrative: Selling, general, and administrative expenses of $66.2 million for the three months ended June 30, 2021, increased by $0.6 million, or 0.9% from $65.6 million in the same period in the prior year. Salaries and benefits increased $0.9 million, or 1.5% to $57.9 million, compared to $57.0 million during the prior year. Our technology segment had 1,514 employees as of June 30, 2021, an increase of 14 from 1,500 as of June 30, 2020. Our headcount as of June 30, 2021 incorporates the addition of 102 employees from the December 31, 2020, acquisition of SMP.
General and administrative expenses increased $0.1 million, or 1.5%, to $8.3 million during the three months ended June 30, 2021, compared to the same period in the prior year, due to an increase in travel and entertainment and other general office related expenses. There were no acquisition related expenses for the three months ended June 30, 2021, and the provision for credit losses was $0.4 million lower for the three months ended June 30, 2021 than in the same period in the prior year.
Depreciation and amortization: Depreciation and amortization increased $0.4 million, or 11.8%, to $3.9 million during the three months ended June 30, 2021, as compared to $3.5 million in the prior year period primarily due to the amortization of the intangible assets acquired in our acquisition of SMP.
Interest and financing costs: Interest and financing costs of $0.2 million were incurred in the three months ended June 30, 2021, compared to $0.3 million in the prior year. The decrease is due to a reduction of $35.0 million in borrowings under the accounts receivable component of our Technology segment credit facility as of June 30, 2021 compared to June 30,2020, offset by $17.0 million in borrowings through an installment payment arrangement as of June 30, 2021, for which there was no comparable borrowing as of June 30,2020.
Segment operating income: As a result of the foregoing, operating income was $25.2 million, an increase of $7.7 million, or 43.9%, for the three months ended June 30, 2021, as compared to $17.5 million in the same period in the prior year.
For the three months ended June 30, 2021, Adjusted EBITDA was $31.0 million, an increase of $7.8 million, or 33.7%, compared to $23.2 million in the same period in the prior year.
Financing Segment
The results of operations for our financing segment were as follows (dollars in thousands):
Three Months Ended June 30, |
||||||||||||||||
2021 |
2020 |
Change |
||||||||||||||
Net sales |
$ |
16,291 |
$ |
13,807 |
$ |
2,484 |
18.0 |
% |
||||||||
Cost of sales |
6,212 |
2,091 |
4,121 |
197.1 |
% |
|||||||||||
Gross profit |
10,079 |
11,716 |
(1,637 |
) |
(14.0 |
%) |
||||||||||
Selling, general, and administrative |
2,622 |
3,911 |
(1,289 |
) |
(33.0 |
%) |
||||||||||
Depreciation and amortization |
28 |
28 |
- |
0.0 |
% |
|||||||||||
Interest and financing costs |
200 |
312 |
(112 |
) |
(35.9 |
%) |
||||||||||
Operating expenses |
2,850 |
4,251 |
(1,401 |
) |
(33.0 |
%) |
||||||||||
Operating income |
$ |
7,229 |
$ |
7,465 |
$ |
(236 |
) |
(3.2 |
%) |
|||||||
Adjusted EBITDA |
$ |
7,314 |
$ |
7,553 |
$ |
(239 |
) |
(3.2 |
%) |
|||||||
Net sales: Net sales increased by $2.5 million, or 18.0%, to $16.3 million for the three months ended June 30, 2021, as compared to prior year results due to higher post contract earnings and higher transactional gains. During the quarters ended June 30, 2021, and 2020, we recognized net gains on sales of financial assets of $3.2 million and $2.5 million, respectively, and the fair value of assets received from these sales were $75.3 million and $73.2 million, respectively.
At June 30, 2021, we had $141.7 million in financing receivables and operating leases, compared to $185.0 million as of June 30, 2020, a decrease of $43.3 million, or 23.4%.
Cost of sales: Cost of sales increased $4.1 million for the three months ended June 30, 2021, compared to the prior year results due to higher cost of sales on off-lease equipment and higher depreciation expense from operating leases. Gross profit decreased by 14.0% to $10.1 million for the three months ended June 30, 2021, as compared to $11.7 million in the prior year.
Selling, general and administrative: For the three months ended June 30, 2021, selling, general, and administrative expenses decreased by $1.3 million or 33.0%, which was due primarily to a decrease in the provision for credit losses and decrease in variable compensation due to lower gross profit.
Interest and financing costs: Interest and financing costs decreased by 35.9% to $0.2 million for the three months ended June 30, 2021, compared to the prior year, due to a decrease in the average balance on total notes payable outstanding. Total notes payable for the financing segment was $15.3 million as of June 30, 2021, a decrease of $48.2 million, or 75.9%, as compared to $63.4 million as of June 30, 2020. Our weighted average interest rate for non-recourse notes payable was 3.66% and 3.54%, as of June 30, 2021, and 2020, respectively. Our weighted average interest rate for recourse notes payable was 2.55% as of June 30, 2020. We did not have any recourse debt as of June 30, 2021.
Segment operating income: As a result of the foregoing, operating income decreased $0.2 million or 3.2% compared to the same period in the prior year to $7.2 million. Likewise, Adjusted EBITDA decreased $0.2 million or 3.2% compared to the same period in the prior year to $7.3 million.
Consolidated
Other income: Other income was a constant of $0.1 million for both the three months ended June 30, 2021, and June 30, 2020.
Income taxes: Our provision for income tax expense was $9.1 million for the three months ended June 30, 2021, as compared to $7.7 million for the same period in the prior year. Our effective income tax rates for the three months ended June 30, 2021, and 2020 were 27.8% and 30.8%, respectively. The change in our effective income tax rate was primarily due to an adjustment to the federal benefit from state taxes in the prior year period.
Net earnings: The foregoing resulted in net earnings of $23.5 million for the three months ended June 30, 2021, an increase of $6.2 million, or 35.5%, as compared to $17.4 million during the three months ended June 30, 2020.
Basic and fully diluted earnings per common share was $1.76 and $1.75, respectively, for the three months ended June 30, 2021, an increase of 35.4% and 34.6% as compared to $1.30 for both basic and fully diluted earnings per common share, for the three months ended June 30, 2020. Non-GAAP diluted earnings per share increased 29.8% to $1.96 for the three months ended June 30, 2021, as compared to $1.51 for the three months ended June 30, 2020.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for both the three months ended June 30, 2021, and June 30, 2020, was 13.3 million and 13.4 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
Our primary source of funding is cash from operations and borrowings which are accounted for as non-recourse and recourse notes payable. We use 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.
ePlus Technology, inc. and certain of its subsidiaries, which are part of our technology segment, finance their operations with funds generated from operations, and with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). This facility provides short-term capital for our technology segment. There are two components of the WFCDF credit facility: (1) a floor plan component, and (2) an accounts receivable component.
We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be enough to finance our working capital, capital expenditures, and other requirements for at least the next year.
Our ability to continue to expand, both organically and through acquisitions, is dependent upon our ability to generate enough cash flow from operations or from borrowing or 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.
The extent of the impact of COVID-19 is uncertain and may impact our liquidity position over the longer term. Credit markets may tighten as a result of COVID-19 and we may have difficulty funding our financing transactions with lenders, which may result in the use of our cash or a decrease in financing originations.
Cash Flows
The following table summarizes our sources and uses of cash over the periods indicated (in thousands):
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Net cash provided by (used in) operating activities |
$ |
(65,136 |
) |
$ |
6,394 |
|||
Net cash used in investing activities |
(6,151 |
) |
(2,159 |
) |
||||
Net cash provided by (used in) financing activities |
35,494 |
54,040 |
||||||
Effect of exchange rate changes on cash |
71 |
(124 |
) |
|||||
Net increase in cash and cash equivalents |
$ |
(35,722 |
) |
$ |
58,151 |
|||
Cash flows from operating activities. We used $65.1 million in operating activities during the three months ended June 30, 2021, compared to $6.4 million provided by operating activities for the three months ended June 30, 2020. See below for a breakdown of operating cash flows by segment (in thousands):
Three Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
Technology segment |
$ |
(65,980 |
) |
$ |
11,191 |
|||
Financing segment |
844 |
(4,797 |
) |
|||||
Net cash provided by (used in) operating activities |
$ |
(65,136 |
) |
$ |
6,394 |
|||
Technology Segment: In the three months ended June 30, 2021, our technology segment used $66.0 million from operating activities primarily due to increases in our accounts receivable and inventories and a decrease in accounts payable-trade. Offsetting this, we had net borrowing on the floor plan component of our credit facility of $40.9 million. We use this facility to manage working capital needs. We present changes in this balance as financing activity in our consolidated statement of cash flows.
In the three months ended June 30, 2020, our technology segment provided $11.2 million from operating activities primarily due to cash generated from earnings. Additionally, we had net borrowing on the floor plan component of our credit facility of $48.3 million. The net borrowing is primarily the result of extended payment terms from Cisco that deferred $34.2 million in payments.
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 June 30, |
||||||||
2021 |
2020 |
|||||||
(DSO) Days sales outstanding (1) |
61 |
61 |
||||||
(DIO) Days inventory outstanding (2) |
13 |
14 |
||||||
(DPO) Days payable outstanding (3) |
(42 |
) |
(45 |
) |
||||
Cash conversion cycle |
32 |
30 |
||||||
| (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 cost of adjusted gross billings for the same three month period. |
Our cash conversion cycle increased to 32 days at June 30, 2021, compared to 30 days at June 30, 2020. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DPO decreased 3 days. Invoices processed through our credit facility, or the A/P-floor plan balance, are typically paid within 45-60 days from the invoice date, while A/P trade invoices are typically paid within 30 days from the invoice date. Our DSO remained the same at 61 days, which reflects higher sales to customers with terms greater than or equal to net 60 days in both periods.
Financing Segment: In the three months ended June 30, 2021, our financing segment provided $0.8 million from operating activities, primarily due to earnings offset by decreases in accounts payable-trade. In the three months ended June 30, 2020, our financing segment used $4.8 million from operating activities, primarily due to changes in financing receivables net of $24.7 million.
Cash flows related to investing activities. In the three months ended June 30, 2021, we used $6.2 million from investing activities, consisting of $7.0 million for purchases of property, equipment and operating lease equipment offset by $0.8 million of proceeds from the sale of property, equipment, and operating lease equipment. In the three months ended June 30, 2020, we used $2.2 million from investing activities, consisting of $2.3 million for purchases of property, equipment and operating lease equipment offset by $0.1 million of proceeds from the sale of property, equipment, and operating lease equipment.
Cash flows from financing activities. In the three months ended June 30, 2021, cash provided by financing activities was $35.5 million consisting of net borrowings on the floor plan component of our credit facility of $40.9 million partially offset by net repayments of non-recourse and recourse notes payable of $1.6 million, and $3.8 million in cash used to repurchase outstanding shares of our common stock. In the three months ended June 30, 2020, cash provided by financing activities was $54.0 million consisting of net borrowings of non-recourse and recourse notes payable of $8.5 million, net borrowings on floor plan facility of $48.3 million, and offset by $2.7 million in repurchase of common stock.
Our borrowing of non-recourse and recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. When the transfers do not meet the requirements for a sale, the proceeds paid to us represent borrowings of non-recourse or recourse notes payable.
Non-Cash Activities. We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. As a condition of these agreements, 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, the customer will make payments to us, and we will remit the payment to the financial institution. The economic impact to us under either structure is similar, in that the assigned contractual payments are paid by the customer and remitted to the lender. However, when our customer makes payments through a trust, such payments represent non-cash transactions. Also, in certain assignment agreements, we may direct the third-party financial institution to pay some of the proceeds from the assignment directly to the vendor or vendors that have supplied the assets being leased and or financed. In these situations, the portion of the proceeds paid directly to our vendors are non-cash transactions.
Secured borrowings – Financing segment
We may finance all or most of the cost of the assets that we finance for customers by transferring all or part of the contractual payments due to us to third-party financing institutions. When we account for the transfer as a secured borrowing, we recognize the proceeds as either recourse or non-recourse notes payable. Our customers are responsible for repaying the debt from a secured borrowing. The lender typically secures a lien on the financed assets at the time the financial assets are transferred and releases it upon collecting all the transferred payments. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk and their only recourse, upon default by the customer, is against the customer and the specific equipment under lease. While we expect that the credit quality of our financing arrangements and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all.
Credit facility — Technology segment
Within our technology segment, ePlus Technology, inc. and certain of its subsidiaries finance their operations, in addition to funds generated from operations, with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). This facility provides short-term capital for our technology segment. There are two components of the WFCDF credit facility: (1) a floor plan component and (2) an accounts receivable component.
The WFCDF credit facility has an aggregate limit for the two components, except during a temporary uplift, of $275 million. We may elect to temporarily increase the aggregate limit to $350 million for a period of not less than 30 days, provided that all such periods shall not exceed 150 days in the aggregate in any calendar year. Additionally, the WFCDF credit facility has a limit on the accounts receivable component of $100 million. WFCDF charges us an interest rate equal to two percent (2.00%) plus the greater of one month LIBOR or seventy-five hundredths of one percent (0.75%).
As of June 30, 2021, the limit of the two components of the credit facility was $275 million. On July 2, 2021, we elected to temporarily increase the aggregate limit to $350 million.
The WFCDF credit facility is secured by the assets of ePlus Technology, inc. and certain of its subsidiaries. Additionally, the credit facility requires a guaranty of $10.5 million by ePlus inc.
The credit facility restricts the ability of ePlus Technology, inc. and certain of its subsidiaries to pay dividends to ePlus inc. unless their available borrowing meets certain thresholds. As of June 30, 2021, and March 31, 2021, their available borrowing met the threshold such that there were no restricted net assets of ePlus Technology, inc.
The credit facility requires that financial statements of ePlus Technology, inc. and certain of its subsidiaries be provided within 45 days of each quarter and 90 days of each fiscal year end and requires that other operational reports be provided on a regular basis. Either party may terminate with 90 days’ advance written notice.
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. After a customer places a purchase order with us and after we have completed our credit review of the customer, 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. Most customer payments in our technology segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically and daily transferred to our operating account. On the due dates of the floor plan component, we make cash payments to WFCDF. Our borrowings and repayments under the floor plan component are included in “net borrowings (repayments) on floor plan facility” within cash flows from the financing activities in our consolidated statements of cash flows.
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 June 30, 2021 |
Balance as of June 30, 2021 |
Maximum Credit Limit at March 31, 2021 |
Balance as of March 31, 2021 |
|||||||||||
$ |
275,000 |
$ |
139,574 |
$ |
275,000 |
$ |
98,653 |
|||||||
Accounts Receivable Component. ePlus Technology, inc. and certain of its subsidiaries have an accounts receivable component included within the WFCDF credit facility, which has a revolving line of credit. The outstanding balance under the accounts receivable component is presented as part of as recourse notes payable- current on our consolidated balance sheets. Our borrowings and repayments under the accounts receivable component are included in “borrowings of non-recourse and recourse notes payable” and “repayments of non-recourse and recourse notes payable,” respectively, within cash flows from the financing activities in our consolidated statements of cash flows.
We did not have any outstanding balance under the accounts receivable component of the WFCDF as of either the period ended June 30, 2021, or March 31, 2021. The maximum credit limit under this facility was $100.0 million.
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 these guarantees in the event of default in the performance of our obligations. We are in compliance with material 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 June 30, 2021, 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. The impacts of COVID-19 may limit or eliminate our access to capital. While the future is uncertain, we do not believe our credit facility will be terminated by the lender or us. Additionally, while our lending partners in our financing segment have become more discerning in their approval processes, we currently have funding resources available for our transactions.
Inflation
For the periods presented herein, inflation has not had a material effect on our results of operations. In the most recent quarter, we have experienced some increases in prices from our suppliers as well as rising wages. We generally have been able to pass along these price increases to our customers. There can be no assurances, however, that inflation would not have a material impact on our sales or operating costs in the future.
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 the worldwide impacts from COVID-19, currency fluctuations, reduction in IT spending, shortages of product from our vendors due to material shortages, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio to a lessee or third-party at the expiration of a lease term or prior to such expiration, 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 2021 Annual Report.
We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our cash flow may be adversely affected by the risks related to the COVID-19 pandemic, which may result in delays in the collections of our accounts receivables or non-payment.
Although a substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, we utilize lines of credit and other financing facilities that are subject to fluctuations in short-term interest rates. Our non-recourse instruments, which are denominated in US dollars, were entered for other than trading purposes and bear interest at a fixed rate. Because the interest rate on these instruments is fixed, changes in interest rates will not directly impact our cash flows. Financing transactions funded with our cash flows, not debt, and may be subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds. Borrowings under the WFCDF facility bear interest at a market-based variable rate. As of June 30, 2021, 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.
The UK’s leaving the European Union (“Brexit”) could impact revenue items, cost items, tax, goodwill impairments and liquidity, among others. The most obvious immediate impact is the effect of foreign exchange fluctuations on revenue and cost items. We have determined that our foreign currency exposure for our UK operations is insignificant in relation to total consolidated operations, and we believe those potential fluctuations in currency exchange rates and other Brexit-related economic and operational risks will not have a material effect on our results of operations and financial position.
We evaluate Brexit-related developments on a regular basis to determine if such developments are anticipated to have a material impact on our results on operations and financial position.
We lease assets in foreign countries, including Canada, the UK and several other European countries. As a lessor, we lease assets for amounts denominated in British Pounds, Euros, and Canadian dollars. As our foreign operations have been smaller compared to our domestic operations, we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.
| Item 4. | Controls and Procedures |
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” as defined in the Exchange Act Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the 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 June 30, 2021.
Changes in Internal Control Over Financial Reporting.
There have not been any changes in our internal control over financial reporting during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, 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.
| Item 1. | Legal Proceedings |
Please refer to Note 9, “Commitment and Contingencies” to the accompanying Consolidated Financial Statements included in "Part I, Item 1. Financial Statements".
| Item 1A. | Risk Factors |
Our risk factors are disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021. Updates to our risk factors due to recent events are provided below.
Supply chain issues, including a shortage of IT products, may increase our costs or cause a delay in fulfilling orders, resulting in an adverse impact on our financial results.
We depend upon the supply of products available from our vendors to fulfill orders from our customers on a timely basis. At present, there is a worldwide shortage of certain IT products resulting from shortages in semiconductors and other components of those products. Like others, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of products, the costs of products, and our ability to meet customer demands. As a result of longer lead times, some sales to customers have been deferred. We believe extended lead times will likely persist for at least the next few quarters. If we are unable to mitigate these disruptions, our financial results may be adversely impacted. As a result of the worldwide shortage of certain IT products, we have experienced some increases in prices from our suppliers. Additionally, we have experienced an increase in wages. If we are unable to pass along these prices increases to customers, our financial results may be adversely impacted. We provide certain professional and managed services under fixed price contracts. If we fail to accurately estimate our costs, including due to inflation, the profitability of our contracts may be adversely affected.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information regarding our total purchases of 45,344 shares of ePlus inc. common stock during the three months ended June 30, 2021, including a total of 17,629 shares purchased as part of the publicly announced share repurchase plans or programs.
Period |
Total number of shares purchased (1) |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
||||||||||||||||
April 1, 2021 through April 30, 2021 |
- |
$ |
- |
- |
440,899 |
(2 |
) |
|||||||||||||
May 1, 2021 through May 27, 2021 |
999 |
$ |
100.80 |
- |
440,899 |
(3 |
) |
|||||||||||||
May 28, 2021 through May 31, 2021 |
- |
$ |
- |
- |
500,000 |
(4 |
) |
|||||||||||||
June 1, 2021 through June 30, 2021 |
44,345 |
$ |
90.42 |
17,629 |
482,371 |
(5 |
) |
|||||||||||||
| (1) | All shares acquired were in open-market purchases, except for 27,715 shares, out of which 999 were repurchased in May 2021 and 26,716 in June 2021 to satisfy tax withholding obligations that arose due to the vesting of shares of restricted stock. |
| (2) | The share purchase authorization in place for the month ended April 30, 2021, had purchase limitations on the number of shares of up to 500,000 shares. As of April 30, 2021, the remaining authorized shares to be purchased were 440,899. |
| (3) | As of May 27, 2021, the authorization under the then-existing share repurchase plan expired. |
| (4) | On March 18, 2021, the board of directors authorized the company to repurchase up to 500,000 shares of our outstanding common stock commencing on May 28, 2021, and continuing to May 27, 2022. As of May 31, 2021, the remaining authorized shares to be purchased were 500,000. |
| (5) | The share purchase authorization in place for the month ended June 30, 2021, had purchase limitations on the number of shares of up to 500,000 shares. As of June 30, 2021, the remaining authorized shares to be purchased were 482,371. |
The timing and expiration date of the current stock repurchase authorizations are included in Note 11, “Stockholders’ Equity” to our unaudited consolidated financial statements included elsewhere in this report.
| Item 3. | Defaults Upon Senior Securities |
Not Applicable.
| Item 4. | Mine Safety Disclosures |
Not Applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
Exhibit Number |
Exhibit Description |
|
ePlus inc. Amended and Restated Certificate of Incorporation as amended September 15, 2008 (Incorporated herein by reference as Exhibit 3.1 to our Current Report on Form 8-K filed on September 19, 2008). |
||
Amended and Restated Bylaws of ePlus inc., as amended February 15, 2018 (Incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on February 20, 2018). |
||
Certification of the Chief Executive Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
||
Certification of the Chief Financial Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
||
Certification of the Chief Executive Officer and Chief Financial Officer of ePlus inc. pursuant to 18 U.S.C. § 1350. |
||
101.INS |
XBRL Instance Document |
|
101.SCH |
XBRL Taxonomy Extension Schema Document |
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
|
104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ePlus inc. |
||
Date: August 4, 2021 |
/s/ MARK P. MARRON |
|
By: Mark P. Marron |
||
Chief Executive Officer and President |
||
(Principal Executive Officer) |
||
Date: August 4, 2021 |
/s/ ELAINE D. MARION |
|
By: Elaine D. Marion |
||
Chief Financial Officer |
||
(Principal Financial Officer) |
||
42
Exhibit 31.1
CERTIFICATION
I, Mark P. Marron, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of ePlus inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f)) for the registrant and have:
|
| a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
| d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
| 5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
| a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
| b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
|
Date: August 4, 2021
|
/s/ MARK P. MARRON
|
|
|
Mark P. Marron
|
|
|
Chief Executive Officer and President
|
|
|
(Principal Executive Officer)
|
Exhibit 31.2
CERTIFICATION
I, Elaine D. Marion, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of ePlus inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f)) for the registrant and have:
|
| a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
| d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
| 5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
| a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
| b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
|
Date: August 4, 2021
|
/s/ ELAINE D. MARION
|
|
|
Elaine D. Marion
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial Officer)
|
Exhibit 32
CERTIFICATION
PURSUANT TO 18 USC. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ePlus
inc. on Form 10-Q for the three months ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 USC. section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002, that to the undersigned's best knowledge and belief:
| a) |
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
| b) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ePlus inc.
|
Date: August 4, 2021
|
/s/ MARK P. MARRON
|
|
|
Mark P. Marron, Chief Executive Officer
and President
|
|
|
(Principal Executive Officer)
|
|
|
/s/ ELAINE D. MARION
|
|
|
Elaine D. Marion, Chief Financial Officer
|
|
|
(Principal Financial Officer)
|
A signed original of this written statement required by Section 906 has been provided to ePlus and will be retained by us and furnished to the Securities and Exchange Commission or its staff upon request.