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.