EPLUS INC (PLUS) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations (“financial review”) of ePlus is intended to help investors understand our
company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the related notes included elsewhere in this report.
For a discussion of results for the year ended March 31, 2021 compared to the results for the year ended March 31, 2020, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual
Report on Form 10-K for the year ended March 31, 2021, filed with the Securities and Exchange Commission on May 21, 2021.
On December 13, 2021, we completed a two-for-one stock split in the form of a stock dividend. References made to outstanding shares or per share amounts have been retroactively adjusted for this stock split.
EXECUTIVE OVERVIEW
BUSINESS DESCRIPTION
We provide leading IT products and services, flexible leasing and financing solutions, and enterprise supply management to enable our customers to optimize their IT infrastructure and supply chain processes.
We design, implement, and provide IT solutions for customers. We focus primarily on specialized IT segments including data center infrastructure, networking, security, cloud, and collaboration. Our solutions
incorporate hardware and software products from multiple leading IT vendors. As our customers’ IT requirements have grown increasingly complex, we have evolved our offerings by investing in our professional and managed services capabilities
and by expanding our relationships with existing and emerging key vendors.
We are an authorized reseller of over 1,000 vendors, which have enabled us to provide our customers with new and evolving IT solutions. We possess top-level engineering certifications with a broad range of
leading IT vendors that enable us to offer IT solutions that are optimized for each of our customers’ specific requirements. Our proprietary software solutions allow our customers to procure, control and automate their IT solutions
environment.
BUSINESS TRENDS
COVID-19 pandemic update: The novel coronavirus (“COVID-19”) pandemic continues to have widespread
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 rules
related to vaccine status, 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.
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 in-person meetings, 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 chains, which have 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 vendor 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.
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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; the impact of variants; governmental, business, and individuals’ actions in response to the pandemic; the efficacy of vaccines and boosters; the willingness of people to be
inoculated; potential vaccine-related regulations; court rulings; and the impact on economic activity including the possibility of recession, inflation, 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” of this Annual Report on Form 10-K.
Supply constraints: A worldwide shortage of certain IT products is resulting from, among other things, shortages in
semiconductors and other product components. Like others, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of products, the costs of products, vendor return and
cancellation policies, and our ability to meet customer demands. We continue to work closely with our suppliers to further mitigate disruptions outside our control. Despite these actions, we believe extended lead times will likely persist
for at least the next few quarters.
Inflation: For the periods presented herein, we have experienced increases in prices from our suppliers as well as rising
wages and interest rates. We generally have been able to pass price increases to our customers. Our labor costs related to services we perform will take longer to pass to customers that have services engagements where prices may be set. Our
financing quotes are generally indexed to market changes to enable us to change rates from time of quote to funding. Financing transactions funded with our cash flows, not debt, are subject to interest rate risk. If the market interest rate
exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds and lock in our profit on the transaction. There can be no assurances, however, that inflation would not have a material impact on our sales, gross
profit, or operating costs in the future.
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 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.
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The following table provides our key business metrics (in thousands, except per share amounts):
| Year Ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated | 2022 | 2021 | 2020 | |||||||||
| Net sales | $ | 1,821,019 | $ | 1,568,323 | $ | 1,588,404 | ||||||
| Gross profit | $ | 460,982 | $ | 393,554 | $ | 391,191 | ||||||
| Gross margin | 25.3 | % | 25.1 | % | 24.6 | % | ||||||
| Operating income margin | 8.1 | % | 6.8 | % | 6.0 | % | ||||||
| Net earnings | $ | 105,600 | $ | 74,397 | $ | 69,082 | ||||||
| Net earnings margin | 5.8 | % | 4.7 | % | 4.3 | % | ||||||
| Net earnings per common share - diluted | $ | 3.93 | $ | 2.77 | $ | 2.57 | ||||||
| Non-GAAP: Net earnings (1) | $ | 117,964 | $ | 85,567 | $ | 82,167 | ||||||
| Non-GAAP: Net earnings per common share - diluted (1) | $ | 4.39 | $ | 3.19 | $ | 3.06 | ||||||
| Adjusted EBITDA (2) | $ | 170,004 | $ | 128,245 | $ | 119,359 | ||||||
| Adjusted EBITDA margin | 9.3 | % | 8.2 | % | 7.5 | % | ||||||
| Technology Segment | ||||||||||||
| Net sales | $ | 1,733,036 | $ | 1,507,954 | $ | 1,530,138 | ||||||
| Adjusted gross billings (3) | $ | 2,620,614 | $ | 2,263,865 | $ | 2,227,885 | ||||||
| Gross profit | $ | 408,153 | $ | 346,235 | $ | 340,588 | ||||||
| Gross margin | 23.6 | % | 23.0 | % | 22.3 | % | ||||||
| Operating income | $ | 109,000 | $ | 75,665 | $ | 62,155 | ||||||
| Adjusted EBITDA (2) | $ | 131,353 | $ | 97,219 | $ | 85,840 | ||||||
| Financing Segment | ||||||||||||
| Net sales | $ | 87,983 | $ | 60,369 | $ | 58,266 | ||||||
| Gross profit | $ | 52,829 | $ | 47,319 | $ | 50,603 | ||||||
| Operating income | $ | 38,316 | $ | 30,670 | $ | 33,124 | ||||||
| Adjusted EBITDA (2) | $ | 38,651 | $ | 31,026 | $ | 33,519 |
| Column 1 | Column 2 |
|---|---|
| (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.
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The following table provides our calculation of Non-GAAP Net earnings and Non-GAAP Net earnings per common share – diluted
(in thousands, except per share amounts):
| Year Ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| GAAP: Earnings before tax | $ | 146,884 | $ | 106,906 | $ | 95,959 | ||||||
| Share based compensation | 7,114 | 7,167 | 7,954 | |||||||||
| Acquisition and integration expense | - | 271 | 1,676 | |||||||||
| Acquisition related amortization expense | 10,072 | 9,116 | 9,217 | |||||||||
| Other (income) expense | 432 | (571 | ) | (680 | ) | |||||||
| Non-GAAP: Earnings before provision for income taxes | 164,502 | 122,889 | 114,126 | |||||||||
| GAAP: Provision for income taxes | 41,284 | 32,509 | 26,877 | |||||||||
| Share based compensation | 2,014 | 2,188 | 2,218 | |||||||||
| Acquisition and integration expense | - | 78 | 490 | |||||||||
| Acquisition related amortization expense | 2,803 | 2,730 | 2,487 | |||||||||
| Other (income) expense | 120 | (143 | ) | (200 | ) | |||||||
| Tax benefit (expense) on restricted stock | 317 | (40 | ) | 87 | ||||||||
| Non-GAAP: Provision for income taxes | 46,538 | 37,322 | 31,959 | |||||||||
| Non-GAAP: Net earnings | $ | 117,964 | $ | 85,567 | $ | 82,167 |
| Year Ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| GAAP: Net earnings per common share - diluted | $ | 3.93 | $ | 2.77 | $ | 2.57 | ||||||
| Share based compensation | 0.20 | 0.19 | 0.22 | |||||||||
| Acquisition and integration expense | - | 0.01 | 0.04 | |||||||||
| Acquisition related amortization expense | 0.26 | 0.24 | 0.25 | |||||||||
| Other (income) expense | 0.01 | (0.02 | ) | (0.02 | ) | |||||||
| Tax benefit (expense) on restricted stock | (0.01 | ) | - | - | ||||||||
| Total non-GAAP adjustments - net of tax | 0.46 | 0.42 | 0.49 | |||||||||
| Non-GAAP: Net earnings per common share - diluted | $ | 4.39 | $ | 3.19 | $ | 3.06 |
| Column 1 | Column 2 |
|---|---|
| (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. |
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.
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The following table provides our calculations of Adjusted EBITDA (in thousands):
| Year Ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated | 2022 | 2021 | 2020 | |||||||||
| Net earnings | $ | 105,600 | $ | 74,397 | $ | 69,082 | ||||||
| Provision for income taxes | 41,284 | 32,509 | 26,877 | |||||||||
| Share based compensation | 7,114 | 7,167 | 7,954 | |||||||||
| Interest and financing costs | 928 | 521 | 294 | |||||||||
| Acquisition and integration expense | - | 271 | 1,676 | |||||||||
| Depreciation and amortization | 14,646 | 13,951 | 14,156 | |||||||||
| Other income (expense) | 432 | (571 | ) | (680 | ) | |||||||
| Adjusted EBITDA | $ | 170,004 | $ | 128,245 | $ | 119,359 | ||||||
| Technology Segment | ||||||||||||
| Operating income | $ | 109,000 | $ | 75,665 | $ | 62,155 | ||||||
| Depreciation and amortization | 14,535 | 13,839 | 14,016 | |||||||||
| Share based compensation | 6,890 | 6,923 | 7,699 | |||||||||
| Interest and financing costs | 928 | 521 | 294 | |||||||||
| Acquisition and integration expense | - | 271 | 1,676 | |||||||||
| Adjusted EBITDA | $ | 131,353 | $ | 97,219 | $ | 85,840 | ||||||
| Financing Segment | ||||||||||||
| Operating income | $ | 38,316 | $ | 30,670 | $ | 33,124 | ||||||
| Depreciation and amortization | 111 | 112 | 140 | |||||||||
| Share based compensation | 224 | 244 | 255 | |||||||||
| Adjusted EBITDA | $ | 38,651 | $ | 31,026 | $ | 33,519 |
| Column 1 | Column 2 |
|---|---|
| (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. |
The following table provides our calculation of Adjusted gross billings (in thousands):
| Year Ended March 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| Technology segment net sales | $ | 1,733,036 | $ | 1,507,954 | $ | 1,530,138 | |||||
| Costs incurred related to sales of third party maintenance, software assurance and subscription/SaaS licenses, and services | 887,578 | 755,911 | 697,747 | ||||||||
| Adjusted gross billings | $ | 2,620,614 | $ | 2,263,865 | $ | 2,227,885 |
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.
FINANCIAL SUMMARY
During the year ended March 31, 2022, net sales increased 16.1% to $1,821.0 million, or an increase of $252.7 million compared to $1,568.3 million in the prior fiscal year. Product sales for the year ended
March 31, 2022, increased 15.7% to $1,580.4 million, or an increase of $214.2 million compared to $1,366.2 million in the prior year. Services sales during the year ended March 31, 2022, increased 19.0% to $240.6 million, or an increase of
$38.5 million, over prior year services sales of $202.2 million. The increase in net sales was driven by higher product and service revenues along with higher proceeds from sales of leased equipment. We had increases in net sales to customers
in the telecom, media and entertainment, healthcare, and smaller other categories of customers, which were offset by a decrease in net sales to customers in the financial services industry, during the year ended March 31, 2022, compared to
the prior year.
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Adjusted gross billings increased by 15.8%, or $356.7 million, to $2,620.6 million for the year ended March 31, 2022, compared to $2,263.9 million in the prior fiscal year. The increase in Adjusted gross
billings was due to higher demand from our current customers, as well as from our acquisitions. Adjusted gross billings increased year over year at a faster rate than net sales due to a shift in mix to a higher proportion of third-party
maintenance, software assurance, subscriptions/SaaS licenses, and services which we recognize revenue on a net basis.
Consolidated gross profit increased 17.1%, to $461.0 million, compared to $393.6 million in the prior fiscal year due to higher margins. Consolidated gross margin increased 20 basis points to 25.3% for the year
ended March 31, 2022, compared to 25.1% for the year ended March 31, 2021. The increase in gross margin was due to expanded gross profit and margins of our technology segment, due to a shift in revenue mix resulting from our continued focus
on value added services for our customers, including the increase in sales of our professional and managed services, and sales of third-party maintenance agreements, software assurance, subscriptions/SaaS licenses, and services. The increase
in gross margin was partially offset by lower margins in our finance segment due to gains on several large transactions in the prior year.
For the year ended March 31, 2022, operating expenses increased $26.4 million, or 9.2%, to $313.7 million, as compared to $287.2 million in the prior year. The increase in operating expenses for the year ended
March 31, 2022, was mainly driven by increased selling, general, and administrative costs with a slight increase in depreciation and amortization expense.
Selling, general, and administrative expense for the year ended March 31, 2022, increased $25.9 million, or 9.5%, to $297.1 million, mainly driven by an increase in salary and fringe benefits, slightly offset
by a decrease in our reserve for credit losses. As of March 31, 2022, we had 1,577 employees, an increase of 1.1% from 1,560 as of March 31, 2021. Depreciation and amortization expense increased by $0.7 million and interest and financing
costs decreased $0.1 million, due to a decrease in the average balance of non-recourse and recourse notes payable outstanding during the year.
Operating income increased $41.0 million, or 38.5%, to $147.3 million and operating margin increased by 130 basis points to 8.1%, as compared to the year ended March 31, 2021. The increase in operating income
was due to a year over increase in gross profit offset by an increase in selling, general, and administrative expense.
Our effective income tax rate for the year ended March 31, 2022, was 28.1%, compared to 30.4% for the prior year. The decrease in our effective income tax rate year over year is primarily due to prior year unfavorable adjustments to the
federal benefit from state taxes and non-deductible executive compensation.
Net earnings for the year ended March 31, 2022, increased 41.9% to $105.6 million, as compared to $74.4 million for the year ended March 31, 2021.
Adjusted EBITDA for the year ended March 31, 2022, was $170.0 million, an increase of $41.8 million, or 32.6%, compared to the prior year. Adjusted EBITDA margin was 9.3% for the year ended March 31, 2022, an
increase of 110 basis points over the prior year.
For the year ended March 31, 2022, diluted earnings per share were $3.93, an increase of $1.16, or 41.9%, compared to the prior year of $2.77 per diluted share. Non-GAAP diluted earnings per share was $4.39 for
fiscal year 2022, an increase of $1.20, or 37.6%, from $3.19 per diluted share in the prior year.
Cash and cash equivalents increased $25.8 million, or 19.9%, to $155.4 million as of March 31, 2022, compared to March 31, 2021. We increased our cash balance through earnings, which was partially offset by an increase in working capital required for the growth in our technology
segment, an increase in our cash conversion cycle, and the repurchase of shares of our common stock of $13.6 million. Our cash on hand, funds generated from operations, amounts available under our credit facility and the possible
monetization of our investment portfolio have provided sufficient liquidity for our business.
SEGMENT OVERVIEW
Our operations are conducted through two segments: technology and financing.
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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, medical equipment and other 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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Portfolio income: Interest income from financing receivables and rents due under operating leases; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Transactional gains: Net gains or losses on the sale of financial assets; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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.
We are implementing a new cloud-based lease accounting application which will provide us with a platform for scalable growth, eliminate inefficient processes, and allow us to retire several legacy applications.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements have been prepared in accordance with US GAAP. Our significant accounting policies are
described in Note 1 of the Notes to the Consolidated Financial Statements under
“Organization and Summary of Significant Accounting Policies.” The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and
estimates, and actual results could differ materially from the amounts reported based on these policies.
REVENUE RECOGNITION — When we enter contracts with customers, we are required to identify the performance obligations in the contract. We recognize most of our revenues from the sales of third-party products,
third-party software, third-party maintenance, software support, and services, ePlus professional and managed services, and hosting ePlus proprietary
software. Our recognition of revenue differs for each of these different types of performance obligations and identifying each performance obligation appropriately may require judgment.
When a contract contains multiple distinct performance obligations, we allocate the transaction price to each performance obligation based on its relative standalone selling price. We determine standalone
selling prices using expected cost-plus margin. When we finance sales of third-party software and third-party maintenance, software support, and services, we reduce the transaction price by the financing component.
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We recognize revenue from sales of third-party products and third-party software at the point in time that control passes to the customer, which is typically upon delivery of the product to the customer. We
perform an analysis to estimate the amount of sales in-transit at the end of the period and adjust revenue and the related costs to reflect only what has been delivered to the customer. This analysis is based upon an analysis of current
quarter and historical delivery dates.
We recognize revenue from sales of third-party maintenance, software support, and services when our customer and vendor accept the terms and conditions of the arrangement. On occasion, judgment is required to
determine this point in time.
We provide ePlus professional services under both time and materials and fixed price contracts. When services are provided on a time and materials basis, we recognize
sales at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, we recognize sales over time in proportion to our progress toward complete satisfaction of the performance obligation. Using this
method requires a determination of the appropriate input or output method to measure progress. We most often measure progress based on costs incurred in proportion to total estimated costs, commonly referred to as the “cost-to-cost” method.
When using this method, significant judgment may be required to estimate the total costs to complete the performance obligation. We typically recognize sales of ePlus managed services on a
straight-line basis over the period services are provided.
We recognize financing revenues from our investments in leases and notes receivable. We recognize interest income on our notes-receivable using the effective interest method.
We classify our leases as either sales-type leases or operating leases. For sales-type leases, upon lease commencement, we recognize the present value of the lease payments and the residual asset discounted
using the rate implicit in the lease. When we are financing equipment provided by another dealer, we typically do not have any selling profit or loss arising from the lease. When we are the dealer of the equipment being leased, we typically
recognize revenue in the amount of the lease receivable and cost of sales in the amount of the carrying value of the underlying asset minus the unguaranteed residual asset. We may need to use judgment to determine the fair value of the
equipment. After the commencement date, we recognize interest income as part of net sales using the effective interest method. For operating leases, we recognize the underlying asset as an operating lease asset. We depreciate the asset on a
straight-line basis to its estimated residual value over its estimated useful life. We recognize the lease payments over the lease term on a straight-line basis as part of net sales.
We account for the transfer of financial assets as sales or secured borrowings. When a transfer meets all the requirements for sale accounting, we derecognize the financial asset and record a net gain or loss
that is included in net sales. We utilize qualified attorneys to provide a true-sale-at-law opinion to support the conclusion that transferred financial assets have been legally isolated.
RESIDUAL ASSETS — Our estimate for the residual asset in a lease is the amount we expect to derive from the underlying asset following the end of the lease term. Our estimates vary, both in amount and as a
percentage of the original equipment cost, and depend upon several factors, including the equipment type, vendor’s discount, market conditions, lease term, equipment supply and demand, and new product announcements by vendors. We evaluate
residual values for impairment on a quarterly basis. We do not recognize upward adjustments due to changes in estimates of residual values.
GOODWILL — We test goodwill for impairment on an annual basis, as of October 1, 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 amount. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit.
In a qualitative assessment, we assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than
its carrying amount, including goodwill. A significant amount of judgment is involved in determining if an event representing an indicator of impairment has occurred between annual test dates. Such indicators may include: a significant
decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for
recoverability of a significant asset group within a reporting unit; and reductions in revenue or profitability growth rates.
In the quantitative impairment test, we compare the fair value of a reporting unit with its carrying amount, including goodwill. We estimate the fair value of each reporting unit using a combination of the
income approach and market approaches.
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The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to a present value using a
discount rate. Cash flow projections are based on management’s estimates of economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The
discount rate in turn is based on the specific risk characteristics of each reporting unit, the weighted average cost of capital and its underlying forecast.
The market approach estimates fair value by applying performance metric multiples to the reporting unit’s prior and expected operating performance. The multiples are derived from comparable publicly traded
companies with similar operating and investment characteristics as the reporting unit.
The fair values determined by the market approach and income approach, as described above, are weighted to determine the fair value for each reporting unit. Although we have consistently used the same methods
in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain and may vary from actual results.
VENDOR CONSIDERATION — We receive payments and credits from vendors and distributors, including consideration pursuant to volume incentive programs, and shared marketing expense programs. Many of these
programs extend over one or more quarters’ sales activities. Different programs have different vendor/program specific goals to achieve. We recognize the rebates pursuant to volume incentive programs, when the rebate is probable and
reasonably estimable, based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in our progress towards earning the rebate. Should our actual performance be different
from our estimates, we may be required to adjust our receivables.
ALLOWANCE FOR CREDIT LOSSES — We maintain an allowance for credit losses related to our accounts receivable and financing receivables. We measure expected credit losses on a collective (pool) basis when
similar risk characteristics exist. Prior to providing credit, we assign an internal rating for each customer’s credit quality based on the customer’s financial status, rating agency reports and other financial information. We review our
internal ratings for each customer at least annually or when there is an indicator of a change in credit quality, such as a delinquency or bankruptcy. We estimate a loss rate for each pool using the historical loss rate as a basis and
adjust for differences in asset specific risk and current conditions. Since the onset of the COVID-19 pandemic, we have measured our allowance using higher than historical loss rates to reflect forecasted credit deterioration. Should our
actual credit losses be different from our estimates, this will result in adjustments to credit losses that could adversely affect our operating results.
INCOME TAXES — We make certain estimates and judgments in determining income tax expense for financial statement reporting purposes. These estimates and judgments occur in the calculation of certain tax
assets and liabilities, which principally arise from differences in the timing of recognition of revenue and expense for tax and financial statement reporting purposes. We also must analyze income tax reserves, as well as determine the
likelihood of recoverability of deferred tax assets and adjust any valuation allowances accordingly.
Considerations with respect to the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as
tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors.
The calculation of our tax liabilities also involves considering uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain income tax positions based on our estimate of whether, and the extent to
which, additional taxes will be required.
BUSINESS COMBINATIONS — We account for business combinations using the acquisition method. For each acquisition, we recognize most assets acquired, and liabilities assumed at their fair values at the
acquisition date. Our valuations of certain assets acquired, including customer relationships and trade names, and certain liabilities assumed, such as performance obligations, involve significant judgment and estimation. Additionally, our
determination of the purchase price may include an estimate for the fair value of contingent consideration. We utilize independent valuation specialists to assist us in determining the fair value of certain assets and liabilities. Our
valuations utilize significant estimates, such as forecasted revenues and profits. Changes in our estimates could significantly impact the value of certain assets and liabilities.
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RESULTS OF OPERATIONS
The Year Ended March 31, 2022, Compared to the Year Ended March 31, 2021
TECHNOLOGY SEGMENT
The results of operations for our technology segment for the years ended March 31, 2022, and 2021 were as follows (in thousands):
| Year Ended March 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| Net sales | ||||||||||||||||
| Product | $ | 1,492,411 | $ | 1,305,789 | $ | 186,622 | 14.3 | % | ||||||||
| Services | 240,625 | 202,165 | 38,460 | 19.0 | % | |||||||||||
| Total | 1,733,036 | 1,507,954 | 225,082 | 14.9 | % | |||||||||||
| Cost of sales | ||||||||||||||||
| Product | 1,175,789 | 1,036,627 | 139,162 | 13.4 | % | |||||||||||
| Services | 149,094 | 125,092 | 24,002 | 19.2 | % | |||||||||||
| Total | 1,324,883 | 1,161,719 | 163,164 | 14.0 | % | |||||||||||
| Gross profit | 408,153 | 346,235 | 61,918 | 17.9 | % | |||||||||||
| Selling, general, and administrative | 283,690 | 256,210 | 27,480 | 10.7 | % | |||||||||||
| Depreciation and amortization | 14,535 | 13,839 | 696 | 5.0 | % | |||||||||||
| Interest and financing costs | 928 | 521 | 407 | 78.1 | % | |||||||||||
| Operating expenses | 299,153 | 270,570 | 28,583 | 10.6 | % | |||||||||||
| Operating income | $ | 109,000 | $ | 75,665 | $ | 33,335 | 44.1 | % | ||||||||
| Adjusted gross billings | $ | 2,620,614 | $ | 2,263,865 | $ | 356,749 | 15.8 | % | ||||||||
| Adjusted EBITDA | $ | 131,353 | $ | 97,219 | $ | 34,134 | 35.1 | % |
Net sales: Net sales for the year ended March 31, 2022, increased by $225.1 million, or 14.9%, to $1,733.0 million due to an
increase in net sales to our customers in telecom, media and entertainment, healthcare, and smaller other categories of customers, which were offset by a decrease in net sales to customers in the financial services sector. Product sales
increased 14.3%, or $186.6 million, to $1,492.4 million and services revenues increased 19.0%, or $38.5 million, to $240.6 million due to an increase in professional services for the year ended March 31, 2022, as compared to the prior year.
Adjusted gross billings increased to $2,620.6 million, or 15.8%, from $2,263.9 million in the prior year. The increase in Adjusted
gross billings was due to an increase in organic demand from our customers in the telecom, media and entertainment, healthcare, and smaller other categories of customers, and our acquisition of Systems Management and Planning, Inc. (“SMP”) in December 2020.
We analyze sales by customer end market and by manufacturer. The percentage of net sales by customer end market and by vendor are summarized below:
| Year Ended March 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales by customer end market: | 2022 | 2021 | ||||||||||
| Telecom, Media & Entertainment | 29 | % | 25 | % | 4 | % | ||||||
| Healthcare | 16 | % | 13 | % | 3 | % | ||||||
| Technology | 14 | % | 17 | % | (3 | %) | ||||||
| SLED | 14 | % | 16 | % | (2 | %) | ||||||
| Financial Services | 9 | % | 13 | % | (4 | %) | ||||||
| All others | 18 | % | 16 | % | 2 | % | ||||||
| Total | 100 | % | 100 | % |
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| Year Ended March 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales by vendor: | 2022 | 2021 | ||||||||||
| Cisco Systems | 39 | % | 36 | % | 3 | % | ||||||
| Dell EMC | 9 | % | 7 | % | 2 | % | ||||||
| Juniper Networks | 5 | % | 6 | % | (1 | %) | ||||||
| NetApp | 5 | % | 4 | % | 1 | % | ||||||
| HP Inc. & HPE | 3 | % | 4 | % | (1 | %) | ||||||
| Arista Networks | 3 | % | 3 | % | 0 | % | ||||||
| All others | 36 | % | 40 | % | (4 | %) | ||||||
| Total | 100 | % | 100 | % |
Our revenues by customer end market have remained consistent over the prior year, with over 80% of our sales being generated from
customers within the five end markets specified above. For the fiscal year ended March 31, 2022, we had an increase in the percentage total revenues from customers in telecom, media and
entertainment, and healthcare industries, while we had decreases in the percentage of total revenues in the financial service, technology, and SLED industries. These changes were driven by changes in customer buying cycles, and the timing
of specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers.
The majority of our revenues by vendor are derived from our top six suppliers, which, when combined, is a fairly constant percentage of 60% or more of total revenues for the twelve-month periods ended March 31,
2022, and 2021.
Cost of sales: The 14.0% increase in cost of sales was due to the increase in product sales and a change in product sales
mix, with a greater portion from sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services, for which the revenues and cost of sales are presented on a net basis, and with a greater portion from services
revenue, for which we have higher profit margins.
Gross profit: Gross profit increased 17.9%, to $408.2 million, compared to $346.2 million in the prior fiscal year due to
higher margins. Gross margin on product sales increased 60 basis points to 21.2% due a shift in product mix to a greater proportion of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. The gross
margin on services decreased 10 basis points to 38.0%. for the year ended March 31, 2022, due to a slight decrease in professional services gross margin, as compared to the prior year. Vendor incentives earned as a percentage of sales for
the year ended March 31, 2022 increased by 20 basis points, which has a positive effect on gross margin, as compared to the prior year.
Selling, general, and administrative expenses: Selling, general, and administrative expenses of $283.7 million for the year
ended March 31, 2022, increased by $27.5 million, or 10.7% compared to the prior year, mainly driven by an increase in salaries and benefits.
Salaries and benefits, including variable compensation, increased $24.1 million or 10.9% to $245.9 million, compared to $221.8 million during the prior year, due to higher variable compensation a result of the
increase in gross profit. Our technology segment had 1,543 employees as of March 31, 2022, which is an increase of 17, or 1.1%, from 1,526 on March 31, 2021.
General and administrative expenses, increased $3.8 million, or 11.1%, to $37.6 million during the year ended March 31, 2022, compared to $33.9 million the prior year. Contributing to the year over year
increase in general and administrative expense were increases in travel and entertainment, and software, subscription, and maintenance expenses.
Depreciation and amortization expense: Depreciation and amortization expense increased $0.7 million, or 5.0%, to $14.5 million during the fiscal year ended March 31, 2022, compared to $13.8 million in the prior year.
Interest and financing costs: Interest and financing costs were $0.9 million for the year ended March 31, 2022, compared to
$0.5 million in the prior year.
Segment earnings: As a result of the foregoing, operating income increased $33.3 million, or 44.1%, to $109.0 million for the
year ended March 31, 2022, compared to $75.7 million in the prior year and Adjusted EBITDA increased 35.1% to $131.4 million for the year ended March 31, 2022, compared to $97.2 million in the prior year.
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FINANCING SEGMENT
The results of operations for our financing segment for the years ended March 31, 2022, and 2021 were as follows (in thousands):
| Year Ended March 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| Net sales | $ | 87,983 | $ | 60,369 | $ | 27,614 | 45.7 | % | ||||||||
| Cost of sales | 35,154 | 13,050 | 22,104 | 169.4 | % | |||||||||||
| Gross profit | 52,829 | 47,319 | 5,510 | 11.6 | % | |||||||||||
| Selling, general, and administrative | 13,427 | 15,053 | (1,626 | ) | (10.8 | %) | ||||||||||
| Depreciation and amortization | 111 | 112 | (1 | ) | (0.9 | %) | ||||||||||
| Interest and financing costs | 975 | 1,484 | (509 | ) | (34.3 | %) | ||||||||||
| Operating expenses | 14,513 | 16,649 | (2,136 | ) | (12.8 | %) | ||||||||||
| Operating income | $ | 38,316 | $ | 30,670 | $ | 7,646 | 24.9 | % | ||||||||
| Adjusted EBITDA | $ | 38,651 | $ | 31,026 | $ | 7,625 | 24.6 | % |
Net sales: Net sales increased by $27.6 million, or 45.7%, to $88.0
million for the year ended March 31, 2022. The increase was due to higher post contract and portfolio revenue offset slightly by a decrease in other financing revenues. Post-contract revenue increased by
$26.7 million to $50.5 million as compared to $23.8 million in the prior year due to proceeds from early lease buyouts and sales of off-lease equipment. Portfolio revenue increased $1.3 million to $17.8 million, due to increases
in operating lease income offset by decreased sales-type lease earnings over the prior fiscal year. Other financing revenues decreased $4.1 million to $1.5 million, compared to the prior year primarily
due to lower profit recognized from signing new lease extensions with customers where the prior lease was classified as an operating lease and the new modified lease was determined to be sales-type lease. Transactional gains increased
$3.7 million to $18.2 million compared to the prior year driven by higher net gains on sale of notes receivable. Total proceeds from sales of financing receivables were $855.1 million and $364.0 million for the years ended March
31, 2022, and 2021, respectively.
Cost of sales: Cost of sales increased 169.4%, or $22.1 million, to $35.2 million for the year ended March 31,
2022, as compared to the prior year, due to an increase in the cost of equipment from early lease buyouts and sales of off-lease equipment of $18.2 million and an increase in operating lease depreciation of $3.7 million. Gross profit increased 11.6%, or $5.5 million, to $52.8 million primarily due to gains on several significant transactions.
Selling, general, and administrative expenses: Selling, general, and administrative expenses were $13.4 million and $15.1 million for years ended March 31, 2022, and 2021, respectively. This decrease of $1.6 million was driven by a reduction in
our reserve for credit losses, and salaries and benefits. Our financing segment employed 34 people as of March 31, 2022 and 2021. Certain support functions for the financing segment are shared resources with the technology segment.
Interest and financing costs: Interest and financing costs decreased by $0.5 million, or 34.3%, to $1.0 million for the year
ended March 31, 2022, as compared to the prior year. Our total notes payable for the financing segment decreased as of March 31, 2022, to $21.2 million from $56.1 million for the prior year. Our weighted average interest rate for our
non-recourse notes payable was 3.59% as of March 31, 2022, compared to 3.35% for March 31, 2021.
Segment earnings: As a result of the foregoing, operating income increased $7.6 million, or 24.9%, to $38.3 million for the
year ended March 31, 2022, as compared to the prior year. Adjusted EBITDA increased $7.6 million, or 24.6%, to $38.7 million for the year ended March 31, 2022, as compared to the prior year.
CONSOLIDATED
Other income: Other income and expense during the year ended March 31,
2022, netted to an expense of $0.4 million and included foreign exchange rate loss of $0.5 million. Other income and expense during the year ended March 31, 2021, was income of $0.6 million and included foreign exchange rate gain of $0.5 million and interest income of $0.1 million.
Income taxes: Our effective income tax rates for the years ended March 31, 2022, and 2021 were 28.1% and 30.4%, respectively.
The decrease in our effective income tax rate year over year is primarily due to prior year unfavorable adjustments to the federal benefit from state taxes and non-deductible executive compensation.
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Net earnings: Net earnings were $105.6 million for the year ended March 31, 2022, an increase of 41.9% or $31.2 million as
compared to $74.4 million in the prior fiscal year. The net earnings increase was due primarily to the increase in operating profits from our technology segment, and a lower income tax rate in the current year compared to the year ended
March 31, 2021.
Basic and fully diluted earnings per common share for the year ended March 31, 2022, were $3.96 and $3.93, respectively, and both increased 41.9% over the prior year. Basic and fully diluted earnings per common
share were $2.79 and $2.77, respectively, for the year ended March 31, 2021.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share were 26.6 million and 26.9 million, respectively, for year ended March 31, 2022. Weighted
average common shares outstanding used in the calculation of basic and diluted earnings per common share were 26.7 million and 26.8 million, respectively, for year ended and March 31, 2021.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OVERVIEW
We finance our operations through funds generated from operations and through borrowings. 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.
Our borrowings in our technology segment are through our WFCDF credit facility. Our borrowings in our financing segment are primarily through secured borrowings that involve transferring all or part of the
contractual payments due to us to third-party financing institutions.
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.
CASH FLOWS
The following table summarizes our sources and uses of cash for the years ended March 31, 2022, and 2021 (in thousands):
| Year Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| Net cash provided by (used in) operating activities | $ | (20,571 | ) | $ | 129,507 | |||
| Net cash used in investing activities | (1,259 | ) | (35,756 | ) | ||||
| Net cash provided by (used in) financing activities | 47,176 | (49,802 | ) | |||||
| Effect of exchange rate changes on cash | 470 | (618 | ) | |||||
| Net increase in cash and cash equivalents | $ | 25,816 | $ | 43,331 |
Cash flows from operating activities
Our operating activities used $20.6 million during the year ended March 31, 2022, compared to providing $129.5 million during the year ended March 31, 2021. The following table provides a breakdown of operating
cash flows by segment for the years end March 31, 2022, and 2021 (in thousands):
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| Year Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| Technology segment | $ | (20,243 | ) | $ | 153,332 | |||
| Financing segment | (328 | ) | (23,825 | ) | ||||
| Net cash provided by (used in) operating activities | $ | (20,571 | ) | $ | 129,507 |
Technology Segment: During the year ended March 31, 2022,
operating cash flows used by our technology segment were $20.2 million due to increases in working capital, primarily increases in inventories and accounts receivable, offset by earnings. Cash provided by the accounts payable – floor plan
facility was $46.7 million. The accounts payable – floor plan is a facility used to manage working capital needs and we are required to present changes in this balance as financing activity in our consolidated statement of cash flows.
During the year ended March 31, 2021, operating cash flows provided by our technology segment were $153.3 million due to cash
generated from earnings and changes in working capital. In addition, cash used by the accounts payable – floor plan facility was $34.4 million.
To manage our working capital, we monitor our cash conversion cycle for our technology segment, which is defined as days sales outstanding (“DSO”) in accounts receivable plus days of supply in inventory (“DIO”)
minus days of purchases outstanding in accounts payable (“DPO”). The following table presents the components of the cash conversion cycle for our Technology segment:
| As of March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| (DSO) Days sales outstanding (1) | 69 | 69 | ||||||
| (DIO) Days inventory outstanding (2) | 25 | 15 | ||||||
| (DPO) Days payable outstanding (3) | (46 | ) | (47 | ) | ||||
| Cash conversion cycle | 48 | 37 |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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, product, and services for the same three-month period. |
Our standard payment term for customers is between 30-60 days; however, certain customers or orders may be approved for extended payment terms. Our DSOs for the quarters ended March 31, 2022 and 2021 were greater than our standard payment
terms primarily due to a significant proportion of sales in those quarters to customers with payment terms greater than or equal to net 60 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 cash conversion cycle increased to 48 days for March 31, 2022 compared to 37 days for March 31, 2021 as DIO increased by 10 days and DPO decreased by 1 day from March 31, 2021 to March 2022.
Inventory, which represents equipment ordered by customers but not yet delivered, increased 121.6% to $155.1 million as of March 31, 2022, up from $70.0 million as of March 31, 2021, partially due to ongoing projects with customers.
Financing Segment: During the year ended March 31, 2022,
our financing segment used $0.3 million from operating activities, primarily due to an increase in accounts receivable and deferred costs and decreases in accounts payable, partially offset by net earnings.
During the year ended March 31, 2021, our financing segment used $23.8 million from operating activities, primarily due to the issuance of new financing receivables.
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Cash flows related to investing activities
During the year ended March 31, 2022, we used $1.3 million from investing activities, consisting of $23.2 million for purchases of property, equipment, and operating lease equipment, partially offset by $21.9
million of proceeds from the sale of property, equipment, and operating lease equipment.
During the year ended March 31, 2021, we used $35.8 million from investing activities, consisting of $27.0 million for our acquisition of SMP and $11.5 million for purchases of property, equipment, and
operating lease equipment, and partially offset by $2.8 million of proceeds from the sale of property, equipment, and operating lease equipment.
Cash flows from financing activities
During the year ended March 31, 2022, financing activities provided $47.2 million. We had net repayments of notes payable in our technology segment of $6.7 million, offset by net borrowings of notes payable of
$20.8 million by our financing segment. Additionally, we had cash inflows of $46.7 million from net borrowings on the floor plan facility and cash outflows of $13.6 million from the repurchase of common stock.
During the year ended March 31, 2021, we used $49.8 million from financing activities. We had net repayments on the accounts receivable component of our credit facility of $35.0 million, partially offset by net
borrowings of non-recourse and recourse notes payable of $27.1 million by our financing segment. Contributing to cash outflows was net repayments on floor plan facility of $34.4 million, repurchase of common stock of $6.9 million, and
payments to payoff contingent consideration agreements and hold backs from prior fiscal year acquisitions of $0.6 million.
Our borrowing of non-recourse and recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under 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 and 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. As a result of COVID-19, credit markets have tightened. Our lenders are more discerning and are taking longer to
approve transactions. In addition, certain lenders have narrowed their demand to certain types of transactions and/or credit quality and excluding others. For example, some lenders have declined transactions that have longer terms or
transactions with certain market segments. Therefore, we may no longer be able to transfer certain receivables to financial institutions which may result in investing our capital or declining the transaction. In addition, interest rates have
been rising. In order to preserve our expected internal rate of return, we generally quote rates that are indexed. Some of our lenders will not commit to rates for a length of time, resulting in exposure to us if the rates rise and we cannot
pass such exposure to the customer.
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CREDIT FACILITY – TECHNOLOGY SEGMENT
We finance the operations of our subsidiaries ePlus Technology, inc., ePlus Technology Services, inc. and SLAIT Consulting,
LLC (collectively, the “Borrowers”) in our technology segment through a credit facility with WFCDF. The WFCDF credit facility has a floor plan facility and a revolving credit facility.
On October 13, 2021, the Borrowers amended, restated, and replaced in their entirety the then-existing credit agreements with WFCDF. The new credit facility is established by a syndicate of banks for which
WFCDF acts as administrative agent and consists of a discretionary senior secured floorplan facility in favor of the Borrowers in the aggregate principal amount of up to $375 million, together with a sublimit for a revolving credit facility
for up to $100 million (collectively, the “2021 Credit Facility”).
Please refer to Note 8 “Credit Facility and Notes Payable” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” for additional information concerning our 2021 Credit
Facility.
The loss of the 2021 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 facility
We finance most purchases of products for sale to our customers through the floor plan facility. Once our customer places a purchase order with us and we have approved their credit, we place an order for
the desired products with one of our vendors. Our vendors are generally paid by the floor plan facility and our liability is reflected in “accounts payable—floor plan” in our consolidated balance sheets.
Most customer payments to us are remitted to our lockbox accounts. Once payments are cleared, the monies in the lockbox accounts are
automatically and daily transferred to our operating account. We pay down the floor plan facility on three specified dates each month, generally 30-60 days from the invoice date. Our borrowings and repayments under the floor plan component are included in “net borrowings (repayments) on floor plan facility” within cash flows from the financing activities in our consolidated statements
of cash flows.
As of March 31, 2022, and March 31, 2021, we had a maximum credit limit of $375.0 million and $275.0 million, respectively, and an outstanding balance on the floor plan facility of $145.3 million and $98.7
million, respectively. On our balance sheet, our liability under the floor plan facility is presented as part of as accounts payable – floor plan.
Revolving credit facility
The outstanding balance under the revolving credit facility is presented as part of recourse notes payable- current on our consolidated balance sheets. Our borrowings and repayments under the revolving credit facility 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.
As of March 31, 2022, and March 31, 2021, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $100.0 million as of both March 31, 2022, and March 31, 2021.
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 the performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred
in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2022, and 2021, we were not involved in
any unconsolidated special purpose entity transactions.
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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 forces. We may also start offices or configuration centers 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. As a result, we may require additional financing to fund our strategy, implementation, and potential future acquisitions, 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. Our lending partners in
our financial segment have tightened credit availability and are more discerning in their approval process. However, currently we have funding resources available for our transactions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by
securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time
of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, major customers, or vendors of ours.
Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to the worldwide impacts from COVID-19, inflation, interest rate
increases, currency fluctuations, reduction in IT spending, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs,
pricing discounts offered by manufacturers at their year ends, pricing increases, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio at the expiration of a lease
term or prior to such expiration, to a lessee or to a third-party and the transfer of financial assets. Sales of equipment and transfers of financial assets may have the effect of increasing revenues and net income during the quarter in which
the sale occurs and reducing revenues and net income otherwise expected in subsequent quarters. See Part I, Item 1A, “Risk Factors” herein.
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.
CONTRACTUAL OBLIGATIONS
Our material contractual obligations consist of payments on recourse and non-recourse notes payable and lease liabilities. Please
refer to Note 4, “Lessee accounting” and Note 8, “Notes payable and credit facility” in the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the maturities of these obligations. Additionally, we have contractual obligations of $7.8
million over the next 5 years for certain hosted software and data center services.