EPLUS INC (PLUS) FY 2024 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 (the “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, 2023, compared to the results for the year ended March 31, 2022, see Exhibit 99.4 “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2023.
EXECUTIVE OVERVIEW
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 cloud, data center, security, networking, collaboration, AI, and service provider and critical
infrastructure. Our solutions incorporate hardware, software, and service products from multiple leading IT vendors as well as our own professional and managed services. 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 1,800 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.
BUSINESS TRENDS
We believe the following key factors are impacting our business performance and our ability to achieve business results:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | General economic concerns including inflation, rising interest rates, staffing shortages, remote work trends, and geopolitical concerns may impact our customers’ willingness to spend on technology and services. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | We are experiencing increases in prices from our suppliers. While we generally have been able to pass price increases to our customers, inflation could have a material impact on our sales, gross profit, or operating costs in the future. Our financing quotes are generally indexed to market rates 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. Also, we are experiencing constriction of funds available and more stringent assessment for our financing arrangements from our lender partners. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Our customers’ top focus areas include AI, security, cloud solutions, hybrid work environments (work from home, work from anywhere, and return to office), as well as digital transformation and modernization. We have developed advisory services, assessments, solutions, and professional and managed services to meet these priorities and help our customers attain and maintain their desired outcome. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Modernizing legacy applications, data modernization, reducing operational complexity, securing workloads, the cost and performance of IT operations, and agility are changing the way companies are purchasing and consuming technology. These are fueling deployments of solutions on cloud, managed services and hybrid platforms and licensing models, which may include invoicing over the term of the agreement. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Rapid cloud adoption has led to customer challenges around increasing costs, security concerns, and skillset gaps. These challenges are consistent across all industries and business sizes. We have developed a Cloud Managed Services portfolio to address these needs, allowing our clients to focus on driving business outcomes via optimized and secure cloud platforms. |
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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 profit and margin,
operating income margin, net earnings, and net earnings per common share, in each case based on information prepared in accordance with US GAAP, as well as the non-GAAP financial measures and ratios, including Adjusted EBITDA, Adjusted EBITDA
margin, Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share - diluted.
We also 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. We use gross billings as an
operational metric to assess the volume of transactions or market share for our technology business segments—product, professional services, and managed services—as well as to understand changes in our accounts receivable and accounts payable. We
believe gross billings will aid investors in the same manner.
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 and operational 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 correspondingly not normally excluded or included in the most directly comparable
measure calculated and presented in accordance with US GAAP. 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 reported under
GAAP, as these measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.
Set forth in footnotes (1) and (2) of the tables that immediately follow the next paragraph, we set forth our reasons for using and presenting Adjusted EBITDA, Adjusted EBITDA margin, Non-GAAP: Net earnings and Non-GAAP:
Net earnings per common share-diluted in the tables and discussion that follow.
The following tables provide our key business metrics for our consolidated entity, our technology business- consisting of our product, professional services, and managed services segments- and our financing business segment (in thousands, except
per share amounts):
| Year Ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Consolidated | ||||||||||||
| Financial Metrics | ||||||||||||
| Net sales | $ | 2,225,302 | $ | 2,067,718 | $ | 1,821,019 | ||||||
| Gross profit | $ | 550,793 | $ | 517,524 | $ | 460,982 | ||||||
| Gross margin | 24.8 | % | 25.0 | % | 25.3 | % | ||||||
| Operating income margin | 7.1 | % | 8.0 | % | 8.1 | % | ||||||
| Net earnings | $ | 115,776 | $ | 119,356 | $ | 105,600 | ||||||
| Net earnings margin | 5.2 | % | 5.8 | % | 5.8 | % | ||||||
| Net earnings per common share - diluted | $ | 4.33 | $ | 4.48 | $ | 3.93 | ||||||
| Non-GAAP Financial Metrics | ||||||||||||
| Non-GAAP: Net earnings (1) | $ | 131,327 | $ | 133,931 | $ | 117,964 | ||||||
| Non-GAAP: Net earnings per common share - diluted (1) | $ | 4.92 | $ | 5.02 | $ | 4.39 | ||||||
| Adjusted EBITDA (2) | $ | 190,441 | $ | 190,592 | $ | 170,004 | ||||||
| Adjusted EBITDA margin (2) | 8.6 | % | 9.2 | % | 9.3 | % | ||||||
| Technology business segments | ||||||||||||
| Financial Metrics | ||||||||||||
| Net sales | ||||||||||||
| Product | $ | 1,883,809 | $ | 1,750,802 | $ | 1,492,411 | ||||||
| Professional services | 154,549 | 151,785 | 146,747 | |||||||||
| Managed services | 137,528 | 112,658 | 93,878 | |||||||||
| Total | $ | 2,175,886 | $ | 2,015,245 | $ | 1,733,036 | ||||||
| Gross profit | ||||||||||||
| Product | $ | 397,618 | $ | 380,741 | $ | 316,622 | ||||||
| Professional services | 68,194 | 61,594 | 63,384 | |||||||||
| Managed services | 42,667 | 32,155 | 28,147 | |||||||||
| Total | $ | 508,479 | $ | 474,490 | $ | 408,153 | ||||||
| Gross margin | ||||||||||||
| Product | 21.1 | % | 21.7 | % | 21.2 | % | ||||||
| Professional services | 44.1 | % | 40.6 | % | 43.2 | % | ||||||
| Managed services | 31.0 | % | 28.5 | % | 30.0 | % | ||||||
| Total | 23.4 | % | 23.5 | % | 23.6 | % | ||||||
| Operating income | $ | 132,560 | $ | 140,110 | $ | 109,000 | ||||||
| Non-GAAP Financial Metric | ||||||||||||
| Adjusted EBITDA (2) | $ | 164,409 | $ | 164,184 | $ | 131,353 | ||||||
| Operational Metrics | ||||||||||||
| Gross billings (3) | ||||||||||||
| Networking | $ | 1,172,274 | $ | 927,319 | $ | 709,687 | ||||||
| Cloud | 824,128 | 892,308 | 828,002 | |||||||||
| Security | 625,392 | 639,416 | 476,339 | |||||||||
| Collaboration | 120,960 | 127,027 | 131,941 | |||||||||
| Other | 262,439 | 282,748 | 240,586 | |||||||||
| Product gross billings | 3,005,193 | 2,868,818 | 2,386,555 | |||||||||
| Service billings | 324,571 | 277,070 | 239,194 | |||||||||
| Total gross billings | $ | 3,329,764 | $ | 3,145,888 | $ | 2,625,749 | ||||||
| Financing business segment | ||||||||||||
| Financial Metrics | ||||||||||||
| Net sales | $ | 49,416 | $ | 52,473 | $ | 87,983 | ||||||
| Gross profit | $ | 42,314 | $ | 43,034 | $ | 52,829 | ||||||
| Operating income | $ | 25,697 | $ | 26,052 | $ | 38,316 | ||||||
| Non-GAAP Financial Metric | ||||||||||||
| Adjusted EBITDA (2) | $ | 26,032 | $ | 26,408 | $ | 38,651 |
| Column 1 | Column 2 |
|---|---|
| (1) | Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted are based on net earnings calculated in accordance with US GAAP, adjusted to exclude other (income) expense, share-based compensation, and acquisition and integration expenses, and the related tax effects. |
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We use Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted as supplemental measures of our performance to gain insight into our operating performance and performance trends. We believe that the
exclusion of other income and acquisition-related amortization expense in calculating Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted 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 and Non-GAAP: Net earnings per common share – diluted
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 US 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 – diluted or similarly
titled measures differently, which may reduce their usefulness as comparative measures.
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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| GAAP: Earnings before tax | $ | 161,093 | $ | 162,974 | $ | 146,884 | |||||
| Share-based compensation | 9,731 | 7,824 | 7,114 | ||||||||
| Acquisition related amortization expense | 15,180 | 9,411 | 10,072 | ||||||||
| Other (income) expense | (2,836 | ) | 3,188 | 432 | |||||||
| Non-GAAP: Earnings before provision for income taxes | 183,168 | 183,397 | 164,502 | ||||||||
| GAAP: Provision for income taxes | 45,317 | 43,618 | 41,284 | ||||||||
| Share-based compensation | 2,772 | 2,104 | 2,014 | ||||||||
| Acquisition related amortization expense | 4,306 | 2,527 | 2,803 | ||||||||
| Other (income) expense | (831 | ) | 950 | 120 | |||||||
| Tax benefit (expense) on restricted stock | 277 | 267 | 317 | ||||||||
| Non-GAAP: Provision for income taxes | 51,841 | 49,466 | 46,538 | ||||||||
| Non-GAAP: Net earnings | $ | 131,327 | $ | 133,931 | $ | 117,964 |
| Year Ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| GAAP: Net earnings per common share - diluted | $ | 4.33 | $ | 4.48 | $ | 3.93 | ||||||
| Share-based compensation | 0.27 | 0.21 | 0.20 | |||||||||
| Acquisition related amortization expense | 0.40 | 0.26 | 0.26 | |||||||||
| Other (income) expense | (0.07 | ) | 0.08 | 0.01 | ||||||||
| Tax benefit (expense) on restricted stock | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
| Total non-GAAP adjustments - net of tax | 0.59 | 0.54 | 0.46 | |||||||||
| Non-GAAP: Net earnings per common share - diluted | $ | 4.92 | $ | 5.02 | $ | 4.39 |
| Column 1 | Column 2 |
|---|---|
| (2) | We define Adjusted EBITDA as net earnings calculated in accordance with US GAAP, adjusted for the following: interest expense, depreciation and amortization, share-based compensation, acquisition and integration expenses, provision for income taxes, and other (income) expense. Adjusted EBITDA presented for the technology business and the financing business segment is defined as operating income calculated in accordance with US 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 business 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. In the table below, we provide 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. |
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We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance and performance trends. We believe that the exclusion of other income in calculating Adjusted EBITDA
and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating
performance. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Adjusted EBITDA and Adjusted EBITDA
margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US 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.
The following table provides our calculations of Adjusted EBITDA (in thousands):
| Year Ended March 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| Consolidated | |||||||||||
| Net earnings | $ | 115,776 | $ | 119,356 | $ | 105,600 | |||||
| Provision for income taxes | 45,317 | 43,618 | 41,284 | ||||||||
| Share-based compensation | 9,731 | 7,824 | 7,114 | ||||||||
| Interest and financing costs | 1,428 | 2,897 | 928 | ||||||||
| Depreciation and amortization | 21,025 | 13,709 | 14,646 | ||||||||
| Other (income) expense | (2,836 | ) | 3,188 | 432 | |||||||
| Adjusted EBITDA | $ | 190,441 | $ | 190,592 | $ | 170,004 | |||||
| Technology business segments | |||||||||||
| Operating income | $ | 132,560 | $ | 140,110 | $ | 109,000 | |||||
| Depreciation and amortization | 20,951 | 13,598 | 14,535 | ||||||||
| Share-based compensation | 9,470 | 7,579 | 6,890 | ||||||||
| Interest and financing costs | 1,428 | 2,897 | 928 | ||||||||
| Adjusted EBITDA | $ | 164,409 | $ | 164,184 | $ | 131,353 | |||||
| Financing business segment | |||||||||||
| Operating income | $ | 25,697 | $ | 26,052 | $ | 38,316 | |||||
| Depreciation and amortization | 74 | 111 | 111 | ||||||||
| Share-based compensation | 261 | 245 | 224 | ||||||||
| Adjusted EBITDA | $ | 26,032 | $ | 26,408 | $ | 38,651 |
| Column 1 | Column 2 |
|---|---|
| (3) | Gross billings are the total dollar value of customer purchases of goods and services including shipping charges during the period, net of customer returns and credit memos, sales, or other taxes. Gross billings include the transaction values for certain sales transactions that are recognized on a net basis, and, therefore, include amounts that will not be recognized as revenue. |
FINANCIAL SUMMARY
Net sales: Net sales for the year ended March 31, 2024, increased 7.6% to $2,225.3 million, or an increase of $157.6 million compared to $2,067.7 million in the prior fiscal year. The increase in net sales was
driven by higher revenues from our technology business segments- product, professional services, and managed services, offset by lower revenues from our financing business segment. For additional information, see the “Segment Results of Operations”
below.
Gross profit: Consolidated gross profit for the year ended March 31, 2024, increased 6.4%, to $550.8 million, compared to $517.5 million in the prior fiscal year due to increased net sales volume. Overall, gross
margins were down by 20 basis points year-over-year as lower product margins were offset by higher service margins.
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Operating expenses: Operating expenses for the year ended March 31, 2024, increased $41.1 million, or 11.7%, to $392.5 million, as compared to $351.4 million in the prior fiscal year. Our increase in operating
expenses was primarily due to an increase in salaries and benefits, and an increase in general and administrative expenses. In addition, we had an increase in depreciation and amortization, and provision for credit losses. Offsetting these
increases was a decrease in interest and financing costs. As of March 31, 2024, we had 1,900 employees, an increase of 8.3% from 1,754 as of March 31, 2023. For additional information, see the “Segment Results of Operations” below.
Operating income: As a result of the foregoing, operating income for the year ended March 31, 2024, decreased $7.9 million, or 4.8%, to $158.3 million and operating margin decreased by 90 basis points to 7.1%, as
compared to $166.2 million for the year ended March 31, 2023.
Adjusted EBITDA for the year ended March 31, 2024, was $190.4 million, a decrease of $0.2 million, or 0.1%, compared to the prior fiscal year. Adjusted EBITDA margin for the year ended March 31, 2024, decreased 60 basis
points to 8.6%, as compared to the prior fiscal year period of 9.2%. The decrease in Adjusted EBITDA was due to a decrease from our financing business segment, which was offset by slightly higher Adjusted EBITDA from our technology business
segments. The decrease in Adjusted EBITDA margin was due to a decrease in gross margins and an increase in operating expenses.
Net earnings per common share - diluted for the year ended March 31, 2024, decreased $0.15, or 3.3%, to $4.33 per share, as compared to $4.48 per share in the prior fiscal year. Non-GAAP: Net earnings per common share
diluted for the year ended March 31, 2024, decreased $0.10, or 2.0%, to $4.92 per share, as compared to $5.02 per share for the year ended March 31, 2023.
SEGMENT OVERVIEW
Technology business segments
Our technology business includes three segments: product, professional services, and managed services as further discussed below.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Product segment: Our product segment consists of the sale of third-party hardware, third-party perpetual and subscription software, and third-party maintenance, software assurance, and other third-party services. The product segment also includes internet-based business-to-business supply chain management solutions for IT products. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Professional services segment: Our professional services segment includes our advanced professional services to our customers that are performed under time and materials, fixed fee, or milestone contracts. Professional services include consulting, assessments, configuration, logistic services, training, staff augmentation services, and project management services. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Managed services segment: Our managed services segment includes our advanced managed services that encompass managing various aspects of our customers’ environments that are billed in regular intervals over a contract term, usually between three to five years. Managed services also include security solutions, storage-as-a-service, cloud hosted services, cloud managed services, and service desk. |
We manage the technology business segments based on gross profit and the operating expenses associated with these segments in total as our technology business.
Our technology business segments sell primarily to corporations and SLED institutions. Customers of our technology business may have a customer master agreement (“CMA”) with our company, which stipulates the terms and
conditions of the commercial 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.
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We endeavor to minimize the cost of sales in our product segment 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; therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.
Financing business segment
Our financing business segment offers financing solutions to corporations, government contractors, and SLED institutions in the US, which accounts for most of our transactions, and to corporations in select international markets including
Canada, the UK, and the EU. The financing business segment derives revenue from leasing IT equipment, medical equipment, and other equipment, and the disposition of that equipment at the end of the lease. The financing business 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. |
| 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. |
Fluctuations in operating results
Our operating results may fluctuate due to customer demand for our products and services, supplier costs, product availability, changes in vendor incentive programs, interest rate fluctuations, currency fluctuations, the
timing of sales of financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized for leased equipment. We expect to continue to expand by hiring additional staff for specific targeted
market areas and roles whenever we can find both experienced personnel and desirable geographic areas over the longer term, which may impact our operating results.
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SEGMENT RESULTS OF OPERATIONS
The Year Ended March 31, 2024, Compared to the Year Ended March 31, 2023
TECHNOLOGY BUSINESS SEGMENTS
The results of operations for our technology business segments were as follows (in thousands):
| Year ended March 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Percent Change | |||||||||||||
| Financial metrics | ||||||||||||||||
| Net sales | ||||||||||||||||
| Product | $ | 1,883,809 | $ | 1,750,802 | $ | 133,007 | 7.6 | % | ||||||||
| Professional services | 154,549 | 151,785 | 2,764 | 1.8 | % | |||||||||||
| Managed services | 137,528 | 112,658 | 24,870 | 22.1 | % | |||||||||||
| Total | $ | 2,175,886 | $ | 2,015,245 | $ | 160,641 | 8.0 | % | ||||||||
| Gross Profit | ||||||||||||||||
| Product | 397,618 | 380,741 | 16,877 | 4.4 | % | |||||||||||
| Professional services | 68,194 | 61,594 | 6,600 | 10.7 | % | |||||||||||
| Managed services | 42,667 | 32,155 | 10,512 | 32.7 | % | |||||||||||
| Total | 508,479 | 474,490 | 33,989 | 7.2 | % | |||||||||||
| Selling, general, and administrative | 353,540 | 317,885 | 35,655 | 11.2 | % | |||||||||||
| Depreciation and amortization | 20,951 | 13,598 | 7,353 | 54.1 | % | |||||||||||
| Interest and financing costs | 1,428 | 2,897 | (1,469 | ) | (50.7 | %) | ||||||||||
| Operating expenses | 375,919 | 334,380 | 41,539 | 12.4 | % | |||||||||||
| Operating income | $ | 132,560 | $ | 140,110 | $ | (7,550 | ) | (5.4 | %) | |||||||
| Key metrics & other information | ||||||||||||||||
| Gross billings | $ | 3,329,764 | $ | 3,145,888 | $ | 183,876 | 5.8 | % | ||||||||
| Adjusted EBITDA | $ | 164,409 | $ | 164,184 | $ | 225 | 0.1 | % | ||||||||
| Product margin | 21.1 | % | 21.7 | % | ||||||||||||
| Professional services margin | 44.1 | % | 40.6 | % | ||||||||||||
| Managed services margin | 31.0 | % | 28.5 | % | ||||||||||||
| Net sales by customer end market: | ||||||||||||||||
| Telecom, media & entertainment | $ | 547,525 | $ | 532,921 | $ | 14,604 | 2.7 | % | ||||||||
| Technology | 379,720 | 393,594 | (13,874 | ) | (3.5 | %) | ||||||||||
| SLED | 329,617 | 290,624 | 38,993 | 13.4 | % | |||||||||||
| Healthcare | 278,893 | 274,936 | 3,957 | 1.4 | % | |||||||||||
| Financial services | 243,630 | 156,257 | 87,373 | 55.9 | % | |||||||||||
| All others | 396,501 | 366,913 | 29,588 | 8.1 | % | |||||||||||
| Total | $ | 2,175,886 | 2,015,245 | 160,641 | 8.0 | % | ||||||||||
| Net sales by type: | ||||||||||||||||
| Networking | $ | 1,005,679 | $ | 803,678 | $ | 202,001 | 25.1 | % | ||||||||
| Cloud | 546,341 | 587,097 | (40,756 | ) | (6.9 | %) | ||||||||||
| Security | 193,956 | 214,459 | (20,503 | ) | (9.6 | %) | ||||||||||
| Collaboration | 65,714 | 57,472 | 8,242 | 14.3 | % | |||||||||||
| Other | 72,119 | 88,096 | (15,977 | ) | (18.1 | %) | ||||||||||
| Total products | 1,883,809 | 1,750,802 | 133,007 | 7.6 | % | |||||||||||
| Professional services | 154,549 | 151,785 | 2,764 | 1.8 | % | |||||||||||
| Managed services | 137,528 | 112,658 | 24,870 | 22.1 | % | |||||||||||
| Total | $ | 2,175,886 | $ | 2,015,245 | $ | 160,641 | 8.0 | % |
Net sales: Net sales of the combined technology business segments for the year ended March 31, 2024, increased compared to the year ended March 31, 2023, driven by demand from customers in telecom, media, and
entertainment, SLED, financial services, and healthcare industries, offset by decreased volume with customers in the technology industry.
Product segment sales for the year ended March 31, 2024, increased compared to the year ended March 31, 2023, due to higher sales of networking equipment and collaboration products, offset by a decline in sales of cloud
and security products. These changes were driven by the timing of purchases by existing customers, which are determined by their buying cycles, and the timing of specific IT related initiatives. In addition, the increase in product segment sales
was due to the addition of product sales to customers from the Network Solutions Group (“NSG”) and Peak Resources, Inc. (“Peak”) acquisitions, which contributed a combined total of $105.0 million.
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Professional services segment sales for the year ended March 31, 2024, increased compared to the year ended March 31, 2023, primarily due to an increase in consulting revenue driven by acquisitions during the fiscal year
offset by a decrease in staff augmentation.
Managed services segment sales for the year ended March 31, 2024, increased compared to the year ended March 31, 2023, due to ongoing expansion of these service offerings primarily related to ongoing growth in enhanced
maintenance support, service desk, and security operations center revenues.
Gross profit: Gross profit of the combined technology business segments for the year ended March 31, 2024, increased compared to the year ended March 31, 2023,
due to the increase in product, professional service, and managed service sales. Gross profit margin decreased by 10 basis points to 23.4% due to lower product margin, offset by higher professional service and managed service margin.
Product segment margin for the year ended March 31, 2024, decreased by 60 basis points compared to the year ended March 31, 2023, due to a shift in product mix as we sold a higher proportion of networking
hardware than third party services that are recognized on a net basis. Vendor incentives earned as a percentage of sales for the year ended March 31, 2024 decreased by 10 basis points, which has a negative effect on gross margin, as compared to the
prior year.
Professional services segment margin for the year ended March 31, 2024, increased by 350 basis points, compared to the year ended March 31, 2023, primarily due to a shift in mix toward higher margin
services.
Managed services segment margin for the year ended March 31, 2024, increased by 250 basis points, compared to the year ended March 31, 2023, primarily due to scaled growth in these services.
Selling, general, and administrative expenses: Selling, general, and administrative expenses for the year ended March 31, 2024, for the technology business,
increased compared to the year ended March 31, 2023, mainly due to increases in salaries and benefits.
Salaries and benefits, including variable compensation for the year ended March 31, 2024, increased $30.7 million, or 11.4% to $300.6 million, as compared to $269.9 million in the prior fiscal year, due to an increase of $23.2 million in
salaries and benefits, mainly driven by increased headcount and salary increases. Our technology business had an aggregate of 1,866 employees as of March 31, 2024, an increase of 148 from 1,718 as of March 31, 2023. We added 76 employees from our
acquisition of NSG, and 28 employees from our acquisition of Peak. In total, we added 143 additional customer-facing employees in the technology business for the year ended
March 31, 2024, compared to the year ended March 31, 2023, of which 66 were professional services and technical support personnel due to demand for our services. The increase in variable compensation of $7.5 million was a result of the
corresponding increase in gross profit.
General and administrative expenses for our technology business for the year ended March 31, 2024, increased $4.8 million, or 10.1%, to $52.6 million, as compared to $47.8 million for the year ended March 31, 2023. General and administrative
expenses increased due to higher travel and entertainment costs of $1.4 million due to the return of in-person business meetings and events, higher software, subscription and maintenance fees of $1.3 million, higher advertising and marketing fees
of $1.3 million, higher consulting fees of $0.4 million, and higher facility rent of $0.5 million due to the opening of our Customer Innovation Center.
Provision for credit losses for our technology business for the year ended March 31, 2024, was $0.4 million, as compared to $0.2 million for the year ended March 31, 2023. Our higher provision for credit losses for the year ended March 31, 2024,
was due to changes in our net credit exposure.
Depreciation and amortization expense: Depreciation and amortization of our technology business for the year ended March 31, 2024, increased
compared to the year ended March 31, 2023, primarily due to an increase in amortization from intangible assets acquired in the NSG and Peak acquisitions.
Interest and financing costs: Interest and financing costs for the year ended March 31, 2024, decreased, compared to the year ended
March 31, 2023, due to lower average borrowings outstanding during the year under our WFCDF Credit Facility offset by higher interest rates. Our average month-end borrowing balance on the accounts receivable component of our WFCDF Credit Facility
was $18.4 million over the year ended March 31, 2024, compared to $47.0 million over the prior fiscal year. Our weighted average interest rate on the accounts receivable component of our WFCDF Credit Facility was 7.07% during our year ended March
31, 2024, compared to 5.35% over the prior fiscal year.
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FINANCING BUSINESS SEGMENT
The results of operations for our financing business segment were as follows (in thousands):
| Year ended March 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Percent Change | |||||||||||||
| Financial Metrics | ||||||||||||||||
| Portfolio earnings | $ | 13,937 | $ | 11,356 | $ | 2,581 | 22.7 | % | ||||||||
| Transactional gains | 19,016 | 16,125 | 2,891 | 17.9 | % | |||||||||||
| Post-contract earnings | 14,301 | 23,581 | (9,280 | ) | (39.4 | %) | ||||||||||
| Other | 2,162 | 1,411 | 751 | 53.2 | % | |||||||||||
| Net sales | $ | 49,416 | $ | 52,473 | $ | (3,057 | ) | (5.8 | %) | |||||||
| Gross profit | 42,314 | 43,034 | (720 | ) | (1.7 | %) | ||||||||||
| Selling, general, and administrative | 14,194 | 15,635 | (1,441 | ) | (9.2 | %) | ||||||||||
| Depreciation and amortization | 74 | 111 | (37 | ) | (33.3 | %) | ||||||||||
| Interest and financing costs | 2,349 | 1,236 | 1,113 | 90.0 | % | |||||||||||
| Operating expenses | 16,617 | 16,982 | (365 | ) | (2.1 | %) | ||||||||||
| Operating income | $ | 25,697 | $ | 26,052 | $ | (355 | ) | (1.4 | %) | |||||||
| Key Metrics & Other Information | ||||||||||||||||
| Adjusted EBITDA | $ | 26,032 | $ | 26,408 | $ | (376 | ) | (1.4 | %) |
Net sales: Net sales for the year ended March 31, 2024, decreased due to lower post-contract earnings offset by higher portfolio earnings and transactional gains. Post-contract earnings decreased due to lower
proceeds from sales of off-lease equipment, and lower month-to-month rents. Portfolio earnings increased due to higher average investments outstanding as well as a higher average earnings rate. Transactional gains increased due to higher volume of
financial assets sold during the year. Total proceeds from sales of financing receivables were $762.6 million and $706.0 million for the years ended March 31, 2024, and 2023, respectively. Our proceeds from sales of financing receivables for the
year ended March 31, 2024, are higher than the prior fiscal year due in part to a few large transactions in the current year period.
Gross Profit: Gross profit for the year ended March 31, 2024, decreased compared to the year ended March 31, 2023, due to a decrease in revenue, primarily month-to-month
rents.
Selling, general, and administrative expenses: Selling, general, and administrative expenses for the year ended March 31, 2024, decreased
compared to the year ended March 31, 2023, due to a decrease in variable compensation attributable to the decline in gross profit. In addition, there was a decrease in general and administrative expenses due to lower professional fees. Offsetting
these decreases was an increase in provision for credit losses as we incurred increased expense due to higher investment exposure.
Our financing business segment employed 34 people as of March 31, 2024, compared to 36 people as of March 31, 2023. Certain support functions for the financing business segment are shared resources with the technology
business and expenses are allocated accordingly.
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Interest and financing costs: Interest and financing costs for the year ended March 31, 2024, increased compared to the year ended March 31, 2023, due to higher interest rates. As of March 31, 2024, our
non-recourse notes payable increased to $36.2 million from $34.3 million in the prior year. Our weighted average interest rate for non-recourse notes payable was 6.49% and 5.01% as of March 31, 2024, and 2023, respectively.
CONSOLIDATED
Other income (expense), net: Other income, net, for the year ended March 31, 2024, was a benefit of $2.8 million, compared to a net expense of $3.2
million, for the year ended March 31, 2023. The higher net gain was driven by decreased foreign exchange losses and increased interest income, partially offset by a $1.9 million gain that was recognized in the prior fiscal year related to our
claim in a class action lawsuit. We had $2.7 million in interest income in the year ended March 31, 2024, compared to $0.3 million in the prior fiscal year. We had a foreign exchange loss of $0.1 million in the year ended March 31, 2024, compared
to a loss of $5.4 million in the prior fiscal year.
Provision for income taxes: Our provision for income tax expense for the years ended March 31, 2024, and 2023 was $45.3 million and $43.6 million, respectively. Our effective income tax rates for the
years ended March 31, 2024, and 2023 were 28.1% and 26.8%, respectively. Our effective income tax rate was higher for the year ended March 31, 2024, as compared to the year ended March 31, 2023, primarily due
to lower state taxes in the same period in the prior year.
Net earnings: Net earnings for the year ended March 31, 2024, were $115.8 million, a decrease of 3.0% or $3.6 million, as compared to $119.4 million in the prior fiscal
year, mainly due to the decrease in operating profits from our technology business, and higher income taxes. These decreases were offset by an increase in other income, net driven by decreased foreign exchange losses.
Basic earnings per common share and diluted earnings per common share for the year ended March 31, 2024, were $4.35 and $4.33, respectively, a decrease of 3.1% and 3.3%, as compared to $4.49 and $4.48 for the year ended
March 31, 2023.
Weighted average common shares outstanding used in the calculation of basic earnings per common share and diluted earnings per common share were 26.6 million and 26.7 million, respectively, for the years ended March 31,
2024, and 2023.
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 business segments are through our WFCDF Credit Facility. Our borrowings in our financing business 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.
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CASH FLOWS
The following table summarizes our sources and uses of cash for the years ended March 31, 2024, and 2023 (in thousands):
| Year Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| Net cash provided by (used in) operating activities | $ | 248,449 | $ | (15,425 | ) | |||
| Net cash used in investing activities | (61,964 | ) | (18,926 | ) | ||||
| Net cash used in financing activities | (36,619 | ) | (20,950 | ) | ||||
| Effect of exchange rate changes on cash | 62 | 3,016 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 149,928 | $ | (52,285 | ) |
Cash flows from operating activities
We provided $248.4 million from operating activities during the year ended March 31, 2024, compared to using $15.4 million during the year ended March 31, 2023. See below for a breakdown of operating cash flows by
business (in thousands):
| Year Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| Technology business segments | $ | 248,967 | $ | 17,157 | ||||
| Financing business segment | (518 | ) | (32,582 | ) | ||||
| Net cash provided by (used in) operating activities | $ | 248,449 | $ | (15,425 | ) |
Technology business: During the year ended March 31, 2024, our combined technology business segments provided $249.0 million from operating activities primarily due to net earnings
and a decrease in inventory, offset by an increase in accounts receivable.
During the year ended March 31, 2023, our combined technology business segments provided $17.2 million from operating activities primarily due to net earnings and an increase in payables, partially offset by increases in
accounts receivables and inventories.
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 business segments:
| As of March 31, | |||
|---|---|---|---|
| 2024 | 2023 | ||
| (DSO) Days sales outstanding (1) | 62 | 74 | |
| (DIO) Days inventory outstanding (2) | 23 | 38 | |
| (DPO) Days payable outstanding (3) | (39) | (53) | |
| Cash conversion cycle | 46 | 59 |
| Column 1 | Column 2 |
|---|---|
| (1) | Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our technology business segments at the end of the period divided by 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 business segments at the end of the period divided by the direct cost of products and services billed to our customers 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 business segments at the end of the period divided by the direct cost of products and services billed to our customers for the same three-month period. |
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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, 2024, and 2023 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 around 30 days from the invoice date.
Our cash conversion cycle decreased to 46 days for March 31, 2024, compared to 59 days for March 31, 2023, as DSO decreased by 12 days, DIO decreased by 15 days, and DPO decreased by 14 days from March 31, 2023, to March
2024.
Financing business segment: During the year ended March 31, 2024, our financing business segment used $0.5 million from operating activities,
primarily due to net earnings and a decrease in accounts receivable, offset by an increase in financing receivables.
During the year ended March 31, 2023, our financing segment used $32.6 million in operating activities, primarily due to changes in financing receivables and deferred costs, partially offset by net earnings.
Cash flows related to investing activities
During the year ended March 31, 2024, we used $62.0 million in investing activities, consisting of $54.2 million to acquire businesses and $8.5 million for purchases of property, equipment, and operating lease equipment,
partially offset by $0.7 million of proceeds from the sale of property, equipment, and operating lease equipment.
During the year ended March 31, 2023, we used $18.9 million in investing activities, consisting of $9.4 million for purchases of property, equipment, and operating lease equipment and $13.3 million to acquire Future Com,
Ltd., partially offset by $3.7 million of proceeds from the sale of operating lease equipment.
Cash flows from financing activities
During the year ended March 31, 2024, we used $36.6 million in financing activities, consisting of $47.4 million repayments on the floor plan component of our WFCDF Credit
Facility, $6.0 million to pay off an installment payment arrangement within our technology business, and $9.9 million to repurchase outstanding shares of our common stock, partially offset by $23.7 million in net borrowings of non-recourse and recourse notes payable in our financing segment, and $3.0 million in proceeds of issuance of common stock to employees under an employee stock purchase plan.
During the year ended March 31, 2023, we used $21.0 million in financing activities. We had net repayments of notes payable and borrowings on our credit facility in our technology segment of $7.1 million, offset by net
borrowings of non-recourse and recourse notes payable of $4.1 million by our financing segment. Additionally, we had cash outflows of $10.7 million from net borrowings/repayments on the floor plan facility and cash outflows of $7.2 million from the
repurchase of common stock.
Other than recourse borrowings under our WFCDF Credit Facility, our borrowing of recourse and non-recourse notes payable primarily arises from our financing business 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 recourse or non-recourse notes payable.
Non-Cash Activities
We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. 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 or financed. In these situations, the portion of the proceeds paid directly to our vendors are non-cash transactions.
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SECURED BORROWINGS
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. Interest rates have been rising and may continue to rise. 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.
CREDIT FACILITY
We finance the operations of our subsidiaries ePlus Technology, inc., ePlus Technology Services, inc. and SLAIT Consulting, LLC
(collectively, the “Borrowers”) in our technology business segments through a credit facility with WFCDF. The WFCDF Credit Facility has a floor plan facility and a revolving credit facility.
Please refer to Note 9, “Notes Payable and Credit Facility” in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K for additional information concerning our WFCDF Credit Facility.
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
business segments 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 customers place 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 45-60 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, 2024, we had a maximum credit limit of $500.0 million, and an outstanding balance on the floor plan of $105.1 million. As of March 31, 2023, we had a maximum credit limit of $500.0 million, and the outstanding balance on the
floor plan facility was $134.6 million. On our balance sheet, our liability under the floor plan facility is presented as part of 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, 2024, and March 31, 2023, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $200.0 million as of both March 31, 2024, and March 31, 2023.
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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, 2024, and 2023, 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 facilities in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance
our geographic footprint, or the platform of bundled solutions to provide additional functionality and value-added services. We may require additional capital due to increases in inventory to accommodate our customers’ IT installation schedules. We
may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivable 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. While the future is uncertain, we do not believe our WFCDF
Credit Facility will be terminated by WFCDF or us. Additionally, while our lending partners in our financing segment continue to be discerning in their approval processes, we currently 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 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.
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 5, “Lessee Accounting” and
Note 9, “Notes Payable and Credit Facility” in the Notes to the 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.
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CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements have been prepared in accordance with US GAAP. Our significant accounting policies are described in Note 1, “Organization and
Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 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 into 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, and ePlus professional and managed services. Our recognition of revenue differs for each of these distinct 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.
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.
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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%) 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.
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 record an expense in the amount necessary to adjust the allowance for credit losses
to our current estimate of expected credit losses on financial assets. We estimate expected credit losses based on our internal rating of the customer’s credit quality, our historical credit losses, current economic conditions, and other relevant
factors. 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 write off financing receivables when we deem them to be uncollectable. As of March 31, 2024, we estimated expected credit loss rates
related to both our accounts receivable and financing receivables at rates comparable to March 31, 2023.
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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.
Numerous foreign jurisdictions have enacted or are in the process of enacting legislation to adopt a minimum effective tax rate described in the Global Anti-Base Erosion (“Pillar Two”) model rules issued by the Organization for Economic
Co-operation and Development. A minimum effective tax rate of 15% would apply to multinational companies with consolidated revenue above €750 million. Under the Pillar Two rules, a company would be required to determine a combined effective tax
rate for all entities located in a jurisdiction. If the jurisdictional effective tax rate determined under the Pillar Two rules is less than 15%, a top-up tax will be due to bring the jurisdictional effective tax rate up to 15%. We are continuing
to monitor the pending implementation of Pillar Two by individual countries and the potential effects of Pillar Two on our business. We do not expect that any Pillar Two the provisions that become effective during calendar year 2024 will have a
materially adverse impact on our results of operations, financial position, or cash flows.
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, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 2, “Recent Accounting Pronouncements” in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.