We manage and report our operating results through four operating segments: product, professional services, managed services, and financing. Our product segment includes sales of IT Services acquisition
On December 6, 2016,products, third-party software, and third-party maintenance, software assurance, and other third-party services. Our professional services segment includes our subsidiary ePlus Technology, inc., acquired certain assets and assumed certain liabilities of Consolidated IT Services. Consolidated IT Services’ business provides data center, unified communications, networking,advanced professional services, staff augmentation, project management services, cloud consulting services and security solutions to a diverse set of domesticservices. Our managed services segment includes our advanced managed services, service desk, storage-as-a-service, cloud hosted services, cloud managed services and international customers including commercial, enterprise, and state, local, and education (SLED) organizations in the upper Midwest. Acquiring Consolidated IT Services expanded our reachmanaged security services. We refer to the upper Midwest, a new geographyproduct segment, professional services segment, and managed services segment collectively as our technology business. Our financing business segment consists of the financing of IT equipment, software, and related services to commercial enterprises, state and local governments, and government contractors.
We measure the performance of the segments within our technology business based on gross profit, while we measure our financing business segment based on operating income. We do not present asset information for ePlus, and enables usour reportable segments as we do not provide asset information to market our advanced technology solutions to their long-standing customer base.chief operating decision maker.
The total purchase price is $13.1 million including $9.5 million paid in cash at closing and $4.0 million that will be paid in cash in equal quarterly installments over 2 years, less $0.4 million paid back to us as part of the final working capital adjustment. Our allocation of the purchase consideration to the assets acquired and liabilities is presented belowfollowing table provides reportable segment information (in thousands):
| | Acquisition Date Amount | |
Accounts receivable and other current assets | | $ | 7,491 | |
Property and equipment | | | 1,045 | |
Identified intangible assets | | | 4,090 | |
Accounts payable and other current liabilities | | | (5,786 | ) |
Total identifiable net assets | | | 6,840 | |
Goodwill | | | 6,227 | |
Total purchase consideration | | $ | 13,067 | |
In the nine months ended December 31, 2017, we increased identified intangible assets and decreased goodwill by $280 thousand from the provisional amounts recorded as of March 31, 2017. | | Three Months Ended | | | Nine Months Ended | |
| | December 31, | | | December 31,
| |
| | 2023
| | | 2022
| | | 2023
| | | 2022
| |
| | | | | | | | | | | | |
Net sales | | | | | | | | | | | | |
Product | | $ | 419,478 | | | $ | 544,316 | | | $ | 1,418,581 | | | $ | 1,336,309 | |
Professional services | | | 40,044 | | | | 39,151 | | | | 113,870 | | | | 114,369 | |
Managed services | | | 34,640 | | | | 28,307 | | | | 99,335 | | | | 81,359 | |
Financing | | | 14,893 | | | | 11,702 | | | | 39,055 | | | | 43,504 | |
Total | | | 509,055 | | | | 623,476 | | | | 1,670,841 | | | | 1,575,541 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | | | | |
Product | | | 91,919 | | | | 104,485 | | | | 308,059 | | | | 282,042 | |
Professional services | | | 17,332 | | | | 15,294 | | | | 47,852 | | | | 45,046 | |
Managed services | | | 11,015 | | | | 8,075 | | | | 31,006 | | | | 22,692 | |
Financing | | | 13,544 | | | | 10,518 | | | | 33,531 | | | | 35,419 | |
Total | | | 133,810 | | | | 138,372 | | | | 420,448 | | | | 385,199 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Technology business | | | 91,599 | | | | 86,764 | | | | 278,869 | | | | 247,568 | |
Financing | | | 4,164 | | | | 5,150 | | | | 12,337 | | | | 13,883 | |
Total | | | 95,763 | | | | 91,914 | | | | 291,206 | | | | 261,451 | |
| | | | | | | | | | | | | | | | |
Operating income | | | | | | | | | | | | | | | | |
Technology business | | | 28,667 | | | | 41,090 | | | | 108,048 | | | | 102,212 | |
Financing | | | 9,380 | | | | 5,368 | | | | 21,194 | | | | 21,536 | |
Total | |
| 38,047 | | |
| 46,458 | | |
| 129,242 | | |
| 123,748 | |
| | | | | | | | | | | | | | | | |
Other income (expense), net | | | 366 | | | | 2,907 | | | | 673 | | | | (3,112 | ) |
| | | | | | | | | | | | | | | | |
Earnings before tax | | $ | 38,413 | | | $ | 49,365 | | | $ | 129,915 | | | $ | 120,636 | |
| | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | | | | |
Technology business | | $ | 5,381 | | | $ | 3,582 | | | $
| 15,747 | | | $ | 10,304 | |
Financing | | | 18 | | | | 27 | | | | 74 | | | | 83 | |
Total | | $ | 5,399 | | | $ | 3,609 | | | $
| 15,821 | | | $ | 10,387 | |
| | | | | | | | | | | | | | | | |
Interest and financing costs | | | | | | | | | | | | | | | | |
Technology business | | $ | 217 | | | $ | 1,308 | | | $ | 1,428 | | | $ | 2,117 | |
Financing | | | 766 | | | | 267 | | | | 1,626 | | | | 746 | |
Total | | $ | 983 | | | $ | 1,575 | | | $ | 3,054 | | | $ | 2,863 | |
| | | | | | | | | | | | | | | | |
Selected Financial Data - Statement of Cash Flow | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Purchases of property, equipment, and operating lease equipment | | | | | | | | | | | | | | | | |
Technology business | | $ | 2,028 | | | $ | 2,225 | | | $ | 6,717 | | | $ | 4,122 | |
Financing | | | 68 | | | | 1,026 | | | | 987 | | | | 1,539 | |
Total | | $ | 2,096 | | | $ | 3,251 | | | $ | 7,704 | | | $ | 5,661 | |
The identified intangible assets of $4.1 million consist entirely of customer relationships with an estimated useful life of 7 years.
We recognized goodwill related to this transaction of $6.2 million, which was assigned to our technology reporting unit. The goodwill recognized in the acquisition is attributable to the acquired assembled workforce and expected synergies, none of which qualify for recognition as a separate intangible asset. The total amount of goodwill is expected to be deductible for tax purposes. The amount of revenues and earnings of the acquiree since the acquisition date are not material. Likewise, the impact to the revenue and earnings of the combined entity for the prior reporting period through the acquisition date had the acquisition date been April 1, 2016 is not material.
The following tables provide a disaggregation of net sales by source and further disaggregate our revenue recognized from contracts with customers by timing and our position as principal or agent (in thousands):
| | Three months ended December 31, 2023 | |
| | Product | | | Professional Services | | | Managed Services | | | Financing | | | Total | |
| | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | |
Contracts with customers | | $ | 412,060 | | | $ | 40,044 | | | $ | 34,640 | | | $ | 774 | | | $ | 487,518 | |
Financing and other | | | 7,418 | | | | - | | | | - | | | | 14,119 | | | | 21,537 | |
Total | | $ | 419,478 | | | $ | 40,044 | | | $ | 34,640 | | | $ | 14,893 | | | $ | 509,055 | |
| | | | | | | | | | | | | | | | | | | | |
Timing and position as principal or agent | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time as principal | | $ | 367,350 | | | $ | - | | | $ | - | | | $ | 774 | | | $ | 368,124 | |
Transferred at a point in time as agent | | | 44,710 | | | | - | | | | - | | | | - | | | | 44,710 | |
Transferred over time as principal | | | - | | | | 40,044 | | | | 34,640 | | | | - | | | | 74,684 | |
Total revenue from contracts with customers | | $ | 412,060 | | | $ | 40,044 | | | $ | 34,640 | | | $ | 774 | | | $ | 487,518 | |
| | Nine months ended December 31, 2023 | |
| | Product | | | Professional Services | | | Managed Services | | | Financing | | | Total | |
| | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | |
Contracts with customers | | $ | 1,398,668 | | | $ | 113,870 | | | $ | 99,335 | | | $ | 4,899 | | | $ | 1,616,772 | |
Financing and other | | | 19,913 | | | | - | | | | - | | | | 34,156 | | | | 54,069 | |
Total | | $ | 1,418,581 | | | $ | 113,870 | | | $ | 99,335 | | | $ | 39,055 | | | $ | 1,670,841 | |
| | | | | | | | | | | | | | | | | | | | |
Timing and position as principal or agent | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time as principal | | $ | 1,262,010 | | | $ | - | | | $ | - | | | $ | 4,899 | | | $ | 1,266,909 | |
Transferred at a point in time as agent | | | 136,658 | | | | - | | | | - | | | | - | | | | 136,658 | |
Transferred over time as principal | | | - | | | | 113,870 | | | | 99,335 | | | | - | | | | 213,205 | |
Total revenue from contracts with customers | | $ | 1,398,668 | | | $ | 113,870 | | | $ | 99,335 | | | $ | 4,899 | | | $ | 1,616,772 | |
| | Three months ended December 31, 2022 | |
| | Product | | | Professional Services | | | Managed Services | | | Financing | | | Total | |
| | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | |
Contracts with customers | | $ | 538,400 | | | $ | 39,151 | | | $ | 28,307 | | | $ | 560 | | | $ | 606,418 | |
Financing and other | | | 5,916 | | | | - | | | | - | | | | 11,142 | | | | 17,058 | |
Total | | $ | 544,316 | | | $ | 39,151 | | | $ | 28,307 | | | $ | 11,702 | | | $ | 623,476 | |
| | | | | | | | | | | | | | | | | | | | |
Timing and position as principal or agent | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time as principal | | $ | 495,294 | | | $ | - | | | $ | - | | | $ | 560 | | | $ | 495,854 | |
Transferred at a point in time as agent | | | 43,106 | | | | - | | | | - | | | | - | | | | 43,106 | |
Transferred over time as principal | | | - | | | | 39,151 | | | | 28,307 | | | | - | | | | 67,458 | |
Total revenue from contracts with customers | | $ | 538,400 | | | $ | 39,151 | | | $ | 28,307 | | | $ | 560 | | | $ | 606,418 | |
| | Nine months ended December 31, 2022 | |
| | Product | | | Professional Services | | | Managed Services | | | Financing | | | Total | |
| | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | |
Contracts with customers | | $ | 1,320,904 | | | $ | 114,369 | | | $ | 81,359 | | | $ | 8,428 | | | $ | 1,525,060 | |
Financing and other | | | 15,405 | | | | - | | | | - | | | | 35,076 | | | | 50,481 | |
Total | | $ | 1,336,309 | | | $ | 114,369 | | | $ | 81,359 | | | $ | 43,504 | | | $ | 1,575,541 | |
| | | | | | | | | | | | | | | | | | | | |
Timing and position as principal or agent | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time as principal | | $ | 1,199,508 | | | $ | - | | | $ | - | | | $ | 8,428 | | | $ | 1,207,936 | |
Transferred at a point in time as agent | | | 121,396 | | | | - | | | | - | | | | - | | | | 121,396 | |
Transferred over time as principal | | | - | | | | 114,369 | | | | 81,359 | | | | - | | | | 195,728 | |
Total revenue from contracts with customers | | $ | 1,320,904 | | | $ | 114,369 | | | $ | 81,359 | | | $ | 8,428 | | | $ | 1,525,060 | |
TECHNOLOGY BUSINESS DISAGGREGATION OF REVENUE
The following table provides a disaggregation of our revenue from contracts with customers for our technology business by customer end market and by type (in thousands):
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2023
| | | 2022
| | | 2023
| | | 2022
| |
Customer end market: | | | | | | | | | | | | |
Telecom, Media & Entertainment | | $ | 139,551 | | | $ | 184,539 | | | $ | 405,192 | | | $ | 431,269 | |
Technology | | | 83,951 | | | | 133,067 | | | | 268,302 | | | | 299,088 | |
State and local government and educational institutions | | | 60,108 | | | | 72,730 | | | | 264,419 | | | | 207,823 | |
Healthcare | | | 55,504 | | | | 69,825 | | | | 214,182 | | | | 205,297 | |
Financial Services | | | 38,816 | | | | 48,008 | | | | 174,391 | | | | 118,917 | |
All others | | | 116,232 | | | | 103,605 | | | | 305,300 | | | | 269,643 | |
Net sales | | | 494,162 | | | | 611,774 | | | | 1,631,786 | | | | 1,532,037 | |
Less: Revenue from financing and other | | | (7,418 | ) | | | (5,916 | ) | | | (19,913 | ) | | | (15,405 | ) |
Revenue from contracts with customers | | $ | 486,744 | | | $ | 605,858 | | | $
| 1,611,873 | | | $
| 1,516,632 | |
| | | | | | | | | | | | | | | | |
Type: | | | | | | | | | | | | | | | | |
Product | | | | | | | | | | | | | | | | |
Networking | | $ | 209,936 | | | $ | 275,774 | | | $
| 723,760 | | | $
| 584,311 | |
Cloud | | | 120,253 | | | | 157,126 | | | | 427,365 | | | | 470,851 | |
Security | | | 58,822 | | | | 77,111 | | | | 156,504 | | | | 173,623 | |
Collaboration | | | 13,608 | | | | 13,405 | | | | 53,647 | | | | 45,572 | |
Other | | | 16,859 | | | | 20,900 | | | | 57,305 | | | | 61,952 | |
Total product | | | 419,478 | | | | 544,316 | | | | 1,418,581 | | | | 1,336,309 | |
| | | | | | | | | | | | | | | | |
Professional services | | | 40,044 | | | | 39,151 | | | | 113,870 | | | | 114,369 | |
Managed services | | | 34,640 | | | | 28,307 | | | | 99,335 | | | | 81,359 | |
Net sales | | | 494,162 | | | | 611,774 | | | | 1,631,786 | | | | 1,532,037 | |
Less: Revenue from financing and other | | | (7,418 | ) | | | (5,916 | ) | | | (19,913 | ) | | | (15,405 | ) |
Revenue from contracts with customers | | $ | 486,744 | | | $ | 605,858 | | | $
| 1,611,873 | | | $
| 1,516,632 | |
We do not disaggregate sales by customer end market beyond the technology business.
FINANCING BUSINESS SEGMENT DISAGGREGATION OF REVENUE
We analyze our revenues within our financing business segment based on the nature of the arrangement. Our financing revenue generally consists of portfolio income, transactional gains, and post-contract earnings including month-to-month rents and the sales of off-lease equipment. All our revenues from contracts with customers within our financing business segment is from the sales of off-lease equipment.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the unaudited consolidated financial statements included in this quarterly reportQuarterly Report on Form 10-Q and the audited consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended March 31, 20172023 (“20172023 Annual Report”)., and our Form 8-K that we filed with the SEC on October 6, 2023, which recasts the disclosures in certain portions of our 2023 Annual Report to reflect changes in our reportable segments. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “Risk Factors,” in our 20172023 Annual Report.Report, as updated by our Form 8-K that we filed with the SEC on October 6, 2023, as well as in our other filings with the SEC.
EXECUTIVE OVERVIEW
Business DescriptionBUSINESS DESCRIPTION
We are a leading solutions provider that deliversin the areas of security, cloud, networking, collaboration, artificial intelligence, and emerging technologies to domestic and foreign organizations across all industry segments. We deliver actionable outcomes for organizations by utilizingusing information technology (IT)(“IT”) and consulting solutions to drive business agility and innovation. Leveraging world-classour engineering talent, we assess, plan, deliver, and secure solutions comprised of leading technologies and consumption models aligned with our customers’ needs. Our expertise and experience enables ePlusenable us to craft optimized solutions that take advantage of the cost, scale, and efficiency of private, public and hybrid cloud in an evolving market. We alsoAs part of our solutions, we provide consulting, professional services, managed services, IT staff augmentation, and complete lifecycle management services includingin the areas of security, cloud, networking, collaboration, and emerging technologies. Additionally, we offer flexible financing solutions.for purchases from us and from third parties. We have been in the business of selling, leasing, financing, and managing information technologyIT and other assets for more than 2730 years.
Our primary focus is to deliver integrated technology solutions that address our customers’ Cloud, Security and Digital Infrastructurebusiness needs, forleveraging the appropriate technologies, both on-premiseon-premises and in the cloud. Our Hybrid IT frameworkapproach is a lifecycle approach that includesto lead with advisory consulting assessment, architecture, testing, implementation, managed services, maintenanceto understand our customers’ needs, and periodic consultative reviews. In additionthen design, deploy, and manage solutions aligned to their objectives. Underpinning the broader areas of cloud, our portfolio of expertise includes software defined, security, IoT,networking, and collaboration are specific skills in orchestration and automation, application modernization, DevSecOps, zero-trust architectures, data andmanagement, data visualization, analytics, mobility, hyper-converged infrastructure,network modernization, edge compute and other advanced and emerging technologies. We design, implement and manage an arrayThese solutions are comprised of IT solutionsclass-leading technologies from multiple leading IT vendors. We are an authorized reseller from over 1,000 vendors, but primarily from approximately 100 vendors, including Artistapartners such as Amazon Web Services, Arista Networks, Check Point, Cisco Systems, Citrix, Commvault, Crowdstrike, Deepwatch, Dell EMC, F5 Networks, Foresite, Fortinet, Gigamon, HP Inc., HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nimble Storage,Nutanix, NVIDIA, Oracle, Palo Alto Networks, Proficio, Pure Storage, Quantum,Rubrik, Splunk, Varonis, and VMware, among many others.We are an authorized reseller of over 1,500 vendors, which enable 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 multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets.
Our scale and financial resources have enabled us to continue investing in engineering and technology resources andto stay current with emergingat the forefront of technology trends. By delivering leading edge Hybrid IT solutions, ePlusOur expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services, has becomeenabled us to remain a trusted advisor tofor our customers. Our integrated technology solutions incorporate hardware, software, security and both managed and professional services. In addition, we offer a wide range of consumption options including leasing and financing for technology and other capital assets. We believe our lifecycle approach offering of integrated solutions, services and financing, asset management and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a uniquecustomized customer experience that spans the continuum from fast delivery of competitively priced products and services to subsequent management and upkeep,maintenance, and through to end-of-life disposal services. This approach also permits us to accommodatedeploy sophisticated solutions to enable our customers’ business requirements and deliver ever-more-sophisticated hybrid IT solutions, thus solidifying our relationships and value.outcomes.
Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. For the twelve months ended December 31, 2017, the percentage of revenue by customer end market within ourWe serve customers in markets including telecom, media and entertainment, technology, segment includes technology industry 25%, state and local government and educational institutions 17%(“SLED”), telecommunications, mediahealthcare, and entertainment 14%financial services. We sell to customers in the United States (“US”), financial services 16%, and healthcare 13%. The majoritywhich account for most of our sales, were generated within the United States; however, we have the abilityand to support our customers nationally and internationallyin select international markets including a presence in the United Kingdom (“U.K.”UK”), the European Union (“EU”), India, Singapore, and Singapore.Israel. Our technology segmentbusiness segments accounted for 97%98% of our net sales and 70%84% of our operating income, while our financing segment accounted for 3%2% of our net sales and 30%16% of our operating income, for the nine months ended December 31, 2017.2023.
BUSINESS TRENDS
We believe the following key factors are impacting our business performance and our ability to achieve business results:
Key Business Metrics
Like others in the industry, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of certain products, our having to carry more inventory for longer periods, the cost 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 continue to persist for at least the next few quarters.
We are experiencing increases in prices from our suppliers. We generally have been able to pass price increases to our customers. Accordingly, 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 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. Also, we are experiencing constriction of funds available and more stringent assessment for our financing arrangements from our lender partners.
Customers’ top focus areas include artificial intelligence, 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, solutions, and professional and managed services to meet these priorities and help our customers attain and maintain their desired outcome.
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.
Rapid cloud adoption has led to customer challenges around increasing costs, security concerns, and skillset gaps. These challenges are consistent across all industries and 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.
KEY BUSINESS METRICS
Our management monitors a number ofseveral financial and non-financial measures and ratios on a regular basis in order to track the progress of our business. We believe that the most important of these measures and ratios include net sales, gross margin, gross margin on product and services, 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, Adjusted gross billings of productNon-GAAP: Net earnings and services, and non-GAAP netNon-GAAP: Net earnings per common share.
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 U.S.US GAAP and presented in our unaudited condensed 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 U.SUS GAAP. Non-GAAPOur 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.
OurSet 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 results from those metrics are as follows, (dollars in thousands)managed services segments- and our financing business segment (in thousands, except per share amounts):
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Sales of products and services | | $ | 330,953 | | | $ | 317,391 | | | $ | 1,045,792 | | | $ | 968,799 | |
| | | | | | | | | | | | | | | | |
Adjusted gross billings of product and services (1) | | $ | 464,105 | | | $ | 432,407 | | | $ | 1,449,371 | | | $ | 1,317,188 | |
| | | | | | | | | | | | | | | | |
Gross margin | | | 22.4 | % | | | 22.6 | % | | | 22.4 | % | | | 22.4 | % |
Gross margin, product and services | | | 20.1 | % | | | 20.7 | % | | | 20.2 | % | | | 20.5 | % |
Operating income margin | | | 4.8 | % | | | 6.5 | % | | | 6.1 | % | | | 6.7 | % |
| | | | | | | | | | | | | | | | |
Net earnings | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | |
Net earnings margin | | | 4.5 | % | | | 3.9 | % | | | 4.3 | % | | | 4.0 | % |
Net earnings per common share - diluted | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | |
| | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings (2) | | $ | 13,574 | | | $ | 15,621 | | | $ | 44,013 | | | $ | 43,710 | |
Non-GAAP: Net earnings per common share - diluted (2) | | $ | 0.97 | | | $ | 1.12 | | | $ | 3.14 | | | $ | 3.12 | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (3) | | $ | 19,284 | | | $ | 23,217 | | | $ | 72,811 | | | $ | 72,404 | |
Adjusted EBITDA margin (3) | | | 5.6 | % | | | 7.1 | % | | | 6.7 | % | | | 7.3 | % |
| | | | | | | | | | | | | | | | |
Purchases of property and equipment used internally | | $ | 2,018 | | | $ | 849 | | | $ | 4,064 | | | $ | 2,413 | |
Purchases of equipment under operating leases | | | 844 | | | | 3,282 | | | | 2,234 | | | | 4,887 | |
Total capital expenditures | | $ | 2,862 | | | $ | 4,131 | | | $ | 3,436 | | | $ | 7,300 | |
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
Consolidated | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | | | | | | | | | | |
Financial metrics | | | | | | | | | | | | |
Net sales | | $ | 509,055 | | | $ | 623,476 | | | $ | 1,670,841 | | | $ | 1,575,541 | |
| | | | | | | | | | | | | | | | |
Gross profit | | $ | 133,810 | | | $ | 138,372 | | | $ | 420,448 | | | $ | 385,199 | |
Gross margin | | | 26.3 | % | | | 22.2 | % | | | 25.2 | % | | | 24.4 | % |
Operating income margin | | | 7.5 | % | | | 7.5 | % | | | 7.7 | % | | | 7.9 | % |
| | | | | | | | | | | | | | | | |
Net earnings | | $ | 27,282 | | | $ | 35,694 | | | $ | 93,793 | | | $ | 86,502 | |
Net earnings margin | | | 5.4 | % | | | 5.7 | % | | | 5.6 | % | | | 5.5 | % |
Net earnings per common share - diluted | | $ | 1.02 | | | $ | 1.34 | | | $ | 3.52 | | | $ | 3.24 | |
| | | | | | | | | | | | | | | | |
Non-GAAP financial metrics | | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings (1) | | $ | 31,546 | | | $ | 36,714 | | | $ | 106,399 | | | $ | 97,623 | |
Non-GAAP: Net earnings per common share - diluted (1) | | $ | 1.18 | | | $ | 1.38 | | | $ | 3.99 | | | $ | 3.66 | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (2) | | $ | 46,189 | | | $ | 53,325 | | | $ | 153,636 | | | $ | 141,933 | |
Adjusted EBITDA margin | | | 9.1 | % | | | 8.6 | % | | | 9.2 | % | | | 9.0 | % |
| | | | | | | | | | | | | | | | |
Technology business segments | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Financial Metrics | | | | | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | | | | | |
Product | | $ | 419,478 | | | $ | 544,316 | | | $ | 1,418,581 | | | $ | 1,336,309 | |
Professional services | | | 40,044 | | | | 39,151 | | | | 113,870 | | | | 114,369 | |
Managed services | | | 34,640 | | | | 28,307 | | | | 99,335 | | | | 81,359 | |
Total | | $ | 494,162 | | | $ | 611,774 | | | $ | 1,631,786 | | | $ | 1,532,037 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | | | | |
Product | | $ | 91,919 | | | $ | 104,485 | | | $ | 308,059 | | | $ | 282,042 | |
Professional services | | | 17,332 | | | | 15,294 | | | | 47,852 | | | | 45,046 | |
Managed services | | | 11,015 | | | | 8,075 | | | | 31,006 | | | | 22,692 | |
Total | | $ | 120,266 | | | $ | 127,854 | | | $ | 386,917 | | | $ | 349,780 | |
| | | | | | | | | | | | | | | | |
Gross margin | | | | | | | | | | | | | | | | |
Product | | | 21.9 | % | | | 19.2 | % | | | 21.7 | % | | | 21.1 | % |
Professional services | | | 43.3 | % | | | 39.1 | % | | | 42.0 | % | | | 39.4 | % |
Managed services | | | 31.8 | % | | | 28.5 | % | | | 31.2 | % | | | 27.9 | % |
Total | | | 24.3 | % | | | 20.9 | % | | | 23.7 | % | | | 22.8 | % |
| | | | | | | | | | | | | | | | |
Operating income | | $ | 28,667 | | | $ | 41,090 | | | $ | 108,048 | | | $ | 102,212 | |
| | | | | | | | | | | | | | | | |
Non-GAAP financial metric | | | | | | | | | | | | | | | | |
Adjusted EBITDA (2) | | $ | 36,725 | | | $ | 47,869 | | | $ | 132,170 | | | $ | 120,135 | |
| | | | | | | | | | | | | | | | |
Operational metric | | | | | | | | | | | | | | | | |
Gross billings (3) | | | | | | | | | | | | | | | | |
Networking | | $ | 251,322 | | | $ | 314,709 | | | $ | 839,638 | | | $ | 676,761 | |
Security | | | 189,476 | | | | 193,866 | | | | 480,159 | | | | 509,241 | |
Cloud | | | 181,559 | | | | 234,464 | | | | 641,120 | | | | 708,080 | |
Collaboration | | | 23,180 | | | | 27,925 | | | | 97,111 | | | | 100,799 | |
Other | | | 55,473 | | | | 60,803 | | | | 203,805 | | | | 205,603 | |
Product gross billings | | | 701,010 | | | | 831,767 | | | | 2,261,833 | | | | 2,200,484 | |
Service gross billings | | | 95,976 | | | | 67,076 | | | | 233,618 | | | | 212,319 | |
Total gross billings | | $ | 796,986 | | | $ | 898,843 | | | $ | 2,495,451 | | | $ | 2,412,803 | |
| | | | | | | | | | | | | | | | |
Financing business segment | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Financial metrics | | | | | | | | | | | | | | | | |
Net sales | | $ | 14,893 | | | $ | 11,702 | | | $ | 39,055 | | | $ | 43,504 | |
| | | | | | | | | | | | | | | | |
Gross profit | | $ | 13,544 | | | $ | 10,518 | | | $ | 33,531 | | | $ | 35,419 | |
| | | | | | | | | | | | | | | | |
Operating income | | $ | 9,380 | | | $ | 5,368 | | | $ | 21,194 | | | $ | 21,536 | |
| | | | | | | | | | | | | | | | |
Non-GAAP financial metric | | | | | | | | | | | | | | | | |
Adjusted EBITDA (2) | | $ | 9,464 | | | $ | 5,456 | | | $ | 21,466 | | | $ | 21,798 | |
(1) | We define Adjusted gross billings of productNon-GAAP: Net earnings and services as our sales of product and servicesNon-GAAP: Net earnings per common share – diluted are based on net earnings calculated in accordance with U.S.US GAAP, adjusted to exclude other (income) expense, share-based compensation, and acquisition and integration expenses, and the costs incurred related to sales of third party software assurance, subscription licenses, maintenance and services. We have provided below a reconciliation of Adjusted gross billings of product and services to Sales of product and services, which is the most directly comparable financial measure to this non-GAAP financial measure.tax effects. |
We use Adjusted gross billings of productNon-GAAP: Net earnings and servicesNon-GAAP: Net earnings per common share – diluted as a supplemental measuremeasures of our performance to gain insight into our operating performance and performance trends. We believe that the volumeexclusion 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 generatedand operating results by excluding items that management believes are not reflective of our technology segment,underlying operating performance. Accordingly, we believe that Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted provide useful information to analyze the changes toinvestors and others in understanding and evaluating our accounts receivable and accounts payable. Ouroperating results. However, our use of Adjusted gross billings of product and servicesnon-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 U.S.US GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted gross billings of productsimilar Non-GAAP: Net earnings and servicesNon-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):
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
GAAP: Earnings before tax | | $ | 38,413 | | | $ | 49,365 | | | $ | 129,915 | | | $ | 120,636 | |
Share-based compensation | | | 2,526 | | | | 1,950 | | | | 7,145 | | | | 5,681 | |
Acquisition related amortization expense | | | 3,856 | | | | 2,505 | | | | 11,348 | | | | 7,182 | |
Other (income) expense | | | (366 | ) | | | (2,907 | ) | | | (673 | ) | | | 3,112 | |
Non-GAAP: Earnings before provision for income taxes | | | 44,429 | | | | 50,913 | | | | 147,735 | | | | 136,611 | |
| | | | | | | | | | | | | | | | |
GAAP: Provision for income taxes | | | 11,131 | | | | 13,671 | | | | 36,122 | | | | 34,134 | |
Share-based compensation | | | 733 | | | | 544 | | | | 2,005 | | | | 1,624 | |
Acquisition related amortization expense | | | 1,115 | | | | 693 | | | | 3,173 | | | | 2,030 | |
Other (income) expense | | | (106 | ) | | | (811 | ) | | | (190 | ) | | | 933 | |
Tax benefit (expense) on restricted stock | | | 10 | | | | 102 | | | | 226 | | | | 267 | |
Non-GAAP: Provision for income taxes | | | 12,883 | | | | 14,199 | | | | 41,336 | | | | 38,988 | |
| | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings | | $ | 31,546 | | | $ | 36,714 | | | $ | 106,399 | | | $ | 97,623 | |
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
GAAP: Net earnings per common share - diluted | | $ | 1.02 | | | $ | 1.34 | | | $ | 3.52 | | | $ | 3.24 | |
| | | | | | | | | | | | | | | | |
Share-based compensation | | | 0.07 | | | | 0.05 | | | | 0.19 | | | | 0.15 | |
Acquisition related amortization expense | | | 0.10 | | | | 0.07 | | | | 0.30 | | | | 0.20 | |
Other (income) expense | | | (0.01 | ) | | | (0.08 | ) | | | (0.01 | ) | | | 0.08 | |
Tax benefit (expense) on restricted stock | | | - | | | | - | | | | (0.01 | ) | | | (0.01 | ) |
Total non-GAAP adjustments - net of tax | | | 0.16 | | | | 0.04 | | | | 0.47 | | | | 0.42 | |
| | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings per common share - diluted | | $ | 1.18 | | | $ | 1.38 | | | $ | 3.99 | | | $ | 3.66 | |
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Sales of products and services | | $ | 330,953 | | | $ | 317,391 | | | $ | 1,045,792 | | | $ | 968,799 | |
Costs incurred related to sales of third party software assurance, maintenance and services | | | 133,152 | | | | 115,016 | | | | 403,579 | | | | 348,389 | |
| | | | | | | | | | | | | | | | |
Adjusted gross billings of product and services | | $ | 464,105 | | | $ | 432,407 | | | $ | 1,449,371 | | | $ | 1,317,188 | |
(2) | Non-GAAP net earnings per common share are based on net earnings calculated in accordance with U.S. GAAP, adjusted to exclude other income and acquisition related amortization expense, and related effects on income tax, the tax (benefit) expense recognized due to the vesting of shared based compensation, the tax benefit associated with the re-measurement of deferred tax assets and liabilities at the new tax rates, as well as an adjustment to our tax expense in the prior year assuming a 31.5% effective annual income tax rate for U.S. operations due to changes in U.S. tax rates. 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 these items 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 net earnings per common share 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 U.S. GAAP. In addition, other companies, including companies in our industry, might calculate Non-GAAP net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures. |
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
GAAP: Earnings before tax | | $ | 16,259 | | | $ | 21,307 | | | $ | 65,724 | | | $ | 67,376 | |
Acquisition related amortization expense | | | 1,871 | | | | 1,035 | | | | 4,178 | | | | 3,098 | |
Other (income) expense | | | 131 | | | | - | | | | 1 | | | | (380 | ) |
Non-GAAP: Earnings before provision for income taxes | | | 18,261 | | | | 22,342 | | | | 69,903 | | | | 70,094 | |
| | | | | | | | | | | | | | | | |
GAAP: Provision for income taxes | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | |
Acquisition related amortization expense | | | 547 | | | | 267 | | | | 1,421 | | | | 956 | |
Other (income) expense | | | 55 | | | | 13 | | | | - | | | | (144 | ) |
Remeasurement of deferred taxes | | | 3,407 | | | | - | | | | 3,407 | | | | - | |
Adjustment to FY17 US Federal tax rate to 31.5% | | | - | | | | (2,252 | ) | | | - | | | | (2,252 | ) |
Tax benefit on restricted stock | | | - | | | | 6 | | | | 1,563 | | | | 514 | |
Non-GAAP: Provision for income taxes | | | 4,687 | | | | 6,721 | | | | 25,890 | | | | 26,384 | |
| | | | | | | | | | | | | | | | |
Non-GAAP: Net earnings | | $ | 13,574 | | | $ | 15,621 | | | $ | 44,013 | | | $ | 43,710 | |
| | | | | | | | | | | | | | | | |
GAAP: Net earnings per common share - diluted | | $ | 1.11 | | | $ | 0.91 | | | $ | 3.30 | | | $ | 2.86 | |
Non-GAAP: Net earnings per common share - diluted | | $ | 0.97 | | | $ | 1.12 | | | $ | 3.14 | | | $ | 3.12 | |
(3) | We define Adjusted EBITDA as net earnings calculated in accordance with U.SUS GAAP, adjusted for the following: interest expense, depreciation and amortization, share-based compensation, acquisition and integration expenses, provision for income taxes, and other income.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. WeIn the table below, 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.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 U.S.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.
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
Consolidated | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net earnings | | $ | 15,581 | | | $ | 12,620 | | | $ | 46,225 | | | $ | 40,066 | |
Provision for income taxes | | | 678 | | | | 8,687 | | | | 19,499 | | | | 27,310 | |
Depreciation and amortization | | | 2,894 | | | | 1,910 | | | | 7,086 | | | | 5,408 | |
Other (income) expense | | | 131 | | | | - | | | | 1 | | | | (380 | ) |
Adjusted EBITDA | | $ | 19,284 | | | $ | 23,217 | | | $ | 72,811 | | | $ | 72,404 | |
| | | | | | | | | | | | | | | | |
Technology Segment | | | | | | | | | | | | | | | | |
Operating income | | $ | 11,415 | | | $ | 16,889 | | | $ | 48,704 | | | $ | 56,003 | |
Depreciation and amortization | | | 2,893 | | | | 1,908 | | | | 7,084 | | | | 5,400 | |
Adjusted EBITDA | | $ | 14,308 | | | $ | 18,797 | | | $ | 55,788 | | | $ | 61,403 | |
| | | | | | | | | | | | | | | | |
Financing Segment | | | | | | | | | | | | | | | | |
Operating income | | $ | 4,975 | | | $ | 4,418 | | | $ | 17,021 | | | $ | 10,993 | |
Depreciation and amortization | | | 1 | | | | 2 | | | | 2 | | | | 8 | |
Adjusted EBITDA | | $ | 4,976 | | | $ | 4,420 | | | $ | 17,023 | | | $ | 11,001 | |
Consolidated ResultsThe following table provides our calculations of OperationsAdjusted EBITDA (in thousands):
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
Consolidated | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Net earnings | | $ | 27,282 | | | $ | 35,694 | | | $ | 93,793 | | | $ | 86,502 | |
Provision for income taxes | | | 11,131 | | | | 13,671 | | | | 36,122 | | | | 34,134 | |
Share-based compensation | | | 2,526 | | | | 1,950 | | | | 7,145 | | | | 5,681 | |
Interest and financing costs | | | 217 | | | | 1,308 | | | | 1,428 | | | | 2,117 | |
Depreciation and amortization | | | 5,399 | | | | 3,609 | | | | 15,821 | | | | 10,387 | |
Other income (expense) | | | (366 | ) | | | (2,907 | ) | | | (673 | ) | | | 3,112 | |
Adjusted EBITDA | | $ | 46,189 | | | $ | 53,325 | | | $ | 153,636 | | | $ | 141,933 | |
| | | | | | | | | | | | | | | | |
Technology business segments | | | | | | | | | | | | | | | | |
Operating income | | $ | 28,667 | | | $ | 41,090 | | | $ | 108,048 | | | $ | 102,212 | |
Depreciation and amortization | | | 5,381 | | | | 3,582 | | | | 15,747 | | | | 10,304 | |
Share based compensation | | | 2,460 | | | | 1,889 | | | | 6,947 | | | | 5,502 | |
Interest and financing costs | | | 217 | | | | 1,308 | | | | 1,428 | | | | 2,117 | |
Adjusted EBITDA | | $ | 36,725 | | | $ | 47,869 | | | $ | 132,170 | | | $ | 120,135 | |
| | | | | | | | | | | | | | | | |
Financing business segment | | | | | | | | | | | | | | | | |
Operating income | | $ | 9,380 | | | $ | 5,368 | | | $ | 21,194 | | | $ | 21,536 | |
Depreciation and amortization | | | 18 | | | | 27 | | | | 74 | | | | 83 | |
Share-based compensation | | | 66 | | | | 61 | | | | 198 | | | | 179 | |
Adjusted EBITDA | | $ | 9,464 | | | $ | 5,456 | | | $ | 21,466 | | | $ | 21,798 | |
(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 includes the transaction values for certain sales transactions that are recognized on a net basis, and, therefore, includes amounts that will not be recognized as revenue. |
CONSOLIDATED RESULTS OF OPERATIONS
Net sales: Net sales for the three months ended December 31, 2017, net sales increased 4.9%2023, decreased $114,.4 million, or 18.4%, or $15.9 million to $342.6$509.1 million, compared to $326.7$623.5 million in the same three-month period in the prior year. The decrease in net sales was partially driven by lower net sales from our product segment due to decreased sales volume and was partially offset by higher net sales from professional services segment, managed services segment, and financing segment net sales due to higher transaction gains.
Net sales for the nine months ended December 31, 2023, increased $95.3 million, or 6.0%, to $1,670.8 million, compared to $1,575.5 million in the same nine-month period in the prior year. The increase in net sales was driven by higher net sales from our product segment and managed services segments, primarily from the addition of sales to new customers from our acquisitions of Network Solutions Group (“NSG”) and Future Com, Ltd. (“Future Com”), and was partially offset by a decline in revenues from our financing business segment primarily due to lower post contract earnings.
Gross profit: Gross profit for the three months ended December 31, 2023, decreased 3.3%, to $133.8 million, compared to $138.4 million in the same three-month period in the prior year due to a decline in product net sales. Overall, gross margin increased 410 basis points to 26.3%, as compared to the same period in the prior fiscal year. ForThe increase in gross margin was primarily due to increases in both product and service margin along with higher gross margin in our financing business segment.
Gross profit for the nine months ended December 31, 2017, net sales2023, increased 8.4%9.2%, or $83.9 million to $1,080.6$420.4 million, compared to $996.6$385.2 million in the same nine-month period in the prior year due to increased net sales volume. Overall, gross margin for the nine months ended December 31, 2023, increased 80 basis points to 25.2%, as compared to the same period in the prior fiscal year.
Adjusted The increase in gross billings ofmargin was primarily due increases in both product and servicesservice margin within our technology business segments along with higher margin in our financing business segment.
Operating expenses: Operating expenses for the three months ended December 31, 2023, increased 7.3%$3.9 million, or 4.2%, or $31.7to $95.8 million, as compared to $464.1$91.9 million for the same three-month period in the prior year. The increase in operating expenses was primarily due to an increase of $4.3 million in salaries and benefits, mainly driven by an increase in headcount and salary increases offset by a decrease of $1.1 million in variable compensation corresponding to the decrease in gross profit. As of December 31, 2023, we had 1,897 employees, an increase of 8.7% from 1,745 as of December 31, 2022.
General and administrative expenses also increased $0.6 million for the three months ended December 31, 2017 from $432.4 million for2023, compared to the same period in the prior fiscal year. For the ninethree months ended December 31, 2017, adjusted gross billings of product2022, as we had higher software, subscription, and services increased 10.0%, or $132.2 millionmaintenance fees due to $1,449.4 million, from $1,317.2 million for the same period in the prior fiscal year. Both the three month and nine month increase in demand was from commercial customers primarily in the technology, financial servicesheadcount.
Depreciation and health care industries, partially offset by SLED and other industries.
Consolidated gross profit rose 3.9% to $76.7 million, compared with $73.8amortization increased $1.8 million for the three months ended December 31, 2016. Consolidated gross margins were 22.4%2023, compared to the three months ended December 31, 2022, due to increased amortization of intangible assets from the acquisition of NSG. Interest and financing costs decreased $0.6 million for the three months ended December 31, 2017 a decrease of 20 basis points2023, compared to 22.6% for the same three-month period in the prior fiscal year due to lower product margins, includingoutstanding borrowings. Offsetting these increases was a decrease of $1.2 million in vendor incentives earned, whichprovision for credit losses.
Operating expenses for the nine months ended December 31, 2023, increased $29.7 million, or 11.4%, to $291.2 million, as compared to $261.5 million for the same nine-month period in the prior year. Our increase in operating expenses was offsetprimarily due to an increase of $18.9 million in salaries and benefits, mainly driven by an increase in service revenues.headcount, as well as higher variable compensation of $3.5 million corresponding to the increase in gross profit.
Consolidated gross profit rose 8.3% to $241.9 million, compared with $223.4General and administrative expenses also increased $3.6 million for the nine months ended December 31, 2016. Consolidated gross margins were 22.4% for both2023, compared to the nine months ended December 31, 20172022, as we had higher software, subscription and 2016. Consolidated gross margins were impacted by lower product margins, including a decrease in vendor incentives earned, which was offset bymaintenance fees, travel and entertainment costs due to the return of in-person business meetings and events, advertising and marketing fees, and facility rent due to the opening of our new Customer Innovation Center. In addition, we had higher serviceprofessional and financing revenues.legal fees.
Our operating expensesDepreciation and amortization increased 14.9% to $60.3$5.4 million or 78.6% of gross profits for the three months ended December 31, 2017 as compared to $52.5 million, representing 71.1% of gross profits in the same period prior year. For the nine months ended December 31, 2017, our operating expenses increased 12.6% to $176.6 million, or 72.5% of gross profits as2023, compared to $156.4the nine months ended December 31, 2022, due to increased amortization of intangible assets from the acquisition of NSG. Interest and financing costs increased $0.2 million representing 70.0% of gross profitsfor the nine months ended December 31, 2023, compared to the same nine-month period in the same prior year period. The majority of this increase reflects increased salary expense due to an increasehigher interest rates offset by lower outstanding borrowings. Offsetting these increases was a decrease of $1.8 million in headcount, as well as variable compensation asprovision for credit losses.
Operating income: As a result of the increase in gross profit, and an increase in employee healthcare costs. Our headcount increased by 120 employees or 10.3% to 1,284 from 1,164 a year ago, 98 of which were from the acquisitions of IDS and OneCloud. The net additions in personnel compared to the prior year include 105 sales and engineering positions, with the remaining additions being administrative, IT, and finance positions.
Operatingforegoing, operating income for the three months ended December 31, 20172023, decreased 23.1%$8.5 million, or 18.3%, to $16.4$38.0 million, as compared to $21.3$46.5 million for the same period in the prior year. For the three months ended December 31, 2017, the2022, and operating margin remained flat at 7.5%. The decrease in operating income margin decreased 170 basis pointswas due to 4.8%decreases from 6.5% for the same period in the prior year. our technology business, which was offset by higher operating income from our financing business segment.
Operating income for the nine months ended December 31, 2017 decreased 1.9%2023, increased $5.5 million, or 4.4%, to $65.7million,$129.2 million, as compared to $67.0$123.7 million for the same period in the prior year. For the nine months ended December 31, 2017, the2022, and operating income margin decreased 60by 20 basis points to 6.1%7.7%. The increase in operating income was due to increases from 6.7% for the same period in the prior year.our technology business, which was offset slightly by lower operating income from our financing business segment.
Consolidated net earningsAdjusted EBITDA for the three months ended December 31, 2017 were $15.62023, was $46.2 million, an increasea decrease of 23.5%$7.1 million, or 13.4%, or $3.0 million,as compared to $53.3 million for the same three-month period in the prior year’s results of $12.6 million. For the nine months ended December 31, 2017, consolidated net earnings were $46.2 million, an increase of 15.4%, or $6.2 million, compared to the prior year’s results of $40.1 million.
Adjusted EBITDA decreased $3.9 million, or 16.9% to $19.3 million andyear. Adjusted EBITDA margin decreased 150 basis points to 5.6% for the three months ended December 31, 2017,2023, increased 50 basis points to 9.1%, as compared to the prior period of 7.1%. For the ninethree months ended December 31, 2017,2022, of 8.6%. The decrease in Adjusted EBITDA increased $0.4 million, or 0.6%was due to $72.8 million anddecreases from our technology business, which was offset by higher Adjusted EBITDA margin decreased 60 basis points to 6.7%from our financing business segment.
Adjusted EBITDA for the nine months ended December 31, 2017,2023, was $153.6 million, an increase of $11.6 million, or 8.2%, as compared to $141.9 million for the same nine-month period in the prior periodyear. Adjusted EBITDA margin for the nine months ended December 31, 2023, increased 20 basis points to 9.2%, as compared to the nine months ended December 31, 2022, of 7.3%9.0%. The increase in Adjusted EBITDA was due to increases from our technology business, which was offset slightly by lower Adjusted EBITDA from our financing business segment.
DilutedNet earnings per common share increased 22.0%diluted for the three months ended December 31, 2023, decreased $0.32, or 23.9%, to $1.02 per share, as compared to $1.34 per share in the same three-month period in the prior year. Non-GAAP: Net earnings per common share diluted for the three months ended December 31, 2023, decreased $0.20, or $0.2014.5%, to $1.11$1.18 per share, as compared to $1.38 per share for the three months ended December 31, 2017, as compared to $0.91 per share for the three months ended December 31, 2016. Our effective tax rate for the three months ended December 31, 2017 was 4.2%, which includes a tax benefit $3.4 million from the re-measurement of deferred tax assets and liabilities due to the change in the U.S. statutory rate. Non-GAAP diluted2022.
Net earnings per common share decreased 13.4% to $0.97diluted for the three months ended December 31, 2017, as compared to $1.12 for the three months ended December 31, 2016.
For the nine months ended December 31, 2017, diluted earnings per share2023, increased 15.4%$0.28, or 8.6%, or $0.44 to $3.30$3.52 per share, as compared to $2.86$3.24 per share in the same nine-month period in the prior year. Non-GAAP: Net earnings per common share diluted for the nine months ended December 31, 2023, increased $0.33, or 9.0%, to $3.99 per share, as compared to $3.66 per share for the nine months ended December 31, 2016. 2022.
SEGMENT OVERVIEW
Technology business segments
Our effective tax ratetechnology business includes three segments: product, professional services, and managed services as further discussed below.
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.
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 cloud consulting, staff augmentation services, and project management services.
Managed services segment: Our managed services segment includes our advanced managed services that include managing various aspects of our customers’ environments and 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.
The quarter ended June 30, 2023, was the nine months ended December 31, 2017 was 29.7%,first quarterly period in which includes a tax benefit of $1.6 million related to the vesting of share based compensation and a tax benefit $3.4 million from the re-measurement of deferred tax assets and liabilities due to the change in the U.S. statutory rate. Non-GAAP diluted earnings per share increased 0.6% to $3.14 for the nine months ended December 31, 2017, as compared to $3.12 for the nine months ended December 31, 2016.
Cash and cash equivalents decreased $33.7 million or 30.7% to $76.1 million at December 31, 2017 compared with $109.8 million as of March 31, 2017. The decrease is primarily the result of investments in our financing portfolio, working capital required for the growth inwe reported these three separate segments within our technology segment, $29.8 million paid in cash at closing of our acquisition of IDS and $7.9 million paid in cash at closing for our acquisition of OneCloud. Our cashbusiness as we previously consolidated this information within a single technology segment. We manage the technology business segments based on hand, funds generated from operations, amounts available under our credit facilitygross profit and the possible monetization ofoperating expenses associated with these segments in total as our investment portfolio provide sufficient liquidity fortechnology business. Based upon our current business and operations, we intend to continue reporting these three segments that will comprise our technology business. We recast prior periods to conform with our current segment organization.
Segment Overview
Our operations are conducted through two segments: technology and financing.
Technology Segment
The technology segment sells IT equipment and software and related servicesbusiness segments sell primarily to corporate customers,corporations, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating toinstitutions. Customers of our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for information technology products.
Our technology segment derives revenue from the sales of new equipment and service engagements. Included in the sales of product and services are revenues derived from performing advanced IT professional and managed services that may be sold together with and integral to third-party products and software. Our service engagements are generally governed by statements of work, and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials.
Customers who purchase IT equipment and services from usbusiness may have a customer master agreements, or CMAs,agreement (“CMA”) with our company, which stipulatestipulates 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 responsesresponses. 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 ourthe 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 pricing received,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,change; therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.
Financing Segmentbusiness segment
Our financing business segment offers financing solutions to corporations, governmental entities,government contractors, state and local governments, and educational institutions nationwide and also in the United Kingdom,US, which accounts for most of our transactions, and to corporations in select international markets including Canada, the UK, and Iceland.the EU. The financing business segment derives revenue from leasing IT equipment, medical equipment, and medicalother 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:
| · | Portfolio income: Interest income from financing receivables and rents due under operating leases; |
Portfolio income: Interest income from financing receivables and rents due under operating leases.
| · |
Transactional gains: Net gains or losses on the sale of financial assets; and |
| · | Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and net gains on the sale of off-lease (used) equipment. |
Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. We also recognize revenue from events that occur after the initial sale of a financial assetassets.
Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and remarketing fees from certain residual value investments.the sale of off-lease (used) equipment.
Fluctuations in Revenuesoperating results
Our operating results of operations are susceptiblemay fluctuate due to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, product availability, changes in vendor incentive programs, interest rate fluctuations, currency fluctuations, the timing of sales of financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of a sale prior to the expiration of the lease term to the lessee or to a third-party or from post-term events.
for leased equipment. We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas in the near futureand roles whenever we can find both experienced personnel and desirable geographic areas. These investmentsareas over the longer term, which may reduceimpact our results from operations in the short term.operating results.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that alternative accounting policies would have been applied, resulting in a change in financial results. On an ongoing basis, we reevaluate our estimates, including those related to revenue recognition, residual values, vendor incentives, lease classification, goodwill and intangibles, reserves for credit losses and income taxes specifically relating to uncertain tax positions. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For all such estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates may require adjustment.
Our critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 annual Report.
SEGMENT RESULTS OF OPERATIONS
The three and nine months ended December 31, 20172023, compared to the three and nine months ended December 31, 20162022
Technology SegmentTECHNOLOGY BUSINESS SEGMENTS
The results of operations for our technology business segments were as follows (in thousands):
| | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Financial Metrics | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | |
Product | | $ | 419,478 | | | $ | 544,316 | | | $ | 1,418,581 | | | $ | 1,336,309 | |
Professional services | | | 40,044 | | | | 39,151 | | | | 113,870 | | | | 114,369 | |
Managed services | | | 34,640 | | | | 28,307 | | | | 99,335 | | | | 81,359 | |
Total | | $ | 494,162 | | | $ | 611,774 | | | $ | 1,631,786 | | | $ | 1,532,037 | |
| | | | | | | | | | | | | | | | |
Gross Profit | | | | | | | | | | | | | | | | |
Product | | | 91,919 | | | | 104,485 | | | | 308,059 | | | | 282,042 | |
Professional services | | | 17,332 | | | | 15,294 | | | | 47,852 | | | | 45,046 | |
Managed services | | | 11,015 | | | | 8,075 | | | | 31,006 | | | | 22,692 | |
Total | | | 120,266 | | | | 127,854 | | | | 386,917 | | | | 349,780 | |
| | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 86,001 | | | | 81,874 | | | | 261,694 | | | | 235,147 | |
Depreciation and amortization | | | 5,381 | | | | 3,582 | | | | 15,747 | | | | 10,304 | |
Interest and financing costs | | | 217 | | | | 1,308 | | | | 1,428 | | | | 2,117 | |
Operating expenses | | | 91,599 | | | | 86,764 | | | | 278,869 | | | | 247,568 | |
| | | | | | | | | | | | | | | | |
Operating income | | $ | 28,667 | | | $ | 41,090 | | | $ | 108,048 | | | $ | 102,212 | |
| | | | | | | | | | | | | | | | |
Key Metrics & Other Information | | | | | | | | | | | | | | | | |
Gross billings | | $ | 796,986 | | | $ | 898,843 | | | $ | 2,495,451 | | | $ | 2,412,803 | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 36,725 | | | $ | 47,869 | | | $ | 132,170 | | | $ | 120,135 | |
| | | | | | | | | | | | | | | | |
Product margin | | | 21.9 | % | | | 19.2 | % | | | 21.7 | % | | | 21.1 | % |
Professional service margin | | | 43.3 | % | | | 39.1 | % | | | 42.0 | % | | | 39.4 | % |
Managed service margin | | | 31.8 | % | | | 28.5 | % | | | 31.2 | % | | | 27.9 | % |
| | | | | | | | | | | | | | | | |
Net sales by customer end market: | | | | | | | | | | | | | | | | |
Telecom, media & entertainment | | $ | 139,551 | | | $ | 184,539 | | | $ | 405,192 | | | $ | 431,269 | |
Technology | | | 83,951 | | | | 133,067 | | | | 268,302 | | | | 299,088 | |
SLED | | | 60,108 | | | | 72,730 | | | | 264,419 | | | | 207,823 | |
Healthcare | | | 55,504 | | | | 69,825 | | | | 214,182 | | | | 205,297 | |
Financial services | | | 38,816 | | | | 48,008 | | | | 174,391 | | | | 118,917 | |
All others | | | 116,232 | | | | 103,605 | | | | 305,300 | | | | 269,643 | |
Total | | $ | 494,162 | | | $ | 611,774 | | | $ | 1,631,786 | | | $ | 1,532,037 | |
| | | | | | | | | | | | | | | | |
Net sales by type: | | | | | | | | | | | | | | | | |
Networking | | $ | 209,936 | | | $ | 275,774 | | | $ | 723,760 | | | $ | 584,311 | |
Cloud | | | 120,253 | | | | 157,126 | | | | 427,365 | | | | 470,851 | |
Security | | | 58,822 | | | | 77,111 | | | | 156,504 | | | | 173,623 | |
Collaboration | | | 13,608 | | | | 13,405 | | | | 53,647 | | | | 45,572 | |
Other | | | 16,859 | | | | 20,900 | | | | 57,305 | | | | 61,952 | |
Total products | | | 419,478 | | | | 544,316 | | | | 1,418,581 | | | | 1,336,309 | |
| | | | | | | | | | | | | | | | |
Professional services | | | 40,044 | | | | 39,151 | | | | 113,870 | | | | 114,369 | |
Managed services | | | 34,640 | | | | 28,307 | | | | 99,335 | | | | 81,359 | |
Total | | $ | 494,162 | | | $ | 611,774 | | | $ | 1,631,786 | | | $ | 1,532,037 | |
Net sales: Net sales of the combined technology business segments for the three months ended December 31, 2023, decreased compared to the three months ended December 31, 2022, driven by decreased volume from customers across all our significant customer end markets.
Net sales of the combined technology business segments for the nine months ended December 31, 2023, increased compared to the nine months ended December 31, 2022, driven by demand from customers in SLED, financial services, and healthcare industries, offset by decreased volume with customers in telecom, media, and entertainment, and technology industries.
Product segment sales for the three months ended December 31, 2023, decreased compared to the same three-month period in the prior year due to lower sales of networking equipment, 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. Offsetting these decreases was the addition of product sales to customers from the NSG acquisition, which contributed $15.5 million.
Product segment sales for the nine months ended December 31, 2023, increased compared to the same nine-month period in the prior year 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 during this nine-month period was due to the addition of product sales to customers from the NSG acquisition, which contributed $75.0 million.
Professional services segment sales for the three months ended December 31, 2023, increased compared to the three months ended December 31, 2022, due to higher project related services of $3.8 million, offset by a decrease in staff augmentation and consulting revenues of $2.7 million and $0.2 million, respectively, primarily driven by the closure of projects with existing customers.
Professional services segment sales for the nine months ended December 31, 2023, decreased compared to the nine months ended December 31, 2022, due to a decrease in staff augmentation and consulting revenues of $7.1 million and $0.1 million, respectively, primarily driven by the decline in customer demand for these services. Offsetting this decline was higher project related services of $7.1 million, primarily driven by the addition of professional services sales to customers from our NSG acquisition.
Managed services segment sales for the three and nine months ended December 31, 20172023, increased compared to the three and 2016nine months ended December 31, 2022, due to ongoing expansion of these service offerings during both periods 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 three months ended December 31, 2023, decreased compared to the three months ended December 31, 2022, due mainly to the decrease in product segment sales, offset by increases in managed service, and professional service sales. Gross profit margin increased by 340 basis points to 24.3% during this three-month period due to higher product, managed service, and professional service margin.
Gross profit of the combined technology business segments for the nine months ended December 31, 2023, increased compared to the nine months ended December 31, 2022, due to the increase in product and managed service sales, offset by a slight decline in professional service sales. Gross profit margin increased by 90 basis points to 23.7% during this nine-month period due to higher product, managed service, and professional service margin.
Product segment margin for the three months ended December 31, 2023, increased by 270 basis points from the same three-month period in the prior year due to a shift in product mix as we sold a higher proportion of third-party maintenance and services in the third quarter of 2024, and an increase in vendor incentives.
Product segment margin for the nine months ended December 31, 2023, increased by 60 basis points from the same nine-month period in the prior year due to improvements to up front margins and an increase in vendor incentives, offset by 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.
Professional services segment margin for the three and nine months ended December 31, 2023, increased by 420 and 260 basis points, respectively, from the same three- and nine-month period in the prior year primarily due to a shift in mix toward higher margin project-based services, offset by lower staff augmentation services.
Managed services segment margin for the three and nine months ended December 31, 2023, increased by 330 basis points, from the same three- and nine-month period in the prior year primarily due to improved margin within our service desk line of business.
Selling, general, and administrative: Selling, general, and administrative expenses for the three and nine months ended December 31, 2023, for the technology business, increased compared to the three and nine months ended December 31, 2022, mainly due to increases in salaries and benefits.
Salaries and benefits for the three months ended December 31, 2023, increased $3.4 million, or 4.8% to $73.9 million, as compared to $70.5 million for the same three-month period in the prior year, due to an increase of $3.4 million in salaries and benefits, mainly driven by increased headcount and salary increases. Our technology business had an aggregate of 1,863 employees as of December 31, 2023, an increase of 154 from 1,709 as of December 31, 2022. We added 83 employees from our acquisition of NSG. In total, we added 134 additional customer-facing employees for the three months ended December 31, 2023, compared to the same three-month period in the prior year, of which 60 were professional services and technical support personnel due to demand for our services.
Salaries and benefits for the nine months ended December 31, 2023, increased $23.4 million, or 11.8% to $221.9 million, as compared to $198.5 million for the same nine-month period in the prior year, due to an increase of $18.7 million in salaries and benefits, mainly driven by increased headcount and salary increases, and an increase of $4.7 million in variable compensation because of the increase in gross profit.
General and administrative expenses for the technology business for the three months ended December 31, 2023, increased $1.1 million, or 9.9%, to $12.1 million, as compared to $11.0 million for the same three-month period in the prior year, driven by higher software, subscription and maintenance fees of $0.4 million, and higher consulting fees of $0.4 million.
General and administrative expenses for our technology business for the nine months ended December 31, 2023, increased $4.0 million, or 11.4%, to $39.3 million, as compared to $35.3 million for the same nine-month period in the prior year. General and administrative expenses increased due to higher travel and entertainment costs of $1.0 million due to the return of in-person business meetings and events, higher software, subscription and maintenance fees of $0.9 million, higher consulting fees of $0.8 million, higher advertising and marketing fees of $0.7 million, and higher facility rent of $0.6 million due to the opening of our new Customer Innovation Center.
Provision for credit losses for our technology business for the three months ended December 31, 2022, was $0.3 million. There were no provision for credit losses in December 31, 2023. Our lower provision for credit losses for the three months ended December 31, 2023, was due to changes in our net credit exposure.
Provision for credit losses for our technology business for the nine months ended December 31, 2023, was $0.4 million, as compared to $1.3 million for the same nine-month period in the prior year. Our lower provision for credit losses for the nine months ended December 31, 2023, was due to changes in our net credit exposure.
Depreciation and amortization: Depreciation and amortization of our technology business for the three and nine months ended December 31, 2023, increased compared to the three and nine months ended December 31, 2022, primarily due to more amortization from intangible assets acquired in the NSG and Future Com acquisitions.
Interest and financing costs: Interest and financing costs of our technology business for the three months ended December 31, 2023, decreased by 83.4% to $0.2 million compared to $1.3 million for the three months ended December 31, 2022, primarily due to lower average borrowings under our WFCDF Credit Facility. Interest and financing costs of our technology business for the nine months ended December 31, 2023, decreased by 32.5% to $1.4 million compared to $2.1 million for the nine months ended December 31, 2022, due to lower average borrowings outstanding under our WFCDF Credit Facility.
FINANCING BUSINESS SEGMENT
The results of operations for our financing business segment were as follows (dollars in(in thousands):
| | Three Months Ended December 31, | | | | | | | | | Nine Months Ended December 31, | | | | | | | | | Three Months Ended December 31, | | | Nine Months Ended December 31, | |
| | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Sales of product and services | | $ | 330,953 | | | $ | 317,391 | | | $ | 13,562 | | | | 4.3 | % | | $ | 1,045,792 | | | $ | 968,799 | | | $ | 76,993 | | | | 7.9 | % | |
Fee and other income | | | 1,678 | | | | 915 | | | | 763 | | | | 83.4 | % | | | 3,707 | | | | 3,679 | | | | 28 | | | | 0.8 | % | |
Financial metrics | | | | | | | | | | | | | |
Portfolio earnings | | | $ | 3,701 | | | $ | 2,391 | | | $ | 10,113 | | | $ | 7,952 | |
Transactional gains | | | 8,107 | | | 5,181 | | | 16,335 | | | 15,125 | |
Post-contract earnings | | | 2,685 | | | 4,036 | | | 11,357 | | | 19,281 | |
Other | | | | 400 | | | | 94 | | | | 1,250 | | | | 1,146 | |
Net sales | | | 332,631 | | | | 318,306 | | | | 14,325 | | | | 4.5 | % | | | 1,049,499 | | | | 972,478 | | | | 77,021 | | | | 7.9 | % | | $ | 14,893 | | | $ | 11,702 | | | $ | 39,055 | | | $ | 43,504 | |
Cost of sales, product and services | | | 264,487 | | | | 251,729 | | | | 12,758 | | | | 5.1 | % | | | 834,873 | | | | 769,780 | | | | 65,093 | | | | 8.5 | % | |
| | | | | | | | | | | | | |
Gross profit | | | 68,144 | | | | 66,577 | | | | 1,567 | | | | 2.4 | % | | | 214,626 | | | | 202,698 | | | | 11,928 | | | | 5.9 | % | | 13,544 | | | 10,518 | | | 33,531 | | | 35,419 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative expenses | | | 53,836 | | | | 47,780 | | | | 6,056 | | | | 12.7 | % | | | 158,838 | | | | 141,295 | | | | 17,543 | | | | 12.4 | % | |
Selling, general, and adminstrative | | | 3,380 | | | 4,856 | | | 10,637 | | | 13,054 | |
Depreciation and amortization | | | 2,893 | | | | 1,908 | | | | 985 | | | | 51.6 | % | | | 7,084 | | | | 5,400 | | | | 1,684 | | | | 31.2 | % | | 18 | | | 27 | | | 74 | | | 83 | |
Interest and financing costs | | | | 766 | | | | 267 | | | | 1,626 | | | | 746 | |
Operating expenses | | | 56,729 | | | | 49,688 | | | | 7,041 | | | | 14.2 | % | | | 165,922 | | | | 146,695 | | | | 19,227 | | | | 13.1 | % | | 4,164 | | | 5,150 | | | 12,337 | | | 13,883 | |
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Operating income | | $ | 11,415 | | | $ | 16,889 | | | $ | (5,474 | ) | | | (32.4 | %) | | $ | 48,704 | | | $ | 56,003 | | | $ | (7,299 | ) | | | (13.0 | %) | | $ | 9,380 | | | $ | 5,368 | | | $ | 21,194 | | | $ | 21,536 | |
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Key business metrics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted gross billings of product and services | | $ | 464,105 | | | $ | 432,407 | | | $ | 31,698 | | | | 7.3 | % | | $ | 1,449,371 | | | $ | 1,317,188 | | | $ | 132,183 | | | | 10.0 | % | |
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Key metrics & other information | | | | | | | | | | |
Adjusted EBITDA | | $ | 14,308 | | | $ | 18,797 | | | $ | (4,489 | ) | | | (23.9 | %) | | $ | 55,788 | | | $ | 61,403 | | | $ | (5,615 | ) | | | (9.1 | %) | | $ | 9,464 | | | $ | 5,456 | | | $ | 21,466 | | | $ | 21,798 | |
Net sales: Net sales for the three months ended December 31, 2017 were $332.6 million2023, increased due to higher portfolio earnings and transactional gains offset by lower post-contract earnings. Portfolio earnings increased compared to $318.3 million during the three months ended December 31, 2016, an increase of 4.5%, or $14.3 million. For the nine months ended December 31, 2017, net sales were $1,049.5 million compared to $972.5 million during the same period in the prior year an increase of 7.9%, or $77.0 million.
Adjusted gross billings of product and services for the three months ended December 31, 2017 were $464.1 million compared to $432.4 million during the three months ended December 31, 2016, an increase of 7.3%, or $31.7 million. Sales of product and services for the three months ended December 31, 2017 were $331.0 million compared to $317.4 million during the same period in the prior year, an increase of 4.3%, or $13.6 million.
The increase in net sales of product and services during the three months ended December 31, 2017 was also due, in part, to an increase in demand for products and services from customers in the technology, financial services and healthcare industries, partially offset by reductions in sales to state and local government and educational customers (“SLED”), technology, and telecom, media and entertainment customers, and other industries.
For the nine months ended December 31, 2017, adjusted gross billings of product and services were $1,449.4 million compared to $1,317.2 million during the nine months ended December 31, 2016, an increase of 10.0%, or $132.2 million. For the nine months ended December 31, 2017, sales of product and services were $1,045.8 million compared to $968.8 million during the same period in the prior year, an increase of 7.9%, or $77.0 million. The increase in net sales of product and services during the nine month period wasmainly due to an increase in demand for products and services from customers in the financial services industries, technology, and health care industries, which include sales relating to several large projects for large customers.
Summarized below are the sequential and year-over-year changes in net sales of product and services:
Quarter Ended | | Sequential | | | Year over Year | |
December 31, 2017 | | | (7.5 | %) | | | 4.3 | % |
September 30, 2017 | | | 0.2 | % | | | (1.0 | %) |
June 30, 2017 | | | 11.1 | % | | | 23.1 | % |
March 31, 2017 | | | 1.3 | % | | | 10.3 | % |
December 31, 2016 | | | (12.1 | %) | | | 10.3 | % |
We rely on our vendors to fulfill a large majority of shipments to our customers. As of December 31, 2017, we had open orders of $170.0 million and deferred revenue of $59.6 million. As of December 31, 2016, we had open orders of $238.5 million and deferred revenues of $66.3 million.
We analyze sales of products and services by customer end market and by manufacturer, as opposed to discrete product and service categories. The percentage of sales of product and services by industry and vendor are summarized below:
| | Twelve Months Ended December 31, | | | | |
| | 2017 | | | 2016 | | | Change | |
Revenue by customer end market: | | | | | | | | | |
Technology | | | 25 | % | | | 22 | % | | | 3 | % |
SLED | | | 17 | % | | | 21 | % | | | (4 | %) |
Telecom, Media & Entertainment | | | 14 | % | | | 16 | % | | | (2 | %) |
Financial Services | | | 16 | % | | | 12 | % | | | 4 | % |
Healthcare | | | 13 | % | | | 11 | % | | | 2 | % |
Other | | | 15 | % | | | 18 | % | | | (3 | %) |
Total | | | 100 | % | | | 100 | % | | | | |
| | | | | | | | | | | | |
Revenue by vendor: | | | | | | | | | | | | |
Cisco Systems | | | 44 | % | | | 49 | % | | | (5 | %) |
HP Inc. & HPE | | | 7 | % | | | 6 | % | | | 1 | % |
NetApp | | | 4 | % | | | 5 | % | | | (1 | %) |
Sub-total | | | 55 | % | | | 60 | % | | | (5 | %) |
Other | | | 45 | % | | | 40 | % | | | 5 | % |
Total | | | 100 | % | | | 100 | % | | | | |
Our revenues by customer end market have remained consistent with over 80% of our revenues generated from customers within the five end markets identified above. During the trailing twelve months ended December 31, 2017 we had an increase in the percentage total revenues from customers in the technology, financial services, and health care industries, which were partially offset by decreases in the percentage of total revenues from SLED compared to the prior year period. These changes were driven by changes in customer buying cycles and specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers.
The majority of our revenues by vendor are derived from Cisco Systems, a combined HP Inc. and HPE, and NetApp, which, collectively, declined to 55% for the twelve months ended December 31, 2017 from approximately 60% in the prior year trailing twelve month period, with the greatest decline in the proportional percentage of total revenues in Cisco product sales. The decrease in the percentage of revenues from the top three vendors is due in part to substantial competition and rapid developments in the IT industry. None of the vendors included within the “other” category exceeded 4% of total revenues.
Cost of sales, product and services: Cost of sales, product and services increased 5.1% for the three months ended December 31, 2017 as compared to the prior year period, due to the 4.3% increase in sales of product and services. For the nine months ended December 31, 2017, cost of sales, product and services increased 8.5% due to the increase in sales of product and services. Our gross margin on the sales of product and services decreased 60 basis points to 20.1% for the three months ended December 31, 2017, from 20.7% in the same period in the prior year.
For the nine months ended December 31, 2017, our gross margin on the sales of product and services decreased 30 basis points to 20.2%, from 20.5%, due to lower product margins from a large competitively bid project which partially shipped during the nine month periodhigher average investments outstanding as well as reduction in vendor incentives earned as a percentagehigher average earnings rate. Transactional gains increased due to a higher volume of financial assets sold during the quarter. Total proceeds from sales of product services. Vendor incentives earned as a percentage of sales of product services for the three monthsfinancing receivables were $422.1 million and the nine months ended December 31, 2017 decreased 50 and 30 basis points respectively, as compared to same periods in the prior year.
Selling, general, and administrative expenses: Selling, general, and administrative expenses were $53.8$157.2 million for the three months ended December 31, 2017, an increase2023, and 2022, respectively. Our proceeds from sales of $6.0 million, or 12.7% compared to $47.8 millionfinancing receivables for the three months ended December 31, 2023, are higher than the same period in the prior year due in part to a few large transactions in the current year period. SalariesPost-contract earnings decreased due to lower month-to-month rents.
Net sales for the nine months ended December 31, 2023, decreased due to lower post-contract earnings offset by higher portfolio earnings and benefitstransactional gains. Post-contract earnings decreased due to lower proceeds from sales of off-lease equipment, and lower month-to-month rents. Portfolio earnings increased $4.3 million, or 10.8% to $44.5 million, compared to $40.2 million duringthe same period in the prior year. Most of the increase wasyear mainly due to higher salariesaverage 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 $704.3 million and benefits expenses related to the increase in the number of employees from both acquisitions and internal growth.
Selling, general, and administrative expenses were $158.8$586.1 million for the nine months ended December 31, 2017, an increase2023, and 2022, respectively. Our proceeds from sales of $17.5 million, or 12.4% compared to $141.3 millionfinancing receivables for the prior year period. Salaries and benefits increased $12.8 million, or 10.8% to $130.6 million, compared to $117.8 million during the prior year. Approximately 20.8% of this increase was due to higher variable compensation due to the increase in gross profit, 18.6% of the increase was due to higher employee benefits, and the remaining increase was primarily due salary expense related to an increase in the number of employees. Our technology segment had 1,236 employees as of December 31, 2017, an increase of 123, or 11.1%, from 1,113 at December 31, 2016. The acquisitions of OneCloud and IDS accounted for 98 of the added positions. There were 107 positions added in the past year related to sales, marketing, and professional services personnel.
General and administrative expenses increased $1.5 million, or 23.9% to $7.9 million during the three months ended December 31, 2017 compared to $6.4 million the prior year, due to an adjustment of $0.7 million to the fair value of contingent consideration for acquisitions, higher advertising and marketing expense, and travel expenses, including travel expense related to acquisitions. For the nine months ended December 31, 2017, general and administrative expenses increased $3.9 million, or 20.3% to $23.3 million compared to $19.3 million2023, are higher than the same period in the prior year due in part to the incremental adjustment of $0.8 million to the fair value of contingent consideration for acquisitions, and higher travel expense, including travel expense related to acquisitions. Professional and other fees increased $0.9 million, or 20.7% to $5.0 million primarily due to legal fees related to the IDS and OneCloud acquisitions.
Depreciation and amortization expense increased $1.0 million, or 51.6% to $2.9 million during the three months ended December 31, 2017 compared to $1.9 milliona few large transactions in the prior year. For the nine months ended December 31, 2017, depreciation and amortization expense increased $1.7 million, or 31.2% to $7.1 million compared to $5.4 million in the prior year. The increase in depreciation and amortization expense is related to the acquisitions of Consolidated IT Services in December 2016, OneCloud in May 2017, and IDS in September 2017.current year period.
Segment operating income: As a result of the foregoing, operating income was $11.4 million, a decrease of $5.5 million, or 32.4%Gross Profit: Gross profit for the three months ended December 31, 20172023, increased compared to $16.9 million in the prior year period. For the three months ended December 31, 2017, Adjusted EBITDA was $14.3 million, a decrease of $4.5 million, or 23.9% compared2022, due to $18.8 millionan increase in the prior year period. For the nine months ended December 31, 2017, operating income was $48.7 million, a decrease of $7.3 million, or 13.0% compared to $56.0 million in the prior year period. Adjusted EBITDAtransaction gains. Gross profit for the nine months ended December 31, 2017, was $55.8 million,2023, decreased compared to the nine months ended December 31, 2022, due to a decrease of $5.6 million, or 9.1%in revenue, primarily month-to-month rents.
Selling, general and administrative:Selling, general, and administrative expenses for the three months ended December 31, 2023, decreased compared to $61.4 millionthe three months ended December 31, 2022, due to a decrease in provision for credit losses, and a decrease in other professional fees. Selling, general, and administrative expenses for the nine months ended December 31, 2023, decreased compared to the nine months ended December 31, 2022, due to a decrease in variable compensation due to the decline in gross profit. Also contributing to the decrease is a decline in provision for credit losses as we incurred increased expense in the prior year period.nine-month period due to higher investment exposure.
Financing Segment
The results of operations for ourInterest and financing segmentcosts: Interest and financing costs for the three and nine months ended December 31, 2017 and 2016 were as follows (dollars in thousands):
| | Three Months Ended December 31, | | | | | | | | | Nine Months Ended December 31, | | | | | | | |
| | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Financing revenue | | $ | 9,592 | | | $ | 8,190 | | | $ | 1,402 | | | | 17.1 | % | | $ | 30,698 | | | $ | 23,899 | | | $ | 6,799 | | | | 28.4 | % |
Fee and other income | | | 346 | | | | 161 | | | | 185 | | | | 114.9 | % | | | 374 | | | | 245 | | | | 129 | | | | 52.7 | % |
Net sales | | | 9,938 | | | | 8,351 | | | | 1,587 | | | | 19.0 | % | | | 31,072 | | | | 24,144 | | | | 6,928 | | | | 28.7 | % |
Direct lease costs | | | 1,394 | | | | 1,142 | | | | 252 | | | | 22.1 | % | | | 3,846 | | | | 3,459 | | | | 387 | | | | 11.2 | % |
Gross profit | | | 8,544 | | | | 7,209 | | | | 1,335 | | | | 18.5 | % | | | 27,226 | | | | 20,685 | | | | 6,541 | | | | 31.6 | % |
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Selling, general, and administrative expenses | | | 3,298 | | | | 2,380 | | | | 918 | | | | 38.6 | % | | | 9,300 | | | | 8,526 | | | | 774 | | | | 9.1 | % |
Depreciation and amortization | | | 1 | | | | 2 | | | | (1 | ) | | | (50.0 | %) | | | 2 | | | | 8 | | | | (6 | ) | | | (75.0 | %) |
Interest and financing costs | | | 270 | | | | 409 | | | | (139 | ) | | | (34.0 | %) | | | 903 | | | | 1,158 | | | | (255 | ) | | | (22.0 | %) |
Operating expenses | | | 3,569 | | | | 2,791 | | | | 778 | | | | 27.9 | % | | | 10,205 | | | | 9,692 | | | | 513 | | | | 5.3 | % |
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Operating income | | $ | 4,975 | | | $ | 4,418 | | | $ | 557 | | | | 12.6 | % | | $ | 17,021 | | | $ | 10,993 | | | $ | 6,028 | | | | 54.8 | % |
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Key business metrics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 4,976 | | | $ | 4,420 | | | $ | 556 | | | | 12.6 | % | | $ | 17,023 | | | $ | 11,001 | | | $ | 6,022 | | | | 54.7 | % |
Net sales: Net sales2023, increased by $1.6 million, or 19.0% to $9.9 million for the three months ended December 31, 2017, as compared to $8.4 million prior year results due to higher post-contract earnings and other financing revenues. During the quarters ended December 31, 2017 and 2016, we recognized net gains on sales of financial assets of $1.2 million and $0.9 million, respectively, and the fair value of assets received from these sales were $32.8 million and $55.8 million, respectively. Post contract earnings increased $1.4 million due to the gain on sale of equipmentn associated with early lease terminations, and other financing revenues decreased $0.3 million mainly due to earnings on consumption based financing arrangements.
For the nine months ended December 31, 2017, net sales increased by $6.9 million, or 28.7% to $31.1 million as compared to $24.1 million prior year results due to higher transactional gains and other financing revenues. During the nine months ended December 31, 2017 and 2016, we recognized net gains on sales of financial assets of $4.6 million and $4.1 million, respectively, and the fair value of assets received from these sales were $166.9 million and $185.4 million, respectively. Post contract earnings increased $4.9 million due to the gain on sale of equipment associated with early lease terminations, and other financing revenues increased $1.0 million mainly due to earnings on consumption based financing arrangements.
At December 31, 2017, we had $147.2 million in financing receivables and operating leases, compared to $140.4 million as of December 31, 2016, an increase of $6.8 million or 4.8%.
Gross Profit: Gross profit increased by $1.3 million, or 18.5% to $8.5 million for the three months ended December 31, 2017, compared to the same period in the prior year. For the nine months ended December 31, 2017, gross profit increased $6.5 million, or 31.6% to $27.2 million compared to the same period of the prior year, as a result of higher revenues. Direct lease costs increased $0.3 million and $0.4 million for the three and nine months ended December 31, 2017, respectively, which primarily consists of depreciation expense from operating leases.
Selling, general, and administrative expenses: For the three months ended December 31, 2017 selling, general, and administrative expenses increased by $0.9 million or 38.6%, which was due primarily to an increase in our salaries and benefits expense of $0.7 million resulting from an increase in variable compensation related to the increase in gross profit. Selling, general, and administrative expenses increased by $0.8 million or 9.1%,2022, due to an increase in our salaries and benefits expense of $1.1 million resulting from an increase in variable compensation related to the increase in gross profit, partially offset by lower professional fees and credit loss expenses for the nine months ended December 31, 2017. Our financing segment had 48 employees ashigher interest rates. As of December 31, 2017, compared to 51 employees as of December 31, 2016.
Interest and financing costs decreased $0.1 million to $0.3 million for the three months ended December 31, 2017, compared to the prior year, due to a decrease in the average total2023, our non-recourse notes payable outstanding compareddecreased to the three months ended December 31, 2017. For the nine months ended December 31, 2017, interest and financing costs decreased by $0.3$48.4 million to $0.9 million, or 22.0%. Total notes payable were $31.5from $48.5 million as of December 31, 2017, a decrease of $22.5 million or 41.7% compared to $54.0 million as of December 31, 2016.2022. Our weighted average interest rate for non-recourse notes payable was 3.73%6.64% and 3.38%,5.05% as of December 31, 20172023, and 2022, respectively.
CONSOLIDATED
Other income, net: Other income, net, for both the three and nine months ended December 31, 2023, was a benefit of $0.4 million and $0.7 million, respectively, compared to a benefit of $2.9 million and a net expense of $3.1 million, for the three and nine months ended December 31, 2016,2022, respectively.
Segment operating income: As a result of the foregoing, both operating income and Adjusted EBITDA increased $0.6 million or 12.6% to $5.0 million for both For the three months ended December 31, 20172023, the lower benefit was driven by decreased net foreign exchange gains and 2016.$1.9 million we received related to our claim in a class action lawsuit in the prior three-month period. For the nine months ended December 31, 2017, operating2023, the higher net gain was driven by increased interest income and Adjusted EBITDA each increased $6.0 million or 54.8% and 54.7%decreased foreign exchange losses offset slightly by the gain related to $17.0 million, respectively.our claim in a class action lawsuit in the prior nine-month period.
Consolidated
Other income: OtherProvision for income and expense during the three months ended December 31, 2017 was a net expense of $0.1 million, which consists of interest income on cash and cash equivalents, more than offset by foreign currency transaction losses.
Income taxes:taxes: Our provision for income tax expense was $0.7 million and $19.5 million for the three and nine months ended December 31 2017,, 2023, was $11.1 million and $36.1 million, respectively, as compared to $8.7$13.7 million and $27.3$34.1 million for the same three-and nine-month periods in the prior year.year, respectively. Our effective income tax raterates for the three and nine months ended December 31 2017 was 4.2%, 2023, were 29.0% and 29.7%27.8%, respectively, compared to 40.8%27.7% and 40.5%28.3% for the three and nine months ended December 31 2016. The favorable change in our, 2022, respectively. Our effective income tax rate was due primarily to a tax benefit of $3.4 million from the re-measurement of deferred tax assets and liabilities due to the change in the U.S. statutory ratehigher for the three and nine months ended December 31 2017, and, 2023, as compared to the same three-month period in the prior year, primarily due to an unfavorable return to provision adjustment in the three months ended December 31, 2023, compared to a favorable return to provision adjustment in same three-month period in the prior year. Our effective tax benefit of $1.6 million on the vesting of restricted stock inrate was lower for the nine months ended December 31, 2023, as compared to the same nine-month period in the prior year, primarily due to lower state effective tax rates and less non-deductible executive compensation in the current period.
Net earnings: Net earnings for the three months ended December 31, 2017,2023, were $27.3 million, a decrease of 23.6% or $8.4 million, as compared to a tax benefit of $0.5$35.7 million in the same three-month period in the prior year, mainly due to a decrease in operating profits from our technology business offset by an increase in operating profits within our financing business segment. In addition, we had a decrease in other income, net driven by higher foreign exchange gains and other income in the prior three-month period. These decreases were offset by lower income taxes. Net earnings for the nine months ended December 31, 2016.
Net earnings: The foregoing resulted in net earnings of $15.62023, were $93.8 million, and $46.2 million for the three and nine months ended December 31, 2017, an increase of 23.5% and 15.4%,8.4% or $7.3 million, as compared to $12.6$86.5 million in the same nine-month period in the prior year, mainly due to the increase in operating profits from our technology business, and $40.1 million during the threean increase in other income, net driven by less foreign exchange losses. These increases were offset by higher income taxes.
Basic earnings per common share and nine months ended December 31, 2016, respectively.
Basic and fully diluted earnings per common share were $1.12 and $1.11both $1.02 for the three months ended December 31, 2017, an increase2023, a decrease of 21.7% and 22.0%23.9%, as compared to $0.92 and $0.91, respectively,$1.34 for the three months ended December 31, 2016. For the nine months ended December 31, 2017,both our basic and fully diluted earnings per common share were $3.34 and $3.30, an increase of 16.0% and 15.4% as compared to $2.88 and $2.86, respectively, for the same period in the prior year.
Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ended December 31, 2017 was 13.9 million and 14.0 million, respectively. Weighted average2022. Basic earnings per common shares outstanding used in the calculation of the basicshare and diluted earnings per common share were $3.53 and $3.52, respectively, for the threenine months ended December 31, 2016 was 13.8 million2023, an increase of 8.3% and 13.9 million, respectively.8.6%, respectively, as compared to $3.26 and $3.24 for our basic earnings per common share and diluted earnings per common share, respectively, for the nine months ended December 31, 2022.
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 ninethree months ended December 31, 2017 was 13.8 million and 14.0 million, respectively.2023. Weighted average common shares outstanding used in the calculation of basic earnings per common share and diluted earnings per common share were both 26.6 million for the three months ended December 31, 2022. Weighted average common shares outstanding used in the calculation of basic earnings per common share and diluted earnings per common share for the nine months ended December 31, 2016 was 13.92023, and 2022, were 26.6 million and 14.026.7 million respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity OverviewLIQUIDITY OVERVIEW
Our primary sources of liquidity have historically been cash and cash equivalents, internallyWe finance our operations through funds generated funds from operations and borrowings, both non-recourse and recourse.through borrowings. We have useduse those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock.
Our subsidiary ePlus Technology, inc., part of our technology segment, finances its operations with funds generated from operations, and with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). ePlus Technology, inc.’s agreement with WFCDF has an aggregate credit limit of $250 million as of December 31, 2017.
On July 27, 2017, we executed an amendment to the WFCDF credit facility which temporarily increases the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017, and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election or October 31 of that same year.
There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component. After a customer places a purchase order with us and we have completed our credit check, we place an order for the equipment with one of our vendors. Generally, most purchase orders from us to our vendors are first financed under the floor plan component and reflected in “accounts payable—floor plan” in our consolidated balance sheets. Payments on the floor plan component are due on three specified dates each month, generally 30-60 days from the invoice date. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no outstanding balance at December 31, 2017or March 31, 2017, while the maximum credit limit was $30.0 million for both periods. The borrowings and repayments under the floor plan component are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows.
Most customer payments in our technology business segments are through our WFCDF Credit Facility. Our borrowings in our financing business segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically transferred to our operating account on a daily basis. On the due datesprimarily through secured borrowings that involve transferring all or part of the floor plan component, we make cashcontractual payments due to WFCDF. These payments from the accounts receivable componentus to the floor plan component and repayments from our cash are reflected as “net borrowings on floor plan facility” in the cash flows fromthird-party financing activities section of our consolidated statements of cash flows. We engage in this payment structure in order to minimize our interest expense and bank fees in connection with financing the operations of our technology segment.institutions.
We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be sufficientenough to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months.year.
Our ability to continue to fund our planned growth,expand, both internallyorganically and externally,through acquisitions, is dependent upon our ability to generate sufficientenough cash flow from operations or to obtain additional funds through equityfrom borrowing or debt financing, or from other sources of financing as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, or if our supply of products is delayed or interrupted, our cash flows from operations may be substantially affected.
Cash Flows
The following table summarizes our sources and uses of cash overfor the periods indicatednine months ended December 31, 2023, and 2022 (in thousands):
| | Nine Months Ended December 31, | |
| | 2017 | | | 2016 | |
Net cash provided by operating activities | | $ | 48,824 | | | $ | 29,702 | |
Net cash used in investing activities | | | (54,793 | ) | | | (47,040 | ) |
Net cash used in financing activities | | | (27,758 | ) | | | (8,205 | ) |
Effect of exchange rate changes on cash | | | 72 | | | | 454 | |
| | | | | | | | |
Net decrease in cash and cash equivalents | | $ | (33,655 | ) | | $ | (25,089 | ) |
| | Nine Months Ended December 31, | |
| | 2023 | | | 2022 | |
Net cash provided by (used in) operating activities | | $ | 143,492 | | | $ | (147,038 | ) |
Net cash used in investing activities | | | (55,838 | ) | | | (15,624 | ) |
Net cash (used in) provided by financing activities | | | (48,651 | ) | | | 103,555 | |
Effect of exchange rate changes on cash | | | 74 | | | | 3,124 | |
Net increase (decrease) in cash and cash equivalents | | $ | 39,077 | | | $ | (55,983 | ) |
Cash flows from operating activities. Cash: We had cash provided by operating activities totaled $48.8 of $143.5 million during the nine months ended December 31, 2017. Net earnings adjusted for the impact of non-cash items was $46.1million. Net changes2023, compared to cash used in assets and liabilities resulted in a increase of cash and cash equivalents of $2.7 million, primarily due to net reductions in inventories of $43.3 million and increased in accounts payable of $18.4 million, mostly offset by additions to deferred costs, other intangible assets and other assets of $26.2 financing receivables of $13.0, accounts receivables of $10.3 million, and salaries and commissions payable and deferred revenues and other liabilities of $9.5 million.
Cash provided by operating activities totaled $29.7 of $147.0 million duringfor the nine months ended December 31, 2016. Net earnings adjusted2022. See below for a breakdown of operating cash flows by business (in thousands):
| | Nine Months Ended December 31, | |
| | 2023 | | | 2022 | |
Technology business segments | | $ | 150,030 | | | $ | (115,811 | ) |
Financing business segment | | | (6,538 | ) | | | (31,227 | ) |
Net cash provided by (used in) operating activities | | $ | 143,492 | | | $ | (147,038 | ) |
Technology business: For the impactnine months ended December 31, 2023, our combined technology business segments had cash provided by operating activities of non-cash items was $45.0 million. Net changes in assets and liabilities resulted in a decrease of cash and cash equivalents of $15.3$150.0 million primarily due to net additions to accounts receivables of $62.0 million, inventories of $77.4 million, partially offset by increasedearnings and increases in accounts payable of $53.2 million,– trade and salaries and commissions payable, deferred revenuesoffset by increases in our accounts receivable.
For the nine months ended December 31, 2022, our combined technology business segments used $115.8 million from operating activities primarily due to increases in our accounts receivable and other liabilities of $51.2 million.inventories, partially offset by net earnings.
In order toTo manage our working capital, we monitor our cash conversion cycle for our Technology segment,technology business segments, 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:technology business segments:
| | As of December 31, | | |
| | 2017 | | | 2016 | | | As of December 31, | |
| | | | | | | | 2023 | | 2022 | |
(DSO) Days sales outstanding (1) | | | 52 | | | | 52 | | | 71 | | 62 | |
(DIO) Days inventory outstanding (2) | | | 12 | | | | 23 | | | 27 | | 30 | |
(DPO) Days payable outstanding (3) | | | (40 | ) | | | (48 | ) | | | (44 | ) | | | (41 | ) |
Cash conversion cycle | | | 24 | | | | 27 | | | | 54 | | | 51 | |
(1) | Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our Technology segmenttechnology business segments at the end of the period divided by Adjusted grossGross billings of product and services for the same three-month period. |
(2) | Represents the rolling three-month average of the balance of inventory, net for our Technology segmenttechnology business segments at the end of the period divided by Costthe direct cost of adjusted gross billings of productproducts and services billed to our customers for the same three-month period. |
(3) | Represents the rolling three-month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our Technology segmenttechnology business segments at the end of the period divided by Costthe direct cost of adjusted gross billings of productproducts and services billed to our customers for the same three-month period. |
Our cash conversion cycle decreasedincreased to 2454 days at as of December 31 2017,, 2023, as compared to 51 days as of December 31, 2022. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DSO increased 9 days to 71 days as of December 31, 2023, compared to 62 days as of December 31, 2022, reflecting higher sales to customers with terms greater than or equal to net 60 days. Our DIO decreased to 27 days atas of December 31, 2023, compared to 30 days as of December 31, 2022. Our DPO increased 3 days as of December 31, 2016,2023. Invoices processed through our WFCDF 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 30-60 days from the invoice date.
Financing business segment: For the nine months ended December 31, 2023, our financing business segment used $6.5 million from operating activities, primarily driven by a decrease in DPO of 8 days due to DPO timing of payments. The higher cash conversion cycle for December 31, 2016 was due mainly to a significantan increase in financing receivables, offset by net earnings and an increase in accounts payable-trade. For the nine months ended December 31, 2022, our inventoriesfinancing business segment used $31.2 million from operating activities, primarily due to large projects for several of our major customersincreases in the prior year’s quarter.financing receivables-net, offset by net earnings.
Cash flows related to investing activities. Cash used in investing activities was $54.8 million during: For the nine months ended December 31 2017. Cash, 2023, we used $55.8 million in investing activities, duringconsisting of $48.6 million for the nine months ended December 31, 2017 was primarily driven by acquisitionsacquisition of $37.7NSG, and $7.7 million net issuance and repayment of financing receivables of $79.1 million, purchases of assets to be leased or financed of $5.7 million, and purchases of property, equipment, software, and operating lease equipment of $6.3 million, which was partially offset by the sale of financing receivables of $64.1 million, and proceeds from sale of property, equipment and operating leases of $10.0 million.
Cash used in investing activities was $47.0 million during the nine months ended December 31, 2016. Cash used in investing activities during the nine months ended December 31, 2016 was primarily driven by issuance of financing receivables of $114.7 million, cash used in acquisitions of $9.5 million,for purchases of property, equipment and operating lease equipment, of $7.3 million, and purchases of assets to be leased or financed of $5.9 million, which was partially offset by cash proceeds from the repayment financing receivable$0.5 million of $44.1 million, the sale of financing receivables of $39.9 million, and proceeds from the sale of property, equipment, and operating lease equipment of $6.4 million.
Cash flows from financing activities. Cash used in financing activities was $27.8 million duringequipment. For the nine months ended December 31 2017, which was primarily due to, 2022, we used $15.6 million in investing activities, consisting of $13.3 million in cash used in acquiring Future Com and $5.7 million for purchases of property, equipment, and operating lease equipment, partially offset by $3.3 million of proceeds from the sale of property, equipment, and operating lease equipment.
Cash flows from financing activities: For the nine months ended December 31, 2023, we used $48.7 million in financing activities, consisting of $58.1 million in net repaymentrepayments onthe floor plan facilitycomponent of $24.9our WFCDF Credit Facility and $9.8 million cash used for theto repurchase outstanding shares of our common stock, partially offset by $16.2 million in net borrowings of non-recourse and recourse notes payable, and $3.0 million in proceeds of issuance of common stock to employees under an employee stock purchase plan. For the nine months ended December 31, 2022, cash provided by financing activities was $103.6 million, consisting of $13.4 million, and repayment of financing of acquisitions of $1.6 million, partially offset by net borrowings of non-recourse and recourse notes payable of $12.1$101.6 million,. Cash used in financing activities was $8.2 million during the nine months ended December 31, 2016, which was primarily due to $30.5 partially offset by $7.2 million in cash used for theto repurchase outstanding shares of our common stock and $9.2 million in net repaymentrepayments on the accounts payable floor plan facility.
Other than recourse borrowings under our WFCDF Credit Facility, our borrowing of $5.6 million, partially offset by to net borrowings ofrecourse and non-recourse and recourse notes payable of $28.6 million.
Non-Cash Activities
We assignprimarily arises from our financing business segment when we transfer contractual payments due to us under lease and financing agreements to third-party financial institutions, which are accountedinstitutions. When the transfers do not meet the requirements for asa sale, the proceeds paid to us represent borrowings of recourse or non-recourse notes payable. As a condition to the assignment agreement, certain financial institutions may request that the customer remit their
Non-cash activities: We transfer contractual payments to a trust; rather than to us, and the trust pays the financial institution. Alternatively, if the structure of the agreement does not require a trustee, the customer will continue to make payments to us, and we will remit the payment to the financial institution. The economic impactdue to us under eitherlease and financing agreements to third-party financial institutions. In certain assignment structure is similar, in that the assigned contractual payments are paid by the customer and remitted to the lender to pay down the corresponding non-recourse notes payable. However, these assignment structures are classified differently within our consolidated statements of cash flows. More specifically,agreements, we are required to exclude non-cash transactions from our consolidated statement of cash flows, so certain contractual payments made by the customer to the trust are excluded from our operating cash receipts and the corresponding repayment of the non-recourse notes payable from the trust tomay direct the third-party financial institution are excludedto pay some of the proceeds from our cash flows from financing activities. Contractual payments received by the trust and paidassignment directly to the lender on our behalf are disclosed as a non-cash financing activity.
Liquidity and Capital Resources
We may utilize non-recourse notes payable to finance approximately 80% to 100% of the purchase price ofvendor or vendors that have supplied the assets being leased or financed by our customers. Any balancefinanced. In these situations, the portion of the purchase price remaining afterproceeds paid directly to our vendors are non-cash transactions.
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 fundingnotes 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 any upfront payments received fromreleases 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, (our equity investment inis against the equipment) must generally be financed by cash flows from our operations,customer and the sale of thespecific equipment leased to third parties, or other internal means. Althoughunder 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 financing necessaryWFCDF Credit Facility has a floor plan facility and a revolving credit facility.
Please refer to supportNote 8 “Notes Payable and Credit Facility” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” for additional information concerning our leaseWFCDF Credit Facility.
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 has been provided byin our consolidated statements of cash and non-recourse borrowings. We monitor our exposure closely. We are able to obtain financing through our traditional lending sources which is primarily non-recourse borrowings from third party banks and finance companies. Non-recourse financings are loans whose repayment is the responsibility of a specific customer, although we may make representations and warranties to the lender regarding the specific contract or have ongoing loan servicing obligations. Under a non-recourse loan, we borrow from a lender an amount based on the present value of the contractually committed payments at a fixed rate of interest, and the lender secures a lien on the financed assets. When the lender is fully repaid, the lien is released and all further proceeds are ours. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk, and the lender’s only recourse, upon default, is against the customer and the specific equipment.flows.
At December 31, 2017, our non-recourse notes payable decreased 13.8% to $31.5 million, as compared to $36.5 million at March 31, 2017. Recourse notes payable was zero as of December 31, 2017 compared to $0.9 million as of March 31, 2017.
Whenever desirable, we arrange for equity investment financing, which includes selling lease payments, including the residual portions, to third parties and financing the equity investment on a non-recourse basis. We generally retain customer control and operational services, and have minimal residual risk. We usually reserve the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed-to return on its investment.
Credit Facility — Technology
Our subsidiary, ePlus Technology, inc., has a financing facility from WFCDF to finance its working capital requirements for inventories and accounts receivable. There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component. This facility has full recourse to ePlus Technology, inc. and is secured by a blanket lien against all its assets, such as chattel paper, receivables and inventory. As of December 31, 2017,2023, and March 31, 2023, we had a maximum credit limit, including the facility had an aggregate limit of the two components of $250.0 million with an accounts receivable sub-limit of $30.0 million.
On July 27, 2017, we executed an amendment to the WFCDFrevolving credit facility, which temporarily increased the aggregate limit of the two components from $250.0$500.0 million, to $325.0 million from the date of the agreement through October 31, 2017, and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election and October 31 of that same year.
Availability under the facility may be limited by the asset value of equipment we purchase or accounts receivable, and may be further limited by certain covenants and terms and conditions of the facility. These covenants include but are not limited to a minimum excess availability of the facility and minimum earnings before interest, taxes, depreciation and amortization of ePlus Technology, inc. We were in compliance with these covenants as of December 31, 2017. Interest on the facility is assessed at a rate of the One Month LIBOR plus two and one half percent if the payments are not made on the three specified dates each month. The facility requires that financial statements of ePlus Technology, inc. be provided within 45 days of each quarter and 90 days of each fiscal year end and also requires other operational reports be provided on a regular basis. Either party may terminate the facility with 90 days advance written notice.
We are not, and do not believe that we are reasonably likely to be, in breach of the WFCDF credit facility. In addition, we do not believe that the covenants of the WFCDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, ePlus Technology, inc. This credit facility is secured by the assets of only ePlus Technology, inc. and the guaranty as described below.
The facility provided by WFCDF requires a guaranty of $10.5 million by ePlus inc. The guaranty requires ePlus inc. to deliver its annual audited financial statements by a certain date. We have delivered the annual audited financial statements for the year ended March 31, 2017, as required. The loss of the WFCDF credit facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology segment and as an operational function of our accounts payable process.
Floor Plan Component
Purchases by ePlus Technology, inc. including computer technology products, software, maintenance and services, are in part financed through a floor plan component in which interest expense for the first thirty to ninety days, in general, is not charged. The floor plan liabilities are recorded as accounts payable—floor plan on our consolidated balance sheets, as they are normally repaid within the fifteen to ninety-day time frame and represent assigned accounts payable originally generated with the manufacturer/distributor. In some cases we are able to pay invoices early and receive a discount, but if the fifteen to ninety-day obligation is not paid timely, interest is then assessed at stated contractual rates.
The respective floor plan component credit limits and actual outstanding balance payables for the dates indicated were as follows (in thousands):
Maximum Credit Limit at December 31, 2017 | | | Balance as of December 31, 2017 | | | Maximum Credit Limit at March 31, 2017 | | | Balance as of March 31, 2017 | |
$ | 250,000 | | | $ | 107,761 | | | $ | 250,000 | | | $ | 132,612 | |
Accounts Receivable Component
Included within the credit facility, ePlus Technology, inc. has an accounts receivable component from WFCDF, which has a revolving line of credit. On the due date of the invoices financed byon the floor plan component,facility of $92.5 million and $134.6 million, respectively. On our balance sheet, our liability under the invoices are paid by thefloor plan facility is presented as part of accounts receivable component of thepayable – floor plan.
Revolving credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. facility: The outstanding balance under the accounts receivable componentrevolving credit facility is recordedpresented as part of recourse notes payablepayable- current on our consolidated balance sheets. There was no balance outstanding forOur borrowings and repayments under the accounts receivable component atrevolving 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 December 31, 2017or2023, and March 31, 2017, while2023, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $30.0$200.0 million foras of both periods.December 31, 2023, and March 31, 2023, and is a sublimit of the $500.0 million facility.
Performance Guarantees
In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations. We are in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations.
Off-Balance Sheet ArrangementsOFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of Regulation S-K or other contractually narrow or limited purposes. As of December 31, 2017,2023, we were not involved in any unconsolidated special purpose entity transactions.
Adequacy of Capital ResourcesADEQUACY 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 start officesopen 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 receivablesreceivable 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 have become more discerning in their approval processes, we currently have funding resources available for our transactions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Inflation
For the periods presented herein, inflation has been relatively low and we believe that inflation has not had a material effect on our results of operations.
Potential Fluctuations in Quarterly Operating Results
Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, or our major customers or vendors 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, 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“Risk Factors,” in our 20172023 Annual Report, as supplemented in subsequently filed reports, including the Form 8-K that we filed with the SEC on October 6, 2023, and in Part II, Item 1A. “Risk Factors” in this Report.
We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.
CRITICAL ACCOUNTING ESTIMATES
As disclosed in Note 2, “Recent Accounting Pronouncements,” we adopted a new standard on accounting for contract assets and contract liabilities from contracts with customers in a business combination in the second quarter of our fiscal year 2023. Under this new standard, we apply Accounting Standards Codification Topic 606, Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers. Other than this change, our critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report.
Item 3. | Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our quantitative and qualitative disclosures about market risk during the nine months ended December 31, 2017 from our 2017 Annual Report. For a discussion of the Company's exposure to market risk, reference is made to disclosures set forth in Part II, Item 7A of our above-mentioned 2017 Annual Report.
Although a substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, we utilize our lines of credit and other financing facilities whichthat are subject to fluctuations in short-term interest rates. TheseOur non-recourse instruments, which are denominated in U.S.US dollars, were entered into for other than trading purposes and with the exception of amounts drawn under the WFCDF facility, bear interest at a fixed rate. Because the interest rate on these instruments is fixed, changes in interest rates will not directly impact our cash flows. 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. Borrowings under the WFCDF facilityCredit Facility bear interest at a market-based variable rate. As of December 31, 2017,2023, the aggregate fair value of our recourse and non-recourse borrowings approximated their carrying value.
We have transactions in foreign currencies, primarily in British Pounds and in Euros. There is a potential for exposure to fluctuations in foreign currency rates resulting primarily from the translation exposure associated with the preparation of our consolidated financial statements. In addition, we have foreign currency exposure when transactions are not denominated in our subsidiaries’ functional currency, which include purchases and sales of the subsidiary’s functional currency.products and services we provide, as well as loans with other ePlus entities. Additionally, we lease assets in foreign countries, including Canada, the UK, and several other European countries. As a lessor, we lease assets for amounts denominated in British Pounds, Euros, and Canadian dollars. To date, our foreign operations are insignificantcurrency exposure associated with purchases and sales of the products and services we provide has not been significant. We have incurred foreign currency transaction gains and losses in relation to total consolidated operations and we believe that potential fluctuationscertain foreign subsidiaries on US dollar denominated loans. Fluctuations in currency exchange rates will not have a material effect on our financial position.
The UK referendum (“Brexit”) to leave, the European Union couldmay impact revenue items, cost items, tax, goodwill impairments and liquidity, among others. The most obvious immediate impact is the effect of foreign exchange fluctuations on revenue and cost items. We have determined that our foreign currency exposure for our United Kingdom operations is insignificant in relation to total consolidated operations and we believe those potential fluctuations in currency exchange rates and other Brexit related economic and operational risks will not have a material effect on our results of operations and financial position.
We evaluate Brexit-related developments on a regular basis to determine if such developments are anticipated to have a material impact on the Company’s results on operations and financial position.
We have assets in Canada and Iceland. As a lessor, we have entered into lease contracts and non-recourse, fixed-interest-rate financing denominated in Canadian dollars and in Icelandic krona. In our fiscal year beginning April 1, 2016, we began entering in financing transactions and non-recourse, fixed-interest-rate financing denominated in British Pounds in the United Kingdom. To date, our foreign operations have been insignificant and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.
| Controls and ProceduresCONTROLS AND PROCEDURES |
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” as defined in the Exchange Act Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report,Quarterly Report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2017.2023.
Changes in Internal Controls
47
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2017, which2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
42LIMITATIONS AND EFFECTIVENESS OF CONTROLS
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, doesdo not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process; therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
PART II. OTHER INFORMATION
Please refer to Note 9, “Commitment and Contingencies” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements”. From time to time, we may be subject to legal proceedings that arise in the ordinary course of business. Legal proceedings which may arise in the ordinary course of business include preference payment claims asserted in customer bankruptcy proceedings, tax audits, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, claims of alleged non-compliance with contract provisions, employment-related claims, claims by competitors, vendors or customers, claims related to alleged violations of laws and regulations, and claims relating to alleged security or privacy breaches. We attempt to ameliorate the effect of potential litigation through insurance coverage and contractual protections such as rights to indemnifications and limitations of liability.
We provide for costs relating to contingencies when a loss is probable and the amount is reasonably determinable. In the opinion of management, there was not at least a reasonable possibility that the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
There has not been any material change in the risk factors previously disclosed in Part“Part I, Item 1A1A. Risk Factors” of our 2017 Annual Report.Report on Form 10-K for the fiscal year ended March 31, 2023, as updated in our Current Report on Form 8-K filed with the SEC on October 6, 2023.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
The following table provides information regarding our purchases of ePlus inc. common stock during the ninethree months ended December 31, 2017.2023.
Period | | Total number of shares purchased (1) | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs | | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | |
April 1, 2017 through April 30, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (2 | ) |
May 1, 2017 through May 31, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (3 | ) |
June 1, 2017 through June 30, 2017 | | | 54,546 | | | $ | 75.72 | | | | - | | | | 1,000,000 | (4 | ) |
July 1, 2017 through July 31, 2017 | | | 3,179 | | | $ | 79.50 | | | | - | | | | 1,000,000 | (5 | ) |
August 1, 2017 through August 18, 2017 | | | - | | | $ | - | | | | - | | | | 1,000,000 | (6 | ) |
August 19, 2017 through August 31, 2017 | | | - | | | $ | - | | | | - | | | | 500,000 | (7 | ) |
September 1, 2017 through September 30, 2017 | | | - | | | $ | - | | | | - | | | | 500,000 | (8 | ) |
October 1, 2017 through October 31, 2017 | | | - | | | $ | - | | | | - | | | | 500,000 | (9 | ) |
November 1, 2017 through November 30, 2017 | | | 56,707 | | | $ | 78.21 | | | | - | | | | 443,293 | (10 | ) |
December 1, 2017 through December 31, 2017 | | | 68,898 | | | $ | 77.61 | | | | - | | | | 374,395 | (11 | ) |
Period | | Total number of shares purchased (1) | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs | | | Maximum number of shares that may yet be purchased under the plans or programs (2) | |
Oct 1, 2023 through Oct 31, 2023 | | | 9,000 | | | $ | 63.96 | | | | 9,000 | | | | 969,743 | |
Nov 1, 2023 through Nov 30, 2023 | | | 11,355 | | | $ | 61.92 | | | | 11,355 | | | | 958,388 | |
Dec 1, 2023 through Dec 31, 2023 | | | 1,786 | | | $ | 67.10 | | | | 1,786 | | | | 956,602 | |
Total | | | 22,141 | | | | | | | | 22,141 | | | | | |
| (1) | AnyAll shares were acquired were in open-market purchases, except for 54,546 shares, which were repurchased in June 2017, and 3,179 shares which were repurchased in July 2017, to satisfy tax withholding obligations that arose due to the vesting of shares of restricted stock.purchases. |
| (2) | The share purchase authorizationamounts presented in place forthis column are the month ended April 30, 2017 had purchase limitations on theremaining number of shares of up to 1,000,000 shares. As of April 30, 2017,that may be repurchased after repurchases during the remaining authorized shares to be purchased were 1,000,000. |
| (3) | The share purchase authorization in place for the month ended May 31, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares.month. As of May 31, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (4) | The share purchase authorization in place for the month ended June 30, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares. As of June 30, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (5) | The share purchase authorization in place for the month ended July 31, 2017 had purchase limitations on the number of shares of up to 1,000,000 shares. As of July 31, 2017, the remaining authorized shares to be purchased were 1,000,000. |
| (6) | As of August 18, 201727, 2023, the authorization under the then existingthen-existing share purchaserepurchase plan expired. |
| (7) | On August 15, 2017, theMarch 22, 2023, our board of directors authorized the company to repurchase of up to 500,0001,000,000 shares of our outstanding common stock, commencing on August 19, 2017 through August 18, 2018. As of August 31, 2017, the remaining authorized shares to be purchased were 500,000.over a 12-month period beginning May 28, 2023. |
| (8) | The share purchase authorization in place for the month ended September 30, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of September 30, 2017, the remaining authorized shares to be purchased were 500,000. |
| (9) | The share purchase authorization in place for the month ended October 31, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of October 31, 2017, the remaining authorized shares to be purchased were 500,000. |
| (10) | The share purchase authorization in place for the month ended November 30, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of November 30, 2017, the remaining authorized shares to be purchased were 443,293. |
48 | (11) | The share purchase authorization in place for the month ended December 31, 2017 had purchase limitations on the number of shares of up to 500,000 shares. As of December 31, 2017, the remaining authorized shares to be purchased were 374,395. |
The timing and expiration date of the current stock repurchase authorizations are included in Note 10, “Stockholders’ Equity11”, “Stockholders’ Equity” to our unaudited condensed consolidated financial statements included elsewhere in this report.
Item 3. | Defaults Upon Senior Securities DEFAULTS UPON SENIOR SECURITIES |
Not Applicable.
Item 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
Item 5. | Other InformationOTHER INFORMATION |
None.
Insider Trading Arrangements and Policies
During the three months ended December 31, 2023, no director or executive officer of ePlus inc. adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K. Certain of our executive officers may participate in employee stock purchase plans that have been designed to comply with Rule 10b5-1(c) under the Exchange Act.
Number | | Exhibit Description |
| | |
| | ePlus inc. Amended and Restated Employment Agreement effectiveCertificate of Incorporation, as last amended September 6, 2017,18, 2023. (Incorporated herein by and between ePlus inc. and Mark P. Marron.reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2023). |
| | |
| | Amended and Restated Bylaws of ePlus inc., as of March 2, 2022. (Incorporated herein by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended March 31, 2022). |
| | |
| | Form of Cash Performance Award Agreement. (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 22, 2023). |
| | |
| | Form of Performance Stock Unit Award Notice and Award Agreement. (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 22, 2023). |
| | |
| Amended and Restated Employment Agreement effective December 12, 2017, by and between ePlus inc. and Phillip G. Norton. |
| |
| Amended and Restated Employment Agreement effective September 6, 2017, by and between ePlus inc. and Elaine D. Marion. |
| |
| Certification of the Chief Executive Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
| | |
| | Certification of the Chief Financial Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
| | |
| | Certification of the Chief Executive Officer and Chief Financial Officer of ePlus inc. pursuant to 18 U.S.C. § 1350. |
| | |
101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover Page Interactive Data File (embedded within the Exhibit 101 Inline XBRL document) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ePlus inc. | |
| | |
Date: February 7, 20186, 2024 | /s/ MARK P. MARRON | |
| By: Mark P. Marron |
| Chief Executive Officer and President | |
| (Principal Executive Officer) | |
| | |
Date: February 7, 20186, 2024 | /s/ ELAINE D. MARION | |
| By: Elaine D. Marion | |
| Chief Financial Officer | |
| (Principal Financial Officer) |