SCSC ScanSource Inc

Driven by 5% Net Sales Growth and 6% Gross Profit Growth

ScanSource, Inc. (NASDAQ: SCSC), a leading global provider of technology products and solutions, today announced financial results for the first quarter ended September 30, 2018.

    Quarter ended September 30, 2018     2017     Change (in millions, except per share data) Net sales $ 972.9     $ 924.6     5 % Operating income 21.4 7.6 182 % Non-GAAP operating income(1) 32.7 30.6 7 % GAAP net income 14.3 4.1 245 % Non-GAAP net income(1) 22.9 19.4 18 % GAAP diluted EPS $ 0.56 $ 0.16 250 % Non-GAAP diluted EPS(1) $ 0.89 $ 0.76 17 %   (1) Non-GAAP results exclude amortization of intangible assets related to acquisitions, change in fair value of contingent consideration and other non-GAAP items. A reconciliation of non-GAAP financial information to GAAP financial information is presented in the Supplementary Information (Unaudited) below.  

“We had a strong start to our fiscal year with excellent results across the board,” said Mike Baur, CEO, ScanSource, Inc. “Both Worldwide segments contributed to our organic sales growth of 6.5%, as we kept our strategic focus on putting our customers first and helping them grow their businesses.”

Quarterly Results

For the first quarter of fiscal year 2019, net sales increased 5% to $972.9 million, reflecting sales growth in both Worldwide segments. Organic sales, which exclude the impact from foreign currency translation and recent acquisitions, grew 6.5% year-over-year. Operating income increased to $21.4 million, as the expense for the change in contingent consideration related to Network1 decreased. Non-GAAP operating income increased 7% to $32.7 million, driven by higher sales volumes and higher gross margins.

On a GAAP basis, net income for the first quarter of fiscal year 2019 totaled $14.3 million, or $0.56 per diluted share, compared with net income of $4.1 million, or $0.16 per diluted share, for the prior-year quarter. Non-GAAP net income for the first quarter of fiscal year 2019 increased 18% to $22.9 million, or $0.89 per diluted share, compared to $19.4 million, or $0.76 per diluted share, for the prior-year quarter.

Forecast for Next Quarter

For the second quarter of fiscal year 2019, ScanSource expects net sales to range from $1.01 billion to $1.07 billion, diluted earnings per share to range from $0.70 to $0.76 per share and non-GAAP diluted earnings per share to range from $0.92 to $0.98 per share. Non-GAAP diluted earnings per share exclude amortization of intangible assets related to acquisitions and change in fair value of contingent consideration and other non-GAAP items.

Webcast Details and CFO Commentary

At approximately 4:15 p.m. ET today, a CFO commentary, as a supplement to this press release and the Company’s conference call, will be available on ScanSource’s website, www.scansource.com (Investor Relations section). ScanSource will present additional information about its financial results and outlook in a conference call today, November 6, 2018, at 5:00 p.m. ET. A webcast of the call will be available for all interested parties and can be assessed at www.scansource.com (Investor Relations section). The webcast will be available for replay for 60 days.

Safe Harbor Statement

This press release contains “forward-looking” statements, including the forecast of sales and earnings per share for next quarter, that involve risks and uncertainties. Any number of factors could cause actual results to differ materially from anticipated or forecasted results, including, but not limited to, changes in interest and exchange rates and regulatory regimes impacting the Company’s international operations, the impact of tax reform laws, the failure of acquisitions to meet the Company’s expectations, the failure to manage and implement the Company’s organic growth strategy, credit risks involving the Company’s larger customers and vendors, termination of the Company’s relationship with key vendors or a significant modification of the terms under which it operates with a key vendor, the decline in demand for the products and services that the Company provides, reduced prices for the products and services that the Company provide due both to competitor and customer action, and other factors set forth in the “Risk Factors” contained in the Company’s annual report on Form 10-K for the year ended June 30, 2018, filed with the Securities and Exchange Commission. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

Non-GAAP Financial Information

In addition to disclosing results that are determined in accordance with United States Generally Accepted Accounting Principles (“GAAP”), the Company also discloses certain non-GAAP financial measures, which are summarized below. Non-GAAP financial measures are used to understand and evaluate performance, including comparisons from period to period. Non-GAAP results exclude amortization of intangible assets related to acquisitions, change in fair value of contingent consideration, acquisition costs and other non-GAAP adjustments.

Net sales on a constant currency basis, excluding acquisitions: The Company discloses the percentage change in net sales excluding the translation impact from changes in foreign currency exchange rates between reporting periods and excluding the net sales from acquisitions prior to the first full year from the acquisition date. This measure enhances the comparability between periods to help analyze underlying trends on an organic basis.

Non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share: To evaluate current period performance on a more consistent basis with prior periods, the Company discloses non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share (non-GAAP diluted “EPS”). These non-GAAP results exclude amortization of intangible assets related to acquisitions, change in the fair value of contingent consideration, acquisition costs and other non-GAAP adjustments. Non-GAAP operating income, non-GAAP net income, and non-GAAP diluted EPS measures are useful in assessing and understanding the Company’s operating performance, especially when comparing results with previous periods or forecasting performance for future periods.

Return on invested capital (“ROIC”): Management uses ROIC as a performance measurement to assess efficiency in allocating capital under the Company’s control to generate returns. Management believes this metric balances the Company’s operating results with asset and liability management, is not impacted by capitalization decisions and correlates with shareholder value creation. In addition, it is easily computed, communicated and understood. ROIC also provides management a measure of the Company’s profitability on a basis more comparable to historical or future periods.

ROIC assists management in comparing the Company’s performance over various reporting periods on a consistent basis because it removes from operating results the impact of items that do not reflect core operating performance. ROIC is calculated as adjusted EBITDA over invested capital. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“Adjusted EBITDA”) excludes the change in fair value of contingent consideration and acquisition costs, in addition to other non-GAAP adjustments. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. Management believes the calculation of ROIC provides useful information to investors and is an additional relevant comparison of the Company’s performance during the year.

These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that the Company reports may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with GAAP. A reconciliation of the Company’s non-GAAP financial information to GAAP is set forth in the Supplementary Information (Unaudited) below.

About ScanSource, Inc.

ScanSource, Inc. (NASDAQ: SCSC) is a leading global provider of technology products and solutions, focusing on point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration and telecom and cloud services. ScanSource’s teams provide value-added solutions and operate from two segments: Worldwide Barcode, Networking & Security, which includes POS Portal, and Worldwide Communications & Services, which includes Intelisys and Canpango. ScanSource is committed to helping its customers choose, configure and deliver the industry’s best solutions across almost every vertical market in North America, Latin America and Europe. Founded in 1992 and headquartered in Greenville, South Carolina, ScanSource was named one of the 2018 Best Places to Work in South Carolina and on FORTUNE magazine’s 2018 List of World’s Most Admired Companies. ScanSource ranks #653 on the Fortune 1000. For more information, visit www.scansource.com.

  ScanSource, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (in thousands)     September 30, 2018     June 30, 2018* Assets Current assets: Cash and cash equivalents $ 18,858 $ 25,530 Accounts receivable, less allowance of $45,340 at September 30, 2018 and $45,561 at June 30, 2018 677,499 678,940 Inventories 672,696 595,948 Prepaid expenses and other current assets 64,643   61,744   Total current assets 1,433,696 1,362,162 Property and equipment, net 71,625 73,042 Goodwill 311,334 298,174 Identifiable intangible assets, net 131,393 136,806 Deferred income taxes 21,283 22,199 Other non-current assets 52,068   52,912   Total assets $ 2,021,399   $ 1,945,295    

Liabilities and Shareholders’ Equity

Current liabilities: Accounts payable $ 629,242 $ 562,564 Accrued expenses and other current liabilities 86,762 90,873 Current portion of contingent consideration 50,806 42,975 Income taxes payable 9,014 13,348 Current portion of long-term debt 335   551   Total current liabilities 776,159 710,311 Deferred income taxes 1,650 1,769 Long-term debt, net of current portion 4,764 4,878 Borrowings under revolving credit facility 276,760 244,000 Long-term portion of contingent consideration 29,367 65,258 Other long-term liabilities 54,802   52,703   Total liabilities 1,143,502 1,078,919

Shareholders’ equity:

Common stock 70,035 68,220 Retained earnings 896,655 882,333 Accumulated other comprehensive income (loss) (88,793 ) (84,177 )

Total shareholders’ equity

877,897   866,376  

Total liabilities and shareholders’ equity

$ 2,021,399   $ 1,945,295   *   Derived from audited financial statements.     ScanSource, Inc. and Subsidiaries Condensed Consolidated Income Statements (Unaudited) (in thousands, except per share data)         Quarter ended September 30, 2018 2017 Net sales $ 972,900 $ 924,559 Cost of goods sold 860,685   818,642   Gross profit 112,215 105,917 Selling, general and administrative expenses 77,931 73,187 Depreciation expense 3,265 3,240 Intangible amortization expense 5,003 5,011 Change in fair value of contingent consideration 4,584   16,881   Operating income 21,432 7,598 Interest expense 2,627 1,585 Interest income (451 ) (881 ) Other expense, net 32   114   Income before income taxes 19,224 6,780 Provision for income taxes 4,902   2,633   Net income $ 14,322   $ 4,147   Per share data: Net income per common share, basic $ 0.56   $ 0.16   Weighted-average shares outstanding, basic 25,599   25,434     Net income per common share, diluted $ 0.56   $ 0.16   Weighted-average shares outstanding, diluted 25,755   25,579       ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)         Net Sales by Segment: Quarter ended September 30, 2018     2017 % Change Worldwide Barcode, Networking & Security: (in thousands) Net sales, as reported $ 655,113 $ 620,329 5.6 % Foreign exchange impact (a) 7,513   —   Net sales, constant currency (non-GAAP) 662,626 620,329 6.8 % Less: Acquisitions (23,465 ) (14,553 ) Net sales, constant currency excluding acquisitions (non-GAAP) $ 639,161   $ 605,776   5.5 %   Worldwide Communications & Services: Net sales, as reported $ 317,787 $ 304,230 4.5 % Foreign exchange impact (a) 13,307   —   Net sales, constant currency (non-GAAP) 331,094 304,230 8.8 % Less: Acquisitions (964 ) —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 330,130   $ 304,230   8.5 %   Consolidated: Net sales, as reported $ 972,900 $ 924,559 5.2 % Foreign exchange impact (a) 20,820   —   Net sales, constant currency (non-GAAP) 993,720 924,559 7.5 % Less: Acquisitions (24,429 ) (14,553 ) Net sales, constant currency excluding acquisitions (non-GAAP) $ 969,291   $ 910,006   6.5 %   (a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended September 30, 2018 into U.S. dollars using the average foreign exchange rates for the quarter ended September 30, 2017.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)             Net Sales by Geography: Quarter ended September 30, 2018 2017 % Change United States and Canada: (in thousands) Net sales, as reported $ 737,957 $ 686,650 7.5 % Less: Acquisitions (24,429 ) (14,553 ) Net sales, excluding acquisitions (non-GAAP) $ 713,528   $ 672,097   6.2 %   International: Net sales, as reported $ 234,943 $ 237,909 (1.2 )% Foreign exchange impact (a) 20,820   —   Net sales, constant currency (non-GAAP) 255,763 237,909 7.5 % Less: Acquisitions —   —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 255,763   $ 237,909   7.5 %   Consolidated: Net sales, as reported $ 972,900 $ 924,559 5.2 % Foreign exchange impact (a) 20,820   —   Net sales, constant currency (non-GAAP) 993,720 924,559 7.5 % Less: Acquisitions (24,429 ) (14,553 ) Net sales, constant currency excluding acquisitions (non-GAAP) $ 969,291   $ 910,006   6.5 %   (a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended September 30, 2018 into U.S. dollars using the average foreign exchange rates for the quarter ended September 30, 2017.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited) (in thousands, except per share data)                 Non-GAAP Financial Information: Quarter ended September 30, 2018

Operatingincome

Pre-taxincome

Netincome

DilutedEPS

GAAP measure $ 21,432 $ 19,224 $ 14,322 $ 0.56 Adjustments: Amortization of intangible assets 5,003 5,003 3,798 0.15 Change in fair value of contingent consideration 4,584 4,584 3,487 0.14 Acquisition costs (a) 355 355 355 0.01 Restructuring costs 1,328   1,328   955   0.04 Non-GAAP measure $ 32,702   $ 30,494   $ 22,917   $ 0.89   Quarter ended September 30, 2017

Operatingincome

Pre-taxincome

Netincome

DilutedEPS

GAAP measure $ 7,598 $ 6,780 $ 4,147 $ 0.16 Adjustments: Amortization of intangible assets 5,011 5,011 3,261 0.13 Change in fair value of contingent consideration 16,881 16,881 11,005 0.43 Acquisition costs (a) 172 172 172 0.01 Legal settlement, net of attorney fees 952   952   771   0.03 Non-GAAP measure $ 30,614   $ 29,796   $ 19,356   $ 0.76   (a) Acquisition costs are non-deductible for tax purposes.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited) (in thousands, except percentages)         Non-GAAP Financial Information:

Quarter endedSeptember 30,

2018 2017 Return on invested capital (ROIC), annualized (a) 12.9 % 13.0 %  

Reconciliation of Net Income to Adjusted EBITDA

Net income (GAAP) $ 14,322 $ 4,147 Plus: Interest expense 2,627 1,585 Plus: Income taxes 4,902 2,633 Plus: Depreciation and amortization 9,268   8,864   EBITDA (non-GAAP) 31,119 17,229 Adjustments: Change in fair value of contingent consideration 4,584 16,881 Acquisition costs 355 172 Restructuring costs 1,328 — Legal settlement, net of attorney fees —   952   Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 37,386   $ 35,234      

Invested Capital Calculation

Equity - beginning of the quarter $ 866,376 $ 837,145 Equity - end of the quarter 877,897 852,976 Adjustments: Change in fair value of contingent consideration, net of tax 3,487 11,005 Acquisition costs 355 172 Restructuring costs, net of tax 955 — Legal settlement, net of attorney fees, net of tax —   771   Average equity 874,535 851,035 Average funded debt (b) 272,277   224,956   Invested capital (denominator for ROIC) (non-GAAP) $ 1,146,812   $ 1,075,991     (a) Calculated as net income plus interest expense, income taxes, depreciation and amortization (EBITDA), plus change in fair value of contingent consideration and other adjustments, annualized and divided by invested capital for the period. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period.   (b) Average funded debt is calculated as the average daily amounts outstanding on short-term and long-term interest-bearing debt.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)         Non-GAAP Financial Information:

Forecast for Quarterending December 31, 2018

Range Low Range High GAAP diluted EPS $ 0.70 $ 0.76 Adjustments: Amortization of intangible assets 0.14 0.14 Change in fair value of contingent consideration 0.07 0.07 Acquisition costs 0.01   0.01 Non-GAAP diluted EPS $ 0.92   $ 0.98  

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ScanSource, Inc.Gerald Lyons, 864-286-4854Executive Vice President, Chief Financial OfficerorMary M. Gentry, 864-286-4892Vice President, Treasurer and Investor Relations