SCSC ScanSource Inc

Record Quarterly Net Sales; EPS Exceeds Forecast Range

ScanSource, Inc. (NASDAQ: SCSC), a leading global provider of technology products and solutions, today announced financial results for the second quarter ended December 31, 2018.

    Quarter ended December 31, 2018     2017     Change (in millions, except per share data) Net sales $ 1,046.0     $ 1,032.2     1 % Operating income 29.7 22.3 33 % Non-GAAP operating income(1) 36.7 34.7 6 % GAAP net income 20.0 8.0 151 % Non-GAAP net income(1) 25.4 23.0 10 % GAAP diluted EPS $ 0.78 $ 0.31 152 % Non-GAAP diluted EPS(1) $ 0.99 $ 0.90 10 %   (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 are very pleased with our outstanding second quarter results and continued successful execution of our strategic plan," said Mike Baur, CEO, ScanSource, Inc. "Our strategic plan is focused on building end customer solutions and enabling our channel partners to deliver more value."

Quarterly Results

For the second quarter of fiscal year 2019, net sales increased 1% to $1,046.0 million, reflecting sales growth in North America and Brazil. Organic sales, which exclude the impact from foreign currency translation and recent acquisitions, grew 3.2% year-over-year. Operating income increased to $29.7 million, as the expense for the change in contingent consideration related to Network1 decreased. Non-GAAP operating income increased 6% to $36.7 million, driven by higher sales volumes and higher margins.

On a GAAP basis, net income for the second quarter of fiscal year 2019 totaled $20.0 million, or $0.78 per diluted share, compared with net income of $8.0 million, or $0.31 per diluted share, for the prior-year quarter. Non-GAAP net income for the second quarter of fiscal year 2019 increased 10% to $25.4 million, or $0.99 per diluted share, compared to $23.0 million, or $0.90 per diluted share, for the prior-year quarter.

Forecast for Next Quarter

For the third quarter of fiscal year 2019, ScanSource expects net sales to range from $910 million to $970 million, diluted earnings per share to range from $0.48 to $0.54 per share and non-GAAP diluted earnings per share to range from $0.76 to $0.82 per share. Non-GAAP diluted earnings per share exclude amortization of intangible assets related to acquisitions, 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, February 5, 2019, 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 2019 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)       December 31, 2018     June 30, 2018* Assets Current assets: Cash and cash equivalents $ 22,749 $ 25,530 Accounts receivable, less allowance of $45,240 at December 31, 2018 and $45,561 at June 30, 2018 708,531 678,940 Inventories 704,444 595,948 Prepaid expenses and other current assets   59,785     61,744   Total current assets 1,495,509 1,362,162 Property and equipment, net 73,354 73,042 Goodwill 326,675 298,174 Identifiable intangible assets, net 129,020 136,806 Deferred income taxes 20,448 22,199 Other non-current assets   50,727     52,912   Total assets $ 2,095,733   $ 1,945,295     Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 604,630 $ 562,564 Accrued expenses and other current liabilities 89,444 90,873 Current portion of contingent consideration 39,729 42,975 Income taxes payable 2,421 13,348 Current portion of long-term debt   335     551   Total current liabilities 736,559 710,311 Deferred income taxes 1,958 1,769 Long-term debt, net of current portion 4,764 4,878 Borrowings under revolving credit facility 367,311 244,000 Long-term portion of contingent consideration 32,157 65,258 Other long-term liabilities   53,481     52,703   Total liabilities 1,196,230 1,078,919 Shareholders' equity: Common stock 70,912 68,220 Retained earnings 916,636 882,333 Accumulated other comprehensive income (loss)   (88,045 )   (84,177 ) Total shareholders' equity   899,503     866,376   Total liabilities and shareholders' equity $ 2,095,733   $ 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 December 31, Six months ended December 31, 2018 2017 2018 2017 Net sales $ 1,046,021 $ 1,032,212 $ 2,018,921 $ 1,956,771 Cost of goods sold   925,543     919,241     1,786,229     1,737,883   Gross profit 120,478 112,971 232,692 218,888 Selling, general and administrative expenses 80,950 74,763 158,880 147,950 Depreciation expense 3,272 3,467 6,538 6,707 Intangible amortization expense 4,700 5,487 9,703 10,498 Change in fair value of contingent consideration   1,850     6,913     6,434     23,794   Operating income 29,706 22,341 51,137 29,939 Interest expense 3,119 2,285 5,746 3,870 Interest income (264 ) (580 ) (715 ) (1,462 ) Other expense, net   201     326     233     441   Income before income taxes 26,650 20,310 45,873 27,090 Provision for income taxes   6,668     12,341     11,570     14,974   Net income $ 19,982   $ 7,969   $ 34,303   $ 12,116   Per share data: Net income per common share, basic $ 0.78   $ 0.31   $ 1.34   $ 0.48   Weighted-average shares outstanding, basic   25,640     25,506     25,619     25,470     Net income per common share, diluted $ 0.78   $ 0.31   $ 1.33   $ 0.47   Weighted-average shares outstanding, diluted   25,750     25,648     25,752     25,612       ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)         Net Sales by Segment: Quarter ended December 31, 2018     2017 % Change Worldwide Barcode, Networking & Security: (in thousands) Net sales, as reported $ 701,639 $ 719,786 (2.5 )% Foreign exchange impact (a)   7,805     — Net sales, constant currency (non-GAAP) 709,444 719,786 (1.4 )% Less: Acquisitions   —     — Net sales, constant currency excluding acquisitions (non-GAAP) $ 709,444   $ 719,786 (1.4 )%   Worldwide Communications & Services: Net sales, as reported $ 344,382 $ 312,426 10.2 % Foreign exchange impact (a)   12,915     — Net sales, constant currency (non-GAAP) 357,297 312,426 14.4 % Less: Acquisitions   (1,832 )   — Net sales, constant currency excluding acquisitions (non-GAAP) $ 355,465   $ 312,426 13.8 %   Consolidated: Net sales, as reported $ 1,046,021 $ 1,032,212 1.3 % Foreign exchange impact (a)   20,720     — Net sales, constant currency (non-GAAP) 1,066,741 1,032,212 3.3 % Less: Acquisitions   (1,832 )   — Net sales, constant currency excluding acquisitions (non-GAAP) $ 1,064,909   $ 1,032,212 3.2 %   (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 December 31, 2018 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2017.               ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)   Net Sales by Segment: Six months ended December 31, Worldwide Barcode, Networking & Security: 2018 2017 % Change (in thousands) Net sales, as reported $ 1,356,752 $ 1,340,114 1.2 % Foreign exchange impact (a)   15,317     —   Net sales, constant currency 1,372,069 1,340,114 2.4 % Less: Acquisitions   (23,465 )   (14,553 ) Net sales, constant currency excluding acquisitions $ 1,348,604   $ 1,325,561   1.7 %   Worldwide Communications & Services: Net sales, as reported $ 662,169 $ 616,657 7.4 % Foreign exchange impact (a)   26,221     —   Net sales, constant currency 688,390 616,657 11.6 % Less: Acquisitions   (2,796 )   —   Net sales, constant currency excluding acquisitions $ 685,594   $ 616,657   11.2 %   Consolidated: Net sales, as reported $ 2,018,921 $ 1,956,771 3.2 % Foreign exchange impact (a)   41,538     —   Net sales, constant currency 2,060,459 1,956,771 5.3 % Less: Acquisitions   (26,261 )   (14,553 ) Net sales, constant currency excluding acquisitions $ 2,034,198   $ 1,942,218   4.7 %   (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 six months ended December 31, 2018 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2017.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)             Net Sales by Geography: Quarter ended December 31, 2018 2017 % Change United States and Canada: (in thousands) Net sales, as reported $ 779,455 $ 755,312 3.2 % Less: Acquisitions   (1,832 )   — Net sales, excluding acquisitions (non-GAAP) $ 777,623   $ 755,312 3.0 %   International: Net sales, as reported $ 266,566 $ 276,900 (3.7 )% Foreign exchange impact (a)   20,720     — Net sales, constant currency (non-GAAP) 287,286 276,900 3.8 % Less: Acquisitions   —     — Net sales, constant currency excluding acquisitions (non-GAAP) $ 287,286   $ 276,900 3.8 %   Consolidated: Net sales, as reported $ 1,046,021 $ 1,032,212 1.3 % Foreign exchange impact (a)   20,720     — Net sales, constant currency (non-GAAP) 1,066,741 1,032,212 3.3 % Less: Acquisitions   (1,832 )   — Net sales, constant currency excluding acquisitions (non-GAAP) $ 1,064,909   $ 1,032,212 3.2 %   (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 December 31, 2018 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2017.               ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)   Net Sales by Geography: Six months ended December 31, 2018 2017 % Change United States and Canada: (in thousands) Net sales, as reported $ 1,517,412 $ 1,441,982 5.2 % Less: Acquisitions   (26,261 )   (14,553 ) Net sales, excluding acquisitions $ 1,491,151   $ 1,427,429   4.5 %   International: Net sales, as reported $ 501,509 $ 514,789 (2.6 )% Foreign exchange impact (a)   41,538     —   Net sales, constant currency 543,047 514,789 5.5 % Less: Acquisitions   —     —   Net sales, constant currency excluding acquisitions $ 543,047   $ 514,789   5.5 %   Consolidated: Net sales, as reported $ 2,018,921 $ 1,956,771 3.2 % Foreign exchange impact (a)   41,538     —   Net sales, constant currency 2,060,459 1,956,771 5.3 % Less: Acquisitions   (26,261 )   (14,553 ) Net sales, constant currency excluding acquisitions $ 2,034,198   $ 1,942,218   4.7 %   (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 six months ended December 31, 2018 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2017.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited) (in thousands, except per share data)                 Non-GAAP Financial Information: Quarter ended December 31, 2018

Operatingincome

Pre-taxincome

Netincome

DilutedEPS

GAAP measure $ 29,706 $ 26,650 $ 19,982 $ 0.78 Adjustments: Amortization of intangible assets 4,700 4,700 3,567 0.14 Change in fair value of contingent consideration 1,850 1,850 1,408 0.05 Acquisition costs (a) 414   414   414   0.02 Non-GAAP measure $ 36,670   $ 33,614   $ 25,371   $ 0.99   Quarter ended December 31, 2017

Operatingincome

Pre-taxincome

Netincome

DilutedEPS

GAAP measure $ 22,341 $ 20,310 $ 7,969 $ 0.31 Adjustments: Amortization of intangible assets 5,487 5,487 3,648 0.14 Change in fair value of contingent consideration 6,913 6,913 4,742 0.18 Tax reform charges $ —   $ —   $ 6,689   $ 0.26 Non-GAAP measure $ 34,741   $ 32,710   $ 23,048   $ 0.90   (a) Acquisition costs are non-deductible for tax purposes.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited) (in thousands, except per share data)                 Non-GAAP Financial Information: Six months ended December 31, 2018

Operatingincome

Pre-taxincome

Netincome

DilutedEPS

GAAP measure $ 51,137 $ 45,873 $ 34,303 $ 1.33 Adjustments: Amortization of intangible assets 9,703 9,703 7,365 0.29 Change in fair value of contingent consideration 6,434 6,434 4,895 0.19 Acquisition costs (a) 769 769 769 0.03 Restructuring costs 1,328   1,328   955   0.04 Non-GAAP measure $ 69,371   $ 64,107   $ 48,287   $ 1.88   Six months ended December 31, 2017

Operatingincome

Pre-taxincome

Netincome

DilutedEPS

GAAP measure $ 29,939 $ 27,090 $ 12,116 $ 0.47 Adjustments: Amortization of intangible assets 10,498 10,498 6,909 0.27 Change in fair value of contingent consideration 23,794 23,794 15,747 0.61 Acquisition costs (a) 172 172 172 0.02 Legal settlement, net of attorney fees 952 952 771 0.03 Tax reform charges     6,689   0.26 Non-GAAP measure $ 65,355   $ 62,506   $ 42,404   $ 1.66   (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 endedDecember 31,

Six months endedDecember 31,

2018 2017 2018 2017 Return on invested capital (ROIC), annualized (a)   13.3 %   13.3 %   13.1 %   13.1 %  

Reconciliation of Net Income to Adjusted EBITDA

Net income (GAAP) $ 19,982 $ 7,969 $ 34,303 $ 12,116 Plus: Interest expense 3,119 2,285 5,746 3,870 Plus: Income taxes 6,668 12,341 11,570 14,974 Plus: Depreciation and amortization   8,935     9,901     18,203     18,766   EBITDA (non-GAAP) 38,704 32,496 69,822 49,726 Adjustments: Change in fair value of contingent consideration 1,850 6,913 6,434 23,794 Acquisition costs 414 — 769 172 Restructuring costs — — 1,328 — Legal settlement, net of attorney fees   —     —     —     952   Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 40,968   $ 39,409   $ 78,353   $ 74,644      

Invested Capital Calculation

Equity - beginning of the quarter $ 877,897 $ 852,976 $ 866,376 $ 837,145 Equity - end of the quarter 899,503 860,787 899,503 860,787 Adjustments: Change in fair value of contingent consideration, net of tax 1,408 4,742 4,895 15,747 Acquisition costs 414 — 769 172 Restructuring costs, net of tax — — 955 — Legal settlement, net of attorney fees, net of tax — — — 771 Tax reform charges   —     6,689     —     6,689   Average equity 889,611 862,597 886,249 860,656 Average funded debt (b)   333,138     311,327     302,707     268,141   Invested capital (denominator for ROIC) (non-GAAP) $ 1,222,749   $ 1,173,924   $ 1,188,956   $ 1,128,797     (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 March 31, 2019

Range Low Range High GAAP diluted EPS $ 0.48 $ 0.54 Adjustments: Amortization of intangible assets 0.14 0.14 Change in fair value of contingent consideration 0.14   0.14 Non-GAAP diluted EPS $ 0.76   $ 0.82  

View source version on businesswire.com: https://www.businesswire.com/news/home/20190205005928/en/

Gerald LyonsExecutive Vice President, Chief Financial OfficerScanSource, Inc.(864) 286-4854orMary M. GentryVice President, Treasurer and Investor RelationsScanSource, Inc.(864) 286-4892