SCSC ScanSource Inc

Gross Profit Growth of 6% and EPS Growth of 7%

ScanSource, Inc. (NASDAQ: SCSC), a leading global provider of technology products and solutions, today announced financial results for the third quarter ended March 31, 2019.

  Quarter ended March 31, 2019   2018   Change (in millions, except per share data) Net sales $ 893.4   $ 895.6   (0.3 )% Operating income 18.8 17.9 5 % Non-GAAP operating income(1) 29.7 27.8 7 % GAAP net income 11.7 10.6 10 % Non-GAAP net income(1) 19.8 17.5 13 % GAAP diluted EPS $ 0.45 $ 0.42 7 % Non-GAAP diluted EPS(1) $ 0.77 $ 0.68 13 %   (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 pleased to continue to grow profits faster than sales, despite sales below our forecast due to a lower volume of big deals,” said Mike Baur, Chairman and CEO, ScanSource, Inc. “We are executing on our strategic plan to drive growth at higher-value margins with more recurring revenues for our sales partners.”

Quarterly Results

For the third quarter of fiscal year 2019, net sales totaled $893.4 million, which are 0.3% lower than the prior year quarter. Organic sales, which exclude the impact of foreign currency translation and recent acquisitions, grew 2% year-over-year with growth in both worldwide segments. Operating income increased to $18.8 million, and non-GAAP operating income increased 7% to $29.7 million, driven by higher gross profit and operating margins.

On a GAAP basis, net income for the third quarter of fiscal year 2019 totaled $11.7 million, or $0.45 per diluted share, compared with net income of $10.6 million, or $0.42 per diluted share, for the prior year quarter. Non-GAAP net income for the third quarter of fiscal year 2019 increased 13% to $19.8 million, or $0.77 per diluted share, compared to $17.5 million, or $0.68 per diluted share, for the prior year quarter.

Forecast for Next Quarter

For the fourth quarter of fiscal year 2019, ScanSource expects net sales to range from $970 million to $1.03 billion, diluted earnings per share to range from $0.56 to $0.62 per share and non-GAAP diluted earnings per share to range from $0.80 to $0.86 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, May 9, 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 pre-tax 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)   March 31, 2019   June 30, 2018* Assets Current assets: Cash and cash equivalents $ 20,400 $ 25,530 Accounts receivable, less allowance of $43,124 at March 31, 2019 and $45,561 at June 30, 2018 632,539 678,940 Inventories 760,711 595,948 Prepaid expenses and other current assets 52,544   61,744   Total current assets 1,466,194 1,362,162 Property and equipment, net 71,282 73,042 Goodwill 319,042 298,174 Identifiable intangible assets, net 133,014 136,806 Deferred income taxes 20,660 22,199 Other non-current assets 51,963   52,912   Total assets $ 2,062,155   $ 1,945,295     Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 585,121 $ 562,564 Accrued expenses and other current liabilities 86,910 90,873 Current portion of contingent consideration 39,445 42,975 Income taxes payable 1,664 13,348 Current portion of long-term debt 335   551   Total current liabilities 713,475 710,311 Deferred income taxes 1,607 1,769 Long-term debt, net of current portion 4,764 4,878 Borrowings under revolving credit facility 342,573 244,000 Long-term portion of contingent consideration 34,814 65,258 Other long-term liabilities 53,859   52,703   Total liabilities 1,151,092 1,078,919 Shareholders' equity: Common stock 72,903 68,220 Retained earnings 928,352 882,333 Accumulated other comprehensive income (loss) (90,192 ) (84,177 ) Total shareholders' equity 911,063   866,376   Total liabilities and shareholders' equity $ 2,062,155   $ 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 March 31, Nine months ended March 31, 2019 2018 2019 2018 Net sales $ 893,357 $ 895,637 $ 2,912,278 $ 2,852,408 Cost of goods sold 783,342   791,749   2,569,570   2,529,632   Gross profit 110,015 103,888 342,708 322,776 Selling, general and administrative expenses 77,688 72,691 236,569 220,642 Depreciation expense 3,417 3,352 9,954 10,059 Intangible amortization expense 5,005 5,103 14,708 15,600 Change in fair value of contingent consideration 5,101   4,801   11,535   28,595   Operating income 18,804 17,941 69,942 47,880 Interest expense 3,670 2,784 9,415 6,655 Interest income (682 ) (887 ) (1,397 ) (2,349 ) Other expense, net 21   252   254   691   Income before income taxes 15,795 15,792 61,670 42,883 Provision for income taxes 4,080   5,143   15,651   20,118   Net income $ 11,715   $ 10,649   $ 46,019   $ 22,765   Per share data: Net income per common share, basic $ 0.46   $ 0.42   $ 1.79   $ 0.89   Weighted-average shares outstanding, basic 25,704   25,572   25,647   25,503     Net income per common share, diluted $ 0.45   $ 0.42   $ 1.79   $ 0.89   Weighted-average shares outstanding, diluted 25,762   25,606   25,755   25,607       ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)     Net Sales by Segment: Quarter ended March 31, 2019   2018 % Change Worldwide Barcode, Networking & Security: (in thousands) Net sales, as reported $ 596,913 $ 604,322 (1.2 )% Foreign exchange impact (a) 10,802   —   Net sales, constant currency (non-GAAP) 607,715 604,322 0.6 % Less: Acquisitions —   —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 607,715   $ 604,322   0.6 %   Worldwide Communications & Services: Net sales, as reported $ 296,444 $ 291,315 1.8 % Foreign exchange impact (a) 11,945   —   Net sales, constant currency (non-GAAP) 308,389 291,315 5.9 % Less: Acquisitions (2,423 ) —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 305,966   $ 291,315   5.0 %   Consolidated: Net sales, as reported $ 893,357 $ 895,637 (0.3 )% Foreign exchange impact (a) 22,747   —   Net sales, constant currency (non-GAAP) 916,104 895,637 2.3 % Less: Acquisitions (2,423 ) —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 913,681   $ 895,637   2.0 %   (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 March 31, 2019 into U.S. dollars using the average foreign exchange rates for the quarter ended March 31, 2018.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)     Net Sales by Segment: Nine months ended March 31, Worldwide Barcode, Networking & Security: 2019   2018 % Change (in thousands) Net sales, as reported $ 1,953,664 $ 1,944,436 0.5 % Foreign exchange impact (a) 26,119   —   Net sales, constant currency 1,979,783 1,944,436 1.8 % Less: Acquisitions (23,465 ) (14,553 ) Net sales, constant currency excluding acquisitions $ 1,956,318   $ 1,929,883   1.4 %   Worldwide Communications & Services: Net sales, as reported $ 958,614 $ 907,972 5.6 % Foreign exchange impact (a) 38,166   —   Net sales, constant currency 996,780 907,972 9.8 % Less: Acquisitions (5,219 ) —   Net sales, constant currency excluding acquisitions $ 991,561   $ 907,972   9.2 %   Consolidated: Net sales, as reported $ 2,912,278 $ 2,852,408 2.1 % Foreign exchange impact (a) 64,285   —   Net sales, constant currency 2,976,563 2,852,408 4.4 % Less: Acquisitions (28,684 ) (14,553 ) Net sales, constant currency excluding acquisitions $ 2,947,879   $ 2,837,855   3.9 %   (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 nine months ended March 31, 2019 into U.S. dollars using the average foreign exchange rates for the nine months ended March 31, 2018.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)       Net Sales by Geography: Quarter ended March 31, 2019 2018 % Change United States and Canada: (in thousands) Net sales, as reported $ 672,155 $ 653,537 2.8 % Less: Acquisitions (2,423 ) —   Net sales, excluding acquisitions (non-GAAP) $ 669,732   $ 653,537   2.5 %   International: Net sales, as reported $ 221,202 $ 242,100 (8.6 )% Foreign exchange impact (a) 22,747   —   Net sales, constant currency (non-GAAP) 243,949 242,100 0.8 % Less: Acquisitions —   —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 243,949   $ 242,100   0.8 %   Consolidated: Net sales, as reported $ 893,357 $ 895,637 (0.3 )% Foreign exchange impact (a) 22,747   —   Net sales, constant currency (non-GAAP) 916,104 895,637 2.3 % Less: Acquisitions (2,423 ) —   Net sales, constant currency excluding acquisitions (non-GAAP) $ 913,681   $ 895,637   2.0 %   (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 March 31, 2019 into U.S. dollars using the average foreign exchange rates for the quarter ended March 31, 2018.         ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited)   Net Sales by Geography: Nine months ended March 31, 2019 2018 % Change United States and Canada: (in thousands) Net sales, as reported $ 2,189,567 $ 2,095,519 4.5 % Less: Acquisitions (28,684 ) (14,553 ) Net sales, excluding acquisitions $ 2,160,883   $ 2,080,966   3.8 %   International: Net sales, as reported $ 722,711 $ 756,889 (4.5 )% Foreign exchange impact (a) 64,285   —   Net sales, constant currency 786,996 756,889 4.0 % Less: Acquisitions —   —   Net sales, constant currency excluding acquisitions $ 786,996   $ 756,889   4.0 %   Consolidated: Net sales, as reported $ 2,912,278 $ 2,852,408 2.1 % Foreign exchange impact (a) 64,285   —   Net sales, constant currency 2,976,563 2,852,408 4.4 % Less: Acquisitions (28,684 ) (14,553 ) Net sales, constant currency excluding acquisitions $ 2,947,879   $ 2,837,855   3.9 %   (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 nine months ended March 31, 2019 into U.S. dollars using the average foreign exchange rates for the nine months ended March 31, 2018.     ScanSource, Inc. and Subsidiaries Supplementary Information (Unaudited) (in thousands, except per share data)         Non-GAAP Financial Information: Quarter ended March 31, 2019

Operating income

Pre-tax income

Net income

Diluted EPS

GAAP measure $ 18,804 $ 15,795 $ 11,715 $ 0.45 Adjustments: Amortization of intangible assets 5,005 5,005 3,789 0.15 Change in fair value of contingent consideration 5,101 5,101 3,619 0.14 Acquisition costs (a) 222 222 222 0.01 Restructuring costs 592   592   443   0.02 Non-GAAP measure $ 29,724   $ 26,715   $ 19,788   $ 0.77   Quarter ended March 31, 2018

Operating income

Pre-tax income

Net income

Diluted EPS

GAAP measure $ 17,941 $ 15,792 $ 10,649 $ 0.42 Adjustments: Amortization of intangible assets 5,103 5,103 3,590 0.14 Change in fair value of contingent consideration 4,801   4,801   3,272   0.12 Non-GAAP measure $ 27,845   $ 25,696   $ 17,511   $ 0.68  

(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: Nine months ended March 31, 2019

Operating income

Pre-tax income

Net income

Diluted EPS

GAAP measure $ 69,942 $ 61,670 $ 46,019 $ 1.79 Adjustments: Amortization of intangible assets 14,708 14,708 11,154 0.43 Change in fair value of contingent consideration 11,535 11,535 8,514 0.33 Acquisition costs (a) 988 988 988 0.04 Restructuring costs 1,920   1,920   1,399   0.05 Non-GAAP measure $ 99,093   $ 90,821   $ 68,074   $ 2.64   Nine months ended March 31, 2018

Operating income

Pre-tax income

Net income

Diluted EPS

GAAP measure $ 47,880 $ 42,883 $ 22,765 $ 0.89 Adjustments: Amortization of intangible assets 15,600 15,600 10,500 0.41 Change in fair value of contingent consideration 28,595 28,595 19,018 0.74 Acquisition costs (a) 172 172 172 0.01 Legal settlement, net of attorney fees 952 952 771 0.03 Tax reform charges —   —   6,689   0.26 Non-GAAP measure $ 93,199   $ 88,202   $ 59,915   $ 2.34   (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 ended March 31,

Nine months ended March 31,

2019 2018 2019 2018 Return on invested capital (ROIC), annualized (a) 11.1 % 11.2 % 12.4 % 12.4 %  

Reconciliation of Net Income to Adjusted EBITDA

Net income (GAAP) $ 11,715 $ 10,649 $ 46,019 $ 22,765 Plus: Interest expense 3,670 2,784 9,415 6,655 Plus: Income taxes 4,080 5,143 15,651 20,118 Plus: Depreciation and amortization (b) 9,363   9,438   27,565   28,204   EBITDA (non-GAAP) 28,828 28,014 98,650 77,742 Adjustments: Change in fair value of contingent consideration 5,101 4,801 11,535 28,595 Acquisition costs 222 — 988 172 Restructuring costs (b) 456 — 1,784 — Legal settlement, net of attorney fees —   —   —   952   Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 34,607   $ 32,815   $ 112,957   $ 107,461      

Invested Capital Calculation

Equity - beginning of the quarter $ 899,503 $ 860,787 $ 866,376 $ 837,145 Equity - end of the quarter 911,063 877,796 911,063 877,796 Adjustments: Change in fair value of contingent consideration, net of tax 3,619 3,272 8,514 19,018 Acquisition costs 222 — 988 172 Restructuring costs, net of tax (b) 334 — 1,289 — Legal settlement, net of attorney fees, net of tax — — — 771 Tax reform charges —     —   6,689   Average equity 907,371 870,928 894,115 870,796 Average funded debt (c) 357,443   315,872   320,686   283,819   Invested capital (denominator for ROIC) (non-GAAP) $ 1,264,814   $ 1,186,800   $ 1,214,801   $ 1,154,615         (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) Accelerated depreciation expense on certain European facilities in connection with restructuring in the third quarter of fiscal 2019 are classified as depreciation expense above rather that restructuring costs. (c) 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 Quarter ending June 30, 2019

Range Low Range High GAAP diluted EPS $ 0.56 $ 0.62 Adjustments: Amortization of intangible assets 0.15 0.15 Change in fair value of contingent consideration 0.08 0.08 Restructuring costs 0.01   0.01 Non-GAAP diluted EPS $ 0.80   $ 0.86

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