ScanSource Announces First Quarter Results

Net Sales of $1.0 Billion with 3.5% Year-Over-Year Growth; Acquired Strategic SaaS Capabilities

ScanSource, Inc. (NASDAQ: SCSC), a leading provider of technology products and solutions, today announced financial results for the first quarter ended September 30, 2019.

Quarter ended September 30,

2019

2018

Change

(in millions, except per share data)

Net sales

1,006.9

972.9

Non-GAAP net sales, excluding Planned Divestitures(1)

851.4

813.3

Operating income

18.6

21.4

(13

Non-GAAP operating income(1) (2)

27.5

32.7

(16

GAAP net income

11.5

14.3

(19

Non-GAAP net income(1) (2)

18.5

22.9

(19

GAAP diluted EPS

0.45

0.56

(20

Non-GAAP diluted EPS(1) (2)

0.72

0.89

(19

(1) A reconciliation of non-GAAP financial information to GAAP financial information is presented in the Supplementary Information (Unaudited) below.

(2) Non-GAAP results exclude amortization of intangible assets related to acquisitions, change in fair value of contingent consideration, the impact of Planned Divestitures and other non-GAAP items. A reconciliation of non-GAAP to GAAP financial information is presented below.

“For the quarter, we are pleased to deliver 3.5% year-over-year sales growth,” said Mike Baur, Chairman and CEO, ScanSource, Inc. “With our acquisition of intY, we added strategic SaaS capabilities to meet strong customer demand for software. We became a Microsoft cloud solution provider, which allows our channel partners access to Office 365, Azure, and Teams.”

Quarterly Results

Net sales for the first quarter of fiscal year 2020 increased 3.5% year-over-year to $1.0 billion, driven primarily by growth across key technologies in North America. Operating income for the first quarter decreased to $18.6 million year-over-year and non-GAAP operating income decreased to $27.5 million from the prior-year quarter, primarily from investments in our business for future growth.

On a GAAP basis, net income for the first quarter of fiscal year 2020 totaled $11.5 million, or $0.45 per diluted share, compared with net income of $14.3 million, or $0.56 per diluted share, for the prior-year quarter. GAAP diluted EPS included a higher than expected expense for the change in fair value of contingent consideration for Intelisys as a result of better than expected actual results. Non-GAAP net income totaled $18.5 million, or $0.72 per diluted share, compared to $22.9 million, or $0.89 per diluted share, for the prior-year quarter. Non-GAAP diluted EPS was near the midpoint of the forecast range.

Acquisition of intY

On July 1, 2019, ScanSource announced and closed the acquisition of intY and its award-winning CASCADE cloud services distribution platform. As an additional element of ScanSource’s cloud and digital strategy, intY’s CASCADE solution provides ScanSource channel partners with another route-to-market to enable key strategic cloud services, including Microsoft, Symantec, and Acronis.

Plan to Divest Certain Businesses Outside of US, Canada and Brazil

On August 20, 2019, ScanSource announced plans to divest its physical products distribution businesses outside of the United States, Canada and Brazil. ScanSource will continue to operate and invest in its digital distribution business in these geographies. These plans are part of a strategic portfolio repositioning to align investments with higher-growth, higher-margin businesses. During the quarter, the Company began a process to market and sell the Planned Divestitures. There can be no assurance that this sale process will result in a transaction or regarding the timing of any transaction. The Planned Divestitures, comprised of physical product businesses in Europe, UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations, had net sales of $156 million for the first quarter fiscal year 2020 and at September 30, 2019 had working capital of $180 million.

Forecast for Next Quarter

For the second quarter of fiscal year 2020, ScanSource expects GAAP net sales to range from $1.03 billion to $1.09 billion and non-GAAP net sales excluding the Planned Divestitures to range from $880 million to $940 million. For the second quarter of fiscal year 2020, ScanSource expects diluted earnings per share to range from $0.54 to $0.59 and non-GAAP diluted earnings per share to range from $0.80 to $0.85. Non-GAAP diluted earnings per share exclude amortization of intangible assets related to acquisitions, change in fair value of contingent consideration, the impact of Planned Divestitures 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 12, 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 and the Planned Divestitures, 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 provides due both to competitor and customer action, the Company's ability to find a buyer for the Planned Divestitures on acceptable terms or to otherwise dispose of the operations, changes in the Company's operating strategy 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, 2019, 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, restructuring costs and other non-GAAP adjustments.

Net sales on a constant currency basis, excluding Planned Divestitures and acquisitions ("organic sales"): 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 Planned Divestitures, as well as 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.

Income Statement Non-GAAP Metrics: To evaluate current period performance on a more consistent basis with prior periods, the Company discloses non-GAAP net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP other expense, net, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share (non-GAAP diluted "EPS"). Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, acquisition and divestiture costs, impact of Planned Divestitures and other non-GAAP adjustments. Non-GAAP metrics 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, 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 at the center of the technology solution delivery channel, connecting businesses and providing solutions for their complex needs. ScanSource sells through multiple, specialized routes-to-market with digital, physical and services offerings from the world’s leading suppliers of point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration, telecom and cloud services. ScanSource enables its sales partners to create, deliver and manage solutions for end-customers across almost every vertical market. Founded in 1992 and headquartered in Greenville, South Carolina, ScanSource was named one of the 2019 Best Places to Work in South Carolina and on FORTUNE magazine’s 2019 List of World’s Most Admired Companies. ScanSource ranks #643 on the Fortune 1000. For more information, visit www.scansource.com.

ScanSource, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands)

September 30, 2019

June 30, 2019*

Assets

Current assets:

Cash and cash equivalents

25,877

23,818

Accounts receivable, less allowance of $37,083 at September 30, 2019 and $38,849 at June 30, 2019

706,428

654,983

Inventories

715,224

697,343

Prepaid expenses and other current assets

101,608

101,171

Total current assets

1,549,137

1,477,315

Property and equipment, net

63,309

63,363

Goodwill

364,867

319,538

Identifiable intangible assets, net

122,217

127,939

Deferred income taxes

24,033

24,724

Other non-current assets

94,962

54,382

Total assets

2,218,525

2,067,261

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable

656,150

558,101

Accrued expenses and other current liabilities

99,021

91,407

Current portion of contingent consideration

38,531

38,393

Income taxes payable

6,657

4,310

Short-term borrowings

—

4,590

Current portion of long-term debt

5,026

4,085

Total current liabilities

805,385

700,886

Deferred income taxes

1,257

1,395

Long-term debt, net of current portion

148,800

151,014

Borrowings under revolving credit facility

216,504

200,817

Long-term portion of contingent consideration

41,866

39,532

Other long-term liabilities

98,962

59,488

Total liabilities

1,312,774

1,153,132

Shareholders' equity:

Common stock

60,089

64,287

Retained earnings

951,460

939,930

Accumulated other comprehensive income (loss)

(105,798

)

(90,088

)

Total shareholders' equity

905,751

914,129

Total liabilities and shareholders' equity

2,218,525

2,067,261

Derived from audited financial statements.

ScanSource, Inc. and Subsidiaries

Condensed Consolidated Income Statements (Unaudited)

(in thousands, except per share data)

Quarter ended September 30,

2019

2018

Net sales

1,006,927

972,900

Cost of goods sold

894,828

860,685

Gross profit

112,099

112,215

Selling, general and administrative expenses

82,512

77,931

Depreciation expense

3,548

3,265

Intangible amortization expense

4,962

5,003

Change in fair value of contingent consideration

2,472

4,584

Operating income

18,605

21,432

Interest expense

3,792

2,627

Interest income

(800

)

(451

)

Other expense, net

Income before income taxes

15,581

19,224

Provision for income taxes

4,051

4,902

Net income

11,530

14,322

Per share data:

Net income per common share, basic

0.45

0.56

Weighted-average shares outstanding, basic

25,539

25,599

Net income per common share, diluted

0.45

0.56

Weighted-average shares outstanding, diluted

25,617

25,755

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

Net Sales by Segment:

Quarter ended September 30,

2019

2018

% Change

Worldwide Barcode, Networking & Security:

(in thousands)

Net sales, reported

697,791

655,113

6.5

Planned Divestitures

(116,603

)

(118,366

)

Non-GAAP net sales, excluding Planned Divestitures

581,188

536,747

8.3

Foreign exchange impact(a)

—

Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions

581,283

536,747

8.3

Worldwide Communications & Services:

Net sales, reported

309,136

317,787

(2.7

Planned Divestitures

(38,913

)

(41,279

)

Non-GAAP net sales, excluding Planned Divestitures

270,223

276,508

(2.3

Foreign exchange impact(a)

244

—

Less: Acquisitions

(12,157

)

(964

)

Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions

258,310

275,544

(6.3

Consolidated:

Net sales, reported

1,006,927

972,900

3.5

Planned Divestitures

(155,516

)

(159,645

)

Non-GAAP net sales, excluding Planned Divestitures

851,411

813,255

4.7

Foreign exchange impact(a)

339

—

Less: Acquisitions

(12,157

)

(964

)

Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions

839,593

812,291

3.4

(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, 2019 into U.S. dollars using the average foreign exchange rates for the quarter ended September 30, 2018.

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

Net Sales by Geography:

Quarter ended September 30,

2019

2018

% Change

United States and Canada:

(in thousands)

Net sales, as reported

769,637

737,957

4.3

Less: Acquisitions

(3,595

)

(964

)

Non-GAAP net sales, excluding acquisitions

766,042

736,993

3.9

International:

Net sales, as reported

237,290

234,943

1.0

Planned Divestitures

(155,516

)

(159,645

)

Non-GAAP net sales, excluding Planned Divestitures

81,774

75,298

8.6

Foreign exchange impact(a)

339

—

Less: Acquisitions

(8,562

)

—

Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions

73,551

75,298

(2.3

Consolidated:

Net sales, as reported

1,006,927

972,900

3.5

Planned Divestitures

(155,516

)

(159,645

)

Non-GAAP net sales, excluding Planned Divestitures

851,411

813,255

4.7

Foreign exchange impact(a)

339

—

Less: Acquisitions

(12,157

)

(964

)

Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions

839,593

812,291

3.4

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

(in thousands, except per share data)

Non-GAAP Financial Information:

Quarter ended September 30, 2019

Reported GAAP measure

Intangible amortization expense

Change in fair value of contingent consideration

Acquisition and Divestiture costs(a)

Restructuring costs

Impact of Planned Divestitures

Non- GAAP measure

in thousands, except per share data

Net sales

1,006,927

—

(155,516

)

851,411

Gross profit

112,099

—

(13,397

)

98,702

Operating income

18,605

4,962

2,472

757

169

507

27,472

Other expense, net

3,024

—

(140

)

2,884

Pre-tax income

15,581

4,962

2,472

757

169

647

24,588

Net income

11,530

3,746

1,869

757

128

444

18,474

Diluted EPS

0.45

0.15

0.07

0.03

—

0.02

0.72

Quarter ended September 30, 2018

Reported GAAP measure

Intangible amortization expense

Change in fair value of contingent consideration

Acquisition costs (a)

Restructuring costs

Impact of Planned Divestitures

Non- GAAP measure

in thousands, except per share data

Net sales

972,900

—

(159,645

)

813,255

Gross profit

112,215

—

(15,198

)

97,017

Operating income

21,432

5,003

4,584

355

1,328

(49

)

32,653

Other expense, net

2,208

—

167

2,375

Pre-tax income

19,224

5,003

4,584

355

1,328

(216

)

30,278

Net income

14,322

3,798

3,487

355

955

(47

)

22,870

Diluted EPS

0.56

0.15

0.14

0.01

0.03

—

0.89

(a) Acquisition and divestiture costs are generally non-deductible for tax purposes.

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

(in thousands, except percentages)

Non-GAAP Financial Information:

Quarter ended September 30,

2019

2018

Return on invested capital ratio (ROIC), annualized (a)

9.6

12.8

Reconciliation of net income to EBITDA:

Net income (GAAP)

11,530

14,322

Plus: Interest expense

3,792

2,627

Plus: Income taxes

4,051

4,902

Plus: Depreciation and amortization

9,189

9,268

EBITDA (non-GAAP)

28,562

31,119

Plus: Change in fair value of contingent consideration

2,472

4,584

Plus: Acquisition and divestiture costs

757

355

Plus: Restructuring costs

169

1,328

Plus: Impact of Planned Divestitures

(76

)

(486

)

Adjusted EBITDA (numerator for ROIC) (non-GAAP)

31,884

36,900

Invested Capital Calculation

Equity – beginning of the quarter

914,129

866,376

Equity – end of the quarter

905,751

877,897

Plus: Change in fair value of contingent consideration, net of tax

1,869

3,487

Plus: Acquisition and divestiture costs

757

355

Plus: Restructuring, net of tax

128

955

Plus: Impact of Planned Divestitures, net of tax

444

908

Average equity

911,539

874,989

Average funded debt(b)

407,306

272,277

Invested capital (denominator for ROIC) (non-GAAP)

1,318,845

1,147,266

(a) Calculated as earnings before 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)

(in thousands, except per share data)

Non-GAAP Financial Information:

Forecast for Quarter ending December 31, 2019

Range Low

Range High

GAAP net sales, reported

1,030,000

1,090,000

Adjustments:

Net sales for Planned Divestitures

(150,000

)

(150,000

)

Non-GAAP net sales, excluding Planned Divestitures

880,000

940,000

GAAP diluted EPS

0.54

0.59

Adjustments:

Amortization of intangible assets

0.17

Change in fair value of contingent consideration

0.05

Impact of Planned Divestitures(a)

0.02

Other (restructuring costs and divestiture costs)

0.02

Non-GAAP diluted EPS

0.80

0.85

(a) Reflects operating results for Planned Divestitures and does not include any non-cash charges from write-downs or costs associated with a sale or liquidation of the businesses and their assets.

View source version on businesswire.com: https://www.businesswire.com/news/home/20191112006029/en/

Gerald Lyons Executive Vice President, Chief Financial Officer ScanSource, Inc. (864) 286-4854

- or -

Mary M. Gentry Vice President, Treasurer and Investor Relations ScanSource, Inc. (864) 286-4892

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