Market Overview

ScanSource Reports Strong Fourth Quarter Results

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Record Full-Year Net Sales with 8% Sales Growth and 14% Gross Profit
Growth

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

     
Quarter ended June 30, Year ended June 30,
2018   2017   Change 2018   2017   Change
(in millions, except per share data) (in millions, except per share data)
Net sales $ 993.9   $ 917.3   8 % $ 3,846   $ 3,568   8 %
Operating income 19.8 22.1 (11 )% 67.6 88.2 (23 )%
Non-GAAP operating income(1) 30.8 27.8 11 % 124.0 110.2 12 %
GAAP net income 10.4 19.0 (45 )% 33.2 69.2 (52 )%
Non-GAAP net income(1) 19.9 17.3 15 % 79.8 70.3 14 %
GAAP diluted EPS $ 0.40 $ 0.74 (46 )% $ 1.29 $ 2.71 (52 )%
Non-GAAP diluted EPS(1) $ 0.77 $ 0.68 13 % $ 3.11 $ 2.75 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 delivered outstanding fourth quarter sales and gross profit growth,
capping a year of progress in executing our growth initiatives," said
Mike Baur, CEO, ScanSource, Inc. "We want to congratulate our teams
worldwide on achieving these excellent results. Investments we are
making in our business are positioning us to accelerate our profitable
growth."

Quarterly Results

For the fourth quarter of fiscal year 2018, net sales increased 8% to
$993.9 million, driven by sales growth in both Worldwide segments.
Organic sales growth, which excludes the impact from foreign currency
translation and a recent acquisition, was 5.0%. Operating income
decreased to $19.8 million largely as a result of increased expense for
the change in fair value of the contingent consideration. Non-GAAP
operating income increased 11% to $30.8 million, primarily from higher
net sales and the addition of the POS Portal acquisition.

On a GAAP basis, net income for the quarter totaled $10.4 million, or
$0.40 per diluted share, compared with net income of $19.0 million, or
$0.74 per diluted share, for the prior-year quarter. Non-GAAP net income
for the fourth quarter of fiscal year 2018 increased 15% to $19.9
million, or $0.77 per diluted share, compared to $17.3 million, or $0.68
per diluted share, for the prior-year quarter.

Full-Year Results

For the full fiscal year 2018, net sales increased 8% to $3.8 billion.
Operating income decreased to $67.6 million, due to additional expense
for the change in the fair value of the contingent consideration.
Non-GAAP operating income increased 12% to $124.0 million, primarily
from higher sales volumes, higher gross margin and the addition of the
POS Portal acquisition.

On a GAAP basis, net income for the fiscal year 2018 totaled $33.2
million, or $1.29 per diluted share, compared to net income of $69.2
million, or $2.71 per diluted share, for the prior year. Non-GAAP net
income for the year increased 14% to $79.8 million, or $3.11 per diluted
share, compared to $70.3 million, or $2.75 per diluted share, for the
prior year.

Forecast for Next Quarter

For the first quarter of fiscal year 2019, ScanSource expects net sales
to range from $950 million to $1.01 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 $0.83 to $0.89 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 our press release and 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, August 28, 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 our international operations, the
impact of tax reform laws, the failure of acquisitions to meet our
expectations, the failure to manage and implement our organic growth
strategy, credit risks involving our larger customers and vendors,
termination of our relationship with key vendors or a significant
modification of the terms under which we operate with a key vendor, the
decline in demand for the products and services that we provide, reduced
prices for the products and services that we provide due both to
competitor and customer actions, and other factors set forth in the
"Risk Factors" contained in our 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, cloud and telecom 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)
    June 30, 2018*     June 30, 2017*
Assets
Current assets:
Cash and cash equivalents $ 25,530 $ 56,094
Accounts receivable, less allowance of $45,561 at June 30, 2018 and
$44,434 at June 30, 2017
678,940 637,293
Inventories 595,948 531,314
Prepaid expenses and other current assets 61,744   56,322  
Total current assets 1,362,162 1,281,023
Property and equipment, net 73,042 56,566
Goodwill 298,174 200,881
Identifiable intangible assets, net 136,806 101,513
Deferred income taxes 22,199 29,491
Other non-current assets 52,912   48,829  
Total assets $ 1,945,295   $ 1,718,303  
 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 562,564 $ 513,155
Accrued expenses and other current liabilities 90,873 104,715
Current portion of contingent consideration 42,975 30,675
Income taxes payable 13,348 7,730
Current portion of long-term debt 551    
Total current liabilities 710,311 656,275
Deferred income taxes 1,769 2,008
Long-term debt, net of current portion 4,878 5,429
Borrowings under revolving credit facility 244,000 91,871
Long-term portion of contingent consideration 65,258 83,361
Other long-term liabilities 52,703   42,214  
Total liabilities 1,078,919 881,158
Shareholders' equity:
Common stock 68,220 61,169
Retained earnings 882,333 849,180
Accumulated other comprehensive income (loss) (84,177 ) (73,204 )
Total shareholders' equity 866,376   837,145  
Total liabilities and shareholders' equity $ 1,945,295   $ 1,718,303  

*Derived from audited financial statements.

 
ScanSource, Inc. and Subsidiaries
Condensed Consolidated Income Statements (Unaudited)
(in thousands, except per share data)
               
Quarter ended June 30, Year ended June 30,
2018* 2017* 2018* 2017*
Net sales $ 993,852 $ 917,291 $ 3,846,260 $ 3,568,186
Cost of goods sold 880,503   816,435   3,410,135   3,184,590  
Gross profit 113,349 100,856 436,125 383,596
Selling, general and administrative expenses 76,834 71,179 297,475 265,178
Depreciation expense 3,252 2,289 13,311 9,444
Intangible amortization expense 5,056 3,987 20,657 15,524
Change in fair value of contingent consideration 8,448   1,290   37,043   5,211  
Operating income 19,759 22,111 67,639 88,239
Interest expense 2,494 934 9,149 3,215
Interest income (1,365 ) (2,382 ) (3,713 ) (5,329 )
Other (income) expense, net 587   139   1,278   (11,142 )
Income before income taxes 18,043 23,420 60,925 101,495
Provision for income taxes 7,655   4,450   27,772   32,249  
Net income $ 10,388   $ 18,970   $ 33,153   $ 69,246  
Per share data:
Net income per common share, basic $ 0.41   $ 0.75   $ 1.30   $ 2.74  
Weighted-average shares outstanding, basic 25,577   25,341   25,522   25,318  
 
Net income per common share, diluted $ 0.40   $ 0.74   $ 1.29   $ 2.71  
Weighted-average shares outstanding, diluted 25,675   25,512   25,624   25,515  
 
*Derived from audited financial statements.
 
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
   
Net Sales by Segment:
Quarter ended June 30,
2018   2017 % Change
Worldwide Barcode, Networking & Security: (in thousands)
Net sales, as reported $ 684,552 $ 619,241 10.5 %
Foreign exchange impact (a) (4,318 )  
Net sales, constant currency (non-GAAP) 680,234 619,241 9.8 %
Less: Acquisitions (30,842 )  
Net sales, constant currency excluding acquisitions (non-GAAP) $ 649,392   $ 619,241   4.9 %
 
Worldwide Communications & Services:
Net sales, as reported $ 309,300 $ 298,050 3.8 %
Foreign exchange impact (a) 4,218    
Net sales, constant currency (non-GAAP) 313,518 298,050 5.2 %
Less: Acquisitions    
Net sales, constant currency excluding acquisitions (non-GAAP) $ 313,518   $ 298,050   5.2 %
 
Consolidated:
Net sales, as reported $ 993,852 $ 917,291 8.3 %
Foreign exchange impact (a) (100 )  
Net sales, constant currency (non-GAAP) 993,752 917,291 8.3 %
Less: Acquisitions (30,842 )  
Net sales, constant currency excluding acquisitions (non-GAAP) $ 962,910   $ 917,291   5.0 %
 
(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 June 30, 2018 into
U.S. dollars using the average foreign exchange rates for the
quarter ended June 30, 2017.
     
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
 
Net Sales by Segment:
Year ended June 30,
Worldwide Barcode, Networking & Security: 2018 2017 % Change
(in thousands)
Net sales, as reported $ 2,628,988 $ 2,389,256 10.0 %
Foreign exchange impact (a) (32,561 )  
Net sales, constant currency 2,596,427 2,389,256 8.7 %
Less: Acquisitions (87,461 )  
Net sales, constant currency excluding acquisitions $ 2,508,966   $ 2,389,256   5.0 %
 
Worldwide Communications & Services:
Net sales, as reported $ 1,217,272 $ 1,178,930 3.3 %
Foreign exchange impact (a) (5,055 )  
Net sales, constant currency 1,212,217 1,178,930 2.8 %
Less: Acquisitions (9,750 ) (2,863 )
Net sales, constant currency excluding acquisitions $ 1,202,467   $ 1,176,067   2.2 %
 
Consolidated:
Net sales, as reported $ 3,846,260 $ 3,568,186 7.8 %
Foreign exchange impact (a) (37,616 )  
Net sales, constant currency 3,808,644 3,568,186 6.7 %
Less: Acquisitions (97,211 ) (2,863 )
Net sales, constant currency excluding acquisitions $ 3,711,433   $ 3,565,323   4.1 %
 
(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 fiscal year ended June 30, 2018
into U.S. dollars using the average foreign exchange rates for the
fiscal year ended June 30, 2017.
 
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
     
Net Sales by Geography:
Quarter ended June 30,
2018 2017 % Change
United States and Canada: (in thousands)
Net sales, as reported $ 751,678 $ 695,036 8.1 %
Less: Acquisitions (30,842 )  
Net sales, excluding acquisitions (non-GAAP) $ 720,836   $ 695,036   3.7 %
 
International:
Net sales, as reported $ 242,174 $ 222,255 9.0 %
Foreign exchange impact (a) (100 )  
Net sales, constant currency (non-GAAP) 242,074 222,255 8.9 %
Less: Acquisitions    
Net sales, constant currency excluding acquisitions (non-GAAP) $ 242,074   $ 222,255   8.9 %
 
Consolidated:
Net sales, as reported $ 993,852 $ 917,291 8.3 %
Foreign exchange impact (a) (100 )  
Net sales, constant currency (non-GAAP) 993,752 917,291 8.3 %
Less: Acquisitions (30,842 )  
Net sales, constant currency excluding acquisitions (non-GAAP) $ 962,910   $ 917,291   5.0 %
 
(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 June 30, 2018 into
U.S. dollars using the average foreign exchange rates for the
quarter ended June 30, 2017.
     
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
 
Net Sales by Geography:
Year ended June 30,
2018 2017 % Change
United States and Canada: (in thousands)
Net sales, as reported $ 2,847,197 $ 2,685,820 6.0 %
Less: Acquisitions (97,211 ) (2,863 )
Net sales, excluding acquisitions $ 2,749,986   $ 2,682,957   2.5 %
 
International:
Net sales, as reported $ 999,063 $ 882,366 13.2 %
Foreign exchange impact (a) (37,616 )  
Net sales, constant currency 961,447 882,366 9.0 %
Less: Acquisitions    
Net sales, constant currency excluding acquisitions $ 961,447   $ 882,366   9.0 %
 
Consolidated:
Net sales, as reported $ 3,846,260 $ 3,568,186 7.8 %
Foreign exchange impact (a) (37,616 )  
Net sales, constant currency 3,808,644 3,568,186 6.7 %
Less: Acquisitions (97,211 ) (2,863 )
Net sales, constant currency excluding acquisitions $ 3,711,433   $ 3,565,323   4.1 %
 
(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 fiscal year ended June 30, 2018
into U.S. dollars using the average foreign exchange rates for the
fiscal year ended June 30, 2017.
 
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands, except per share data)
               
Non-GAAP Financial Information:
Quarter ended June 30, 2018

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 19,759 $ 18,043 $ 10,388 $ 0.40
Adjustments:
Amortization of intangible assets 5,056 5,056 3,521 0.14
Change in fair value of contingent consideration 8,448 8,448 5,679 0.22
Tax recovery and related interest income (2,466 ) (3,119 ) (2,058 ) (0.08 )
Tax reform changes     2,345   0.09  
Non-GAAP measure $ 30,797   $ 28,428   $ 19,875   $ 0.77  
 
Quarter ended June 30, 2017

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 22,111 $ 23,420 $ 18,970 $ 0.74
Adjustments:
Amortization of intangible assets 3,987 3,987 2,625 0.10
Change in fair value of contingent consideration 1,290 1,290 680 0.03
Acquisition costs (a) 422 422 422 0.02
Tax recovery and related interest income   (1,382 ) (5,370 ) (0.21 )
Non-GAAP measure $ 27,810   $ 27,737   $ 17,327   $ 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:
Year ended June 30, 2018

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 67,639 $ 60,925 $ 33,153 $ 1.29
Adjustments:
Amortization of intangible assets 20,657 20,657 14,021 0.55
Change in fair value of contingent consideration 37,043 37,043 24,697 0.96
Acquisition costs (a) 172 172 172 0.01
Legal settlement, net of attorney fees 952 952 771 0.03
Tax recovery and related interest income (2,466 ) (3,119 ) (2,058 ) (0.08 )
Tax reform changes     9,034   0.35  
Non-GAAP measure $ 123,997   $ 116,630   $ 79,790   $ 3.11  
 
Year ended June 30, 2017

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 88,239 $ 101,495 $ 69,246 $ 2.71
Adjustments:
Amortization of intangible assets 15,524 15,524 10,247 0.40
Change in fair value of contingent consideration 5,211 5,211 2,921 0.11
Acquisition costs (a) 1,256 1,256 1,256 0.06
Legal settlement, net of attorney fees (12,777 ) (8,047 ) (0.32 )
Tax recovery and related interest income   (1,382 ) (5,370 ) (0.21 )
Non-GAAP measure $ 110,230   $ 109,327   $ 70,253   $ 2.75  
(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

June 30,

Year ended June 30,
2018 2017 2018 2017
Return on invested capital (ROIC), annualized (a) 12.5 % 13.2 % 12.5 % 13.1 %
 

Reconciliation of Net Income to Adjusted
EBITDA

Net income - GAAP $ 10,388 $ 18,970 $ 33,153 $ 69,246
Plus: Interest expense 2,494 934 9,149 3,215
Plus: Income taxes 7,655 4,450 27,772 32,249
Plus: Depreciation and amortization 9,291   6,276   37,495   24,968  
EBITDA 29,828 30,630 107,569 129,678
Adjustments:
Change in fair value of contingent consideration 8,448 1,290 37,043 5,211
Acquisition costs 422 172 1,256
Tax recovery and related interest income (3,119 ) (1,382 ) (3,119 ) (1,382 )
Legal settlement (recovery), net of attorney fees     952   (12,777 )
Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 35,157   $ 30,960   $ 142,617   $ 121,986  
 
 

Invested Capital Calculation

Equity - beginning of quarter $ 877,796 $ 808,719 $ 837,145 $ 774,496
Equity - end of quarter 866,376 837,145 866,376 837,145
Adjustments:
Change in fair value of contingent consideration, net of tax 5,679 680 24,697 2,921
Acquisition costs 422 172 1,256
Legal settlement (recovery), net of attorney fees, net of tax 771 (8,047 )
Tax recovery and related interest income, net of tax (2,058 ) (5,370 ) (2,058 ) (5,370 )
Tax reform changes 2,345     9,034    
Average equity 875,069 820,798 868,069 801,201
Average funded debt (b) 253,393   117,970   276,233   131,445  
Invested capital (denominator for ROIC) (non-GAAP) $ 1,128,462   $ 938,768   $ 1,144,302   $ 932,646  
 
 
 
(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 Quarter ending September 30, 2018
Range Low Range High
GAAP diluted EPS $ 0.56 $ 0.62
Adjustments:
Amortization of intangible assets 0.14 0.14
Change in fair value of contingent consideration 0.07 0.07
Restructuring costs 0.05 0.05
Acquisition costs $ 0.01   $ 0.01
Non-GAAP diluted EPS $ 0.83   $ 0.89

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