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ScanSource Reports Third Quarter Results

Posted: May 10, 2016 8:57 pm (UTC)

Net Sales Growth of 5% and EPS Growth of 20%

ScanSource Reports Third Quarter Results

GREENVILLE, S.C. — (BUSINESS WIRE) —

ScanSource, Inc. (NASDAQ:SCSC), a leading global provider of technology products and solutions, today announced financial results for fiscal year 2016 third quarter ended March 31, 2016.

  Quarter ended March 31,
2016   2015   Change
(in millions, except per share data)
Net sales $ 798.4 $ 763.2 5 %
Operating income 21.6 21.5 1 %
Non-GAAP operating income(1) 25.3 24.2 5 %
GAAP net income 14.0 12.9 8 %
Non-GAAP net income(1) 16.5 14.9 11 %
GAAP diluted EPS $ 0.54 $ 0.45 20 %
Non-GAAP diluted EPS(1) $ 0.64 $ 0.52 23 %
 

(1) A reconciliation of non-GAAP financial information to GAAP financial

information is presented in the following Supplementary Information

(Unaudited) tables.

“Although sales fell below our expected range primarily from a lower volume of big deals, we are pleased to deliver EPS growth of 20%,” said Mike Baur, CEO, ScanSource, Inc. “Our 10.6% gross margin reflects the value-added services we provide to our customers and vendors.”

Net sales for the quarter ended March 31, 2016 increased 5% year-over-year to $798.4 million. The increase in net sales includes the acquisition of KBZ in September 2015. Net sales in constant currency excluding acquisitions decreased 1% year-over-year.

Operating income for the quarter ended March 31, 2016 totaled $21.6 million. Non-GAAP operating income of $25.3 million increased 5% year-over-year from $24.2 million.

On a GAAP basis, net income for the quarter ended March 31, 2016 totaled $14.0 million, or $0.54 per diluted share, compared with net income of $12.9 million, or $0.45 per diluted share, for the prior year quarter. Non-GAAP net income for the quarter ended March 31, 2016 of $16.5 million increased 11%, and non-GAAP diluted earnings per share of $0.64 increased 23% year-over-year.

Share Repurchase Update

During the quarter ended March 31, 2016, ScanSource repurchased approximately 0.9 million shares for an aggregate purchase price of approximately $26.8 million. Under the Company’s $120 million share repurchase authorization through March 31, 2016, ScanSource has repurchased approximately 3.3 million shares for approximately $117.2 million, having executed over 97% of the total authorization.

Forecast for Next Quarter

The Company announced its current expectations for the fourth quarter of fiscal year 2016. ScanSource expects net sales for the quarter ending June 30, 2016 to range from $900 million to $950 million and non-GAAP diluted earnings per share to range from $0.70 to $0.74 per share. Non-GAAP diluted earnings per share exclude amortization of intangibles, change in fair value of contingent consideration and acquisition costs.

Webcast Details

ScanSource will present additional information about its financial results and outlook in a conference call with presentation slides today, May 10, 2016 at 5:00 p.m. (ET). A webcast of the call and accompanying presentation slides will be available for all interested parties and can be accessed at www.scansource.com (Investor Relations section). The webcast will be available for replay for 60 days.

Safe Harbor Statement

This press release contains comments that are “forward-looking” statements that involve risks and uncertainties; these statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Any number of important factors could cause actual results to differ materially from anticipated or forecasted results, including, but not limited to, utilization and further implementation of the Company’s new ERP system; risks in connection with our growth which includes strategic acquisitions; expanded international operations that expose the Company to greater risks than its operations in domestic markets; risks associated with consolidation of the Company’s vendors; risks in connection with compliance with laws and regulations governing the Company’s international business; macroeconomic circumstances that could impact the business, such as currency fluctuations, credit market conditions, and an economic downturn; expectations of market demand trends; the ability to forecast volatility in earnings resulting from the quarterly revaluation of the Company’s earnout obligations; the timing and amount of any share repurchases; the exercise of discretion by the Company to make any repurchase or continue the share repurchase authorization; and changes to the source of funds for any repurchases. For more information concerning factors that could cause actual results to differ from anticipated results, see the Company’s annual report on Form 10-K for the year ended June 30, 2015, 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 better understand and evaluate performance, including comparisons from period to period. Non-GAAP results exclude amortization of intangible assets related to acquisitions and change in fair value of contingent consideration.

Net sales on a constant currency basis: The Company discloses the percentage change in net sales excluding the translation impact from changes in foreign currency exchange rates between reporting periods. This measure enhances comparability between periods to help analyze underlying trends.

Non-GAAP operating income, non-GAAP net income and non-GAAP EPS: To evaluate current period performance on a clearer and more consistent basis with prior periods, the Company discloses non-GAAP operating income, non-GAAP net income and non-GAAP diluted earnings per share. Non-GAAP results exclude amortization of intangible assets related to acquisitions, change in the fair value of contingent consideration, and other non-GAAP adjustments. Non-GAAP operating income, non-GAAP net income, and non-GAAP 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 is considered to have a strong correlation 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. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) excludes the change in fair value of contingent consideration, in addition to other non-GAAP adjustments. 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. In addition, the Company’s Board of Directors uses ROIC in evaluating business and management performance. Certain management incentive compensation targets are set and measured relative to ROIC.

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 following Supplementary Information (Unaudited) tables.

About ScanSource, Inc.

ScanSource, Inc. (NASDAQ: SCSC) is a leading global provider of technology products and solutions, focusing on point-of-sale (POS), barcode, physical security, video, voice, data networking and emerging technologies. ScanSource’s teams provide value-added solutions and operate from two segments, Worldwide Barcode & Security and Worldwide Communications & Services. ScanSource is committed to helping its reseller 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, the Company is headquartered in Greenville, South Carolina and was named one of the 2015 Best Places to Work in South Carolina. ScanSource ranks #775 on the Fortune 1000. For more information, visit www.scansource.com.

ScanSource, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
  March 31, 2016   June 30, 2015*
Assets
Current assets:
Cash and cash equivalents $ 40,849 $ 121,646
Accounts receivable, less allowance of $33,188 at March 31, 2016 and $32,589 at June 30, 2015 522,693 522,532
Inventories 568,247 553,063
Prepaid expenses and other current assets 54,249 46,917
Deferred income taxes 17,811   20,556  
Total current assets 1,203,849 1,264,714
Property and equipment, net 50,076 46,574
Goodwill 90,912 66,509
Net identifiable intangible assets 53,064 46,272
Other non-current assets 41,560   52,872  
Total assets $ 1,439,461   $ 1,476,941  
 
Liabilities and Shareholders’ Equity
Current liabilities:
Current debt $ 774 $ 2,860
Accounts payable 431,913 501,329
Accrued expenses and other current liabilities 98,429 81,000
Current portion of contingent consideration 12,915 9,391
Income taxes payable 3,218   4,180  
Total current liabilities 547,249 598,760
Deferred income taxes 3,403 3,773
Long-term debt 5,429 5,966
Borrowings under revolving credit facility 73,641
Long-term portion of contingent consideration 14,226 24,569
Other long-term liabilities 38,139   34,888  
Total liabilities 682,087 667,956
Shareholders’ equity:
Common stock 67,534 157,172
Retained earnings 767,009 716,315
Accumulated other comprehensive income (loss) (77,169 ) (64,502 )
Total shareholders’ equity 757,374   808,985  
Total liabilities and shareholders’ equity $ 1,439,461   $ 1,476,941  
 

* 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,
2016 2015 2016 2015
Net sales $ 798,404 $ 763,203 $ 2,662,754 $ 2,361,941
Cost of goods sold 713,928   683,187   2,390,093   2,126,168  
Gross profit 84,476 80,016 272,661 235,773
Selling, general and administrative expenses 61,690 58,235 190,202 158,047
Change in fair value of contingent consideration 1,139   285   4,520   1,262  
Operating income 21,647 21,496 77,939 76,464
Interest expense 694 891 1,684 1,288
Interest income (800 ) (731 ) (2,509 ) (2,057 )
Other, net 400   1,515   1,357   2,238  
Income before income taxes 21,353 19,821 77,407 74,995
Provision for income taxes 7,311   6,878   26,713   26,023  
Net income $ 14,042   $ 12,943   $ 50,694   $ 48,972  
Per share data:
Net income per common share, basic $ 0.54   $ 0.45   $ 1.90   $ 1.71  
Weighted-average shares outstanding, basic 25,863   28,646   26,741   28,590  
 
Net income per common share, diluted $ 0.54   $ 0.45   $ 1.88   $ 1.70  
Weighted-average shares outstanding, diluted 25,967   28,855   26,908   28,825  
 
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
   
Net Sales by Segment:
Quarter ended March 31,
Worldwide Barcode & Security: 2016   2015 % Change
Net sales, as reported $ 532,534 $ 482,780 10.3 %
Foreign exchange impact (a) 11,152    
Net sales, constant currency 543,686 482,780 12.6 %
Less: Acquisitions (63,637 )  
Net sales, constant currency excluding acquisitions $ 480,049   $ 482,780   (0.6 )%
 
Worldwide Communications & Services:
Net sales, as reported $ 265,870 $ 280,423 (5.2 )%
Foreign exchange impact (a) 12,193    
Net sales, constant currency 278,063 280,423 (0.8 )%
Less: Acquisitions    
Net sales, constant currency excluding acquisitions $ 278,063   $ 280,423   (0.8 )%
 
Consolidated:
Net sales, as reported $ 798,404 $ 763,203 4.6 %
Foreign exchange impact (a) 23,345    
Net sales, constant currency 821,749 763,203 7.7 %
Less: Acquisitions (63,637 )  
Net sales, constant currency excluding acquisitions $ 758,112   $ 763,203   (0.7 )%
 

(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 quarter ended March 31, 2016 into U.S. dollars using the weighted average

foreign exchange rates for the quarter ended March 31, 2015.

ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
   
Net Sales by Segment:
Nine Months ended March 31,
Worldwide Barcode & Security: 2016   2015 % Change  
Net sales, as reported $ 1,795,733 $ 1,578,723 13.7 %
Foreign exchange impact (a) 77,663    
Net sales, constant currency 1,873,396 1,578,723 18.7 %
Less: Acquisitions (229,721 )  
Net sales, constant currency excluding acquisitions $ 1,643,675   $ 1,578,723   4.1 %
 
Worldwide Communications & Services:
Net sales, as reported $ 867,021 $ 783,218 10.7 %
Foreign exchange impact (a) 19,944    
Net sales, constant currency 886,965 783,218 13.2 %
Less: Acquisitions (118,926 ) (4,686 )
Net sales, constant currency excluding acquisitions $ 768,039   $ 778,532   (1.3 )%
 
Consolidated:
Net sales, as reported $ 2,662,754 $ 2,361,941 12.7 %
Foreign exchange impact (a) 97,607    
Net sales, constant currency 2,760,361 2,361,941 16.9 %
Less: Acquisitions (348,647 ) (4,686 )
Net sales, constant currency excluding acquisitions $ 2,411,714   $ 2,357,255   2.3 %
 

(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, 2016 into U.S. dollars using the

weighted average foreign exchange rates for the nine months ended March 31, 2015.

ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
       
Net Sales by Geography:
Quarter ended March 31,

Non-GAAP

% Change

2016 2015 % Change

Constant

Currency(a)

United States $ 591,663 $ 534,742 10.6 % 10.6 %
International 206,741   228,461   (9.5 )% 0.7 %
Consolidated $ 798,404   $ 763,203   4.6 % 7.7 %
 
 
Nine Months ended March 31,

Non-GAAP

% Change

2016 2015 % Change

Constant

Currency(a)

United States $ 1,969,236 $ 1,717,600 14.7 % 14.7 %
International 693,518   644,341   7.6 % 22.8 %
Consolidated $ 2,662,754   $ 2,361,941   12.7 % 16.9 %
 

(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 quarter and nine months ended March 31, 2016 into U.S. dollars

using the weighted average foreign exchange rates for the quarter and nine months ended March 31, 2015. International

net sales excluding the translation impact of foreign currencies for the quarter and nine months ended March 31, 2016

totaled $230.1 million and $791.1 million, respectively.

ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
       
Non-GAAP Financial Information:
Quarter ended March 31, 2016

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 21,647 $ 21,353 $ 14,042 $ 0.54
Adjustments:
Amortization of intangible assets 2,507 2,507 1,703 0.07
Change in fair value of contingent consideration 1,139 1,139 748 0.03
Acquisition costs (a) 29   29   29  
Non-GAAP measure $ 25,322   $ 25,028   $ 16,522   $ 0.64
 
Quarter ended March 31, 2015

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 21,496 $ 19,821 $ 12,943 $ 0.45
Adjustments:
Amortization of intangible assets 2,114 2,114 1,464 0.05
Change in fair value of contingent consideration 285 285 200 0.01
Acquisition costs (a) 292   292   292   0.01
Non-GAAP measure $ 24,187   $ 22,512   $ 14,899   $ 0.52
 
Nine months ended March 31, 2016

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 77,939 $ 77,407 $ 50,694 $ 1.88
Adjustments:
Amortization of intangible assets 7,237 7,237 5,032 0.19
Change in fair value of contingent consideration 4,520 4,520 3,072 0.11
Acquisition costs (a) 309   309   309   0.01
Non-GAAP measure $ 90,005   $ 89,473   $ 59,107   $ 2.19
 
Nine months ended March 31, 2015

Operating

income

Pre-tax

income

Net

income

Diluted

EPS

GAAP measure $ 76,464 $ 74,995 $ 48,972 $ 1.70
Adjustments:
Amortization of intangible assets 4,550 4,550 3,149 0.11
Change in fair value of contingent consideration 1,262 1,262 887 0.03
Acquisition costs (a) 3,116   3,116   3,116   0.11
Non-GAAP measure $ 85,392   $ 83,923   $ 56,124   $ 1.95
 
(a) Acquisition costs are non-deductible for tax purposes.
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
     
Non-GAAP Financial Information:
Quarter ended

March 31,

Nine Months ended

March 31,

2016 2015 2016 2015
Return on invested capital (ROIC), annualized (a) 12.3 % 12.1 % 14.5 % 14.5 %
 

Reconciliation of Net Income to Adjusted EBITDA

Net income – GAAP $ 14,042 $ 12,943 $ 50,694 $ 48,972
Plus: Income taxes 7,311 6,878 26,713 26,023
Plus: Interest expense 694 891 1,684 1,288
Plus: Depreciation and amortization 4,281   3,710   12,570   8,050  
EBITDA 26,328 24,422 91,661 84,333
Adjustments:
Change in fair value of contingent consideration 1,139 285 4,520 1,262
Acquisition costs 29   292   309   3,116  
Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 27,496   $ 24,999   $ 96,490   $ 88,711  
 
 

Invested Capital Calculation

Equity – beginning of quarter $ 754,794 $ 818,748 $ 808,985 $ 802,643
Equity – end of quarter 757,374 799,051 757,374 799,051
Adjustments:
Change in fair value of contingent consideration, net of tax 748 200 3,072 887
Acquisition costs, net of tax 29   292   309   3,116  
Average equity 756,473 809,146 784,870 802,849
Average funded debt (b) 146,213   32,046   100,755   14,432  
Invested capital (denominator for ROIC) (non-GAAP) $ 902,686   $ 841,192   $ 885,625   $ 817,281  
 
 

(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.

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