Attached files
| file | filename |
|---|---|
| EX-99.1 - EXHIBIT 99.1 - SCANSOURCE, INC. | a2018-q2exhibit99112312017.htm |
| 8-K - 8-K - SCANSOURCE, INC. | a2018-q2form8xk12312017.htm |
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com
FINANCIAL INFORMATION AND CONFERENCE CALL
Please see the accompanying earnings press release available at
www.scansource.com in the Investor Relations section. The information
included in this CFO commentary is unaudited and should be read in
conjunction with the Company’s SEC filings on Form 10-K for the year
ended June 30, 2017 and subsequent reports on Form 10-Q.
ScanSource will present additional information about its financial results
and outlook in a conference call on Tuesday, February 6, 2018 at 5:00
pm ET. A webcast of the call is available and can be accessed at
www.scansource.com (Investor Relations section). The webcast will be
available for replay for 60 days.
SECOND QUARTER SUMMARY
We delivered both strong sales and non-GAAP profitability growth
during the second quarter. Our record quarterly net sales exceeded
$1 billion for the first time with 10% organic sales growth. GAAP EPS
of $0.31 includes a $0.26 unfavorable impact from one-time tax reform
charges. Both net sales and non-GAAP EPS were above the high
end of our forecast range. For second quarter fiscal year 2018, we
earned a return on invested capital of 13.3%, which reflects a 21%
increase in adjusted EBITDA. As a result of tax reform legislation
enacted in December, we recognized one-time tax reform charges of
approximately $6.7 million, or a $0.26 impact on GAAP diluted EPS.
Excluding these tax charges, our effective tax rate for the quarter was
lower than planned.
Q2 FY18 Results:
NET SALES
GAAP
DILUTED EPS
NON-GAAP
DILUTED EPS
CFO COMMENTARY
Q2 FY 2018
February 6, 2018 1
Please see Appendix for calculation of non-GAAP measures and reconciliations to GAAP measures.
$0.90
Forecast:
$0.76 to $0.82
$0.31
Forecast:
$0.54 to $0.60
$1.03 billion
Forecast:
$950 million to
$1.01 billion
Exhibit 99.2
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com
Q2 FY18 Q1 FY18 Q2 FY17
Y/Y
Change
Net sales $1,032.2 $924.6 $904.8 +14%
Gross profit 113.0 105.9 98.5 +15%
Gross profit margin % 10.9% 11.5% 10.9% +5 bps
Operating income 22.3 7.6 23.3 -4%
Operating income % 2.2% 0.8% 2.6% -41 bps
Non-GAAP operating income 34.7 30.6 29.6 +18%
Non-GAAP operating income % 3.4% 3.3% 3.3% +10 bps
GAAP net income 8.0 4.1 23.0 -65%
Non-GAAP net income 23.0 19.4 19.1 +21%
GAAP diluted EPS $0.31 $0.16 $0.91 -66%
Non-GAAP diluted EPS $0.90 $0.76 $0.75 +20%
February 6, 2018
HIGHLIGHTS
• Record net sales of $1 billion
- Above the high end of forecast range
- 10% Y/Y organic growth
• WW Barcode, Networking & Security
segment drove sales growth, including
higher big deals in North America
• Gross profit margin of 10.9%
- Q/Q decrease from higher mix of large
deals
- Y/Y includes higher margins from POS
Portal acquisition
• Non-GAAP operating income (+18%)
grew faster than net sales growth (+14%)
• Operating income margin was 2.2%, and
non-GAAP operating income margin
increased to 3.4%
• GAAP net income includes one-time tax
reform charges of $6.7 million, or a $0.26
impact on GAAP diluted EPS
• Non-GAAP EPS increased 20% Y/Y to
$0.90
- Includes a $0.07 per share benefit from
tax reform lower rates
2
$ in millions, except EPS
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com
Q2 FY18 Q1 FY18 Q2 FY17
Net sales $719.8 $620.3 $593.8
Gross profit $62.0 $57.5 $49.0
Gross margin 8.6% 9.3% 8.2%
Operating income $15.5 $14.0 $12.1
Operating income % 2.2% 2.3% 2.0%
Non-GAAP operating income $17.9 $15.9 $13.2
Non-GAAP operating income % 2.5% 2.6% 2.2%
February 6, 2018
WORLDWIDE BARCODE, NETWORKING & SECURITY
• Record net sales of $720 million
- Driven by higher big deals in North
America from federal business,
mobile computing, POS systems,
and physical security
• Gross profit margin of 8.6%
- Q/Q decrease from higher mix of
big deals at lower margins
- Y/Y increase from addition of higher
margin POS Portal acquisition
• Operating income margin of 2.2%
increased 12 basis points Y/Y
• Non-GAAP operating income margin
of 2.5% increased 26 basis points Y/Y
3
$594
$549
$619 $620
$720
$300
$400
$500
$600
$700
$800
Q2'17 Q3'17 Q4'17 Q1'18 Q2'18
Net Sales, $ in millions
Y/Y Growth +21%
Y/Y Organic Growth +16%
$ in millions
Organic growth, a non-GAAP measure, reflects reported sales growth less impacts from foreign currency translation
and acquisitions. Non-GAAP operating income excludes amortization of intangibles and change in fair value of
contingent consideration.
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com
Q2 FY18 Q1 FY18 Q2 FY17
Net sales $312.4 $304.2 $311.0
Gross profit $51.0 $48.5 $49.6
Gross margin 16.3% 15.9% 15.9%
Operating income $6.8 $(6.3) $11.5
Operating income % 2.2% (2.1)% 3.7%
Non-GAAP operating income $16.9 $14.7 $16.4
Non-GAAP operating income % 5.4% 4.8% 5.3%
February 6, 2018
WORLDWIDE COMMUNICATIONS & SERVICES
4
$311
$265
$298 $304
$312
$0
$100
$200
$300
$400
Q2'17 Q3'17 Q4'17 Q1'18 Q2'18
Net Sales, $ in millions
Y/Y Growth +0.5%
Y/Y Organic Growth (1)%
$ in millions
Organic growth, a non-GAAP measure, reflects reported sales growth less impacts from foreign currency translation
and acquisitions. Non-GAAP operating income excludes amortization of intangibles and change in fair value of
contingent consideration.
• Net sales of $312 million
- Strong sales growth in Latin America,
offset by declines in North America
and Europe in constant currency
- Intelisys net sales increased 22% Y/Y
• Gross profit margin increased to 16.3%
from improved vendor program
recognition and higher services mix in
North America
• Operating income margin decreased to
2.2% from increased expense for the
change in fair value of contingent
consideration
• Non-GAAP operating margin of 5.4%
increased 15 basis points Y/Y
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com
Q2 FY18 Q1 FY18 Q2 FY17
Accounts receivable (Q/E) $717.3 $661.4 $620.6
Days sales outstanding in receivables* 60 63 60
Inventory (Q/E) $581.8 $597.3 $512.9
Inventory turns* 6.2 5.8 6.0
Accounts payable (Q/E) $515.3 $534.9 $476.3
Paid for inventory days* 9.4 10.1 6.5
Working capital (Q/E) (AR+INV–AP) $783.8 $723.8 $657.1
February 6, 2018
WORKING CAPITAL
5
• Working capital of $783.8, up 19% Y/Y
and 8% Q/Q
• Additional working capital investment to
support faster growth
- Strong sales late in the quarter
- Lower accounts payable days from
timing of accounts payable
• Days sales outstanding in receivables at
60 days are in line with current trends
• Inventory turns improved to 6.2x with
inventory up 13% Y/Y and down 3% Q/Q
$ in millions
* Excludes the impact of the POS Portal acquisition, completed 7/31/17, for Q1 FY18 and Intelisys for all periods
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com
Q2 FY18 Q1 FY18 Q2 FY17
Adjusted EBITDA (QTR) $39.4 $35.2 $32.6
Adjusted ROIC (QTR)* 13.3% 13.0% 13.8%
Operating cash flow (QTR) $(46.8) $(37.4) $29.5
Operating cash flow, trailing 12-months $(25.0) $51.2 $128.4
Cash and cash equivalents (Q/E) $35.4 $23.6 $45.1
Debt (Q/E) $360.9 $285.8 $141.7
Net debt to adjusted EBITDA, trailing 12-months 2.4x 2.0x 0.9x
Shares repurchased – # of shares (QTR) -- -- 100,530
Shares repurchased – dollars (QTR) -- -- $3.5
Remaining authorization under plan (as of Q/E) $99.7 $99.7 $99.7
February 6, 2018
CASH FLOW AND BALANCE SHEET HIGHLIGHTS
6
• Adjusted EBITDA of $39.4 million, up
21% Y/Y, from operating leverage on
higher sales volume and the addition of
the POS Portal acquisition
• Adjusted return on invested capital of
13.3%, down from prior year due to higher
invested capital
• Operating cash flow was $(46.8) for the
second quarter
• Expect to generate operating cash flow
during the remainder of fiscal year 2018
from operating income and lower working
capital investment
• Cash balances of $35.4 million at
12/31/17, including $26.8 million held
outside of the U.S.
• Net debt to trailing 12-months adjusted
EBITDA is 2.4x
• No shares repurchased during the quarter
• Balance sheet remains strong and
provides us with the ability to execute our
capital allocation plan
$ in millions
* Excludes non-GAAP adjustments and change in fair value of contingent consideration
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
Q3 FY2018 OUTLOOK*
7
For the quarter ending March 31, 2018:
Forecast Range:
$860 million to
$920 million
Forecast Range:
$0.44 to $0.50
per share
Forecast: Range
$0.67 to $0.73
per share
NET SALES GAAP DILUTED EPS NON-GAAP DILUTED EPS
• Outlook as of February 6, 2018
• Non-GAAP diluted EPS excludes amortization of intangible assets, change in fair value of
contingent consideration and acquisition costs
• Forecast midpoint reflects organic sales growth of approximately 5%
• Reflects the following FX rates: $1.22 to EUR 1.00 for the Euro, $0.31 to R$1.00 for the
Brazilian real (R$3.23 to $1), and $1.38 to GBP 1.00 for the British pound
• Expect foreign currency translation to positively impact sales by approximately $15 million
• Expect interest expense to increase from higher interest rates and average debt balances
similar to the December 2017 quarter
• Includes impact from U.S. tax reform and assumes a lower tax rate of 30% for the quarter
Q3 FY17: Net sales $814 million Q3 FY17: GAAP diluted EPS $0.49 Q3 FY17: Non-GAAP diluted EPS $0.65
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
FORWARD-LOOKING STATEMENTS
This CFO Commentary contains certain
comments that are “forward-looking”
statements, including statements about
expected EBITDA, return on invested capital
(“ROIC”), sales, GAAP diluted earnings per
share (“EPS”), and non-GAAP diluted EPS,
that involve plans, strategies, economic
performance and trends, projections,
expectations, costs or beliefs about future
events and other statements that are not
descriptions of historical facts. Forward-
looking information is inherently subject to
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, 2017, and
subsequent reports on Form 10-Q, filed with
the Securities and Exchange Commission
(“SEC”).
Although ScanSource believes the
expectations in its forward-looking statements
are reasonable, it cannot guarantee future
results, levels of activity, performance or
achievement. ScanSource disclaims any
obligation to update or revise any forward-
looking statements, whether as a result of new
information, future events, or otherwise,
except as may be required by law.
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 measures, including non-GAAP
operating income, non-GAAP operating
income margin, non-GAAP net income, non-
GAAP diluted EPS, adjusted EBITDA, ROIC
and net sales excluding the impact of foreign
currency translation and acquisitions (organic
growth). A reconciliation of the Company's
non-GAAP financial information to GAAP
financial information is provided in the
Appendix and in the Company’s Form 8-K,
filed with the SEC, with the quarterly earnings
press release for the period indicated.
8
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION
Operating Income, Pre-Tax Income, Net Income & EPS – QTR
9
($ in thousands) Quarter Ended December 31, 2017
Operating
Income
Pre-tax
income
Net
income
Diluted
EPS
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 (a) - - 6,689 0.26
Non-GAAP measure $ 34,741 $ 32,710 $ 23,048 $ 0.90
Quarter Ended September 30, 2017
Operating
Income
Pre-tax
income
Net
income
Diluted
EPS
GAAP measure $ 7,598 $ 6,780 $ 4,147 $ 0.16
Adjustments:
Amortization of intangible assets 5,011 5,011 3,261 0.13
Change in fair value of contingent
consideration 16,881 16,881 11,005 0.43
Acquisition costs (b) 172 172 172 0.01
Legal settlement, net of attorney fees 952 952 771 0.03
Non-GAAP measure $ 30,614 $ 29,796 $ 19,356 $ 0.76
Quarter Ended December 31, 2016
Operating
Income
Pre-tax
income
Net
income
Diluted
EPS
GAAP measure $ 23,275 $ 35,781 $ 23,036 $ 0.91
Adjustments:
Amortization of intangible assets 4,165 4,165 2,740 0.11
Change in fair value of contingent
consideration 1,791 1,791 1,000 0.04
Acquisition costs (b) 335 335 335 0.01
Legal settlement, net of attorney fees - (12,777) (8,047) (0.32)
Non-GAAP measure $ 29,566 $ 29,295 $ 19,064 $ 0.75
(a) As a result of tax reform laws enacted in the United States and Belgium, the Company recognized a one-time charge of $6.7 million in
the December quarter from the estimated impact of the inclusion of foreign earnings and revaluation of deferred tax assets and liabilities.
(b) Acquisition costs are nondeductible for tax purposes.
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION
Net Sales, Constant Currency and Excluding Acquisitions (Organic Growth) – QTR
10
($ in thousands) WW Barcode,
NW & Security
WW Comms.
& Services Consolidated
For the quarter ended December 31, 2017:
Q2 FY18 net sales, as reported $ 719,786 $ 312,427 $ 1,032,212
Foreign exchange impact (a) (9,669) (4,162) (13,831)
Q2 FY18 net sales, constant currency 710,117 308,265 1,018,381
Less: Acquisitions (19,706) - (19,706)
Q2 FY18 net sales, constant currency excluding
acquisitions $ 690,410 $ 308,265 $ 998,675
Q2 FY17 net sales, as reported $ 593,833 $ 310,959 $ 904,792
Less: Acquisitions - - -
Q2 FY17 net sales, excluding acquisitions $ 593,833 $ 310,959 $ 904,792
Y/Y % Change:
As reported 21.2% 0.5% 14.1%
Constant currency 19.6% -0.9% 12.6%
Constant currency, excluding acquisitions
(organic growth) 16.3% -0.9% 10.4%
(a) Year-over-year sales growth excluding the translation impact of changes in foreign currency rates. Calculated by translating net sales for
the quarter ended December 31, 2017 into U.S. dollars using the weighted average foreign exchange rates for the quarter ended
December 31, 2016.
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION
Highlights by Segment – QTR
11
Quarter Ended December 31, 2017
YTD FY18
Consolidated
($ in thousands) WW Barcode,
NW & Security
WW Comms.
& Services Corporate Consolidated
Net sales $ 719,786 $ 312,426 $ - $ 1,032,212 $ 1,956,771
GAAP operating income $ 15,542 $ 6,799 $ - $ 22,341 $ 29,939
Adjustments:
Amortization of intangible assets 2,309 3,177 - 5,487 10,498
Change in fair value of contingent consideration - 6,913 - 6,913 23,794
Acquisition costs - - - - 172
Legal settlement - - - - 952
Non-GAAP operating income $ 17,852 $ 16,889 $ - $ 34,741 $ 65,355
GAAP operating income % (of net sales) 2.16% 2.18% n/m 2.16% 1.53%
Non-GAAP operating income % (of net sales) 2.48% 5.41% n/m 3.37% 3.34%
Quarter Ended September 30, 2017
($ in thousands) WW Barcode,
NW & Security
WW Comms.
& Services Corporate Consolidated
Net sales $ 620,329 $ 304,230 $ - $ 924,559
GAAP operating income $ 14,035 $ (6,265) $ (172) $ 7,598
Adjustments:
Amortization of intangible assets 1,774 3,237 - 5,011
Change in fair value of contingent consideration 69 16,812 - 16,881
Acquisition costs - - 172 172
Legal settlement 952 - 952
Non-GAAP operating income $ 15,878 $ 14,736 $ - $ 30,614
GAAP operating income % (of net sales) 2.26% -2.06% n/m 0.82%
Non-GAAP operating income % (of net sales) 2.56% 4.84% n/m 3.31%
Quarter Ended December 31, 2016 (a)
($ in thousands) WW Barcode,
NW & Security
WW Comms.
& Services Corporate Consolidated
Net sales $ 593,833 $ 310,959 $ - $ 904,792
GAAP operating income $ 12,131 $ 11,479 $ (335) $ 23,275
Adjustments:
Amortization of intangible assets 1,079 3,086 - 4,165
Change in fair value of contingent consideration - 1,791 - 1,791
Acquisition costs - - 335 335
Non-GAAP operating income $ 13,210 $ 16,356 $ - $ 29,566
GAAP operating income % (of net sales) 2.04% 3.69% n/m 2.57%
Non-GAAP operating income % (of net sales) 2.22% 5.26% n/m 3.27%
n/m = not meaningful
(a) Reflects reclassifications between segments for certain geographies to provide comparable financial information.
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION
Average Return on Invested Capital
12
($ in thousands)
Q2 FY18 Q1 FY18 Q4 FY17 Q3 FY17 Q2 FY17
Adjusted return on invested capital (ROIC), annualized (a) 13.3% 13.0% 13.2% 12.6% 13.8%
Reconciliation of Net Income to Adjusted EBITDA
Net income - GAAP $ 7,969 $ 4,147 $ 18,970 $ 12,424 $ 23,037
Plus:
Interest expense 2,285 1,585 934 780 912
Income taxes 12,342 2,633 4,450 7,147 12,744
Depreciation and amortization 9,901 8,864 6,276 6,880 6,588
EBITDA 32,497 17,229 30,630 27,231 43,281
Adjustments:
Change in fair value of contingent consideration 6,913 16,881 1,290 1,960 1,791
Acquisition costs - 172 422 - 335
Interest income related to tax settlement - - (1,382) - -
Legal settlement, net of attorney fees - 952 - - (12,777)
Adjusted EBITDA (numerator for ROIC)(non-GAAP) $ 39,410 $ 35,234 $ 30,960 $ 29,191 $ 32,630
Invested Capital Calculation
Equity - beginning of the quarter $ 852,976 $ 837,145 $ 808,719 $ 787,536 $ 773,161
Equity - end of quarter 860,787 852,976 837,145 808,719 787,536
Adjustments:
Change in fair value of contingent consideration, net of tax 4,742 11,005 680 1,194 1,000
Acquisition costs, net of tax - 172 422 - 335
Tax settlement and related interest income, net of tax - 771 (5,370) - -
Legal settlement, net of attorney fees, net of tax - - - - (8,047)
Tax reform charges 6,689
Average equity 862,597 851,035 820,798 798,725 776,993
Average funded debt (b) 311,327 224,956 117,970 137,597 162,483
Invested capital (denominator for ROIC)(non-GAAP) $ 1,173,924 $ 1,075,991 $ 938,768 $ 936,322 $ 939,476
(a) Calculated as net income plus interest expense, income taxes, depreciation and amortization (EBITDA), annualized divided by invested capital for the
period. Adjusted EBITDA reflects other adjustments for non-GAAP measures.
(b) Average daily amounts outstanding on short-term and long-term interest-bearing debt.
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION
Net Debt and EBITDA Metrics
13
($ in thousands)
Q2 FY18 Q1 FY18 Q4 FY17 Q3 FY17 Q2 FY17 Q1 FY17 Q4 FY16 Q3 FY16
Debt (Q/E) $ 360,932 $ 285,763 $ 97,300 $ 113,934 $ 141,666 $ 166,141 $ 76,856 $ 79,844
Less: Cash and cash equivalents (Q/E) (35,435) (23,616) (56,094) (62,187) (45,071) (45,125) (61,400) (40,849)
Net debt (Q/E) $ 325,497 $ 262,147 $ 41,206 $ 51,747 $ 96,595 $ 121,016 $ 15,456 $ 38,995
Reconciliation of Net Income to Adjusted
EBITDA
Net income - GAAP $ 7,969 $ 4,147 $ 18,970 $ 12,424 $ 23,037 $ 14,816 $ 12,925 $ 14,042
Plus:
Interest expense 2,285 1,585 934 780 912 589 440 694
Income taxes 12,342 2,633 4,450 7,147 12,744 7,908 5,678 7,311
Depreciation and amortization 9,901 8,864 6,276 6,880 6,588 5,224 4,584 4,281
EBITDA 32,497 17,229 30,630 27,231 43,281 28,537 23,627 26,328
Adjustments:
Change in fair value of contingent
consideration 6,913 16,881 1,290 1,960 1,791 169 (3,226) 1,139
Acquisition costs - 172 422 - 335 498 553 29
Interest income related to tax
settlement - - (1,382) - - - - -
Legal settlement, net of attorney fees - 952 - - (12,777) - - -
Adjusted EBITDA (non-GAAP) $ 39,410 $ 35,234 $ 30,960 $ 29,191 $ 32,630 $ 29,204 $ 20,954 $ 27,496
Adjusted EBITDA, TTM (a) $ 134,795 $ 128,015 $ 121,985 $ 111,979 $ 110,284
Net Debt / Adjusted EBITDA, TTM (a) 2.4x 2.0x 0.3x 0.5x 0.9x
(a) Adjusted EBITDA for the trailing 12-month period
CFO COMMENTARY
Q2 FY2018
ScanSource, Inc.
scansource.com February 6, 2018
APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION
Forecasted Range for EPS – Q3 FY18 Outlook
14
($ in thousands)
Forecast for Quarter ending
March 31, 2018
Range Low Range High
GAAP diluted EPS $ 0.44 $ 0.50
Adjustments:
Amortization of intangible assets 0.14 0.14
Change in fair value of contingent consideration 0.09 0.09
Non-GAAP diluted EPS $ 0.67 $ 0.73