ScanSource Reports First Quarter Results

ScanSource, Inc. (NASDAQ: SCSC), a leading provider of technology products and solutions, today announced financial results for the first quarter ended September 30, 2020. All results in this release reflect continuing operations only unless otherwise noted.

First Quarter Summary:

  • Net sales: $757.3 million, down 10% year-over-year (down 7% year-over-year for organic growth)
  • 19% quarter-over-quarter growth for net sales (up from $636.5 million for fourth quarter of fiscal year 2020)
  • Gross profit: $80.8 million, down 18% year-over-year
  • GAAP operating income of $1.6 million; non-GAAP operating income of $15.8 million
  • Net loss from continuing operations of $(0.1) million, which includes restructuring and other charges of $8.3 million
  • GAAP diluted EPS of $(0.01) per share; non-GAAP diluted EPS of $0.42 per share
  • Generated strong operating cash flow of $71.2 million during the quarter

“I am incredibly proud of the ScanSource team and our strong execution in an unprecedented operating environment,” said Mike Baur, Chairman and CEO, ScanSource, Inc. “Our sales grew 19% quarter-over-quarter with broad-based growth across our technologies in North America and Brazil. ScanSource is uniquely positioned to help channel partners drive growth by providing customers with industry-leading endpoints and cloud solutions.”

Quarterly Results

Net sales totaled $757.3 million for the first quarter of fiscal year 2021, down 10% year-over-year, or down 7% year-over-year for organic growth. The year-over-year reduction in net sales is primarily due to the impact of the COVID-19 pandemic. For the Intelisys master agency business, net sales increased 11% year-over-year for the first quarter of fiscal year 2021. ScanSource delivered 19% sequential quarter growth from the June quarter, driven primarily by growth across key technologies in North America and Brazil.

For the first quarter of fiscal year 2021, operating income decreased to $1.6 million, and non-GAAP operating income decreased to $15.8 million. At the end of July 2020, the Company implemented a $30 million annualized expense reduction program to address the business impacts of the COVID-19 pandemic and prepare for the next phase of growth. Selling, general and administrative expenses for the quarter reflect a partial quarter impact for the expense reduction plan, and the Company is on track to achieve the $30 million in cost savings. In the first quarter of fiscal year 2021, the Company recorded restructuring charges of $8.3 million.

On a GAAP basis, net loss for the first quarter of fiscal year 2021 totaled $(0.1) million, or $(0.01) per diluted share, compared to net income of $12.3 million, or $0.48 per diluted share, for the prior-year quarter. Non-GAAP net income totaled $10.7 million, or $0.42 per diluted share, compared to $18.5 million, or $0.72 per diluted share, for the prior-year quarter.

At September 30, 2020, ScanSource had cash and cash equivalents of $55.6 million and total debt of $168.7 million for continuing and discontinued operations. The Company generated $71.2 million of operating cash flow in the first quarter of fiscal year 2021 and $225.6 million for the trailing 12-month period.

Discontinued Operations

On August 20, 2019, ScanSource announced plans to divest its products distribution businesses outside of the United States, Canada and Brazil (the “Divestitures”). ScanSource continues to operate 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. The Divestitures are classified as assets held for sale and discontinued operations in our financial statements. On October 30, 2020, ScanSource completed the sale of its products distribution business located in Mexico, Colombia, Chile, Peru, and its Miami-based export operations to Intcomex. The Company is actively working on sales opportunities for its divestitures in Europe and the UK.

COVID-19 Update

Our top priority during the COVID-19 pandemic is protecting the health and safety of our employees. We implemented travel restrictions and transitioned our employees, where possible, to a remote working environment. Most of our office-based employees around the world are working remotely. We have taken a number of measures to ensure our teams have the flexibility and resources they need to stay safe and healthy. We are experiencing higher costs from these safety measures to protect our employees. We are continuing to provide the high level of customer service our partners expect from us.

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 in a conference call today, November 9, 2020, at 5:00 p.m. ET. A webcast of the call 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 “forward-looking” statements, including the Company's Divestitures and the impact of the COVID-19 pandemic, which involve risks and uncertainties. Any number of factors could cause actual results to differ materially from anticipated results, including, but not limited to, the impact of the COVID-19 pandemic on the Company's operations and financial condition and the potential prolonged economic weakness brought on by COVID-19, the Company's ability to complete the Divestitures on acceptable terms or otherwise dispose of the operations, the failure to manage and implement the Company's organic growth strategy, credit risks involving the Company's larger customers and suppliers, changes in interest and exchange rates and regulatory regimes impacting the Company's international operations, risk to the Company's business from a cyber-security attack, a failure of the Company's IT systems, failure to hire and retain quality employees, loss of the Company's major customers, termination of the Company's relationship with key suppliers or a significant modification of the terms under which it operates with a key supplier, 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, 2020, 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 Divestitures and 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 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, impairment charges and other non-GAAP adjustments. These year-over-year metrics include the translation impact of changes in foreign currency exchange rates. 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"): ROIC assists management in comparing the Company's performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of ROIC provides useful information to investors and is an additional relevant comparison of our 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 Best Places to Work in South Carolina and on FORTUNE magazine’s 2020 List of World’s Most Admired Companies. ScanSource ranks #654 on the Fortune 1000. For more information, visit www.scansource.com.

 

ScanSource, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands)

September 30, 2020

June 30, 2020*

Assets

Current assets:

Cash and cash equivalents

$

49,889

$

29,485

Accounts receivable, less allowance of $21,981 at September 30, 2020 and $21,906 at September 30, 2019

509,779

443,185

Inventories

423,088

454,885

Prepaid expenses and other current assets

92,216

94,681

Current assets held for sale

176,903

181,231

Total current assets

1,251,875

1,203,467

Property and equipment, net

52,264

55,641

Goodwill

215,170

214,288

Identifiable intangible assets, net

117,492

121,547

Deferred income taxes

24,366

24,630

Other non-current assets

72,177

72,521

Total assets

$

1,733,344

$

1,692,094

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable

$

544,856

$

454,240

Accrued expenses and other current liabilities

84,537

76,686

Current portion of contingent consideration

46,850

46,334

Income taxes payable

1,820

5,886

Current portion of long-term debt

7,843

7,839

Current liabilities held for sale

152,259

128,022

Total current liabilities

838,165

719,007

Deferred income taxes

4,029

3,884

Long-term debt, net of current portion

140,956

143,175

Borrowings under revolving credit facility

67,714

Other long-term liabilities

78,967

80,068

Total liabilities

1,062,117

1,013,848

Commitments and contingencies

Shareholders’ equity:

Preferred stock, no par value; 3,000,000 shares authorized, none issued

Common stock, no par value; 45,000,000 shares authorized, 25,361,298 and 25,361,298 shares issued and outstanding at September 30, 2020 and June 30, 2020, respectively

64,945

63,765

Retained earnings

735,457

747,276

Accumulated other comprehensive loss

(129,175

)

(132,795

)

Total shareholders’ equity

671,227

678,246

Total liabilities and shareholders’ equity

$

1,733,344

$

1,692,094

 

*Derived from audited financial statements.

ScanSource, Inc. and Subsidiaries

Condensed Consolidated Income Statements (Unaudited)

(in thousands, except per share data)

Quarter ended September 30,

2020

2019

Net sales

$

757,342

$

842,701

Cost of goods sold

676,563

744,176

Gross profit

80,779

98,525

Selling, general and administrative expenses

62,112

68,532

Depreciation expense

3,396

3,301

Intangible amortization expense

4,853

4,538

Restructuring and other charges

8,268

169

Change in fair value of contingent consideration

516

2,472

Operating income

1,634

19,513

Interest expense

1,913

3,317

Interest income

(481

)

(807

)

Other expense (income), net

364

374

(Loss) income before income taxes

(162

)

16,629

Provision for income taxes

(47

)

4,338

Net (loss) income from continuing operations

(115

)

12,291

Net loss from discontinued operations

(11,704

)

(761

)

Net (loss) income

$

(11,819

)

$

11,530

Per share data:

Net (loss) income from continuing operations per common share, basic

$

(0.01

)

$

0.48

Net loss from discontinued operations per common share, basic

(0.46

)

(0.03

)

Net (loss) income per common share, basic

$

(0.47

)

$

0.45

Weighted-average shares outstanding, basic

25,361

25,539

Net (loss) income from continuing operations per common share, diluted

$

(0.01

)

$

0.48

Net loss from discontinued operations per common share, diluted

(0.46

)

(0.03

)

Net (loss) income per common share, diluted

$

(0.47

)

$

0.45

Weighted-average shares outstanding, diluted

25,361

25,617

ScanSource, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

Quarter ended September 30,

2020

2019

Cash flows from operating activities:

Net (loss) income

$

(11,819

)

$

11,530

Net loss from discontinued operations

(11,704

)

(761

)

Net (loss) income from continuing operations

(115

)

12,291

Adjustments to reconcile net income to net cash (used in) provided by operating activities of continuing operations:

Depreciation and amortization

8,710

8,518

Amortization of debt issue costs

104

104

Provision for doubtful accounts

(8

)

1,225

Share-based compensation

1,168

1,241

Deferred income taxes

139

56

Change in fair value of contingent consideration

516

2,472

Finance lease interest

37

22

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

(68,726

)

(48,844

)

Inventories

31,155

(49,276

)

Prepaid expenses and other assets

2,369

306

Other non-current assets

(274

)

(7,516

)

Accounts payable

92,419

94,587

Accrued expenses and other liabilities

7,827

10,063

Income taxes payable

(4,096

)

2,381

Net cash provided by operating activities of continuing operations

71,225

27,630

Cash flows from investing activities of continuing operations:

Capital expenditures

(748

)

(939

)

Cash paid for business acquisitions, net of cash acquired

(49,080

)

Net cash used in investing activities of continuing operations

(748

)

(50,019

)

Cash flows from financing activities of continuing operations:

Borrowings on revolving credit, net of expenses

477,381

476,171

Repayments on revolving credit, net of expenses

(545,095

)

(515,772

)

Borrowings on long-term debt, net

(2,214

)

(1,272

)

Repayments of finance lease obligations

(327

)

(391

)

Taxes paid on settlement of equity awards

(12

)

Repurchase of common stock

(6,077

)

Net cash used in financing activities of continuing operations

(70,255

)

(47,353

)

ScanSource, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited), continued

(in thousands)

Cash flows from discontinued operations:

Net cash flows provided by operating activities of discontinued operations

31,853

19,370

Net cash flows used in investing activities of discontinued operations

(36

)

(1

)

Net cash flows (used in) provided by financing activities of discontinued operations

(9,488

)

52,861

Net cash flows provided by discontinued operations

22,329

72,230

Effect of exchange rate changes on cash and cash equivalents

(1,439

)

(429

)

Increase in cash and cash equivalents

21,112

2,059

Consolidated cash and cash equivalents at beginning of period

34,455

23,818

Consolidated cash and cash equivalents at end of period

55,567

25,877

Cash and cash equivalents of discontinued operations

5,678

1,526

Cash and cash equivalents of continuing operations

$

49,889

$

24,351

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

(in thousands, except percentages)

Non-GAAP Financial Information:

Quarter ended September 30,

2020

2019

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

8.4

%

9.6

%

Reconciliation of net income to EBITDA:

Net (loss) income from continuing operations (GAAP)

$

(115

)

$

12,291

Plus: Interest expense

1,913

3,317

Plus: Income taxes

(47

)

4,338

Plus: Depreciation and amortization

8,710

8,518

EBITDA (non-GAAP)

10,461

28,464

Plus: Change in fair value of contingent consideration

516

2,472

Plus: Acquisition and divestiture costs(b)

498

757

Plus: Restructuring costs

8,268

169

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

$

19,743

$

31,862

Invested Capital Calculations:

Equity – beginning of the period

$

678,246

$

914,129

Equity – end of the period

671,227

905,751

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

390

1,869

Plus: Acquisition and divestiture costs(b)

498

757

Plus: Restructuring, net of tax

6,250

128

Plus: Discontinued operations net loss

11,704

761

Average equity

684,158

911,698

Average funded debt(c)

243,268

407,306

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

$

927,426

$

1,319,004

(a) The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year. There were 92 days in the current and prior-year quarter.

(b) Acquisition and divestiture costs are generally nondeductible for tax purposes.

(c) Average funded debt, which includes both continuing and discontinued operations, is calculated as the average daily amounts outstanding on short-term and long-term interest-bearing debt.

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

Net Sales by Segment:

Quarter ended September 30,

2020

2019

% Change

Worldwide Barcode, Networking & Security:

(in thousands)

Non-GAAP net sales, including Divestitures

$

638,385

$

697,791

(8.5

)%

Divestitures

(114,808

)

(116,604

)

Net sales, reported

523,577

581,187

(9.9

)%

Foreign exchange impact (a)

7,724

Non-GAAP net sales, constant currency excluding Divestitures

$

531,301

$

581,187

(8.6

)%

Worldwide Communications & Services:

Non-GAAP net sales, including Divestitures

$

264,005

$

300,627

(12.2

)%

Divestitures

(30,240

)

(39,113

)

Net sales, reported

233,765

261,514

(10.6

)%

Foreign exchange impact (a)

17,440

Non-GAAP net sales, constant currency excluding Divestitures

$

251,205

$

261,514

(3.9

)%

Consolidated:

Non-GAAP net sales, including Divestitures

$

902,390

$

998,418

(9.6

)%

Divestitures

(145,048

)

(155,717

)

Net sales, reported

757,342

842,701

(10.1

)%

Foreign exchange impact (a)

25,164

Non-GAAP net sales, constant currency excluding Divestitures

$

782,506

$

842,701

(7.1

)%

(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 quarter ended September 30, 2020 into U.S. dollars using the average foreign exchange rates for the quarter ended September 30, 2019.

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

Net Sales by Geography:

Quarter ended September 30,

2020

2019

% Change

United States and Canada:

(in thousands)

Net sales, as reported

$

683,603

$

768,508

(11.0

)%

International:

Non-GAAP net sales, including Divestitures

$

218,787

$

229,910

(4.8

)%

Divestitures

(145,048

)

(155,717

)

Net sales, reported

73,739

74,193

(0.6

)%

Foreign exchange impact(a)

25,164

Non-GAAP net sales, constant currency excluding Divestitures

$

98,903

$

74,193

33.3

%

Consolidated:

Non-GAAP net sales, including Divestitures

$

902,390

$

998,418

(9.6

)%

Divestitures

(145,048

)

(155,717

)

Net sales, reported

757,342

842,701

(10.1

)%

Foreign exchange impact(a)

25,164

Non-GAAP net sales, constant currency excluding Divestitures

$

782,506

$

842,701

(7.1

)%

(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 quarter ended September 30, 2020 into U.S. dollars using the average foreign exchange rates for the quarter ended September 30, 2019.

Quarter ended September 30, 2020

GAAP Measure

Intangible
amortization
expense

Change in fair
value of
contingent
consideration

Acquisition and
divestiture costs

Restructuring
costs

Non-GAAP
measure

(in thousands, except per share data)

Net sales

$

757,342

$

$

$

$

$

757,342

Gross profit

80,779

80,779

Operating income

1,634

4,853

516

498

8,268

15,769

Other expense, net

1,796

1,796

Pre-tax (loss) income

(162

)

4,853

516

498

8,268

13,973

Net (loss) income from continuing operations

(115

)

3,675

390

498

6,250

10,698

Diluted EPS from continuing operations

$

(0.01

)

$

0.14

$

0.02

$

0.02

$

0.25

$

0.42

Quarter ended September 30, 2019

GAAP Measure

Intangible
amortization
expense

Change in fair
value of
contingent
consideration

Acquisition and
divestiture costs

Restructuring
costs

Non-GAAP
measure

(in thousands, except per share data)

Net sales

$

842,701

$

$

$

$

$

842,701

Gross profit

98,525

98,525

Operating income

19,513

4,538

2,472

757

169

27,449

Other expense, net

2,884

2,884

Pre-tax income

16,629

4,538

2,472

757

169

24,565

Net income from continuing operations

12,291

3,406

1,869

757

128

18,451

Diluted EPS from continuing operations

$

0.48

$

0.13

$

0.07

$

0.03

$

0.01

$

0.72

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

Discontinued Operations - Financial Results:

Quarter ended September 30,

2020

2019

(in thousands)

Net sales

$

145,049

$

155,716

Cost of goods sold

134,534

142,142

Gross profit

10,515

13,574

Selling, general and administrative expenses

10,913

13,810

Depreciation expense

201

248

Intangible amortization expense

424

Operating loss

(599

)

(908

)

Interest expense, net

125

483

Loss on held for sale classification

10,686

Other expense, net

291

(343

)

Loss from discontinued operations before taxes

(11,701

)

(1,048

)

Income tax expense

3

(287

)

Net loss from discontinued operations

$

(11,704

)

$

(761

)

ScanSource, Inc. and Subsidiaries

Supplementary Information (Unaudited)

Discontinued Operations - Assets and Liabilities:

September 30, 2020

June 30, 2020

(in thousands)

Assets

Current assets:

Cash and cash equivalents

$

5,678

$

4,970

Accounts receivable, net

130,553

117,200

Inventories, net

95,560

106,779

Prepaid expenses and other current assets

27,465

23,808

Total current assets

259,256

252,757

Property and equipment, net

1,724

1,833

Deferred income taxes

9,633

9,349

Other non-current assets

5,899

6,215

Total assets, before valuation allowance

276,512

270,154

Less: valuation allowance

(99,609

)

(88,923

)

Total assets, net of valuation allowance (a)

$

176,903

$

181,231

Liabilities

Current liabilities:

Accounts payable

$

84,657

$

56,098

Accrued expenses and other current liabilities

15,834

14,815

Other taxes payable

23,136

20,378

Short-term borrowings

3,524

Income tax payable

1,338

1,085

Total current liabilities

124,965

95,900

Borrowings under revolving credit facility

19,932

24,704

Other long-term liabilities

7,362

7,418

Total liabilities(1)

$

152,259

$

128,022

(a) Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company's consolidated balance sheet as of September 30, 2020 and June 30, 2020, as the discontinued operations are expected to be disposed by June 30, 2021.

Contacts:

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

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