EX-99.2 3 scsccfocommentary19feb05.htm EXHIBIT 99.2 scsccfocommentary19feb05
Exhibit 99.2 ScanSource, Inc. CFO COMMENTARY Q2 FY2019 CFO COMMENTARY Q2 FY 2019 FINANCIAL INFORMATION AND CONFERENCE CALL Q2 FY19 Results: Please see the accompanying earnings press release available at www.scansource.com in the Investor Relations section. The information NET SALES included in this CFO commentary is unaudited and should be read in conjunction with the Company’s SEC filings on Form 10-Q for the quarter ended December 31, 2018. ScanSource will present additional $ 1.05 billion information about its financial results and outlook in a conference call on Tuesday, February 05, 2019 at 5:00 pm ET. A webcast of the call is Forecast: available and can be accessed at www.scansource.com (Investor $1.01 billion to Relations section). The webcast will be available for replay for 60 days. $1.07 billion SECOND QUARTER SUMMARY GAAP DILUTED EPS We delivered record quarterly net sales and strong profitability during the second quarter. For the quarter, profits grew faster than sales. We $0.78 had 1% net sales growth (3% organic), 7% gross profit growth, 33% Forecast: operating income growth, and 6% non-GAAP operating income growth. $0.70 to $0.76 Our operating income margin was 2.8%, and our non-GAAP operating margin increased to 3.5%. Net sales were at the midpoint of our forecast range, while both GAAP diluted EPS and non-GAAP diluted NON-GAAP DILUTED EPS EPS were above the high end of our forecast range. Second quarter fiscal year 2019 GAAP diluted EPS increased 152% year-over-year $0.99 (the prior year period included one-time tax reform charges), and non- Forecast: GAAP diluted EPS increased 10% year-over-year. $0.92 to $0.98 Please see Appendix for calculation of non-GAAP measures and reconciliations to GAAP measures. scansource.com 1 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 QUARTERLY HIGHLIGHTS Y/Y Q2 FY19 Q1 FY19 Q2 FY18 $ in millions, except EPS Change Net sales $1,046.0 $972.9 $1,032.2 +1% Gross profit $120.5 $112.2 $113.0 +7% Gross profit margin % 11.5% 11.5% 10.9% +57 bps SG&A expenses $81.0 $77.9 $74.8 +8% Operating income $29.7 $21.4 $22.3 +33% Operating income % 2.8% 2.2% 2.2% +68 bps Non-GAAP operating income $36.7 $32.7 $34.7 +6% Non-GAAP operating income % 3.5% 3.4% 3.4% +14 bps GAAP net income $20.0 $14.3 $8.0 +151% Non-GAAP net income $25.4 $22.9 $23.0 +10% GAAP diluted EPS $0.78 $0.56 $0.31 +152% Non-GAAP diluted EPS $0.99 $0.89 $0.90 +10% • Record net sales of $1.05 billion (+1% Y/Y) for change in fair value of contingent consideration (down $5.1 million) - 3% Y/Y organic growth - At the midpoint of the forecast range • Non-GAAP operating income (+6% Y/Y) grew faster than net sales (+1% Y/Y) - Foreign currency translation negatively impacted sales by $21 million • Operating income margin was 2.8%, and non-GAAP operating income margin • Gross profit margin of 11.5%, a 57 bp Y/Y increased to 3.5% improvement - Prior year included a higher mix of large • For Q2 FY19, effective tax rate of 25.0% and deals non-GAAP effective tax rate of 24.5% • Operating income of $29.7 million and • Non-GAAP EPS increased 10% Y/Y to GAAP EPS of $0.78 includes lower expense $0.99 Organic growth, a non-GAAP measure, reflects reported sales growth less impacts from foreign currency translation and acquisitions. Non-GAAP operating income, non-GAAP net income and non-GAAP diluted EPS exclude amortization of intangibles, change in fair value of contingent consideration, acquisition costs and other non-GAAP items. scansource.com 2 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 WORLDWIDE BARCODE, NETWORKING & SECURITY Q2 FY19 Q1 FY19 Q2 FY18 $ in millions Net sales $701.6 $655.1 $719.8 Gross profit $64.8 $62.0 $62.0 Gross margin 9.2% 9.5% 8.6% Operating income $18.6 $13.5 $15.5 Operating income % 2.6% 2.1% 2.2% Non-GAAP operating income $20.4 $16.5 $17.9 Non-GAAP operating income % 2.9% 2.5% 2.5% • Net sales of $702 million, down 3% Y/Y Net Sales, $ in millions - Decrease primarily due to higher big deal Y/Y Growth -3% sales volumes in prior year quarter Y/Y Organic Growth -1% - Strong growth in video surveillance and payments $800 $720 $702 • Gross profit margin of 9.2% $700 $685 $655 - Y/Y increase from lower mix of big deals $604 $600 • Operating income margin of 2.6% increased 49 basis points Y/Y $500 • Non-GAAP operating income margin of 2.9% increased 43 basis points Y/Y $400 • Non-GAAP operating income increased 14% Y/Y $300 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 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 other non-GAAP items. scansource.com 3 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 WORLDWIDE COMMUNICATIONS & SERVICES Q2 FY19 Q1 FY19 Q2 FY18 $ in millions Net sales $344.4 $317.8 $312.4 Gross profit $55.7 $50.3 $51.0 Gross margin 16.2% 15.8% 16.3% Operating income $11.5 $8.3 $6.8 Operating income % 3.4% 2.6% 2.2% Non-GAAP operating income $16.2 $16.2 $16.9 Non-GAAP operating income % 4.7% 5.1% 5.4% Net Sales, $ in millions • Net sales of $344 million, up 10% Y/Y Y/Y Growth +10% - Organic growth of 14% Y/Y Organic Growth +14% - Strong sales growth in North America and Brazil $400 $344 - Intelisys net sales increased 14% Y/Y $312 $309 $318 $291 $300 • Gross profit margin of 16.2%, consistent with prior year • Higher operating income due to lower $200 expense for the change in fair value of contingent consideration ($1.9 million for Q2 FY19 versus $6.9 million for Q2 FY18) $100 • Investments for future growth led to lower non-GAAP operating income, down 4% $- Y/Y Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 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, change in fair value of contingent consideration and other non-GAAP items. scansource.com 4 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 WORKING CAPITAL Q2 FY19 Q1 FY19 Q2 FY18 $ in millions Accounts receivable (Q/E) $708.5 $677.5 $717.3 Days sales outstanding in receivables* 58 60 60 Inventory (Q/E) $704.4 $672.7 $581.8 Inventory turns 5.4 5.4 6.2 Accounts payable (Q/E) $604.6 $629.2 $515.3 Paid for inventory days* 13.2 8.1 9.4 Working capital (Q/E) (AR+INV–AP) $808.3 $721.0 $783.8 * Excludes the impact of Intelisys for all periods; paid for inventory days represent Q/E inventory days less Q/E accounts payable days • Working capital of $808.3 million, up 3% • Inventory turns of 5.4x with inventory up Y/Y and up 12% Q/Q 21% Y/Y and up 5% Q/Q • Working capital investment to support • Paid for inventory days of 13.2 reflect growth timing of accounts payable • Days sales outstanding in receivables of 58 days - 2-day improvement from prior and year-ago quarters scansource.com 5 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 CASH FLOW AND BALANCE SHEET HIGHLIGHTS Q2 FY19 Q1 FY19 Q2 FY18 $ in millions Adjusted EBITDA (QTR)* $41.0 $37.4 $39.4 Adjusted ROIC (QTR)* 13.3% 12.9% 13.3% Operating cash flow (QTR) $(57.5) $5.7 $(46.8) Operating cash flow, trailing 12-months $60.2 $71.0 $(25.0) Cash and cash equivalents (Q/E) $22.7 $18.9 $35.4 Debt (Q/E) $372.4 $281.9 $360.9 Net debt to adjusted EBITDA, trailing 12-months 2.4x 1.8x 2.4x Shares repurchased – # of shares (QTR) 9,387 -- -- Shares repurchased – dollars (QTR) $0.3 -- -- Remaining authorization under share repurchase $99.4 $99.7 $99.7 plan (as of Q/E) * Excludes non-GAAP adjustments and change in fair value of contingent consideration • Adjusted EBITDA of $41.0 million, up 4% • Cash and cash equivalent balances of Y/Y, due to higher sales volume and $22.7 million at 12/31/18, including $14.1 higher margins million held outside of the U.S. • Adjusted return on invested capital of • Net debt to trailing 12-months adjusted 13.3%, consistent with prior year EBITDA is 2.4x • Operating cash flow of $(57.5) million for • Share repurchases totaled $0.3 million the quarter and $60.2 million for the trailing 12-months • Balance sheet remains strong and provides us with the ability to execute our • Expect to generate operating cash flow capital allocation plan during the remainder of fiscal year 2019 scansource.com 6 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 Q3 FY19 OUTLOOK* For the quarter ending March 31, 2019: NET SALES GAAP DILUTED EPS NON-GAAP DILUTED EPS Forecast Range: Forecast Range: Forecast: Range $910 million to $0.48 to $0.54 $0.76 to $0.82 $970 million per share per share Q3 FY18: Net sales $896 million Q3 FY18: GAAP diluted EPS $0.42 Q3 FY18: Non-GAAP diluted EPS $0.68 • Outlook as of February 05, 2019 • Non-GAAP diluted EPS excludes amortization of intangible assets and change in fair value of contingent consideration • Forecast midpoint reflects 7% year-over-year organic sales growth • Reflects the following FX rates: $1.14 to EUR 1.00 for the Euro, $0.265 to R$1.00 for the Brazilian real (R$3.77 to $1), and $1.28 to GBP 1.00 for the British pound • Expects foreign currency translation to negatively impact sales by approximately $20 million • Assumes interest expense will be approximately $3.8 million for Q3 FY19 • Assumes an effective tax rate of 25.5% to 26.5% for FY19 scansource.com 7 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 FORWARD-LOOKING STATEMENTS Although ScanSource believes the expectations in its forward-looking statements This CFO Commentary contains certain are reasonable, it cannot guarantee future comments that are “forward-looking” results, levels of activity, performance or statements, including statements about achievement. ScanSource disclaims any expected sales, GAAP diluted earnings per obligation to update or revise any forward- share (“EPS”), non-GAAP diluted EPS, looking statements, whether as a result of new operating cash flow, foreign currency rates, information, future events, or otherwise, tax rates and interest expense that involve except as may be required by law. plans, strategies, economic performance and trends, projections, expectations, costs or beliefs about future events and other NON-GAAP FINANCIAL INFORMATION statements that are not descriptions of In addition to disclosing results that are historical facts. Forward-looking information is determined in accordance with United States inherently subject to risks and uncertainties. Generally Accepted Accounting Principles (“GAAP”), the Company also discloses certain Any number of factors could cause actual non-GAAP measures, including non-GAAP results to differ materially from anticipated or operating income, non-GAAP operating forecasted results, including but not limited to, income margin, non-GAAP net income, non- changes in interest and exchange rates and GAAP diluted EPS, adjusted EBITDA, ROIC regulatory regimes impacting our international and net sales excluding the impact of foreign operations, the impact of tax reform laws, the currency translation and acquisitions (organic failure of acquisitions to meet our growth). A reconciliation of the Company's expectations, the failure to manage and non-GAAP financial information to GAAP implement our organic growth strategy, credit financial information is provided in the risks involving our larger customers and Appendix and in the Company’s Form 8-K, vendors, termination of our relationship with filed with the SEC, with the quarterly earnings key vendors or a significant modification of the press release for the period indicated. 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, and subsequent reports on Form 10-Q, filed with the Securities and Exchange Commission (“SEC”). scansource.com 8 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION Operating Income, Pre-Tax Income, Net Income & EPS – QTR ($ in thousands) Quarter Ended December 31, 2018 Operating Pre-tax Net Diluted Income income income EPS GAAP measure $ 29,706 $ 26,650 $ 19,982 $ 0.78 Adjustments: Amortization of intangible assets 4,700 4,700 3,567 0.14 Change in fair value of contingent consideration 1,850 1,850 1,408 0.05 Acquisition costs (a) 414 414 414 0.02 Non-GAAP measure $ 36,670 $ 33,614 $ 25,371 $ 0.99 Quarter Ended September 30, 2018 Operating Pre-tax Net Diluted Income income income EPS GAAP measure $ 21,432 $ 19,224 $ 14,322 $ 0.56 Adjustments: Amortization of intangible assets 5,003 5,003 3,798 0.15 Change in fair value of contingent consideration 4,584 4,584 3,487 0.14 Acquisition costs (a) 355 355 355 0.01 Restructuring Costs 1,328 1,328 955 0.04 Non-GAAP measure $ 32,702 $ 30,494 $ 22,917 $ 0.89 Quarter Ended December 31, 2017 Operating Pre-tax Net Diluted Income income income 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 (b) - - 6,689 0.26 Non-GAAP measure $ 34,741 $ 32,710 $ 23,048 $ 0.90 (a) Acquisition costs are nondeductible for tax purposes. (b) Reflects adjustments to the one-time charge from the estimated impact of the inclusion of foreign earnings and revaluations of deferred tax assets and liabilities, as a result of tax reform laws enacted in the United States and Belgium in December 2017. scansource.com 9 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION Net Sales, Constant Currency and Excluding Acquisitions (Organic Growth) – QTR ($ in thousands) WW Barcode, WW Comms. NW & Security & Services Consolidated For the quarter ended December 31, 2018: Q2 FY19 net sales, as reported $ 701,639 $ 344,382 $ 1,046,021 Foreign exchange impact (a) 7,805 12,915 20,720 Q2 FY19 net sales, constant currency 709,444 357,297 1,066,741 Less: Acquisitions - (1,832) (1,832) Q2 FY19 net sales, constant currency excluding acquisitions $ 709,444 $ 355,465 $ 1,064,909 Q2 FY18 net sales, as reported $ 719,786 $ 312,426 $ 1,032,212 Less: Acquisitions - - - Q2 FY18 net sales, excluding acquisitions $ 719,786 $ 312,426 $ 1,032,212 Y/Y % Change: As reported -2.5% 10.2% 1.3% Constant currency -1.4% 14.4% 3.3% Constant currency, excluding acquisitions (organic growth) -1.4% 13.8% 3.2% (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, 2018 into U.S. dollars using the weighted average foreign exchange rates for the quarter ended December 31, 2017. scansource.com 10 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION Highlights by Segment – QTR Quarter Ended December 31, 2018 ($ in thousands) WW Barcode, WW Comms. FY19 YTD NW & Security & Services Corporate Consolidated Consolidated Net sales $ 701,639 $ 344,382 $ - $ 1,046,021 $ 2,018,921 GAAP operating income $ 18,581 $ 11,539 $ (414) $ 29,706 $ 51,137 Adjustments: Amortization of intangible assets 1,854 2,846 - 4,700 9,703 Change in fair value of contingent - 1,850 - 1,850 6,434 consideration Acquisition costs - - 414 414 769 Restructuring costs - - - - 1,328 Non-GAAP operating income $ 20,435 $ 16,235 $ - $ 36,670 $ 69,371 GAAP operating income % (of net sales) 2.65% 3.35% n/m 2.84% 2.53% Non-GAAP operating income % (of net sales) 2.91% 4.71% n/m 3.51% 3.44% Quarter Ended September 30, 2018 ($ in thousands) WW Barcode, WW Comms. NW & Security & Services Corporate Consolidated Net sales $ 655,113 $ 317,787 $ - $ 972,900 GAAP operating income $ 13,532 $ 8,255 $ (355) $ 21,432 Adjustments: Amortization of intangible assets 2,309 2,694 - 5,003 Change in fair value of contingent - 4,584 - 4,584 consideration Acquisition costs - - 355 355 Restructuring costs 708 620 - 1,328 Non-GAAP operating income $ 16,549 $ 16,153 $ - $ 32,702 GAAP operating income % (of net sales) 2.07% 2.60% n/m 2.20% Non-GAAP operating income % (of net sales) 2.53% 5.08% n/m 3.36% Quarter Ended December 31, 2017 ($ in thousands) WW Barcode, WW Comms. NW & Security & Services Corporate Consolidated Net sales $ 719,786 $ 312,426 $ - $ 1,032,212 GAAP operating income $ 15,542 $ 6,799 $ - $ 22,341 Adjustments: Amortization of intangible assets 2,309 3,178 - 5,487 Change in fair value of contingent consideration - 6,913 - 6,913 Non-GAAP operating income $ 17,851 $ 16,890 $ - $ 34,741 GAAP operating income % (of net sales) 2.16% 2.18% n/m 2.16% Non-GAAP operating income % (of net sales) 2.48% 5.41% n/m 3.37% n/m = not meaningful scansource.com 11 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION Average Return on Invested Capital - QTR ($ in thousands) Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Adjusted return on invested capital (ROIC), annualized (a) 13.3% 12.9% 12.5% 11.2% 13.3% Reconciliation of Net Income to Adjusted EBITDA Net income - GAAP $ 19,982 $ 14,322 $ 10,388 $ 10,649 $ 7,969 Plus: Interest expense 3,119 2,627 2,494 2,784 2,285 Income taxes 6,668 4,902 7,655 5,143 12,341 Depreciation and amortization 8,935 9,268 9,291 9,438 9,901 EBITDA 38,704 31,119 29,828 28,014 32,496 Adjustments: Change in fair value of contingent consideration 1,850 4,584 8,448 4,801 6,913 Acquisition costs 414 355 - - - Tax recovery and related interest income - - (3,119) - - Restructuring Costs - 1,328 - - - Adjusted EBITDA (numerator for ROIC)(non-GAAP) $ 40,968 $ 37,386 $ 35,157 $ 32,815 $ 39,409 Invested Capital Calculation Equity - beginning of the quarter $ 877,897 $ 866,376 $ 877,796 $ 860,787 $ 852,976 Equity - end of quarter 899,503 877,897 866,376 877,796 860,787 Adjustments: Change in fair value of contingent consideration, net of tax 1,408 3,487 5,679 3,272 4,742 Acquisition costs, net of tax 414 355 - - - Tax recovery and related interest income, net of tax - - (2,058) - - Tax reform charges - - 2,345 - 6,689 Restructuring costs, net of tax - 955 - - - Average equity 889,611 874,535 875,069 870,928 862,597 Average funded debt (b) 333,138 272,277 253,393 315,872 311,327 Invested capital (denominator for ROIC)(non-GAAP) $ 1,222,749 $ 1,146,812 $ 1,128,462 $ 1,186,800 $ 1,173,924 (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. scansource.com 12 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION Net Debt and EBITDA Metrics ($ in thousands) Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q4 FY17 Q3 FY17 Debt (Q/E) $ 372,410 $ 281,859 $ 249,429 $ 282,158 $ 360,932 $ 285,763 $ 97,300 $ 113,934 Less: Cash and cash equivalents (Q/E) (22,749) (18,858) (25,530) (35,361) (35,435) (23,616) (56,094) (62,187) Net debt (Q/E) $ 349,661 $ 263,000 $ 223,899 $ 246,797 $ 325,497 $ 262,147 $ 41,206 $ 51,747 Reconciliation of Net Income to Adjusted EBITDA Net income - GAAP $ 19,982 $ 14,322 $ 10,388 $ 10,649 $ 7,969 $ 4,147 $ 18,970 $ 12,424 Plus: Interest expense 3,119 2,627 2,494 2,784 2,285 1,585 934 780 Income taxes 6,668 4,902 7,655 5,143 12,341 2,633 4,450 7,147 Depreciation and amortization 8,935 9,268 9,291 9,438 9,901 8,864 6,276 6,880 EBITDA 38,704 31,119 29,828 28,014 32,496 17,229 30,630 27,231 Adjustments: Change in fair value of contingent consideration 1,850 4,584 8,448 4,801 6,913 16,881 1,290 1,960 Acquisition costs 414 355 - - - 172 422 - Tax recovery and related interest income - - (3,119) - - - (1,382) - Legal settlement, net of attorney fees - - - - - 952 - - Restructuring Costs - 1,328 - - - - - - Adjusted EBITDA (non-GAAP) $ 40,968 $ 37,386 $ 35,157 $ 32,815 $ 39,409 $ 35,234 $ 30,960 $ 29,191 Adjusted EBITDA, TTM (a) $ 146,326 $ 144,767 $ 142,617 $ 138,418 $ 134,794 $ 128,015 $ 121,986 $ 111,979 Net Debt / Adjusted EBITDA, TTM (a) 2.4x 1.8x 1.6x 1.8x 2.4x 2.0x 0.3x 0.5x (a) Adjusted EBITDA for the trailing 12-month period scansource.com 13 February 05, 2019


 
ScanSource, Inc. CFO COMMENTARY Q2 FY2019 APPENDIX: RECONCILIATIONS FOR NON-GAAP FINANCIAL INFORMATION Forecasted Range for EPS – Q3 FY19 Outlook ($ in thousands) Forecast for Quarter ending March 31, 2019 Range Low Range High $ 0.48 $ 0.54 GAAP diluted EPS Adjustments: 0.14 0.14 Amortization of intangible assets 0.14 0.14 Change in fair value of contingent consideration $ 0.76 $ 0.82 Non-GAAP diluted EPS scansource.com 14 February 05, 2019