ScanSource, Inc. (SCSC)

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ScanSource, Inc. (SCSC)

F1Q09 Earnings Call

October 23, 2008 5:00 pm ET


Richard Cleys – Chief Financial Officer

Michael Baur – Chief Executive Officer


Reik Reed – Robert Baird

Andy Young – Thomas Weisel Partners

Chris Quilty – Raymond James

Brian Drab – William Blair



(Operator Instructions) I would now like to turn the call over to Mr. Richard Cleys.

Richard Cleys

Thank you for joining us for the ScanSource conference call to discuss financial for the quarter ended September 30, 2008. My name is Rich Cleys and with me is Mike Baur, CEO of ScanSource and Scott Benbenick, President of Worldwide Operations. We will review with you the quarters' operating results and then take your questions.

This conference call contains certain comments which are forward-looking statements that involved 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 intimated results. For information concerning factors that could such a difference, see the company's annual report on Form 10-K for the year ended June 30, 2008 filed with the securities and exchange commission.

I will start our discussion by providing overall sales and operating results. The company posted sales of $539.8 million for the quarter ended September 30, 2008, a decrease of 3% over sales of $553.7 for the same quarter last year. Measuring sales based upon our product group shows year over year growth over 3% and AIDC and point of sale which was offset by an 11% year over year decrease in communications products for the quarter ended September 30.

As expected, revenues in our catalyst telecom sales unit were adversely impacted by program changes implemented by our key vendor of this division. Mike will discuss this further in his remarks later on this call.

Overall, we have a 63/37 mix of AIDC POS versus communications products for the current quarter. Gross margin was 10.3% for the September 2008 quarter compared to 10.5% for the same period last year. The decrease in gross margin percentage from the prior period comparable quarter is largely attributed to less favorable product and geographic mix and to a lesser extent lower achievement of vendor programs compared to the prior year.

Operating expenses in the current quarter were $34.9 million or 6.5% of sales compared to $32.8 million or 5.9% of sales for the comparable prior year period. The majority of the increase is attributed to operating expenditures associated with our newest acquisition, MTV Telecom which was acquired in April 2008 and did not exist in the comparative period.

Although year over year our bad debt expense is essentially flat, we've increased our reserve by $1 million since June 30, reflective of the tightened credit markets. The company also experienced incremental expenditures associated with the operation of our new North American distribution facility located in South Haven, Mississippi which was opened in January of 2008.

Our operating income for the September 2008 quarter was $20.6 million, a 19% decrease from the prior year. Expressed as a percentage of sales, operating income was 2.8% in the current quarter compared to 4.6% in the comparable prior year period.

Net interest expense was $200,000 in the current quarter compared to $1.8 million for the comparative prior year quarter. Interest expense decreased over the prior year quarter primarily due to lower average debt balance. In fact, at September 30, 2008, we had no outstanding balance on our revolving line of credit.

The effective tax rate for September 2008 quarter increased slightly to 38.2% compared to the prior year quarter of 38.0%. Net income for the September 2008 quarter decreased to $12.4 million or 2.3% of sales compared to the prior year quarter of $14.7 million which was 2.7% of sales. Our return on invested capital this quarter was 20% which is at the low end of our historical range of 20% to 25%.

Balance sheet metrics and cash management were as follows; during the quarter we were diligent in our efforts to manage inventory levels and were successful in maintaining inventory turns of 6.9 times for the September quarter which was consistent with the June 2008 quarter and down slightly from the 7.0 turns posted in September 2007.

The number of days in receivables, DSO, decreased to 57 at September 30, 2008 compared to 61 days posted in September 2007 and 59 days posted in June 2008. The decrease in DSO reflects the change in geographic and customer mix. In the current economic environment, we continue to monitor the health of our receivable portfolio. At the same time, we have never been more committed to finding ways to assist our customers.

Paid for inventory was a positive one day for the September 2008 quarter and a positive 7.2 days for the Sept 2007 quarter. At June 2008 our paid for inventory days were a positive 2.7 days. Quarter over quarter improvement over paid for inventory days was driven by lower inventory purchases in response to lower sales volumes as well as higher quarter over quarter accounts payable which can be impacted by the timing of payments. Included in accounts payable are checks written but not cleared which decreased to $21 million compared to $26 million in June.

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