SCSC

ScanSource, Inc. (SCSC)

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ScanSource, Inc. (SCSC)

F3Q10 (Qtr End 03/31/10) Earnings Call Transcript

April 22, 2010 5:00 pm ET

Executives

Rich Cleys – VP of Finance and CFO

Mike Baur – CEO

Analysts

Brian Drab – William Blair

Ajit Pai – Thomas Weisel Partners

Anthony Kure – KeyBanc Capital Markets

Chris Quilty – Raymond James

Gregory Macosko – Lord Abbett

Presentation

Operator

Welcome to the ScanSource quarterly earnings call. All lines have been placed on a listen-only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mr Rich Cleys, CFO. Sir, you may begin.

Rich Cleys

Thank you, Gerard, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended March 31, 2010. My name is Rich Cleys, and with me are Scott Benbenek, President of Worldwide Operations; and Mike Baur, CEO of ScanSource. We will review with you the quarter’s operating result and then take your questions.

This conference call contains certain comments, which 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. The statements made in this call are made as of the date hereof even if subsequently made available on ScanSource’s Web site or otherwise.

ScanSource does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made. Any number of important factors could cause actual results to differ materially from anticipated results. For more information concerning the factors that could cause such a difference, see the company’s Annual Report on Form 10-K for the year ended June 30, 2009 filed with the Securities and Exchange Commission.

This afternoon the company released results for our third quarter and year to date period ended March 31, 2010. I will start our discussion by providing overall sales and operating results for the quarter. Later in the call, Mike will comment specifically on quarterly results and the outlook for each of our business units.

For the quarter ended March 31, 2010 the company generated a worldwide net sales of $496 million, which represents a 27% increase in sales over the comparative prior year quarter, and a 9.5% decrease from the quarter ended December 31, 2009. Our net sales for the quarter were below our expectations and we attribute these results largely to product shortages in our AIDC POS business units and less demand than the December quarter in our communications business units.

The quarter’s sales results also include an entire quarter of revenues due to the acquisition of the assets of Algol Europe on November 30, 2009. This acquisition is a key step in our strategy to expand our communications business in Europe. On a geographic basis, sales originating from our North American distribution segment increased 21% in comparison to the prior year quarter. Our international segment grew 55% and when measured in local currency grew 48%. Our international business is 24% of total revenues.

Within our product lines, we experienced a 26% increase of worldwide sales of our POS bar coding and security product categories over the prior year quarter. These product categories represented 62% of the total sales for the current quarter with the remaining 38% of our total sales originating from communications products. Our communications businesses experienced an increase of 30% in comparison to the prior year quarter.

The company’s consolidated gross margin percentage was 11% for the quarter ended March 31, 2010, which was lower than the prior year quarter gross margin of 12.2%. The prior year quarter benefited from the sale of lower cost inventory in Europe. Excluding this unusual event in Europe, gross margins were largely consistent between the two periods. Sequentially from December 2009, gross margin increased 70 basis points primarily due to vendor program benefits and favorable customer mix due to fewer large deals.

Operating expenses in the current quarter increased to $35.4 million compared to $32.4 million in the comparative prior year period. The majority of this increase relates to the addition of operations of the former Algol Europe business that did not use this in the prior year’s quarter. Operating expenses as a percent of net sales decreased to 7.1% compared to 8.3% for the prior year period.

Operating income for the March 2010 quarter increased to $19 million, a 25.5% increase from operating income of the comparative prior year of $15.1 million. Expressed this percentage of sales, operating income was 3.8% in the current quarter compared to 3.9% for the prior year period.

Interest expense was $377,000 for the quarter. The effective tax rate for the March 2010 quarter decreased to 36.5% compared with the prior year quarter of 37.6%. Our return on investment capital was 16.5% for the quarter, which compares to 13.8% for the prior year.

In summary, the March 2010 quarter had reported EPS of $0.45 versus a reported EPS of $0.35 for the March 2009 quarter. This increase was primarily due to higher sales and related gross profit dollars than the previous year’s quarter.

Turning to the balance sheet, inventory turned 5.7 times during the quarter which was lower than the 6.8 turns generated in the December 2009 quarter plus the same in the comparative quarter last year. As inventory balances continued to increase during the current quarter, paid for inventory days were a positive 17.7 days compared to a positive six days for the December 2009 quarter, and a positive 5.4 days for the comparative prior year quarter.

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