ScanSource, Inc. (SCSC)

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ScanSource, Inc. (SCSC)

F3Q08 Earnings Call

April 24, 2008 5:00 pm ET


Richard P. Cleys - Chief Financial Officer & Vice President, Finance

Michael L. Baur - Chief Executive Officer & Director

R. Scott Benbenek - President, Worldwide Operations


Jeff Rosenberg – William Blair & Company, L.L.C.

Chris Quilty – Raymond James & Associates

Reik Reid – Robert Baird & Co., Inc.

Andy Young – Thomas Weisel Partners



(Operator Instructions) Now I’d like to turn the meeting over to Rich Cleys.

Richard P. Cleys

Thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended March 31, 2008. My name is Rich Cleys, Chief Financial Officer of ScanSource and with me are Mike Baur, CEO; and Scott Benbenek, President of Worldwide Operations.

We’ll review with you the quarter’s operating results 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 and a number of important factors could cause actual results to differ materially from anticipated results. For more information concerning factors that could cause such a difference, see the company’s annual report on Form 10-K for the year ended June 30, 2007 filed with the Securities and Exchange Commission.

I will start our discussion by providing overall sales and operating results. The company posted sales of $514.4 million for the quarter ended March 31, 2008 an increase of 4% over sales of $492.7 million for the same quarter last year. Measuring sales based upon our product groups shows year-over-year growth of 13% in AIDC and point of sales along with a 9% year-over-year decrease in communications products for the quarter ended March 31. That produced a 65/35 mix of AIDC POS versus communication products.

Gross margin was 10.1% for the March 2008 quarter compared to 10.4% for the same period last year. This quarter’s margin of 10.1% was adversely impacted by a decrease in Europe margin due to unfavorable pricing and a lower achievement of vendor programs. Without these two factors our gross margin percent would have been 10.4%.

Operating expenses were $32.7 million or 6.4% of sales compared to 6.9% for the prior year. On the non-GAAP basis operating expenses increased from 6.3% for the prior to 6.4%. Included in the prior year expenses were Special Committee expenses of $3 million related to the stock option review. When we have significantly lower revenues than planned our SG&A expenses as a percentage of sales is higher because we did not reduce expenses substantially by the end of the quarter.

Operating income for the March 2008 quarter increased 10% to $19 million from the prior year. Operating income as a percent of sales without the cost of Special Committee was 3.7% compared to the prior quarter of 4.1% or a decrease of $1 million. Net interest expense was $696,000 compared to $1.7 million for the prior year quarter. Interest expense decreased from prior March quarter on lower debt.

Operating cash flow for the March 2008 quarter was -$54 million which is due to less inventory purchasing and accounts payable payment timing. Nonetheless the bulk of the negative cash flow occurred late in the quarter and had little impact on interest expense for the quarter. Our average debt for the March quarter was the same average debt as the December quarter.

The tax rate for March 2008 was 38.8% compared with the prior year quarter of 34.6%. Last year’s full tax rate was 37.8%. Our year to date tax rate is 38.1% which is reflective of our expectation for the year.

Net income for the March 2008 quarter increased to $11 million or 2.1% of sales compared to $10.1 million which was 2.0% of sales. Excluding Special Committee non-GAAP net income for the March 2007 period was $12 million. Therefore the March 2008 net income decreased 8%. Our return on invested capital this quarter was 18% which is below our historical range of 20 to 25%. This is primarily due to lower operating earnings for the quarter.

Balance sheet metrics and cash management were as follows. Inventory turns were 5.8 times at the end of the March 2008 quarter down from 6.2 turns posted in March 2007 quarter and 6.3 turns for the December 2007 quarter due to lower sales volume than planned. The number of days of sales in receivables, DSO, was 59 at March 31, 2008 compared to 61 days posted in the March 2007 quarter and 57 days posted in December 2007.

We increased our bad debt reserve $460,000 from the December 31, 2007 reserve balance. Paid for inventory days were +14.5 days for the March 2008 quarter and +8.4 days at the end of the March 2007 quarter. At December 31, 2007 our paid for inventory days were -1.7 days.

Lower sales led to lower inventory purchases primarily in our Catalyst and our international business units. Lower purchases during the quarter had the impact of lowering accounts payable by the end of the quarter. In addition timing had a significant impact on payable days as the checks written but not cleared which are included as accounts payable decreased to $30 million compared to $72 million at the end of December. Further we elected to take advantage of early pay discounts which decreased accounts payable by $15 million at the end of the quarter.

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