SCSC

ScanSource, Inc. (SCSC)

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ScanSource, Inc. (SCSC)

F4Q08 (Qtr End 6/30/08) Earnings Call Transcript

August 21, 2008 5:00 pm ET

Executives

Richard Cleys - VP of Finance and CFO

Mike Baur - CEO

Analysts

Jeff Rosenberg - William Blair & Company

Chris Quilty - Raymond James

Ajit Pai - Thomas Weisel Partners

Presentation

Operator

Thank you for standing by and welcome to Year-End Earnings Call. At this time, all participants are in a listen-only mode until the question-and-answer period. (Operator Instructions). Today’s conference is being recorded, and if you have any objections, you may disconnect at this time.

Now, I’d like to turn the meeting over to your host for today’s call, the CFO of ScanSource, Mr. Richard Cleys. Sir, you may begin.

Richard Cleys

Thank you, Matt, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter and year ended June 30th, 2008. My name is Rich Cleys, and with me is Mike Baur, CEO of ScanSource. 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 risk 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 the 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 30th, 2007, and the company’s annual report on Form 10-K for the year ended June 30th, 2008 to be filed with the Securities and Exchange Commission.

I will start our discussion by providing overall sales and operating results. The company posted sales of $554 million for the quarter ended June 30, 2008, an increase of 6% over sales of $524.3 million for the same quarter last year.

Measuring sales based upon our product groups, shows year-over-year growth of 11% in AIDC and point-of-sale, along with a 3% year-over-year decrease in the communication products for the quarter ended June 30, 2008. That produced a 65-35 mix of AIDC POS versus communication products.

Gross margin was 10.6% for the June 2008 quarter compared to 10.5% for the same period last year. This quarter’s margin of 10.6% was favorably impacted by improved cost on European POS and bar code product purchases as well as favorable program results, which more than offset lower program benefits from vendors in North America.

Operating expenses were $34.4 million or 6.2% of sales, compared to 6.5% for the prior year. On a non-GAAP basis, operating expenses remained constant at 6.2%. Included in the prior year’s expenses was special committee expenses of $2 million related to the company’s stock option review. In the current year quarter the company increased headcount with the acquisition of MTV Telecom Distribution PLC, a U.K. based distributor of voice and data solutions.

Operating income for the June 2008 quarter increased 17% to $24.2 million from the prior year. Operating income as a percent of sales was 4.36% compared to the prior year quarter of 4.33%, or an increase of $1.5 million. The prior year operating income percentage of 4.33% reflects exclusion of special committee cost.

Net interest expense was $570,000 compare to $1.9 million for the prior year quarter. Interest expense decreased over the prior year quarter primarily due to lower debt balances into a lesser extent lower interest rates.

The tax rate for both the June 2008 and 2007 quarters was 39%. Net income for the June 2008 quarter increased to $14.5 million or 2.6% of sales compared to the prior year quarter of $11.3 million, which was 2.2% of sales. Excluding special committee cost non-GAAP net income for the June 2007 period was 2.4% so the non-GAAP comparison of net income as a percent of sales is 2.6% for 2008 to 2.4% for 2007.

We were pleased with our return on invested capital this quarter, which had 22% as within our historical range of 20% to 25%. Balance sheet metrics and cash management were as follows. Inventory returns were 6.9 times at the end of June 2008 improved from the 6.7 turns posted in the June 2007 quarter and 5.8 turns for the March 2008 quarter.

The number of days sales and receivables, DSO was 59 at June 30, 2008 compared to 60 days posted in June 2007 and 59 days posted in March 2008.

Paid for inventory days were a positive 2.7 days for June 2008 quarter and a positive 2.9 days for the June 2007 quarter. At March 2008 our paid for inventory days were a positive 14.5 days, the quarter-over-quarter improvement in paid for inventory days was driven by lower inventory purchases, primarily in our telecommunications business units and higher quarter-over-quarter accounts payable. As we have stated in the past accounts payable can be impacted by the timing of payments. Embedded in the higher accounts payable days, our checks written but not cleared. Checks written but not cleared decreased to $26 million compared to $30 million in March.

Our interest bearing debt was $64 million at June 30, 2008 compared to $111 million at June 30, 2007. At March 31, 2008, our interest bearing debt was $100 million. The reduced debt at June from the March 31, balance reflects $53 million of positive cash flow from operations, less about $10 million of capital expenditures and acquisition expenditures.

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