SCSC

ScanSource, Inc. (SCSC)

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ScanSource, Inc. (SCSC)

F4Q2010 Earnings Call Transcript

August 19, 2010 5:00 pm ET

Executives

Rich Cleys – VP of Finance and CFO

Mike Baur – CEO

Analysts

Reik Reed – Robert W. Baird & Company

Andrew Abrams – Avian Securities

Chris Quilty – Raymond James

Tony Kure – KeyBanc

Ajit Pai – Stifel Nicolaus

Presentation

Operator

Welcome to the ScanSource quarterly and year-end earnings conference 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 like to turn the call over to Mr. Rich Cleys, CFO. Sir, you may begin.

Rich Cleys

Thank you, Sharon, and thank you for joining us for the ScanSource conference call to discuss the financial results for the quarter ended June 30, 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 today’s date. We may subsequently make these statements 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 today’s date. 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 2009 filed with the Securities and Exchange Commission.

This afternoon the company released results for fourth quarter and full year period ended June 30, 2010. I will start our discussion by providing overall sales and operating results for the fourth quarter. Later in the call, Mike will comment specifically on the quarterly results and outlook for each of our business units.

For the quarter ended June 30, 2010 the company generated worldwide net sales of $582.3 million, which represents a 32% increase in sales over the comparative prior year quarter, and a 17% increase over the quarter ended March 31, 2010. Included in the quarter’s sales results are revenues from ScanSource Communications Germany, formerly known as Algol Europe, which was acquired November 30, 2009.

Our net sales for the quarter hit a new record for the company and as well exceeded our expectations as we experienced good demand in all geographies. In fact, even without the revenue of ScanSource Communications Germany, the company still would have achieved record quarterly revenues.

On a geographic basis, sales originating from our North American distribution segment increased 28% in comparison with the prior year quarter. Our international segment grew 49% and when measured in local currency grew 62%.

Within our product lines, we experienced a 30% increase in worldwide sales in our POS bar coding and security product categories over the prior year quarter. These product categories represent 60% of our total sales for the current quarter with the remaining 40% of our total sales originating from communications products. Our communications businesses experienced an increase of 35% in comparison to the prior year quarter.

The company’s consolidated gross margin percentage was 9.8% for the quarter ended June 30, 2010, which was lower than the prior year quarter gross margin of 12.1%. We noted last year that a more normalized margin would have been 10.8%. Sequentially, gross margin decreased from the previously reported 11% primarily due to more big deals in the higher mix of lower margin products lines.

Operating expenses in the current quarter increased to $35.8 million compared with $33.5 million in the comparative prior year period. The increase primarily results from the addition of ScanSource Communications Germany, which does not exist in the prior year’s quarter, changes in vendor programs and higher bad debt expense. Operating expense as a percent of net sales decreased to 6.2% in the current quarter compared to 7.6% in the comparative prior year period. Sequentially SG&A was approximately $400,000 higher than the third quarter on much higher revenues.

Operating income for the June 2010 quarter increased to $21 million, a 5% increase from operating income in the comparative prior year of $20 million. Expressed as a percentage of sales, operating income was 3.6% in the current quarter compared to 4.5% for the prior year quarter, and sequentially was down from the 3.8% for the third quarter of 2010.

Interest expense was $365,000 for the quarter and was flat to the prior year quarter. The effective tax rate for the June 2010 quarter decreased to 33.1% compared with the prior year quarter of 37.4%. This decrease in the effective rate from the prior year reflects a higher mix of taxable income derived in lower tax rate jurisdiction, and reflects the benefit of changes to our international capital structure executed during the fiscal year.

Our return on invested capital was 17.8% for the quarter, which compares to 18.9% for the prior year quarter.

In summary, the June 2010 quarter had reported EPS of $0.52 versus a reported EPS of $0.47 in the June 2009 quarter. This improvement was due to the increased operating income generated from higher gross profit dollars on higher sales and a more favorable tax rate than in the previous year’s quarter.

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