SCSC

ScanSource, Inc. (SCSC)

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ScanSource, Inc. (SCSC)

Q3 2010 Earnings Call

October 28, 2010; 05:00 pm ET

Executives

Mike Baur - Chief Executive Officer

Rich Cleys - Chief Financial Officer

Scott Benbenek - President of Worldwide Operations

Analysts

Ajit Pai - Stifel Nicolaus

Tony Kure - KeyBanc

Brian Drab - William Blair

Reik Read - Robert Baird

Presentation

Operator

Welcome to the ScanSource quarterly earnings announcements call. All lines have been placed in a listen-only mode until the question and answer session. Today’s call is being recorded. (Operator Instructions)

Now I’d like to introduce your presenter Mr. Rich Cleys, the CFO. Sir, you may begin.

Rich Cleys

Thank you Bobby, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended September 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 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.

The statements made in this call are made as of today’s date hereof, even it’s subsequently made available on ScanSource’s website or otherwise. ScanSource does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist as of 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 factors that could cause such differences, see the company’s annual report on Form 10-K for the fiscal year ended June 30, 2010, filed with the Securities and Exchange Commission.

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

For the quarter ended September 30, 2010, the company generated worldwide net sales of $634.5 million, which represents a 30% increase in sales over the comparative prior year quarter and a 9% increase of the quarter ended June 30, 2010. Included in the quarter 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 another new record for the company and well exceeded our expectations as we experience some good demand and gained market share in all of geographies. On a geographic basis, sales originating from our North American distribution segments increased 24% in comparison to the prior quarter.

Our international segment grew 54% and when measured in local currency, grew 67%. Within our product lines, we experienced a 27% increase in worldwide sales of our POS Barcoding 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 experience an increase of 35% in comparison to the prior year quarter.

The company's consolidated gross margin percentage was 10% for the quarter-ended September30, which was lower than the prior year quarter gross margin of 10.5%. The September 2010 gross margin reflects a higher mix of lower margin product line. Sequentially, gross margin increased from the previously reported 9.8%, primarily due to timing of vendor extended program benefits.

Operating expenses in the current quarter increased to $38.6 million compared to a $33.7 million in the comparative prior year period. The increase is primarily the results of higher headcounts in the addition of ScanSource Communications Germany, which did not exist in the prior year's quarter.

The September 2010 quarter, bad debt expense was as expected. However, it is lower than the September 2009 quarter, which was much higher than normal. Operating expenses as a percent of net sales decreased to 6.1% from the current quarter, compared to 6.9% in the comparative prior year period.

Operating income for the September 2010 quarter increased to $24.8 million, up 40% increase from operating income in the comparative prior year of $17.7 million. Expressed as a percentage of sales, operating income was 3.9% in the current quarter, compared to 3.6% for the prior year quarter, and sequentially was up from the 3.6% reported for the fourth quarter 2010.

Interest expense was $366,000 for the quarter, which was flat to the prior-year quarter. The effective tax rate for the September 2010 quarter decreased to 35.6%, compared with the prior year quarter of 37.4%. The decrease in the effective rate from the prior year reflects the benefit of changes from our international capital structure executed during the fourth quarter of last fiscal year.

Our return on invested capital was 19.5% for the quarter, which compares favorably to the 16% reported for the prior-year quarter. In summary, the September 2010 quarter as reported fully diluted earnings per share of $0.58 versus reported fully diluted earnings per share of $0.41 for the September, 2009 quarter. This improvement was due to the increased operating income generated from higher gross profit dollars on higher sales.

Turning to the balance sheet, inventory turned 6.6 times during the quarter, which was higher than the 6.4 times, inventory turns generated in June 2010 quarter, that’s lower than the 7.2 turns in the comparative quarter last year.

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