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ScanSource Reports Second Quarter Results

ScanSource, Inc. (NASDAQ:SCSC), the leading international value-added distributor of specialty technology products, today announced financial results for its second quarter in fiscal year 2014, for the period ended December 31, 2013.

                      Quarter ended December 31, 2013:

Net sales

 

$740.6 million

Net income

$18.3 million

Diluted EPS

$0.64 per share

"Year-over-year growth for both of our communications business units in North America drove strong operating performance," said Mike Baur, CEO, ScanSource, Inc. "Our worldwide POS and barcode business units showed improved market demand, and quarterly revenues for Brazil were an all-time record."

For the quarter ended December 31, 2013, net sales totaled $740.6 million. This represents a 1.2% increase from the prior quarter’s sales of $731.9 million and a 0.9% decrease from net sales of $747.7 million for the quarter ended December 31, 2012. Operating income totaled $27.5 million, compared with $24.4 million in the prior year quarter. Net income for the quarter ended December 31, 2013 totaled $18.3 million, or $0.64 per diluted share, compared with net income of $16.4 million, or $0.59 per diluted share, for the prior year quarter. Excluding expenses associated with Belgian tax compliance and personnel replacement costs, adjusted net income for the quarter ended December 31, 2012 totaled $17.8 million, or $0.64 per diluted share.

Forecast for Next Quarter

The Company announced its current expectations for the third quarter of fiscal year 2014. ScanSource expects that net sales for the quarter ending March 31, 2014 could range from $700 million to $720 million, and diluted earnings per share could be in the range of $0.53 to $0.55 per share.

Webcast Details

ScanSource will present additional information about its financial results and outlook in a conference call with presentation slides today, January 30, 2014, at 5:00 p.m. (ET). A webcast of the call and accompanying presentations slides will be available for all interested parties and can be accessed at www.scansource.com (Investor Relations section). The webcast will be available for replay for 60 days.

Safe Harbor Statement

This press release contains comments that 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. Any number of important factors could cause actual results to differ materially from anticipated or forecasted results, including, but not limited to, expanded operations in emerging markets, such as Brazil, that expose the Company to greater political and economic volatility than its operations in established markets; costs and delays in connection with the Company's new ERP system and the costs associated with the litigation of the prior ERP system project; the ability to forecast volatility in earnings resulting from the quarterly revaluation of the Company's earnout obligation to the sellers of CDC; and macroeconomic circumstances that could impact the business, such as currency fluctuations, credit market conditions, and an economic downturn. For more information concerning factors that could cause actual results to differ from anticipated results, see the Company's annual report on Form 10-K for the year ended June 30, 2013 and the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2013, filed with the Securities and Exchange Commission. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

Non-GAAP Financial Information

In addition to disclosing results that are determined in accordance with United States Generally Accepted Accounting Principles ("GAAP"), the Company also discloses certain non-GAAP financial measures, including net sales excluding the translation impact of foreign currencies and return on invested capital ("ROIC"). Non-GAAP financial measures are used to better understand and evaluate performance, including comparisons from period to period, as described below.

Net sales excluding the translation impact of foreign currencies: The Company discusses the percentage change in net sales excluding the translation impact from changes in foreign currency exchange rates between reporting periods. This measure enhances comparability between periods to help analyze underlying trends.

Return on invested capital ("ROIC"): Management uses ROIC as a performance measurement to assess efficiency in allocating capital under the Company's control to generate returns. Management believes this metric balances the Company's operating results with asset and liability management, excludes the results of capitalization decisions, is easily computed and understood, and is considered to have a strong correlation with shareholder value creation. ROIC also provides management a measure of the Company's profitability on a basis more comparable to historical or future periods. In addition, the Company's Board of Directors uses ROIC in evaluating business and management performance. Certain management incentive compensation targets are set and measured relative to ROIC.

Adjusted net income and adjusted EPS: To evaluate current period performance on a clearer and more consistent basis with prior periods, the Company discloses adjusted net income and adjusted diluted earnings per share, which exclude costs associated with tax compliance and personnel replacement in the Company's Belgian office for the quarter ended December 31, 2012. Management believes that these historical items are outside of the Company's normal operating expenses. Adjusted net income and adjusted EPS are useful in better assessing and understanding the Company's operating performance, especially when comparing results with previous periods or forecasting performance for future periods.

These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that the Company reports may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with GAAP. A reconciliation of the Company's non-GAAP financial information to GAAP is set forth in the following Supplementary Information tables.

About ScanSource, Inc.

ScanSource, Inc. (NASDAQ: SCSC) is the leading international distributor of specialty technology products, focusing on point-of-sale (POS) and barcode, communications and physical security solutions. ScanSource's teams provide value-added services and operate from two technology segments, Worldwide Barcode & Security and Worldwide Communications & Services. ScanSource is committed to helping its reseller customers choose, configure, and deliver the industry's best products across almost every vertical market in North America, Latin America and Europe. Founded in 1992, the Company ranks #711 on the Fortune 1000. For more information, visit www.scansource.com.

ScanSource, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
  December 31, 2013   June 30, 2013*
Assets
Current assets:
Cash and cash equivalents $ 157,130 $ 148,164
Accounts receivable, less allowance of 438,358 435,028
$29,545 at December 31, 2013
$25,479 at June 30, 2013
Inventories 467,202 402,307
Prepaid expenses and other current assets 40,731 40,105
Deferred income taxes 16,815   16,456  
Total current assets 1,120,236 1,042,060
Property and equipment, net 18,890 20,203
Goodwill 31,994 31,795
Other non-current assets, including identifiable intangible assets 67,182   70,125  
Total assets $ 1,238,302   $ 1,164,183  
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of contingent consideration $ 5,229 $ 3,732
Accounts payable 383,996 362,271
Accrued expenses and other current liabilities 59,705 59,983
Income taxes payable 2,137   1,696  
Total current liabilities 451,067 427,682
Deferred income taxes 201 205
Long-term debt 5,429 5,429
Long-term portion of contingent consideration 4,318 8,813
Other long-term liabilities 25,841   26,098  
Total liabilities 486,856 468,227
Shareholders' equity:
Common stock 163,680 149,821
Retained earnings 606,842 569,107
Accumulated other comprehensive income (loss) (19,076 ) (22,972 )
Total shareholders' equity 751,446   695,956  
Total liabilities and shareholders' equity $ 1,238,302   $ 1,164,183  
* Derived from audited financial statements.
ScanSource, Inc. and Subsidiaries
Condensed Consolidated Income Statements (Unaudited)
(in thousands)
       
Quarter ended

December 31,

Six months ended

December 31,

2013 2012 2013 2012
Net sales $ 740,618 $ 747,716 $ 1,472,522 $ 1,481,320
Cost of goods sold 663,362   673,365   1,318,767   1,332,930  
Gross profit 77,256 74,351 153,755 148,390
Operating expenses:
Selling, general and administrative expenses 49,296 49,393 96,836 96,454
Change in fair value of contingent consideration 499   533   1,237   1,296  
Operating income 27,461 24,425 55,682 50,640
Other expense (income):
Interest expense 235 130 482 254
Interest income (525 ) (532 ) (1,099 ) (1,166 )
Other, net (58 ) 53   51   39  
Income before income taxes 27,809 24,774 56,248 51,513
Provision for income taxes 9,511   8,417   18,513   17,514  
Net income $ 18,298   $ 16,357   $ 37,735   $ 33,999  
Per share data:
Weighted-average shares outstanding, basic 28,293   27,713   28,164   27,665  
Net income per common share, basic $ 0.65   $ 0.59   $ 1.34   $ 1.23  
 
Weighted-average shares outstanding, diluted 28,597   27,958   28,434   27,928  
Net income per common share, diluted $ 0.64   $ 0.59   $ 1.33   $ 1.22  
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
   
Net Sales by Segment:
Quarter ended December 31, Non-GAAP % Change
2013   2012 % Change Excluding FX(a)
Worldwide Barcode & Security $ 476,206 $ 489,075 (2.6 )% (2.7 )%
Worldwide Communications & Services 264,412   258,641   2.2 % 1.9 %
Consolidated $ 740,618   $ 747,716   (0.9 )% (1.1 )%
 
Six months ended December 31, Non-GAAP % Change
2013 2012 % Change Excluding FX(a)
Worldwide Barcode & Security $ 926,850 $ 945,262 (1.9 )% (2.0 )%
Worldwide Communications & Services 545,672   536,058   1.8 % 1.5 %
Consolidated $ 1,472,522   $ 1,481,320   (0.6 )% (0.7 )%
 
 
 
 
 
Net Sales by Geographic Segment:
Quarter ended December 31, Non-GAAP % Change
2013 2012 % Change Excluding FX(b)
North American (U.S. and Canada) $ 545,089 $ 547,987 (0.5 )% (0.5 )%
International 195,529   199,729   (2.1 )% (2.7 )%
Consolidated $ 740,618   $ 747,716   (0.9 )% (1.1 )%
 
 
Six months ended December 31, Non-GAAP % Change
2013 2012 % Change Excluding FX(b)
North American (U.S. and Canada) $ 1,103,429 $ 1,093,799 0.9 % 0.9 %
International 369,093   387,521   (4.8 )% (5.3 )%
Consolidated $ 1,472,522   $ 1,481,320   (0.6 )% (0.7 )%
 
Notes:
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended and six months ended December 31, 2013 into U.S. dollars using the weighted average foreign exchange rates for the quarter ended and six months ended December 31, 2012, respectively. Worldwide Barcode & Security net sales excluding the translation impact of foreign currencies for the quarter ended and six months ended December 31, 2013, as adjusted, totaled $475.8 million and $926.5 million, respectively. Worldwide Communications & Services net sales excluding the translation impact of foreign currencies for the quarter ended and six months ended December 31, 2013, as adjusted, totaled $263.6 million and $543.9 million.
 
(b)Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended and six months ended December 31, 2013 into U.S. dollars using the weighted average foreign exchange rates for the quarter ended and six months ended December 31, 2012, respectively. International net sales excluding the translation impact of foreign currencies for the quarter ended and six months ended December 31, 2013, as adjusted, totaled $194.3 million and $367.0 million, respectively.
Non-GAAP Financial Information:          
Quarter ended December 31, 2013 Quarter ended December 31, 2012
Pre-tax income Net Income Diluted EPS Pre-tax Income Net Income Diluted EPS
GAAP Measure $ 27,809 $ 18,298 $ 0.64 $ 24,774 $ 16,357 $ 0.59
Non-GAAP Adjustment(a)       2,121   1,400   0.05
Non-GAAP Measure $ 27,809   $ 18,298   $ 0.64   $ 26,895   $ 17,757   $ 0.64
 
 
Quarter ended December 31,
2013 2012
Return on invested capital (ROIC), annualized (b) 15.9 % 15.2 %
 
Reconciliation of Net Income to EBITDA
Net income - GAAP $ 18,298 $ 16,357
Plus: Income taxes 9,511 8,417
Plus: Interest expense 235 130
Plus: Depreciation and amortization (c) 1,778   2,275  
EBITDA (numerator for ROIC) (non-GAAP) $ 29,822   $ 27,179  
 
Invested Capital Calculation
Equity - beginning of quarter $ 723,748 $ 676,136
Equity - end of quarter 751,446   696,960  
Average equity 737,597 686,548
Average funded debt (d) 5,429   23,850  
Invested capital (denominator for ROIC) (non-GAAP) $ 743,026   $ 710,398  
 
Notes:
(a) Expenses associated with Belgian tax compliance and personnel replacement costs, including related professional fees.
(b) Calculated as net income plus interest expense, income taxes, depreciation and amortization (EBITDA), annualized and divided by invested capital for the period.
(c) Depreciation and amortization for the quarter ended December 31, 2012 includes debt issuance costs of $0.1 million.
(d) Average funded debt is calculated as the average daily amounts outstanding on our short-term and long-term interest-bearing debt.

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