ScanSource Reports Fourth Quarter and Full Year Results

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ScanSource Reports Fourth Quarter and Full Year Results

Fourth Quarter Non-GAAP EPS of $0.71

GREENVILLE, S.C.--(BUSINESS WIRE)-- ScanSource, Inc. (NAS: SCSC) , the leading international value-added distributor of specialty technology products, today announced complete financial results for its fourth quarter and fiscal year ended June 30, 2013, including non-cash impairment charges.

Quarter ended June 30, 2013:Fiscal Year ended June 30, 2013:
Net sales$712.7 millionNet sales$2,877.0 million
GAAP net loss$(13.3) millionGAAP net income$34.7 million
Adjusted net income(1)$19.9 millionAdjusted net income(1)$69.3 million
GAAP diluted EPS$(0.48) per shareGAAP diluted EPS$1.24 per share
Adjusted diluted EPS(1)$0.71 per shareAdjusted diluted EPS(1)$2.47 per share

(1) A reconciliation of non-GAAP financial information to GAAP financial information is presented in the following Supplementary

Information table.


"We saw record quarterly sales in our North America Communications and Security business units," said Mike Baur, CEO, ScanSource, Inc. "The lack of big deals in our POS & Barcode business units, however, led to lower than expected fourth quarter sales. Despite lower sales, our return on invested capital increased to 17.2%, excluding the impairment charges, driven by higher margins, better working capital management, and our focus on value-added growth."

For the quarter ended June 30, 2013, net sales totaled $712.7 million. This represents a 4.4% increase from the prior quarter's net sales of $683.0 million and a 5.5% decrease from net sales of $754.5 million for the quarter ended June 30, 2012.

Operating loss for the quarter ended June 30, 2013 of $20.4 million included pre-tax, non-cash impairment charges of $48.8 million. Excluding the non-cash impairment charges, operating income was $28.4 million, comparable to $28.3 million for the prior year quarter.

Net loss for the quarter ended June 30, 2013 was $13.3 million, or $0.48 per diluted share, compared with net income of $19.8 million, or $0.71 per diluted share, for the prior year quarter. Excluding the non-cash impairment charges, adjusted net income for the quarter ended June 30, 2013 totaled $19.9 million, or $0.71 per diluted share.

Impairment charges

During the fourth quarter 2013, the Company recorded pre-tax, non-cash impairment charges of $48.8 million, including $28.2 million for the impairment of capitalized costs associated with the Enterprise Resource Planning ("ERP") project that the Company has been developing and $20.6 million for the impairment of goodwill.

In January 2013, the Company, through its wholly-owned subsidiary Partner Services, Inc., filed a lawsuit against its former ERP software systems integrator, Avanade, Inc. ("Avanade"). The lawsuit alleges, among other things, fraud, tortious misrepresentation and breach of contract on the part of Avanade in connection with its misconduct and performance failures on the ERP project, and the Company is seeking recovery of damages.

The Company engaged a new systems integration partner, Tata Consultancy Services ("TCS"), to replace Avanade. In March 2013, TCS presented an integrated project plan that included the time and costs to complete the project. This plan indicated that the effort remaining was going to approach the $72 million upper end of the Company's previously-disclosed total project cost range with no assurance that the system would be successful. In April 2013, the Company moved a significant number of its team members who were working on the ERP project back into business roles and began evaluating alternatives for next steps.

In the current quarter, the ERP team has been focused on working with Microsoft Consulting on alternative options to facilitate completion of the project. Additionally, the ERP team met with other software vendors for an understanding of how their software would meet the needs of the Company. At this time, there is not a viable plan to complete and use the software development of the Microsoft Dynamics AX-based ERP project. The Company believes that the incomplete ERP implementation by Avanade is of almost no value. The Company believes that the ERP project impairment is in large part a result of Avanade's cost overruns, time overruns and performance failures as alleged in the Complaint. Based on the above factors, in connection with the preparation and review of the financial statements for the quarter ended June 30, 2013, the Company reviewed the ERP project from an accounting impairment perspective and determined that the ERP software project is impaired.

The Company is currently evaluating its alternatives for next steps in the development of a new ERP system. Meanwhile, its legacy ERP systems continue to run its business successfully.

The $20.6 million charge for the impairment of goodwill included $5.4 million and $15.1 million related to its Europe Communications and Brazilian POS & Barcode reporting units, respectively. The Company's purchase price for its acquisition of CDC Brasil (now its Brazilian POS & Barcode unit) included an earnout structure with five annual payments through 2015. Earnout payments made to CDC Brasil shareholders have been lower than those forecasted and assumed in the calculation of goodwill at the time of acquisition.

Change in Operating Segments

In June 2013, the Company announced a change in its management structure and reporting segments to enhance its worldwide technology markets focus. As part of this new structure, ScanSource has created two technology segments: Worldwide Barcode & Security and Worldwide Communications & Services. Historical results reflecting the new reporting segments for each quarter of fiscal year 2013 are provided in the following Supplementary Information tables.

Forecast for Next Quarter

The Company announced its current expectations for the first quarter of fiscal 2014. ScanSource expects that net sales for the quarter ending September 30, 2013 could range from $715 million to $735 million, and diluted earnings per share could be in the range of $0.56 to $0.58 per share.

Webcast Details

ScanSource will present additional information about its financial results outlook in a conference call with presentation slides today, August 22, 2013, at 5:00 p.m. (ET). A webcast of the call and accompanying presentation slides will be available for all interested parties and can be accessed at www.scansourceinc.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; impairment charges, additional costs and delays in connection with the Company's new ERP system and associated litigation; 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 prior Form 10Q's, and annual report on Form 10-K for the year ended June 30, 2012 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, adjusted net income and adjusted EPS, 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.

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 charges associated with the ERP and goodwill impairments, and costs associated with tax compliance and personnel replacement in the Company's Belgian office. 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.

Return on invested capital ("ROIC"): Management uses ROIC as a performance measurement to assess efficiency at 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. 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. Management adjusted the calculation of ROIC to exclude the impact of ERP and goodwill impairment charges in addition to costs associated with Belgian tax compliance and personnel replacement, to provide a measure of the Company's profitability on a basis more comparable to historical or 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 Supplemental Information tables.

About ScanSource, Inc.

ScanSource, Inc. (NAS: 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.scansourceinc.com.

ScanSource, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
June 30, 2013June 30, 2012*
Assets
Current assets:
Cash and cash equivalents$148,164$29,173
Accounts receivable, less allowance of435,028458,341
$25,479 at June 30, 2013
$24,405 at June 30, 2012
Inventories402,307487,946
Prepaid expenses and other current assets40,10541,846
Deferred income taxes16,45614,624
Total current assets1,042,0601,031,930
Property and equipment, net20,20348,785
Goodwill31,79553,885
Other non-current assets, including identifiable intangible assets70,12567,206
Total assets$1,164,183$1,201,806
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings$-$4,268
Current portion of contingent consideration3,7324,976
Accounts payable362,271419,683
Accrued expenses and other current liabilities59,98367,776
Income taxes payable1,6961,698
Total current liabilities427,682498,401
Deferred income taxes205-
Long-term debt5,4295,429
Long-term portion of contingent consideration8,81311,677
Other long-term liabilities26,09833,988
Total liabilities468,227549,495
Shareholders' equity:
Common stock149,821139,557
Retained earnings569,107534,445
Accumulated other comprehensive income (loss)(22,972)(21,691)
Total shareholders' equity695,956652,311
Total liabilities and shareholders' equity$1,164,183$1,201,806
*Derived from audited financial statements at June 30, 2012.
ScanSource, Inc. and Subsidiaries
Condensed Consolidated Income Statements (Unaudited)
(in thousands, except per share data)
Quarter ended

June 30,

Year ended

June 30,

20132012*20132012*
Net sales$712,678$754,470$2,876,964$3,015,296
Cost of goods sold637,027680,6432,584,0902,713,272
Gross profit75,65173,827292,874302,024
Operating expenses:
Selling, general and administrative expenses46,82446,634191,216188,388
Impairment charges, including ERP and goodwill48,772-48,772-
Change in fair value of contingent consideration447(1,123)1,843120
Operating income (loss)(20,392)28,31651,043113,516
Other expense (income):
Interest expense4191507751,639
Interest income(590)(653)(2,238)(2,886)
Other, net(554)188(520)3,552
Income (loss) before income taxes(19,667)28,63153,026111,211
Provision for income taxes(6,352)8,84618,36436,923
Net income (loss)$(13,315)$19,785$34,662$74,288
Per share data:
Weighted-average shares outstanding, basic27,92227,57927,77427,362
Net income (loss) per common share, basic$(0.48)$0.72$1.25$2.72
Weighted-average shares outstanding, diluted27,92227,86627,99427,751
Net income (loss) per common share, diluted$(0.48)$0.71$1.24$2.68
*Derived from audited financial statements at June 30, 2012.
ScanSource, Inc. and Subsidiaries
Supplementary Information (Unaudited)
(in thousands)
Net Sales by Segment:
Non-GAAP
Quarter ended June 30,% Change
20132012% ChangeExcluding FX(a)
Worldwide Barcode & Security$444,766$454,115(2.1)%(2.0)%
Worldwide Communications & Services267,912300,355(10.8)%(10.9)%
Consolidated$712,678$754,470(5.5)%(5.5)%
Non-GAAP
Year ended June 30,% Change
20132012% ChangeExcluding FX(a)
Worldwide Barcode & Security$1,828,219$1,837,307(0.5)%1.4%
Worldwide Communications & Services1,048,7451,177,989(11.0)%(10.7)%
Consolidated$2,876,964$3,015,296(4.6)%(3.4)%
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 and year ended June 30, 2013 into U.S. dollars using the weighted average foreign exchange rates

for the quarter and year ended June 30, 2012, respectively. Worldwide Barcode & Security net sales excluding the translation impact of

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