UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the

Quarterly period ended March 31, ~~2013~~2014

Commission File Number: 000-26926

ScanSource, Inc.

(Exact name of registrant as specified in its charter)



SOUTH CAROLINA		57-0965380
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6 Logue Court

Greenville, South Carolina, 29615

(Address of principal executive offices)

(864) 288-2432

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post to such files. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ~~“large~~"large accelerated filer,~~” “accelerated~~" "accelerated filer,”" and ~~“smaller~~"smaller reporting ~~company”~~company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). �� Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at ~~April 30, 2013~~May 5, 2014
Common Stock, no par value per share		~~27,882,395~~28,518,432 shares

SCANSOURCE, INC.

INDEX TO FORM 10-Q

March 31, ~~2013~~2014



		Page #
PART I. FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of March 31, ~~2013~~2014 and June 30, ~~2012~~2013	4
	Condensed Consolidated Income Statements for the Quarters and Nine Months Ended March 31, ~~2013~~2014 and ~~201~~2 2013	5
	Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended March 31, ~~2013~~2014 and ~~201~~2 2013	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, ~~2013~~2014 and ~~201~~2 2013	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2827
Item 4.	Controls and Procedures	3029

PART II. OTHER INFORMATION		3130

Item 1	Legal Proceeding	30
Item 1A.	Risk Factors	3130
Item 5.	Other Information	30
Item 6.	Exhibits	3431

SIGNATURES		3532

EXHIBIT INDEX		3633

Table of Contents

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the ~~“Management’s~~"Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and ~~“Quantitative~~"Quantitative and Qualitative Disclosures About Market ~~Risk”~~Risk" and ~~“Risk Factors”~~"Risk Factors" sections and elsewhere herein, which reflect our best judgment based on factors currently known, involve risks and uncertainties. Words such as ~~“expects,” “anticipates,” “believes,” “intends,” “plans,” “hopes,” “forecasts”~~"expects," "anticipates," "believes," "intends," "plans," "hopes," "forecasts" and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements included in ~~“Risk Factors”~~"Risk Factors" contained in ~~this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 and~~ our Annual Report on Form 10-K for the year ended June 30, ~~2012~~2013. The forward-looking information we have provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995, should be evaluated in the context of these factors.

Table of Contents

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share information)


	March 31, 2013			June 30, 2012			March 31, 2014			June 30, 2013
Assets
Current assets:
Cash and cash equivalents	$	93,905		$	29,173		$	183,562		$	148,164
Accounts receivable, less allowance of $30,996 at March 31, 2013 and $27,349 at June 30, 2012	431,264			470,808
Accounts receivable, less allowance of $26,825 at March 31, 2014 and $25,479 at June 30, 2013							419,889			435,028
Inventories	407,093			475,479			479,871			402,307
Prepaid expenses and other current assets	42,041			41,846			41,947			40,105
Deferred income taxes	14,687			14,624			15,876			16,456
Total current assets	988,990			1,031,930			1,141,145			1,042,060
Property and equipment, net	49,008			48,785			25,674			20,203
Goodwill	53,743			53,885			32,143			31,795
Other non-current assets, including identifiable intangible assets	66,698			67,206
Other non-current assets, including net identifiable intangible assets							53,412			70,125
Total assets	$	1,158,439		$	1,201,806		$	1,252,374		$	1,164,183
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings	$	—		$	4,268
Accounts payable	325,658			419,683			$	375,892		$	362,271
Accrued expenses and other current liabilities	68,169			67,776			62,756			59,983
Current portion of contingent consideration	4,524			4,976			5,718			3,732
Income taxes payable	2,699			1,698			2,289			1,696
Total current liabilities	401,050			498,401			446,655			427,682
Deferred income taxes	2,879			—			192			205
Long-term debt	5,429			5,429			5,429			5,429
Long-term portion of contingent consideration	8,797			11,677			5,018			8,813
Other long-term liabilities	30,372			33,988			22,294			26,098
Total liabilities	448,527			549,495			479,588			468,227
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued	—			—			—			—
Common stock, no par value; 45,000,000 shares authorized, 27,872,395 and 27,604,840 shares issued and outstanding at March 31, 2013 and June 30, 2012, respectively	146,975			139,557
Common stock, no par value; 45,000,000 shares authorized, 28,513,120 and 27,971,809 shares issued and outstanding at March 31, 2014 and June 30, 2013, respectively							166,509			149,821
Retained earnings	582,421			534,445			623,791			569,107
Accumulated other comprehensive income (loss)	(19,484		)	(21,691		)	(17,514		)	(22,972		)
Total shareholders’ equity	709,912			652,311			772,786			695,956
Total liabilities and shareholders’ equity	$	1,158,439		$	1,201,806		$	1,252,374		$	1,164,183

June 30, ~~2012~~2013 amounts are derived from audited consolidated financial statements.

See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(In thousands, except per share data)


	Quarter ended						Nine months ended						Quarter ended						Nine months ended
	March 31,						March 31,						March 31,						March 31,
	2013			2012			2013			2012			2014			2013			2014			2013
Net sales	$	682,965		$	707,883		$	2,164,286		$	2,260,827		$	682,998		$	682,965		$	2,155,520		$	2,164,286
Cost of goods sold	614,133			638,615			1,947,063			2,032,630			609,647			614,133			1,928,414			1,947,063
Gross profit	68,832			69,268			217,223			228,197			73,351			68,832			227,106			217,223
Selling, general and administrative expenses	47,937			46,711			144,392			141,753			46,705			47,937			143,541			144,392
Change in fair value of contingent consideration	100			1,072			1,396			1,244			981			100			2,218			1,396
Operating income	20,795			21,485			71,435			85,200			25,665			20,795			81,347			71,435
Interest expense	102			254			356			1,490			217			102			698			356
Interest income	(483		)	(780		)	(1,648		)	(2,233		)	(545		)	(483		)	(1,644		)	(1,648		)
Other (income) expense, net	(4		)	206			34			3,363			13			(4		)	65			34
Income before income taxes	21,180			21,805			72,693			82,580			25,980			21,180			82,228			72,693
Provision for income taxes	7,202			7,049			24,716			28,077			9,031			7,202			27,544			24,716
Net income	$	13,978		$	14,756		$	47,977		$	54,503		$	16,949		$	13,978		$	54,684		$	47,977
Per share data:
Weighted-average shares outstanding, basic	27,847			27,489			27,725			27,290			28,502			27,847			28,275			27,725
Net income per common share, basic	$	0.50		$	0.54		$	1.73		$	2.00		$	0.59		$	0.50		$	1.93		$	1.73

Weighted-average shares outstanding, diluted	28,024			27,926			27,960			27,709			28,730			28,024			28,548			27,960
Net income per common share, diluted	$	0.50		$	0.53		$	1.72		$	1.97		$	0.59		$	0.50		$	1.92		$	1.72

See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	Quarter ended					Nine months ended					Quarter ended					Nine months ended
	March 31,					March 31,					March 31,					March 31,
	2013			2012		2013		2012			2014		2013			2014		2013
Net income	$	13,978		$	14,756	$	47,977	$	54,503		$	16,949	$	13,978		$	54,684	$	47,977
Unrealized gain on hedged transaction, net of tax	—			—		—		139
Foreign currency translation adjustment	(3,107		)	4,965		2,206		(13,325		)	1,562		(3,107		)	5,458		2,206
Comprehensive income	$	10,871		$	19,721	$	50,183	$	41,317		$	18,511	$	10,871		$	60,142	$	50,183

See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine months ended						Nine months ended
	March 31,						March 31,
	2013			2012			2014			2013
Cash flows from operating activities:
Net income	$	47,977		$	54,503		$	54,684		$	47,977
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	6,863			7,594			5,391			6,604
Provision for accounts and notes receivable	8,312			4,968
Amortization of debt issuance costs							238			259
Provision for doubtful accounts							5,469			8,312
Share-based compensation and restricted stock	4,565			5,515			3,807			4,565
Deferred income taxes	(4,028		)	(5,387		)	10,981			(4,028		)
Excess tax benefits from share-based payment arrangements	(849		)	(150		)	(982		)	(849		)
Change in fair value of contingent consideration	1,396			1,244			2,218			1,396
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	33,605			90			13,340			32,061
Inventories	70,626			(44,859		)	(74,461		)	72,170
Prepaid expenses and other assets	(303		)	1,424			(2,924		)	(303		)
Other non-current assets	3,658			(486		)	3,790			3,658
Accounts payable	(94,951		)	(297		)	12,404			(94,951		)
Accrued expenses and other liabilities	(2,696		)	3,557			(2,817		)	(2,696		)
Income taxes payable	1,831			(2,648		)	1,532			1,831
Net cash provided by (used in) operating activities	76,006			25,068			32,670			76,006
Cash flows from investing activities:
Capital expenditures	(4,463		)	(10,187		)	(6,785		)	(4,463		)
Net cash provided by (used in) investing activities	(4,463		)	(10,187		)	(6,785		)	(4,463		)
Cash flows from financing activities:
Borrowings (repayments) on short-term borrowings, net	(4,459		)	(2,949		)	—			(4,459		)
Borrowings on revolving credit	515,262			1,132,968			—			515,262
Repayments on revolving credit	(515,877		)	(1,117,312		)	—			(515,877		)
Debt issuance costs	—			(1,360		)	(468		)	—
Repayments on long-term debt	—			(25,000		)
Contingent consideration payments	(4,777		)	(2,000		)	(3,793		)	(4,777		)
Exercise of stock options	2,231			8,071			12,152			2,231
Excess tax benefits from share-based payment arrangements	849			150			982			849
Net cash provided by (used in) financing activities	(6,771		)	(7,432		)	8,873			(6,771		)
Effect of exchange rate changes on cash and cash equivalents	(40		)	(1,901		)	640			(40		)
Increase (decrease) in cash and cash equivalents	64,732			5,548			35,398			64,732
Cash and cash equivalents at beginning of period	29,173			28,747			148,164			29,173
Cash and cash equivalents at end of period	$	93,905		$	34,295		$	183,562		$	93,905

See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Business and Summary of Significant Accounting Policies

Business Description

ScanSource, Inc. ~~and its subsidiaries (the “Company”)~~ is a leading international wholesale distributor of specialty technology ~~products, providing~~products. ScanSource, Inc. and its subsidiaries ("the Company") provide value-added distribution ~~sales~~services for technology manufacturers and sell to resellers in the following specialty technology ~~markets.~~ markets: POS Barcode and Security through its Worldwide Barcode & Security segment and Communications through its Worldwide Communications & Services segment.

The Company ~~has~~ ~~two~~operates in the United States, Canada, Latin America and Europe and uses centralized distribution centers for major geographic ~~distribution segments: the North American distribution segment serving~~regions. The Company distributes to the United States and Canada from ~~the~~its Southaven, Mississippi distribution ~~center, and an international segment currently serving~~center; to Latin America ~~and Europe~~principally from distribution centers located in Florida, Mexico and ~~Brazil,~~Brazil; and to Europe from its distribution center in Belgium, respectively. Each segment is managed around its geographic customer and vendor bases and is supported by its centralized infrastructure, such as warehousing and back office operations as appropriate. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource POS and Barcode sales unit; voice, data, video and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony and communications products through its ScanSource Communications sales unit; and electronic security products and wireless infrastructure products through its ScanSource Security sales unit. The international distribution segment markets AIDC, POS, communications and security products through its ScanSource Latin America sales unit; AIDC and POS products through its ScanSource POS and Barcode, Europe sales unit; and communication products through its ScanSource Communications, Europe sales unit.Belgium.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ScanSource, Inc. have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("US GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by ~~U.S. generally accepted accounting principles~~US GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position as of March 31, ~~2013~~2014 and June 30, ~~2012~~2013, the results of operations for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013, the statements of comprehensive income for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013 and the statements of cash flows for the nine months ended March 31, ~~2013~~2014 and ~~2012~~2013. The results of operations for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2012~~2013.

WeReclassifications

Certain prior year amounts have ~~restated~~been reclassified to conform to the current year presentation ~~of borrowings and repayments on revolving credit and debt issuance costs~~ in the ~~statements~~accompanying Condensed Consolidated Statements of ~~cash flows for the~~ ~~nine~~ ~~months ended March 31,~~ ~~2012. Related amounts had previously been presented on a net basis, rather than on a gross basis in accordance with Accounting Standards Codification ("ASC") Topic 230. The correction had~~Cash Flows. Such reclassifications have no effect on ~~net~~the cash ~~used in~~flow from operating, investing and financing ~~activities.~~activities as previously reported.

Summary of Significant Accounting Policies

Except as described below, there have been no material changes to the Company’s significant accounting policies for the quarter and nine months endedMarch 31, ~~2013~~2014 from the information included in the notes to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, ~~2012~~2013. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2012~~2013.

During the third quarter of fiscal 2014, the Company changed its annual goodwill impairment testing date from June 30 to April 30. This voluntary change is considered preferable as it better aligns the timing of the impairment test with management’s financial planning and budgeting process, and ensures the completion of the test prior to the end of the annual reporting period. This change does not accelerate, delay or avoid a potential impairment charge. The Company will complete its annual goodwill impairment test during the fourth quarter of fiscal 2014.

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Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains some zero-balance, disbursement accounts at various financial institutions in which the Company does not maintain significant depository relationships. Due to the nature of the Company’s banking relationships with these institutions, the Company does not have the right to offset most if not all outstanding checks written from these accounts against cash on ~~hand.~~hand, and the respective institutions are not legally obligated to honor the checks until sufficient funds are transferred to fund the checks. Checks released but not yet cleared from these accounts in the amounts of $~~47.3~~53.2 million and $~~48.2~~65.9 million are included in accounts payable as of March 31, ~~2013~~2014 and June 30, ~~2012~~2013, respectively.

~~Table of Contents~~

Recent Accounting Pronouncements

~~Effective for interim and annual reporting periods for fiscal 2013, the Company has implemented Accounting Standard Update ("ASU") 2011-05,~~ ~~Presentation of Comprehensive Income~~. The objective of this update is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity or in a separate footnote and requires companies to present all nonowner changes in shareholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company has elected to present a separate condensed consolidated statement of comprehensive income.

~~Effective for the annual goodwill impairment testing during fiscal 2013, the Company will implement ASU 2011-08,~~ ~~Testing Goodwill for Impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not~~There are currently no new accounting pronouncements that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The adoption of this amendment is notare expected to have ana significant impact on the Company's ~~condensed consolidated~~ financial ~~statements.~~

~~In July 2012, the Financial Accounting Standards Board ("FASB") issued ASU 2012-02,~~ ~~Testing Indefinite-Lived Intangible Assets for Impairment. This amendment allows companies to first assess qualitative factors~~position, results of ~~impairment of all indefinite-lived intangible assets, similar to the provisions in ASU 2011-08. The amendment becomes effective for annual~~operations and interim impairment tests performed for fiscal years beginning after September 15, 2012, but early adoption is permitted. The Company has elected early adoption for this amendment. The adoption of this amendment did not have an impact on the Company's condensed consolidated financial statements.cash flows.

(2) Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.


	Quarter ended				Nine months ended				Quarter ended				Nine months ended
	March 31,				March 31,				March 31,				March 31,
	2013		2012		2013		2012		2014		2013		2014		2013
	(in thousands, except per share data)								(in thousands, except per share data)
Numerator:
Net Income	$	13,978	$	14,756	$	47,977	$	54,503	$	16,949	$	13,978	$	54,684	$	47,977
Denominator:
Weighted-average shares, basic	27,847		27,489		27,725		27,290		28,502		27,847		28,275		27,725
Dilutive effect of share-based payments	177		437		235		419		228		177		273		235
Weighted-average shares, diluted	28,024		27,926		27,960		27,709		28,730		28,024		28,548		27,960

Net income per common share, basic	$	0.50	$	0.54	$	1.73	$	2.00	$	0.59	$	0.50	$	1.93	$	1.73
Net income per common share, diluted	$	0.50	$	0.53	$	1.72	$	1.97	$	0.59	$	0.50	$	1.92	$	1.72

For the quarter and nine months ended March 31, ~~2013~~2014, ~~there were~~ ~~1,119,940~~ ~~and~~ ~~1,097,610~~ weighted average shares outstanding excluded from the computation of diluted earnings per share because their effect would be ~~anti-dilutive.~~anti-dilutive were 275,635 and 203,384, respectively. For the quarter and nine months ended March 31, ~~2012~~2013, there were ~~260,901~~1,119,940 and ~~597,872~~1,097,610 weighted average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.

~~Table of Contents~~

(3) ~~Restructuring Costs~~

In April 2013, the Company implemented a restructuring plan for its Communications business unit in Europe to support a strategy for profitable growth. In the March 2013 quarter, the Company recorded a liability for expected restructuring costs of ~~$1.2 million~~ related to the termination of employees for workforce reductions. This charge is included in selling, general and administration costs in the accompanying condensed consolidated income statements. The liability, which is recorded in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets, is expected to be substantially utilized by the end of fiscal 2013.

~~(4)~~ Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of the following:


	March 31, 2013			June 30, 2012			March 31, 2014			June 30, 2013
	(in thousands)						(in thousands)
Foreign currency translation adjustment	$	(19,484	)	$	(21,691	)	$	(17,514	)	$	(22,972	)
Accumulated other comprehensive income (loss)	$	(19,484	)	$	(21,691	)	$	(17,514	)	$	(22,972	)

For the quarter and nine months ended March 31, 2014, the tax effect of amounts in comprehensive income reflect a tax benefit of $0.2 million. For the quarter and nine months ended March 31, 2013, the tax effect of amounts in comprehensive income reflect a tax expense of $0.3 million and a tax benefit of $0.1 million, respectively.

~~(5)~~

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(4) Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended March 31, ~~2013~~2014, by reporting segment, are as follows:

North American
Distribution
Segment

International
Distribution
Segment
Total
(in thousands)
Balance as of June 30, 2012 $ 20,081
$ 33,804
$ 53,885
Foreign currency translation adjustment —
(142 ) (142 )
Balance as of March 31, 2013 $ 20,081
$ 33,662
$ 53,743



	Barcode & Security Segment		Communications & Services Segment		Total
	(in thousands)
Balance as of June 30, 2013	$	16,329	$	15,466	$	31,795
Foreign currency translation adjustment	348		—		348
Balance as of March 31, 2014	$	16,677	$	15,466	$	32,143

Included within other non-current assets in the ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets are net identifiable intangible assets of $~~23.0~~16.9 million and $~~27.1~~19.8 million at March 31, ~~2013~~2014 and June 30, ~~2012~~2013, respectively. These amounts relate primarily to acquired intangible assets including customer relationships, non-compete agreements, ~~trade names,~~and distributor ~~agreements and debt issue costs.~~agreements.

~~(6)~~(5) Short-Term Borrowings and Long-Term Debt

Short-Term Borrowings

A subsidiary of the Company has a €6.0 million line of credit, which is secured by the assets of our European operations and is guaranteed by ScanSource, Inc. This agreement can be withdrawn by the lender with minimal notice. The subsidiary line of credit bears interest at the 30-day Euro Interbank Offered Rate ~~(“EURIBOR”~~("EURIBOR") plus a spread ranging from 1.25% to 2.00% per annum. The spread in effect ~~as of~~for the period ended March 31, ~~2013~~2014 was 1.25%. Additionally, the Company is assessed commitment fees ranging from 0.10% to 0.275% on non-utilized borrowing availability if outstanding balances are below €3.0 million. The interest rate spread and commitment fee rates ~~related to~~are based on the ~~€6.0 million~~ ~~line of credit refer to the~~Company's Leverage Ratio for its revolving credit facility, as defined ~~by the Company's~~ ~~$300 million~~ ~~multi-currency senior secured revolving credit facility. The~~below. There were no outstanding balances at March 31, ~~2013~~2014 and June 30, ~~2012~~2013 ~~are as follows:~~.

March 31,
2013 June 30,
2012
(in thousands)
Short-term borrowings $ —
$ 4,268

~~Table of Contents~~

Revolving Credit Facility

On ~~October 11, 2011, the Company amended and restated its primary revolving credit facility.~~ The Company ~~entered into~~has a~~five-year,~~ $300 million multi-currency senior secured revolving credit facility ~~(“Revolving~~that was scheduled to mature on October 11, 2016. On November 6, 2013, the Company entered into an amendment of this credit facility ("Amended Credit ~~Facility”~~Agreement") ~~pursuant to the terms of an Amended and Restated Credit Agreement~~ with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of ~~lenders named therein.~~banks to extend its maturity to November 6, 2018. The ~~Revolving~~Amended Credit ~~Facility~~Agreement allows for the issuance of up to $50 million for letters of credit and has a $150 million accordion feature that allows the Company to increase the availability to $450 million, subject to obtaining additional credit commitments for the ~~incremental capacity from existing or new lenders. In fiscal year~~ ~~2012~~,lenders participating in the increase. The Company incurred~~$1.4 million~~ in debt issuance costs ~~that~~of $0.5 million in connection with the Amended Credit Agreement, which were capitalized to other ~~non-current assets, including identifiable intangible~~ assets on the ~~condensed consolidated balance sheet~~Condensed Consolidated Balance Sheets and ~~are being amortized on a straight-line basis through~~ ~~October 11, 2016~~,added to the ~~maturity date of~~unamortized debt issuance costs from the ~~Revolving Credit Facility.~~previous credit facility.

At the Company's option, loans denominated in U.S. dollars under the ~~Revolving~~Amended Credit ~~Facility,~~Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ~~(“LIBOR”~~("LIBOR") or ~~prime~~alternate base rate depending upon the Company's ratio of total debt (excluding accounts payable and accrued liabilities), measured as of the end of the most recent quarter, to adjusted earnings before interest expense, taxes, depreciation and amortization ~~(“EBITDA”~~("EBITDA") for the most recently completed four quarters (the ~~“Leverage Ratio”~~"Leverage Ratio"). The Leverage Ratio calculation excludes the Company's subsidiary in Brazil. This spread ranges from 1.00% to 2.25% for LIBOR-based loans and 0.00% to 1.25% for ~~prime rate-based~~alternate base rate loans. The spread in effect ~~as of~~for the period ended March 31, ~~2013~~2014 was 1.00% for LIBOR-based loans and 0.00% for ~~prime rate-based~~alternate base rate loans. Additionally, the Company is assessed commitment fees ranging from 0.175% to 0.40%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings ~~under the Revolving Credit Facility~~ are guaranteed by substantially all of the domestic assets of the Company as well as certain foreign subsidiaries determined to be material under the Amended Credit Agreement and a pledge of up to 65% of capital stock or other equity interest in each Guarantor as defined in the ~~Revolving~~Amended Credit ~~Facility.~~Agreement. The Company was in compliance with all covenants under the ~~Revolving Credit Facility~~credit facility as of March 31, ~~2013~~2014. There were no outstanding balances at March 31, ~~2013~~2014 and June 30, ~~2012~~2013. ~~Fluctuations in functional currency rates are reflected in the net activity.~~

The average daily balance during the nine month ~~periods~~period ended March 31, ~~2013~~2014 and ~~2012~~2013 was$0.0 million and $12.5 million ~~and~~ ~~$92.8 million~~, respectively.

Long-Term Debt

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On August 1, 2007, the Company entered into an agreement with the State of Mississippi ~~in order~~ to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s ~~current~~ Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100% of the principal amount outstanding. As of March 31, ~~2013~~2014, the Company was in compliance with all covenants under this bond. The balance on the bond was $5.4 million as of March 31, 2014 and June 30, 2013 and is included in long-term debt. The interest rate at March 31, 2014 and June 30, 2013 was 1.01% and 1.04%, respectively.

March 31,
2013 June 30,
2012
(in thousands)
Industrial Development Revenue Bond, monthly payments of interest only, 1.05% variable interest rate at March 31, 2013 $ 5,429
$ 5,429
Debt Issuance Costs

As of March 31, 2014, net debt issuance costs associated with the credit facility and bonds totaled $1.4 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.

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~~(7)~~(6) Derivatives and Hedging Activities

The Company’s results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. These risks and the management of these risks are discussed in greater detail below. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with US GAAP. The Company records all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.

Foreign Currency – The Company conducts a portion of its business internationally in a variety of foreign currencies. The exposure to market risk for changes in foreign currency exchange rates arises from foreign ~~currency denominated~~currency-denominated assets and liabilities, and transactions arising from non-functional currency financing or trading activities. The Company’s objective is to preserve the economic value of non-functional ~~currency denominated~~currency-denominated cash flows. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, euro, British pound, Canadian dollar, Mexican peso and Brazilian real. While the Company utilizes foreign exchange contracts to hedge foreign currency exposure, the Company's foreign exchange policy prohibits the use of derivative financial instruments for speculative purposes.

The Company had contracts outstanding with notional amounts of $~~89.2~~62.5 million and $~~62.3~~81.3 million tofor the exchange of foreign currencies as of March 31, ~~2013~~2014 and June 30, ~~2012~~2013, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures are as follows:


	Quarter ended						Nine months ended					Quarter ended						Nine months ended
	March 31,						March 31,					March 31,						March 31,
	2013			2012			2013			2012		2014			2013			2014			2013
	(in thousands)											(in thousands)
Net foreign exchange derivative contract (gains) losses	$	(2,092	)	$	(1,666	)	$	(759	)	$	2,863	$	114		$	(2,092	)	$	2,511		$	(759	)
Net foreign currency transactional and re-measurement (gains) losses	2,237			1,386			1,087			708		(57		)	2,237			(2,185		)	1,087
Net foreign currency (gains) losses	$	145		$	280		$	328		$	3,571	$	57		$	145		$	326		$	328

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange ~~derivative~~ contract gains and ~~losses.~~losses and are included in other income and expense. Foreign exchange ~~losses~~gains and ~~gains~~losses are generated as the result of fluctuations in the value of the British pound versus the euro, the U.S. dollar versus the euro, the U.S. dollar versus the Brazilian real and other currencies versus the U.S. dollar.

~~In the prior year, the majority of foreign currency losses were associated with exposures between the U.S. dollar and Brazilian real. In September 2011, the Company incurred a~~ ~~$2.5 million~~ ~~loss in conjunction with an unfavorable forward exchange contract to purchase Brazilian reais.~~ The Company decided to pre-fund a portion of the contingent earnout payments associated with the acquisition of CDC Brasil, S.A. (“CDC”). This contract was designed to preserve the currency exchange for the few weeks required to transfer the cash to Brazil. From the time the Company entered into the contract through settlement, the real devalued from the contractual rate by ~~11.8%, ultimately resulting in a~~ ~~$2.5 million~~ loss. Further contributing to the prior year quarter foreign exchange loss, the Brazilian business incurred significant losses on the remeasurement of U.S. dollar denominated transactions that were not hedged at the time. Subsequently, the Company has been including these exposures in its ongoing hedging activities.

~~Table of Contents~~

~~The Company has~~used the following derivative instruments, located on its ~~condensed consolidated balance sheet, utilized~~Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:


	As of March 31, 2013				As of March 31, 2014
	Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments		Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments
	(in thousands)				(in thousands)
Derivative assets:^(a)
Foreign exchange contracts	$	—	$	248	$	—	$	23
Derivative liabilities:^(b)
Foreign exchange contracts	$	—	$	200	$	—	$	61


(a)	All derivative assets are recorded as prepaid expenses and other current assets in the ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheets.


(b)	All derivative liabilities are recorded as accrued expenses and other current liabilities in the ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheets.

~~(8)~~

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(7) Fair Value of Financial Instruments

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the fair value hierarchy, which groups fair value measured assets and liabilities based upon the following levels of inputs:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; ~~and~~

Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

The assets and liabilities maintained by the Company that are required to be measured at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding foreign exchange forward contracts and contingent consideration owed to the previous owners of ~~CDC.~~Brasil Distribuidora de Tecnologias Especiais LTDA ("CDC" or "ScanSource Brasil"). The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to LIBOR or the ~~prime~~alternate base rate using the market approach (Level 2 criteria).

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis as of March 31, ~~2013~~2014:


	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)								(in thousands)
Assets:
Deferred compensation plan investments, current and non-current portion	$	13,822	$	13,822	$	—	$	—	$	15,403	$	15,403	$	—	$	—
Forward foreign currency exchange contracts	248		—		248		—		23		—		23		—
Total assets at fair value	$	14,070	$	13,822	$	248	$	—	$	15,426	$	15,403	$	23	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	13,822	$	13,822	$	—	$	—	$	15,403	$	15,403	$	—	$	—
Forward foreign currency exchange contracts	200		—		200		—		61		—		61		—
Liability for contingent consideration, current and non-current portion	13,321		—		—		13,321		10,736		—		—		10,736
Total liabilities at fair value	$	27,343	$	13,822	$	200	$	13,321	$	26,200	$	15,403	$	61	$	10,736

~~Table of Contents~~

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis as of June 30, ~~2012~~2013:


	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)								(in thousands)
Assets:
Deferred compensation plan investments, current and non-current portion	$	11,635	$	11,635	$	—	$	—	$	13,752	$	13,752	$	—	$	—
Forward foreign currency exchange contracts	21		—		21		—		308		—		308		—
Total assets at fair value	$	11,656	$	11,635	$	21	$	—	$	14,060	$	13,752	$	308	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	11,635	$	11,635	$	—	$	—	$	13,752	$	13,752	$	—	$	—
Forward foreign currency exchange contracts	110		—		110		—		34		—		34		—
Liability for contingent consideration, current and non-current portion	16,653		—		—		16,653		12,545		—		—		12,545
Total liabilities at fair value	$	28,398	$	11,635	$	110	$	16,653	$	26,331	$	13,752	$	34	$	12,545

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The investments in the deferred compensation plan are held in a rabbi trust and include mutual funds and cash equivalents for payment of non-qualified benefits for certain retired, terminated or active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distributions to recipients, which are reported in accrued expenses and other current liabilities or other long-term non-current liabilities, respectively.

Foreign currency forward contracts are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers (Level 2). See Note 6 - Derivatives and Hedging Activities. Foreign currency contracts are classified in the ~~condensed~~ consolidated balance sheet in prepaid expenses and other current assets or accrued expenses and other current liabilities, depending on the respective ~~contracts’~~contracts' favorable or unfavorable positions.

The Company recorded a contingent consideration liability at the acquisition date of CDC representing the amounts payable to former CDC shareholders, as outlined under the terms of the Share Purchase and Sale Agreement, based upon the achievement of projected earnings, net of specific pro forma adjustments. The current and non-current portions of this obligation are reported separately on the ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheets. The fair value of contingent consideration (Level 3) is determined using a discounted cash flow model. Subsequent changes in the fair value of the contingent consideration liability are recorded to the change in fair value of contingent consideration line item in the ~~condensed consolidated income statements.~~Condensed Consolidated Income Statements. Fluctuations due to foreign currency translation are captured in other comprehensive income through the changes in foreign currency translation adjustments line item as seen in ~~other comprehensive income.~~Note 3 - Accumulated Other Comprehensive Income.

The table below provides a summary of the changes in fair value of the Company’s contingent consideration (Level 3) for the CDC earnout for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013:


	Contingent consideration for the quarter ended						Contingent consideration for the nine months ended						Contingent consideration for the quarter ended						Contingent consideration for the nine months ended
	March 31,						March 31,						March 31,						March 31,
	2013			2012			2013			2012			2014			2013			2014			2013
	(in thousands)												(in thousands)
Fair value at beginning of period	$	13,090		$	20,002		$	16,653		$	23,794		$	9,547		$	13,090		$	12,545		$	16,653
Payments	(61		)	(2,000		)	(4,777		)	(2,000		)	(147		)	(61		)	(3,793		)	(4,777		)
Change in fair value of contingent consideration	100			1,072			1,396			1,244			981			100			2,218			1,396
Foreign currency translation adjustment	192			665			49			(3,299		)	355			192			(234		)	49
Fair value at end of period	$	13,321		$	19,739		$	13,321		$	19,739		$	10,736		$	13,321		$	10,736		$	13,321

~~Table of Contents~~

The fair value of the liability for the contingent consideration recognized at March 31, ~~2013~~2014 was $~~13.3~~10.7 million of which $~~4.5~~5.7 million is classified as current. The fair values of amounts owed are recorded in ~~“current~~current portion of contingent ~~consideration”~~consideration and ~~“long-term~~long-term portion of contingent ~~consideration”~~consideration in the Company’s ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheets. The U.S. dollar amounts of actual disbursements made in connection with future earnout payments are subject to change as the liability is denominated in Brazilian reais and subject to foreign exchange fluctuation risk. The Company will revalue the contingent consideration liability at each reporting date through the last payment, with changes in the fair value of the contingent consideration reflected in the ~~“change~~change in fair value of contingent ~~consideration”~~consideration line item on the Company’s ~~condensed consolidated income statement~~Condensed Consolidated Income Statements that is included in the calculation of operating income. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including:

estimated future results, net of pro forma adjustments set forth in the Share Purchase and Sale Agreement;

the probability of achieving these results; and

a discount rate reflective of the Company’s creditworthiness and market risk premium associated with the Brazilian market.

A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. The change in fair value of the contingent consideration recognized in the ~~condensed consolidated income statement~~Condensed Consolidated Income Statements contributed losses of $~~0.1~~1.0 million and ~~$1.4~~$2.2 million for the quarter and nine months ended March 31, ~~2013~~2014, respectively. The change ~~in the three~~this quarter and ~~nine~~ ~~month periods~~year to date is largely driven by the recurring amortization of the unrecognized fair value discount and ~~changes in actual~~better than expected operating results. In addition, volatility in the foreign exchange between the Brazilian real and the U.S. dollar has driven changes in the translation of this Brazilian real denominated liability. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $~~18.5~~13.2 million, based on the Company’s best estimate as the earnout is based on a multiple of adjusted earnings.

~~(9)~~

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(8) Segment Information

The Company is a leading ~~wholesale~~ distributor of specialty technology products, providing value-added distribution sales to resellers in specialty technology markets. The Company has two ~~reporting~~reportable segments, based on product and service type.

Historically, the Company's reporting units coincided with its geographic ~~location.~~operating segments of North America and International. In the fourth quarter of fiscal 2013, the Company reorganized its management structure and reporting segments to globally leverage the Company's leadership in specific technology markets, changing from a geographic to a technology focus. As part of this new structure, the Company formed two operating segments with a global technology focus: Worldwide Barcode & Security ("Barcode/Security") and Worldwide Communications & Services ("Communications/Services"). Each operating segment is managed around its global technology focus and is supported by its centralized infrastructure, including distribution centers and back office operations. Each operating segment has its own management team led by a president and includes regional presidents within the operating group who manage the various functions within each segment. Decisions and planning for the Company as a whole are made at the corporate level by analyzing results from the operating segments. The principal measure of segment ~~profit~~performance is considered to be operating ~~income,~~income. These technology business segments replace the geographic segments previously used, and the ~~accounting policies of~~Company has retrospectively reclassified the ~~segments are the same as those described in the notes to the~~condensed consolidated financial statements ~~included in~~to conform to the ~~Company’s Annual Report on Form 10-K for the fiscal year ended~~ ~~June 30, 2012~~.new presentation.

~~North American Distribution~~Worldwide Barcode & Security Segment

The ~~North American~~Barcode/Security distribution segment ~~markets~~focuses on automatic identification and data capture ("AIDC"), point-of-sale ("POS"), and electronic physical security technologies. We have business units within this segment for sales and merchandising functions, including ScanSource POS and Barcode business units in North America, Latin America, and Europe and the ScanSource Security business unit in North America. We see adjacencies among these technologies in helping our resellers develop solutions, such as with networking products. AIDC and POS products ~~through its~~interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling, warehouse management and health care applications. Electronic physical security products include identification, access control, video surveillance, intrusion-related and wireless infrastructure products.

Worldwide Communications & Services Segment

The Communications/Services distribution segment focuses on communications technologies and services. We have business units within this segment for sales and merchandising functions, including the ScanSource ~~POS~~Catalyst business unit in North America, ScanSource Communications business units in North America and ~~Barcode sales unit;~~Europe, and the ScanSource Services Group business unit in North America. ScanSource Catalyst and ScanSource Communications business units market voice, video conferencing, data ~~video~~networking and converged communications ~~equipment through its Catalyst Telecom sales unit; video conferencing, telephony~~solutions. The ScanSource Services Group business unit delivers value-added support programs and ~~communications products through its ScanSource Communications sales unit;~~services, including education and ~~electronic security products~~training, network assessments, custom configuration, implementation and ~~wireless infrastructure products through its ScanSource Security sales unit. The Company serves more than~~ ~~14,000~~ ~~resellers and integrators of technology products in the United States and Canada. No single account represented more than~~ 6% ~~of the Company’s worldwide net sales for the quarters and~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013~~ or ~~2012~~.

~~International Distribution~~

The international distribution segment markets AIDC, POS, communications and security products as follows: ScanSource Latin America markets AIDC, POS, communications and security products; ScanSource POS and Barcode, Europe markets AIDC and POS products, while communication products are marketed through its ScanSource Communications, Europe sales unit. The Company serves more than ~~14,800~~ ~~resellers and integrators of technology products in Europe and Latin America. Of this segment’s customers, no single account represented more than~~ 1% ~~of the Company’s worldwide net sales during the quarters and~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013~~ or ~~2012. Operating income for the international distribution segment in the quarter and nine months ended~~ ~~March 31, 2013~~ ~~include~~ ~~$1.2 million~~ ~~in restructuring costs, as discussed in Note 3.~~marketing.

~~Table of Contents~~

Inter-segment sales consist primarily of sales by the North American distribution segment to the international distribution segment. All inter-segment revenues and profits have been eliminated in the accompanying condensed consolidated financial statements. Selected financial information of each reporting segment is presented as follows:

Quarter ended Nine months ended
March 31, March 31,
2013 2012 2013 2012
(In thousands)
Sales:
North American distribution $ 519,502
$ 541,049
$ 1,647,115
$ 1,699,106
International distribution 174,571
178,038
562,093
594,587
Less intersegment sales (11,108 ) (11,204 ) (44,922 ) (32,866 )
$ 682,965
$ 707,883
$ 2,164,286
$ 2,260,827
Depreciation and amortization:
North American distribution $ 939
$ 935
$ 2,908
$ 2,977
International distribution 1,335
1,819
3,955
4,617
$ 2,274
$ 2,754
$ 6,863
$ 7,594
Operating income (loss):
North American distribution $ 24,973
$ 21,471
$ 73,216
$ 77,501
International distribution (4,178 ) 14
(1,781 ) 7,699
$ 20,795
$ 21,485
$ 71,435
$ 85,200
Capital expenditures:
North American distribution $ 975
$ 3,342
$ 3,697
$ 7,670
International distribution 285
1,333
766
2,517
$ 1,260
$ 4,675
$ 4,463
$ 10,187

March 31, 2013 June 30, 2012
(in thousands)
Assets:
North American distribution $ 797,378
$ 813,889
International distribution 361,061
387,917
$ 1,158,439
$ 1,201,806

1615

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~~(10)~~



	Quarter ended						Nine months ended
	March 31,						March 31,
	2014			2013			2014			2013
	(In thousands)
Sales:
Worldwide Barcode & Security	$	455,822		$	438,191		$	1,382,672		$	1,383,453
Worldwide Communications & Services	227,176			244,774			772,848			780,833
	$	682,998		$	682,965		$	2,155,520		$	2,164,286

Depreciation and amortization:
Worldwide Barcode & Security	$	1,024		$	1,415		$	3,159		$	4,274
Worldwide Communications & Services	719			773			2,232			2,330
	$	1,743		$	2,188		$	5,391		$	6,604
Operating income:
Worldwide Barcode & Security	$	13,820		$	10,413		$	38,734		$	36,326
Worldwide Communications & Services	11,845			10,382			42,613			35,109
	$	25,665		$	20,795		$	81,347		$	71,435
Capital expenditures:
Worldwide Barcode & Security	$	204		$	181		$	507		$	324
Worldwide Communications & Services	130			211			249			877
Corporate	6,029			868			6,029			3,262
	$	6,363		$	1,260		$	6,785		$	4,463

Sales by Geography Category:
North America	$	508,751		$	519,502		$	1,637,308		$	1,647,115
International	184,225			174,571			553,318			562,093
Less intercompany sales	(9,978		)	(11,108		)	(35,106		)	(44,922		)
	$	682,998		$	682,965		$	2,155,520		$	2,164,286



	March 31, 2014		June 30, 2013
	(in thousands)
Assets:
Worldwide Barcode & Security	$	663,135	$	609,939
Worldwide Communications & Services	399,030		387,097
Corporate	190,209		167,147
	$	1,252,374	$	1,164,183

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(9) Commitments and Contingencies

The Company and its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

During the Company's due diligence for the CDC acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company is able to record indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as they were escrowed in the Share Purchase and Sale Agreement. However, indemnity claims can be made up to the entire purchase price, which includes the initial payment and all future earnout payments. The table below summarizes the balances and line item presentation of these pre-acquisition contingencies and corresponding indemnification receivables in the Company's ~~condensed consolidated balance sheets:~~Condensed Consolidated Balance Sheets:


	March 31, 2013		June 30, 2012		March 31, 2014		June 30, 2013
	(in thousands)				(in thousands)
Assets
Prepaid expenses and other current assets	$	5,569	$	3,886	$	4,889	$	5,061
Other non-current assets	$	3,196	$	5,112	$	1,189	$	2,905
Liabilities
Other current liabilities	$	5,569	$	3,886
Accrued expenses and other current liabilities					$	4,889	$	5,061
Other long-term liabilities	$	3,196	$	5,112	$	1,189	$	2,905

~~The change~~Changes in these contingent liabilities and receivables from June 30, ~~2012~~2013 is, are primarily driven by foreign currency translation and the lapse of the statute of limitations on a portion of the contingencies.

~~(11)~~(10) Income Taxes

The Company had approximately $~~1.1~~1.2 million and $~~1.3~~1.0 million of total gross unrecognized tax benefits as of March 31, ~~2013~~2014 and June 30, ~~2012~~2013. Of this total at March 31, ~~2013,~~2014, approximately $0.7 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for the years before ~~2010.~~June 30, 2009.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, ~~2013~~2014, the Company had approximately $~~1.1~~0.9 million accrued for interest and penalties.

Income taxes for the interim period presented have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax provision. As a result of a change in our effective state tax rate, an adjustment to deferred tax assets was accounted for discretely, resulting in a net tax benefit of $0.7 million for the quarter ended September 30, 2013. During the quarter ended March 31, 2014, $0.1 million of tax expense was recognized discretely as the result of an increase in unrecognized tax benefits.

The Company’s effective tax rate differs from the federal statutory rate of 35% primarily as a result of income derived from tax jurisdictions with varying income tax rates and state income taxes.

~~During the quarter, the~~The Company ~~reviewed and modified its policy toward permanently reinvested foreign earnings. Prospectively, the Company will provide~~has provided for U.S. income taxes for the current earnings of its Canadian subsidiary. Earnings from all other geographies will continue to be considered retained indefinitely for reinvestment. ~~The tax effect of this accounting policy change is immaterial to the financial statements.~~

~~Recent financial~~Financial results in ~~Europe~~prior quarters have generated pre-tax losses in Europe, which were primarily the result of our European Communications ~~business. To the extent the Europe Communications~~ business, ~~does not return to profitability as expected, this~~and could affect the valuation of certain deferred tax assets. Year to date, the European business has

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fluctuated, generating a pre-tax profit in the first and third quarters, resulting in a pre-tax profit for all combined European operating segments. In the judgment of management, it is more likely than not that the deferred tax asset will be realized.

1718

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

ScanSource,, Inc.~~, together with its subsidiaries (the “Company”),~~ is a leading international wholesale distributor of specialty technology ~~products, providing~~products. ScanSource, Inc. and its subsidiaries (the "Company") provide value-added distribution services for approximately 250 technology manufacturers and sell to approximately 28,000 resellers in the following specialty technology ~~markets.~~markets: POS and Barcode, Security and Communications.

The Company operates in the United States, Canada, Latin America and Europe and uses centralized distribution centers for major geographic regions. The Company distributes ~~approximately 100,000 products worldwide. The Company has~~ ~~two~~ ~~geographic distribution segments: the North American distribution segment serving~~to the United States and Canada from ~~the~~its Southaven, Mississippi distribution ~~center, and an international segment currently serving~~center; to Latin America ~~and Europe~~principally from distribution centers located in Florida, Mexico and ~~Brazil,~~Brazil; and to Europe principally from its distribution center in Belgium, respectively. Each segment is managed around its geographic customer and vendor bases and is supported by its centralized infrastructure, such as warehousing and back office operations as appropriate. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource POS and Barcode sales unit; voice, data, video and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony and communications products through its ScanSource Communications sales unit; and electronic security products and wireless infrastructure products through its ScanSource Security sales unit. The international distribution segment markets AIDC, POS, communications and security products through its ScanSource Latin America sales unit; AIDC and POS products through its ScanSource POS and Barcode, Europe sales unit; and communication products through its ScanSource Communications, Europe sales unit.Belgium.

The Company was incorporated in South Carolina in December 1992 and is headquartered in Greenville, South Carolina. The Company serves North America from a single, centrally-located distribution center located in Southaven, Mississippi, near the FedEx hub. The single warehouse and management information system form the cornerstone of the Company’s cost-driven operational strategy.

The Company distributes products for many of its key vendors in all of its geographic markets; however certain vendors only allow distribution to specific geographies. The ~~Company’s~~Company's key vendors in ~~its worldwide POS and Barcode sales units~~barcode technologies include Bematech, Cisco, Datalogic, ~~Datamax-O’Neil,~~Datamax-O'Neil, Elo, Epson, Honeywell, Intermec by Honeywell, Motorola, NCR, Toshiba Global Commerce Solutions and Zebra Technologies. The ~~Company’s~~Company's key vendors ~~in its worldwide communications sales units, including Catalyst Telecom~~, ~~include Aruba, Avaya, Audiocodes, Cisco, Dialogic, Extreme Networks, Meru Networks, Plantronics, Polycom and ShoreTel. The Company’s key vendors in its~~for security ~~sales units~~technologies include Arecont, Axis, Bosch, Cisco, Datacard, Exacq Technologies, Fargo, HID, March Networks, Panasonic, Ruckus Wireless, Samsung, Sony and Zebra Card. The Company's key vendors in communications technologies include Aruba, Avaya, AudioCodes, Cisco, Dialogic, Extreme Networks, Meru Networks, Plantronics, Polycom, Shoretel and Sonus.

~~Our distribution agreement with Juniper Networks ended~~In April 2014, it was announced that Zebra Technologies intends to purchase much of Motorola Solutions' enterprise business. Zebra Technologies and Motorola Solutions represent key vendors in ~~the first quarter of this fiscal year. Accordingly, sales of Juniper products, which were primarily distributed by~~ our ~~Catalyst Telecom sales unit in North America and to a lesser extent by ScanSource Communications Europe, have significantly declined in the~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013~~ ~~compared to prior periods.~~barcode technologies business.

Our Latin America subsidiary is experiencing a significant drop in revenue in Venezuela due to increased country-specific risks. In Venezuela, the Company's transactions are denominated in U.S. dollars, however, our Venezuelan resellers are having difficulties getting U.S. dollars to pay us since the government controls the available U.S. dollars within the country. Hence, we have heightened risk of collectability in this country. At March 31, 2013, the Company held $3.2 million in accounts receivable and $0.7 million in reserves specific to accounts receivable in this country.

The Company announced the restructuring of its Communications business unit in Europe to support a strategy for profitable growth. The new organizational structure will provide focused business unit leadership, as well as dedicated merchandising, sales and technical support teams, at a scale for profitable growth. In addition, the Company will move certain European support functions to centralized global teams in the United States to gain efficiencies.

The annualized cost savings in connection with the restructuring, principally associated with the elimination of positions, are estimated to be approximately $3.1 million. The Company incurred approximately $1.2 million in associated costs, including related severance expenses. These restructuring costs, which were accrued as of March 31, 2013, are included in selling, general and administration costs in the accompanying condensed consolidated income statements. The liability, which is recorded in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets, is expected to be substantially utilized by the end of fiscal 2013.

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We are developing an Enterprise Resource Planning system (“ERP”) that is intended to be used globally and standardize our processes throughout the world. Through our wholly-owned subsidiary Partner Services, Inc. (“PSI”), we filed a lawsuit in the U.S. District Court in Atlanta, Georgia on January 2, 2013 against our former ERP software systems integration partner, 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 performance on the ERP project. PSI is seeking recovery of damages that it has incurred and will continue to incur, as a result of Avanade's misconduct. The Company had 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 our previously-disclosed total project cost range. We are currently evaluating our project plan. In April 2013, we moved a significant number of Company team members who were working on our ERP project back into business roles and are evaluating our alternatives for next steps. During the third quarter 2013, SG&A expenses included $2.3 million in ERP related costs including internal personnel costs. In the fourth quarter of fiscal 2013, we ~~expect~~announced a new management structure to ~~spend less than half~~enhance our worldwide technology markets focus and growth strategy. This strategy focuses on our pos and barcode, security and communication technologies. Our worldwide management structure created new leadership roles and reporting segments to globally leverage the Company's leadership in specific technology markets. As a part of ~~what we spent~~this new structure, ScanSource has created two technology segments, each with its own president. The two segments are Worldwide Barcode & Security, which includes ScanSource POS and Barcode and ScanSource Security business units, and Worldwide Communications & Services, which encompasses ScanSource Catalyst, ScanSource Communications and ScanSource Services Group business units. The new reporting segments of Worldwide Barcode & Security and Worldwide Communications & Services replace the geographic segments of North America and International and give us the ability to leverage our size and experience to deliver more value to our vendor and reseller partners in our existing markets.

Our objective is to continue to grow profitable sales in the ~~third quarter.~~technologies we distribute with emphasis on growth in security and communication technologies. We ~~have incurred approximately $41.4 million on the project from inception to date, which includes capital expenditures associated with the project of $28.6 million as of~~ ~~March 31, 2013. Meanwhile, our legacy ERP systems~~ continue to ~~run~~evaluate strategic acquisitions to enhance our ~~business successfully.~~

Wetechnological and geographic portfolios, as well as introduce new product lines to our line card. In doing so, we face numerous challenges that require attention and resources. Certain ~~of our~~ business units and geographies ~~are experiencing~~continue to experience increased competition for the products we distribute. This competition may come in the form of pricing, credit terms, service levels, product availability and ~~in some cases,~~ changes from a closed distribution sales model, in which resellers must purchase exclusively from one distributor, to an open distribution sales model, in which resellers may choose to purchase from multiple distributors. As this competition could affect both our market share and pricing of our products, we may change our strategy in order to effectively compete in the marketplace.

As compared to prior year, our Latin America subsidiary has been experiencing a significant drop in revenue in Venezuela due to increased country-specific risks. In Venezuela, the Company's transactions are denominated in U.S. dollars; however, our Venezuelan resellers are having difficulties getting U.S. dollars to pay us since the government controls the available U.S. dollars within the country. Hence, we have heightened risk of collectability in this country. At March 31, 2014, the Company held $1.9 million in accounts receivable with 100% reserves specific to accounts receivable in Venezuela.

In December 2013, the Company retained SAP for software platform and implementation consulting services for a new Enterprise Resource Planning ("ERP") system. Development of our new ERP system began in January of 2014.

Evaluating Financial Condition and Operating Performance

In addition to disclosing results that are determined in accordance with United States Generally Accepted Accounting Principles ("US GAAP"), we also disclose certain non-GAAP financial measures. These measures include return on invested capital ("ROIC") and "constant currency," a measure that excludes the translation exchange impact from changes in foreign currency exchange rates

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between reporting periods. We ~~place~~use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.

These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a ~~significant emphasis on operating income~~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 US GAAP.

Return on Invested Capital ~~(“ROIC”) in evaluating and monitoring financial condition and operating performance. We use~~

Management uses ROIC as a ~~non-GAAP measure,~~performance measurement to assess efficiency at allocating capital under ~~our~~the Company's control to generate returns. Management believes this metric balances the Company's operating results with asset and liability management, is not impacted by capitalization decisions and is considered to have a strong correlation with shareholder value creation. In addition, it is easily computed, communicated and understood. ROIC also provides management a measure of the Company's profitability on a basis more comparable to historical or future periods.

ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of ROIC provides useful information to investors and is ~~computed by~~an additional relevant comparison of our performance during the ~~Company~~year. 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.

We calculate ROIC as ~~net income plus~~earnings before interest expense, income taxes, depreciation and amortization ~~(“EBITDA”~~("EBITDA") ~~annualized by calendar days and~~ divided by invested capital. Invested capital is defined as average equity plus average daily ~~average~~ funded interest-bearing debt for the period.

The following table summarizes annualized return on invested capital ratio for the quarters ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively:

Quarter ended March 31,
2013 2012
Return on invested capital ratio, annualized 13.3 % 13.5 %

The discussion that follows this overview explains the change in ROIC from the comparative period. Management uses ROIC as a performance measurement because we believe this metric best balances our operating results with asset and liability management, excludes the results of capitalization decisions, is easily computed and understood, and drives changes in shareholder value. The components of this calculation and reconciliation to our financial statements are shown on the following schedule:

Quarter ended March 31,
2013 2012
(in thousands)
Reconciliation of EBITDA to net income:
Net income $ 13,978
$ 14,756
Plus: income taxes 7,202
7,049
Plus: interest expense 102
254
Plus: depreciation & amortization 2,274
2,754
EBITDA (numerator) $ 23,556
$ 24,813

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Quarter ended March 31,
2013 2012
(in thousands)
Invested capital calculations:
Equity – beginning of the quarter $ 696,960
$ 616,103
Equity – end of the quarter 709,912
642,450
Average equity 703,436
629,277
Average funded debt ^(a)
15,675
111,247
Invested capital (denominator) $ 719,111
$ 740,524

Return on invested capital (annualized)^(b)
13.3 % 13.5 %



	Quarter ended March 31,
	2014		2013
Return on invested capital ratio, annualized^(a)	14.8	%	13.3	%


(a)	~~Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt.~~


~~(b)~~	The annualized EBITDA amount is divided by days in the quarter times 365 days per year (366 during leap years). There were 90 ~~and 91~~ days in the current and prior year ~~quarters,~~quarter, respectively.

~~Our annualized return~~The components of this calculation and reconciliation to our financial statements are shown on ~~invested capital was~~ ~~13.3%~~the following schedule:



	Quarter ended March 31,
	2014		2013
	(in thousands)
Reconciliation of net income to EBITDA:
Net income (GAAP)	$	16,949	$	13,978
Plus: income taxes	9,031		7,202
Plus: interest expense	217		102
Plus: depreciation and amortization^(a)	1,743		2,274
EBITDA (numerator for ROIC) (non-GAAP)	$	27,940	$	23,556

(a) Depreciation and amortization for the quarter ~~down from~~ ~~13.5%~~ ~~in the same quarter~~ended March 31, 2013 include debt issuance costs of ~~the prior year. The decrease in EBITDA is largely the result~~$0.1 million.



	Quarter ended March 31,
	2014		2013
	(in thousands)
Invested capital calculations:
Equity – beginning of the quarter	$	751,446	$	696,960
Equity – end of the quarter	772,786		709,912
Average equity	762,116		703,436
Average funded debt ^(a)	5,429		15,675
Invested capital (denominator for ROIC) (non-GAAP)	$	767,545	$	719,111


(a)	Average funded debt is calculated as the average daily amounts outstanding on our short-term and long-term interest-bearing debt.

Table of ~~lower sales volumes and an increase in SG&A expenses related to bad debt expenses and the restructuring of our European operations.~~Contents

Results of Operations

Currency

~~In this Management Discussion and Analysis, we~~We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the weighted average foreign exchange rates between reporting periods. ~~Certain financial results are adjusted~~Constant currency is calculated by translating current period results from currencies other than the U.S. dollar using the comparable weighted average foreign exchange rates from the prior year period. This information is provided to view financial results without the impact of fluctuations in foreign currency rates, thereby enhancing comparability between reporting periods.

Net Sales

The Company has two reportable segments, which are based on technologies. The following ~~table summarizes our~~tables summarize the Company’s net sales results ~~(net of inter-segment sales)~~by technology segment and by geographic location for the quarters ~~and~~ ~~nine~~ ~~months~~ ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively:

Quarter ended March 31,
2013 2012 $ Change % Change
(in thousands)
North American distribution $ 508,394
$ 529,845
$ (21,451 ) (4.0 )%
International distribution 174,571
178,038
(3,467 ) (1.9 )%
Net sales $ 682,965
$ 707,883
$ (24,918 ) (3.5 )%

Nine Months ended March 31,
2013 2012 $ Change % Change
(in thousands)
North American distribution $ 1,602,193
$ 1,666,240
$ (64,047 ) (3.8 )%
International distribution 562,093
594,587
(32,494 ) (5.5 )%
Net sales $ 2,164,286
$ 2,260,827
$ (96,541 ) (4.3 )%



	Quarter ended March 31,
Net Sales by Segment:	2014		2013		$ Change			% Change
	(in thousands)
Worldwide Barcode & Security	$	455,822	$	438,191	$	17,631		4.0	%
Worldwide Communications & Services	227,176		244,774		(17,598		)	(7.2	)%
Total net sales	$	682,998	$	682,965	$	33		—	%

	Nine Months ended March 31,
	2014		2013		$ Change			% Change
	(in thousands)
Worldwide Barcode & Security	$	1,382,672	$	1,383,453	$	(781	)	(0.1	)%
Worldwide Communications & Services	772,848		780,833		(7,985		)	(1.0	)%
Total net sales	$	2,155,520	$	2,164,286	$	(8,766	)	(0.4	)%

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~~North American Distribution~~Worldwide Barcode & Security

The ~~North American~~Barcode & Security distribution segment consists of ~~net~~ sales to technology resellers in our ScanSource POS & Barcode business units in North America, Europe, Brazil and Latin America and our ScanSource Security business unit in North America. Sales for the ~~United States and Canada. For the quarter ended~~ ~~March 31, 2013, net sales decreased~~Barcode & Security distribution segment increased $~~21.5~~17.6 million or ~~4.0%. For the~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013, net sales~~and decreased ~~$64.0~~$0.8 million, or ~~3.8%~~.

~~The North American distribution segment’s POS and barcode product lines experienced modest growth in sales in the current three and~~ ~~nine~~ ~~month periods~~ compared to the prior year. Meanwhile, the ScanSource Security sales unit had high single digit year-over-year sales growth for the quarter, largely driven by vendors such as Ruckus Wireless and Axis Communications.

~~The Company has two North American sales units that sell communications products – Catalyst Telecom and ScanSource Communications. The combined net sales of these units decreased by 10.3% from~~ the prior year quarter and ~~11.1% from the~~ prior year nine month period. These decreases were largely attributable to lower Avaya Enterprise and Juniper sales. Our distribution agreement with Juniper Networks ended in September 2012. These declines however, were partially offset by increased volumes with our wireless communications products with vendors such as Aruba.

~~International Distribution~~

~~The international distribution segment markets POS, AIDC, communications and security products in Latin America and POS, AIDC and communications products in Europe. For the quarter ended~~ ~~March 31, 2013, net sales for this segment decreased by~~ ~~$3.5 million~~ or ~~1.9%~~ ~~from the prior year quarter.~~period, respectively. On a constant currency basis, net sales ~~were flat with~~for the ~~prior year quarter. Net sales were down in Europe from~~Barcode & Security distribution segment increased $21.2 million and $1.9 million, which represents a 4.8% and 0.1% increase, compared to the prior year quarter and prior year nine month period, respectively. The increase in Barcode & Security sales for the current quarter as compared to the prior year quarter is primarily due to ~~the loss of Juniper revenues and weaker deal volume~~growth in ~~Germany, both of which affected our Communications business. Meanwhile, Latin America~~most international POS & Barcode business ~~unit experienced a decrease in revenues from the prior year~~units, driven by ~~difficulties~~Brazil and Europe, and in ~~selling products in Venezuela and Argentina due to economic turmoil in both countries.~~

~~For~~ the North America Security business unit. Barcode & Security sales remained relatively flat for the nine months ended March 31, ~~2013, net sales decreased by~~ ~~$32.5 million~~ or ~~5.5%. The sales decrease over~~2014 as compared to the prior year nine month period ~~is primarily driven~~resulting from growth in business for Brazil POS & Barcode and North America Security, offset by ~~foreign currency exchange translation which had a $37.7 million unfavorable impact on~~declines in business for North and Latin America POS & Barcode.

Worldwide Communications & Services

The Communications & Services distribution segment consists of sales to technology resellers in our ~~net sales~~ScanSource Communications business units in North America and Europe, ScanSource Catalyst in North America, and ScanSource Services Group. Sales for the Communications & Services segment decreased $17.6 million and $8.0 million compared to the prior year quarter and prior year nine month period, ~~ended~~ ~~March 31, 2013~~.respectively. On a constant currency basis, net sales ~~increased $5.2~~for the Communications & Services distribution segment decreased $18.1 million ~~or 1% over~~and $10.2 million, which represents a 7.4% and 1.3% decrease, compared to the prior year quarter and prior year nine month ~~period. Our international segment's growth was driven by contributions from our Brazilian~~period, respectively. Sales for the Europe Communications and ~~other Latin American~~Catalysts business ~~units.~~units declined year-over-year, primarily due to decreases in run rate business for the Catalyst business unit and competitive pressures for Europe Communications.

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	Quarter ended March 31,
Net Sales by Geography:	2014		2013		$ Change			% Change
	(in thousands)
North American (U.S. and Canada)	$	498,773	$	508,394	$	(9,621	)	(1.9	)%
International	184,225		174,571		9,654			5.5	%
Total net sales	$	682,998	$	682,965	$	33		—	%

	Nine Months ended March 31,
	2014		2013		$ Change			% Change
	(in thousands)
North American (U.S. and Canada)	$	1,602,202	$	1,602,193	$	9		—	%
International	553,318		562,093		(8,775		)	(1.6	)%
Total net sales	$	2,155,520	$	2,164,286	$	(8,766	)	(0.4	)%

Gross Profit

The following ~~tables summarize~~table summarizes the Company’s gross profit for the quarters ended March 31, 2014and ~~nine~~2013, respectively:



	Quarter ended March 31,								% of Net Sales March 31,
	2014		2013		$ Change		% Change		2014		2013
	(in thousands)
Worldwide Barcode & Security	$	43,031	$	39,078	$	3,953	10.1	%	9.4	%	8.9	%
Worldwide Communications & Services	30,320		29,754		566		1.9	%	13.3	%	12.2	%
Gross profit	$	73,351	$	68,832	$	4,519	6.6	%	10.7	%	10.1	%



	Nine Months ended March 31,								% of Net Sales March 31,
	2014		2013		$ Change		% Change		2014		2013
	(in thousands)
Worldwide Barcode & Security	$	126,512	$	124,774	$	1,738	1.4	%	9.1	%	9.0	%
Worldwide Communications & Services	100,594		92,449		8,145		8.8	%	13.0	%	11.8	%
Gross profit	$	227,106	$	217,223	$	9,883	4.5	%	10.5	%	10.0	%

Worldwide Barcode & Security

Gross profit dollars and gross profit margin for the Barcode & Security distribution segment increased for the quarter and nine months ended March 31, ~~2013~~ ~~and~~ ~~2012~~2014, ~~respectively:~~

Quarter ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
North American distribution $ 51,340
$ 50,187
$ 1,153
2.3 % 10.1 % 9.5 %
International distribution 17,492
19,081
(1,589 ) (8.3 )% 10.0 % 10.7 %
Gross profit $ 68,832
$ 69,268
$ (436 ) (0.6 )% 10.1 % 9.8 %

Nine Months ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
North American distribution $ 158,178
$ 164,176
$ (5,998 ) (3.7 )% 9.9 % 9.9 %
International distribution 59,045
64,021
(4,976 ) (7.8 )% 10.5 % 10.8 %
Gross profit $ 217,223
$ 228,197
$ (10,974 ) (4.8 )% 10.0 % 10.1 %

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~~North American Distribution~~

~~Gross profit for~~compared to the ~~North American distribution segment increased~~ ~~2.3%~~ or ~~$1.2 million~~ ~~and decreased~~ ~~3.7%~~ or ~~$6.0 million~~ ~~for the quarter and~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013, respectively.~~prior period. As a percentage of net sales, ~~for the North American distribution segment,~~ our gross profit ~~increased to~~ ~~10.1%~~ ~~from~~ ~~9.5%~~ ~~in the prior year quarter and remained flat at~~ ~~9.9%~~ ~~compared to the prior~~ ~~nine~~ ~~month period. The increase in~~ margin ~~percentage is~~increased primarily due to ~~changes in product~~improved vendor program recognition and ~~customer mix as well as timing of vendor programs compared to the prior year quarter.~~a more favorable sales mix.

~~International Distribution~~Worldwide Communications & Services

In ~~our international~~the Communications & Services distribution segment, gross profit ~~decreased~~ ~~8.3%~~ or ~~$1.6 million~~dollars and ~~7.8%~~ or ~~$5.0 million~~gross profit margin increased for the quarter and nine months ended March 31, ~~2013~~2014, ~~respectively,~~ compared to the prior ~~periods. As a percentage of net sales for the international distribution segment, our~~period. The increases in gross profit ~~decreased to~~ ~~10.0%~~ ~~from~~ ~~10.7%~~ ~~in the prior year quarter and to~~ ~~10.5%~~ ~~from~~ ~~10.8%~~ ~~in the prior~~ ~~nine~~ ~~month period. The decline in gross~~ margin isare primarily due to ~~weaker demand~~a favorable sales mix, higher service fee income and ~~competitive pricing pressures.~~improved margins in Europe Communications compared to the prior year.

Operating Expenses

The following table summarizes our operating expenses for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively:

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	Quarter ended March 31,									% of Net Sales March 31,
	2014		2013		$ Change			% Change		2014		2013
	(in thousands)
Selling, general and administrative expenses	$	46,705	$	47,937	$	(1,232	)	(2.6	)%	6.8	%	7.0	%
Change in fair value of contingent consideration	981		100		881			881.0	%	0.1	%	0.0	%
Operating expenses	$	47,686	$	48,037	$	(351	)	(0.7	)%	7.0	%	7.0	%

Quarter ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
Selling, general and administrative expense $ 47,937
$ 46,711
$ 1,226
2.6 % 7.0 % 6.6 %
Change in fair value of contingent consideration 100
1,072
(972 ) (90.7 )% 0.0 % 0.2 %
Operating expense $ 48,037
$ 47,783
$ 254
0.5 % 7.0 % 6.8 %

Nine Months ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
Selling, general and administrative expense $ 144,392
$ 141,753
$ 2,639
1.9 % 6.7 % 6.3 %
Change in fair value of contingent consideration 1,396
1,244
152
12.2 % 0.1 % 0.0 %
Operating expense $ 145,788
$ 142,997
$ 2,791
2.0 % 6.7 % 6.3 %



	Nine Months ended March 31,									% of Net Sales March 31,
	2014		2013		$ Change			% Change		2014		2013
	(in thousands)
Selling, general and administrative expenses	$	143,541	$	144,392	$	(851	)	(0.6	)%	6.7	%	6.7	%
Change in fair value of contingent consideration	2,218		1,396		822			58.9	%	0.1	%	0.1	%
Operating expenses	$	145,759	$	145,788	$	(29	)	0.0	%	6.8	%	6.7	%

Selling, general and administrative ~~expense (“~~expenses ("SG~~&A”~~&A") ~~increased~~ ~~2.6%~~ ordecreased $1.2 million and ~~1.9%~~ or ~~$2.6~~$0.9 million for the quarter and nine months ended March 31, ~~2013~~2014, respectively. ~~As a percentage of net sales, SG&A totaled~~ ~~7.0%~~ ~~and~~ ~~6.7%~~ ~~for the quarter and~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013, respectively, up from the prior~~ ~~nine~~ ~~months ended March 31, 2012.~~The $1.2 million decrease in SG&A expenses for the quarter ended March 31, 2014 is primarily due to lower bad debt expense, partially offset by increased employee-related expenses. For the quarter ended March 31, 2013 ~~quarter~~SG&A expenses included approximately $1.2 million in expenses for restructuring costs associated with our Communications business ~~unit~~ in Europe. ~~In addition,~~

The decrease in SG&A expenses for the nine months ended March 31, 2014 is primarily due to lower bad debt expense and lower amortization expense for fully-amortized intangible assets, partially offset by increased employee-related expenses. For the nine months ended March 31, 2013, SG&A expenses included increases to bad debt reserves, based on our evaluation of collectability of certain balances for Europe Communications and higher country-specific risk reserves in Venezuela. Accordingly, the allowance for bad debts increased to $31.0 million at March 31, 2013 from $29.8 million at December 31, 2012, while accounts receivable declined. The increase compared to the prior year ~~nine~~ ~~months included $2.1~~approximately $3.3 million in ~~costs associated with~~expenses related to tax compliance and ~~personnel replacement~~restructuring costs in ~~our Belgium office. These costs include severance benefits, as well as tax accruals and professional fees. These increased costs were partially offset by lower employee costs.~~Europe.

We ~~have elected to~~ present changes in fair value of the contingent consideration owed to the former shareholders of CDC ~~separately from other selling, general and administrative~~as a separate line item in operating expenses. In the current quarter and nine month ~~periods,~~period, we have recorded fair value adjustment losses of $~~0.1~~1.0 million and ~~$1.4~~$2.2 million,, respectively. These losses are primarily the result of the improved operating results for Brazil and recurring amortization of the unrecognized fair value ~~discount and changes in actual results.~~discount.

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Operating Income ~~(Loss)~~

The following table summarizes our operating income ~~(loss)~~ for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively:

Quarter ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
North American distribution $ 24,973
$ 21,471
$ 3,502
16.3 % 4.9 % 4.1 %
International distribution (4,178 ) 14
(4,192 ) (29,942.9 )% (2.4 )% 0.0 %
$ 20,795
$ 21,485
$ (690 ) (3.2 )% 3.0 % 3.0 %



	Quarter ended March 31,								% of Net Sales March 31,
	2014		2013		$ Change		% Change		2014		2013
	(in thousands)
Worldwide Barcode & Security	$	13,820	$	10,413	$	3,407	32.7	%	3.0	%	2.4	%
Worldwide Communications & Services	11,845		10,382		1,463		14.1	%	5.2	%	4.2	%
Operating income	$	25,665	$	20,795	$	4,870	23.4	%	3.8	%	3.0	%

Nine Months ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
North American distribution $ 73,216
$ 77,501
$ (4,285 ) (5.5 )% 4.6 % 4.7 %
International distribution (1,781 ) 7,699
(9,480 ) (123.1 )% (0.3 )% 1.3 %
$ 71,435
$ 85,200
$ (13,765 ) (16.2 )% 3.3 % 3.8 %



	Nine Months ended March 31,								% of Net Sales March 31,
	2014		2013		$ Change		% Change		2014		2013
	(in thousands)
Worldwide Barcode & Security	$	38,734	$	36,326	$	2,408	6.6	%	2.8	%	2.6	%
Worldwide Communications & Services	42,613		35,109		7,504		21.4	%	5.5	%	4.5	%
Operating income	$	81,347	$	71,435	$	9,912	13.9	%	3.8	%	3.3	%

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Worldwide Barcode & Security

For the ~~North American~~Barcode & Security distribution segment, operating income increased ~~16.3%~~ or $~~3.5~~3.4 million and ~~decreased~~ ~~5.5%~~ or ~~$4.3~~$2.4 million from the prior year quarter and ~~nine~~ ~~months, respectively. Operating income as a percentage of net sales increased to~~ ~~4.9%~~ ~~and decreased to~~ ~~4.6%~~ ~~for the quarter and~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013~~, respectively. The increase in operating income percentage in North America for the current quarter is primarily due to changes in product and customer mix as well as timing of vendor rebate programs and lower bad debt expenses. The decrease for the currentprior year nine month period, ~~is due to lower sales volumes .~~respectively, primarily from increases in gross profit margin.

Worldwide Communications & Services

For the ~~international~~Communications & Services distribution segment, operating ~~losses totaled~~income increased $~~4.2~~1.5 million and ~~$1.8~~$7.5 million for the quarter and ~~nine~~ ~~months ended~~ ~~March 31, 2013, respectively, compared with operating income for the~~ prior year ~~periods. The decreases internationally are~~nine month period, respectively, primarily due to ~~the~~ increases in operating expenses described earlier. For the current quarter, decreases are primarily due to margin issues described above, higher bad debt expense and the restructuring charges in the European Communications business as well as lower pricing in certain geographies. Furthermore, the year-to-date operating income was also reduced by costs of $2.1 million for Belgian tax compliance and personnel replacement in the second quarter fiscal 2013.gross profit margin.

Total Other Expense (Income)

The following table summarizes our total other (income) expense for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively:



	Quarter ended March 31,											% of Net Sales March 31,
	2014			2013			$ Change			% Change		2014		2013
	(in thousands)
Interest expense	$	217		$	102		$	115		112.7	%	0.0	%	0.0	%
Interest income	(545		)	(483		)	(62		)	12.8	%	(0.1	)%	(0.1	)%
Net foreign exchange (gains) losses	57			145			(88		)	(60.7	)%	0.0	%	0.0	%
Other, net	(44		)	(149		)	105			(70.5	)%	(0.0	)%	(0.0	)%
Total other (income) expense, net	$	(315	)	$	(385	)	$	70		(18.2	)%	(0.0	)%	(0.1	)%

Quarter ended March 31, % of Net Sales
March 31,
2013 2012 $ Change % Change 2013 2012
(in thousands)
Interest expense $ 102
$ 254
$ (152 ) (59.8 )% 0.0 % 0.0 %
Interest income (483 ) (780 ) 297
(38.1 )% (0.1 )% (0.0 )%
Net foreign exchange (gains) losses 145
280
(135 ) (48.2 )% 0.0 % 0.0 %
Other, net (149 ) (74 ) (75 ) 101.4 % (0.0 )% (0.0 )%
Total other (income) expense, net $ (385 ) $ (320 ) $ (65 ) 20.3 % (0.1 )% 0.0 %

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	Nine Months ended March 31,											% of Net Sales March 31,				Nine Months ended March 31,											% of Net Sales March 31,
	2013			2012			$ Change			% Change		2013		2012		2014			2013			$ Change			% Change		2014		2013
	(in thousands)															(in thousands)
Interest expense	$	356		$	1,490		$	(1,134	)	(76.1	)%	0.0	%	0.0	%	$	698		$	356		$	342		96.1	%	0.0	%	0.0	%
Interest income	(1,648		)	(2,233		)	585			(26.2	)%	(0.1	)%	(0.1	)%	(1,644		)	(1,648		)	4			(0.2	)%	(0.1	)%	(0.1	)%
Net foreign exchange (gains) losses	328			3,571			(3,243		)	(90.8	)%	0.0	%	0.2	%	326			328			(2		)	(0.6	)%	0.0	%	0.0	%
Other, net	(294		)	(208		)	(86		)	41.3	%	(0.0	)%	(0.0	)%	(261		)	(294		)	33			(11.2	)%	(0.0	)%	(0.0	)%
Total other (income) expense, net	$	(1,258	)	$	2,620		$	(3,878	)	(148.0	)%	(0.1	)%	0.1	%	$	(881	)	$	(1,258	)	$	377		(30.0	)%	(0.0	)%	(0.1	)%

Interest expense reflects interest incurred on ~~borrowings~~long-term debt, non-utilization fees from the ~~Company’s~~Company's revolving credit facility and ~~other long-term~~the amortization of debt ~~borrowings, as well as non-utilization fees. Interest expense for~~issuance costs in the quarter and nine months ended March 31, ~~2013~~2014 ~~was~~ ~~$0.1 million~~ ~~and~~ ~~$0.4 million, respectively. Interest expense was down~~ ~~59.8%~~ ~~and~~ ~~76.1%~~ ~~from the prior year quarter and~~ ~~nine~~ ~~months, respectively, largely from decreased borrowings on our $300 million Revolving Credit Facility.~~.

Interest income for the quarter and nine months ended March 31, ~~2013~~2014 was $0.5 million and ~~$1.6~~$1.6 million,, respectively, and includes interest income generated on longer-term interest bearing receivables and interest earned on cash and ~~cash-equivalents. Interest income decreased~~ ~~38.1%~~ ~~and~~ ~~26.2%~~ ~~from the prior year quarter and~~ ~~nine~~ months, respectively. In September 2011, we transferred $22 million to our Brazilian subsidiary to prefund a portion of the future earn-out payments and finance current operations. With the use of this cash ~~for our annual earn-out payments for the purchase of CDC and short-term working capital needs in Brazil, interest income has declined.~~equivalents.

Net foreign exchange losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange ~~losses~~gains and ~~gains~~losses are generated ~~as the result of~~from fluctuations in the value of the British pound versus the euro, the U.S. dollar versus the euro, the U.S. dollar versus the Brazilian real, the Canadian dollar versus the U.S. dollar and other currencies versus the U.S. dollar. While we utilize foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, our foreign exchange policy prohibits the use of derivative financial instruments for speculative transactions.

~~Net foreign exchange gains and losses for the quarter and~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013~~ ~~totaled~~ ~~$0.1 million~~ ~~and~~ ~~$0.3 million, respectively. Compared to the prior year~~ ~~nine~~ ~~months, net foreign exchange loss decreased~~ ~~$3.2 million~~. In the prior year, we incurred a $2.5 million loss in connection with an unfavorable forward exchange contract to purchase Brazilian reais. In August 2011, we decided to pre-fund a portion of the estimated earnout payments associated with the CDC acquisition and finance current operations as mentioned above. This contract was designed to preserve the currency exchange for the few weeks required to transfer the cash to Brazil. From the time we entered into the contract through settlement, the real devalued from the contractual rate by 11.8%, ultimately resulting in a $2.5 million loss. Further contributing to the prior year quarter foreign exchange loss, our Brazilian business incurred significant losses on the remeasurement of U.S. dollar denominated transactions that were not hedged at the time. Subsequently, we have been including these exposures in our ongoing hedging activities.

Provision for Income Taxes

For the quarter and nine months ended March 31, ~~2013~~2014, income tax expense was $~~7.2~~9.0 million and ~~$24.7~~$27.5 million, respectively, reflecting an effective tax rate of 34.8% and 33.5%, respectively. The effective tax rate for the ~~same two periods was 34.0%. The effective tax rates in the~~ quarter and nine months ended March 31, ~~2012~~ ~~were 32.3% and 34.0%, respectively.~~2013 was 34%. The increase in the effective tax rate from the prior year quarter is ~~due primarily~~the result of an increase in our annual effective state tax rate, an increase in non-deductible expenses, and the recognition of a $0.1 million discrete tax expense item for the current quarter. As a result of a change in our effective state tax rate, an adjustment to deferred tax assets was accounted for discretely, resulting in a ~~cumulative adjustment~~net tax benefit of $0.7 million for the quarter ended September 30, 2013, which contributed to the decrease in the effective tax rate from the prior year ~~quarter to reduce~~nine month period. Excluding the recognition of the discrete item, the effective tax ~~expense.~~rate for the nine months ended

March 31, 2014 would have been 34.2%.

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Liquidity and Capital Resources

Our primary sources of liquidity are cash ~~flow~~flows from operations and borrowings under ~~our~~the $300 million revolving credit facility, ~~(the “Revolving Credit Facility”), borrowings under our~~$5.4 million industrial ~~development~~ revenue bond and ~~borrowings under our European subsidiary’s~~ €6 million line of ~~credit.~~credit for our European subsidiary. As a distribution company, our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors and revolving lines of credit. ~~Overall,~~In general, as our sales ~~volume increases,~~volumes increase, our net investment in working capital ~~needs~~ typically ~~increase,~~increases, which ~~in general,~~typically results in decreased cash flow from operating activities. Conversely, when sales ~~volume decreases,~~volumes decrease, our net investment in working capital ~~needs~~ typically ~~decrease,~~decreases, which ~~in general,~~typically results in increased cash flow from operating activities.

Our cash and cash ~~equivalent~~equivalents balance totaled $~~93.9~~183.6 million at March 31, ~~2013~~2014, compared to $~~29.2~~148.2 million at June 30, ~~2012~~2013, ~~of which $24.1~~including $38.2 million and ~~$18.7~~$23.8 million ~~were~~ held outside of the United States ~~as of~~at March 31, ~~2013~~2014 and June 30, ~~2012~~2013, respectively. Checks released but not yet cleared in the amounts of $53.2 million and $65.9 million are included in accounts payable as of March 31, 2014 and June 30, 2013, respectively.

~~Cash balances are generated and used~~We conduct business in many locations throughout the world. Prior to this quarter, management’s intent was to permanently reinvest these funds in our businesses outside the United States to continue to fund growth in our international operations. During the quarter,world where we ~~reviewed~~generate and ~~modified our policy toward permanently reinvested foreign earnings. Prospectively, the~~use cash. The Company ~~will provide~~provides for U.S. income taxes for the earnings of its Canadian subsidiary. Earnings from all other geographies ~~will continue to be~~are considered retained indefinitely for reinvestment. If these funds were needed in the operations of the United States, we would be required to record and pay significant income taxes upon repatriation of these funds.

~~As mentioned above, our business model typically yields an inverse relationship between cash flows from operating activities and our sales volumes. Net sales are down $96.5 million from the prior year~~ ~~nine~~ ~~month period. On a constant currency basis, net sales are down $58.9 million. As a result, cash from operating activities increased to an inflow of~~ ~~$76.0 million~~ ~~versus an inflow of~~ ~~$25.1 million~~ ~~in the prior year~~ ~~nine~~ ~~month period.~~

Our net investment in working capital has increased to $~~587.9~~694.5 million at March 31, ~~2013~~2014 from $~~533.5~~614.4 million at June 30, ~~2012~~2013 and increased compared to the March 31, ~~2012~~2013 balance of $~~567.8~~587.9 million. Net working capital has increased $~~54.4~~80.1 million since ~~the~~ June 30, ~~2012~~2013~~. The increase is largely attributable to increases in our~~, principally from higher inventory and cash ~~balance generated~~balances, partially offset by ~~lower inventory,~~ lower accounts receivable and ~~payable levels due to lower sales.~~higher accounts payable. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, ~~before non-cash charges,~~ timing of collections from customers, increases and decreases to inventory levels, payments to vendors, as well as cash generated or used by other financing and investing activities.

Net cash provided by operating activities was $32.7 million for the nine months ended March 31, 2014, compared to $76.0 million provided by operating activities in the prior year period. The decrease is largely attributable to increases in inventory balances, partially offset by higher accounts payable balances.

The number of days sales ~~in receivables (DSO)~~outstanding ("DSO") was 5755 days at March 31, ~~2013~~2014, ~~compared to~~ 56 ~~and~~ 57 ~~days at~~ June 30, ~~2012~~2013 and March 31, ~~2012~~2013~~, respectively.~~. Inventory turned ~~5.6~~5.1 times during the third quarter of fiscal year ~~2013~~2014 versus ~~5.7~~5.9 and ~~5.0~~5.4 times in the sequential and prior year ~~quarters.~~

~~We are developing a new ERP system and have incurred approximately $41.4 million on~~quarters, respectively. The decrease in inventory turns in relation to comparative periods is primarily due to higher inventory levels from lower than expected sales for the ~~project from inception through~~ quarter.~~March 31, 2013~~. Of the total amount incurred, $28.6 million has been capitalized. We believe that the total spend will range from $58 million to $72 million, though this is currently under review. We expect to incur costs and expenses in connection with the implementation beyond 2013, however, we expect a significant reduction in these costs in the fourth quarter 2013 while our project is under review.

Through our wholly-owned subsidiary Partner Services, Inc. (“PSI”) we filed a lawsuit in the U.S. District Court in Atlanta, Georgia on January 2, 2013 against our former ERP software systems integration partner, 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 performance on the ERP project, and PSI is seeking recovery of damages that it has incurred and will continue to incur, as a result of Avanade's misconduct. The Company had engaged a new systems integration partner, 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 our previously-disclosed total project cost range. We are currently evaluating our project plan. In April 2013, we moved a significant number of Company team members who were working on our ERP project back into business roles and are evaluating our alternatives for next steps. During the third quarter 2013, SG&A expenses included $2.3 million in ERP related costs including internal personnel costs. In the fourth quarter we expect to spend less than half of what we spent in the third quarter. Meanwhile, our legacy ERP systems continue to run our business successfully.

Cash used in investing activities for the nine months ended March 31, ~~2013~~2014 was $~~4.5~~6.8 million, for capital expenditures, compared to $~~10.2~~4.5 million used in the prior year period. Current ~~and~~year capital expenditures were attributable to the Company's new Enterprise Resource Planning ("ERP") system implementation, while prior year investing cash flows ~~are~~were primarily attributable to investments that were subsequently impaired.

In December 2013, we retained SAP for the ~~investment in our~~software platform and implementation consulting services for a new ERP system. The Company is currently working on the development and implementation of the new ERP platform. Management expects capital spending for fiscal 2014 to range from $11 million to $14 million, primarily related to the ERP system.

For the nine months ended March 31, 2014, cash provided by financing activities totaled to $8.9 million, compared to $6.8 million cash used in financing activities in the prior year period. The change in cash provided by financing activities was primarily from increased exercises of stock options and no activity related to our short-term borrowings.

~~Table of Contents~~

~~On October 11, 2011, we entered into~~The Company has a ~~five-year, $300~~$300 million multi-currency senior secured revolving credit facility ~~pursuant~~that was scheduled to mature on October 11, 2016. On November 6, 2013, the ~~terms~~Company entered into an amendment of an this credit facility ("Amended ~~and Restated~~ Credit ~~Agreement (the “Credit Agreement”~~Agreement") with ~~JPMorgan~~JP Morgan Chase Bank, ~~N.A.,~~N.A, as administrative agent, and a syndicate of ~~lenders named therein.~~banks to extend its maturity to November 6, 2018. The Amended Credit Agreement allows for the issuance of up to ~~$50~~$50 million for letters of credit and has a ~~$150~~$150 million accordion feature that allows the Company to increase the availability to ~~$450~~$450 million, subject to obtaining additional credit commitments for the ~~incremental capacity from existing or new lenders.~~lenders participating in the increase.

At our option, loans denominated in U.S. dollars under the ~~Revolving~~Amended Credit ~~Facility,~~Agreement, other than swingline loans, ~~shall~~ bear interest at a rate equal to a spread over the London Interbank Offered Rate ~~(“LIBOR”~~("LIBOR") or ~~prime~~alternate base rate depending upon ~~our~~the Company's ratio of total debt (excluding accounts payable and accrued liabilities), to EBITDA, measured as of the end of the most recent year

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or quarter, as applicable, for which financial statements have been delivered to ~~adjusted earnings before interest expense, taxes, depreciation and amortization (“EBITDA”), for~~ the ~~most recently completed four quarters~~Lenders (the ~~“Leverage Ratio”~~"Leverage Ratio"). ~~The Leverage Ratio excludes the Company's subsidiary in Brazil.~~ This spread ranges from 1.00% to 2.25% for LIBOR-based loans and 0.00% to 1.25% for ~~prime rate-based loans. The spread in effect as of~~ ~~March 31, 2013~~ ~~was~~ ~~1.00%~~ ~~for LIBOR-based loans and 0.00% for Prime rate-based loans. Additionally, we are assessed commitment fees ranging from~~ ~~0.175%~~ to ~~0.40%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline~~alternate base rate loans. Borrowings under the ~~Revolving~~Amended Credit ~~Facility~~Agreement are guaranteed by substantially all of ~~our~~the domestic assets of the Company as well as certain foreign subsidiaries determined to be material under the ~~Revolving~~Amended Credit ~~Facility~~Agreement and a pledge of up to 65% of capital stock or other equity interest in each ~~Guarantor.~~Guarantor (as defined in the Amended Credit Agreement). We were in compliance with all covenants under the ~~Revolving Credit Facility~~credit facility as of March 31, ~~2013~~2014.

~~For the~~ ~~nine~~ ~~months ended~~ ~~March 31, 2013, cash used in financing activities amounted to~~ ~~$6.8 million, in comparison to~~ ~~$7.4 million~~ in the prior year period. The change in cash used in financing activities is primarily attributable to less borrowing activity on our Revolving Credit Facility as a result of lower sales volumes and the prior year repayment of our $25.0 million unsecured note payable.

There were no outstanding borrowings on our $300 million revolving credit facility as of March 31, ~~2013~~2014 and June 30, ~~2012~~2013. On

On a gross basis, we ~~borrowed~~ ~~$515.3 million~~made zero borrowings and ~~repaid~~ ~~$515.9 million~~repayments on our Revolving Credit Facility in the nine months ended March 31, ~~2013~~2014. In the prior year-to-date period, we borrowed $~~1,133.0~~515.3 million and repaid $~~1,117.3~~515.9 million ~~and additionally paid~~ ~~$1.4 million~~ ~~of debt issuance costs.~~. The average daily balance on the Revolving Credit Facility was $~~12.5~~0.0 million and $~~92.8~~12.5 million for the nine months ended March 31, ~~2013~~2014 and ~~2012,~~2013, respectively. There were no standby letters of credits issued and outstanding as of March 31, ~~2013~~2014, on the revolving credit facility, leaving $300 million available for additional borrowings.

In addition to our ~~Revolving Credit Facility, a subsidiary of the Company has~~multi-currency $300 million revolving credit facility, we have a €6.0 million ~~line of credit, which is secured by the assets of our European operations and is guaranteed by ScanSource, Inc. This agreement can be withdrawn by the lender with minimal notice. Our~~ subsidiary line of credit for our European operations which bears interest at the 30-day Euro Interbank Offered Rate ~~(“EURIBOR”~~("EURIBOR") plus a spread ranging from 1.25% to 2.00% per annum. ~~The spread in effect~~There were no outstanding borrowings as of March 31, ~~2013~~ ~~was~~ ~~1.25%. Additionally, we are assessed commitment fees ranging from~~ ~~0.10%~~ to ~~0.275%~~ ~~on non-utilized borrowing availability if outstanding balances are below~~ ~~€3.0 million. The interest rate spread and commitment fee rates related to the~~ ~~€6.0 million~~ ~~line of credit refer to the Leverage Ratio as defined by our Revolving Credit Facility. There was no outstanding balance at~~ ~~March 31, 2013~~2014 and ~~$4.3 million~~ ~~was outstanding at~~ June 30, ~~2012~~2013. This facility is secured by the assets of our European operations and is guaranteed by ScanSource, Inc.

~~In fiscal year~~On April 15, 2011, ~~we acquired~~the Company, through its wholly-owned subsidiary, ScanSource do Brasil Participações LTDA, completed its acquisition of all of the shares of CDC, ~~Brasil, S.A.~~pursuant to a Share Purchase and Sale Agreement dated April 7, 2011. The purchase price was paid with an initial payment of $36.2 million, net of cash acquired, assumption of working capital payables and debt, and variable annual payments through October 2015 based on CDC's annual financial results. The Company has made its first three payments to the former shareholders. As of March 31, ~~2013~~2014, we have $~~13.3~~10.7 million recorded for the ~~contingent~~continuing earnout obligation, of which $~~4.5~~5.7 million is classified as current. Future ~~contingent~~ earnout payments will be funded by cash on hand and our ~~Revolving Credit Facility.~~existing revolving credit facility.

We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet the present and future working capital and cash requirements for at least the next twelve months.

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Contractual Obligations

There have been no material changes in our contractual obligations and commitments as disclosed in our Annual Report on Form 10-K as of August ~~24, 2012.~~26, 2013.

Accounting Standards Recently Issued

~~Effective for interim and annual reporting periods for fiscal 2013, we have implemented ASU 2011-05,~~ ~~Presentation of Comprehensive Income~~. The objective of this update is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity or in a separate footnote and requires companies to present all non-owner changes in shareholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We are presenting a separate condensed consolidated statement of comprehensive income.

~~Effective for the annual goodwill impairment testing during fiscal 2013, the Company will implement ASU 2011-08,~~ ~~Testing Goodwill for Impairment~~. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The adoption of this amendment is not expected to have an impact on the Company's condensed consolidated financial statements.

~~In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU 2012-02,~~ ~~Testing Indefinite-Lived Intangible Assets for Impairment~~. This amendment allows companies to first assess qualitative factors of impairment of all indefinite-lived intangible assets, similar to the provisions in ASU 2011-08. The amendment becomes effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, but early adoption is permitted. The Company has elected early adoption for this amendment. The adoption of this amendment did not have an impact on the Company's condensed consolidated financial statements.

There are currently no new accounting standards ~~that have been~~ issued that are expected to have a significant impact on our financial position, results of operations and cash flows upon adoption.

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Critical Accounting Policies and Estimates

Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the consolidated financial statements and related notes and believe those policies to be reasonable and appropriate. See Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended June 30, ~~2012~~2013 for a complete listing of our significant accounting policies.

Goodwill

Goodwill is not amortized but is tested annually for impairment at a reporting unit level. Additionally, goodwill is tested for impairment on an interim basis if at any time facts and circumstances indicate that an impairment may have occurred.

During the current quarter, the Company changed its annual goodwill impairment testing date from June 30 to April 30. This voluntary change is considered preferable as it better aligns the timing of the impairment test with management’s financial planning and budgeting process, and ensures the completion of the test prior to the end of the annual reporting period. This change does not accelerate, delay or avoid a potential impairment charge.

As discussed in Item 7 of the Company's ~~2012~~2013 Annual Report on Form 10-K under Critical Accounting Policies, we performed our annual goodwill impairment test for the ~~Brazilian~~European POS & Barcode and ScanSource Latin America reporting ~~unit~~units as of June 30, ~~2012~~2013 and found that the fair value of the reporting units exceeded their carrying values by 7.2% and 9.7%, respectively. In addition, we recorded an impairment of a portion of the goodwill balance for our ScanSource Brasil reporting unit, ~~exceeded its carrying value by 7%.~~and we fully impaired the goodwill associated with our European Communications reporting unit.

We monitor results of ~~this business~~these reporting units on a quarterly basis, as ~~missing~~not meeting estimated expectations or changes to the projected future results of ~~this operation~~their operations could result in a future impairment of goodwill for ~~this~~these reporting ~~entity. The business missed its projected results by a wider margin than expected during the March 31, 2013 quarter, however, based~~entities. Based on current projected future results, we do not believe there is a more likely than not expectation that a goodwill impairment exists. The goodwill associated with the ~~Brazilian~~ScanSource Brasil, European POS & Barcode and ScanSource Latin America goodwill testing ~~unit~~units as of March 31, ~~2013~~2014 is ~~$19.9 million.~~

Recent financial results in Europe have generated pre-tax losses, primarily the result of our Europe Communications business. The overall European results as a goodwill testing unit could generate an impairment if this business unit continues to miss projected results. The goodwill associated with the European goodwill testing unit as of ~~March 31, 2013~~ ~~is $9.8 million.~~$3.1 million, $4.9 million and $4.0 million respectively.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

The Company’s principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bank debt and transacting business in foreign currencies in connection with its foreign operations.

Interest Rate Risk

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include revolving credit facilities with a group of banks used to maintain liquidity and fund the Company’s business operations. The nature and amount of the Company’s debt ~~will~~may vary as a result of future business requirements, market conditions and other factors. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company’s revolving credit facility, variable rate long-term debt and subsidiary line of credit for the quarter ended March 31, ~~2013~~2014 would have resulted in less than a $0.1 million increase or decrease, respectively, in pre-tax income for the period.

The Company evaluates its interest rate risk and may use interest rate swaps to mitigate the risk of interest rate fluctuations associated with the Company's variable rate long-term debt. At March 31, ~~2013~~2014, the Company had $5.4 million in variable rate long-term debt outstanding with no interest rate swaps in place. If used, derivative instruments have the potential to expose the Company to certain market risks including the possibility of (1) the Company’s hedging activities not being as effective as

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anticipated in reducing the volatility of the Company’s cash flows, (2) the counterparty not performing its obligations under the applicable hedging arrangement, (3) the hedging arrangement being imperfect or ineffective, or (4) the terms of the swap or associated debt changing. The Company seeks to lessen such risks by having established a policy to identify, control, and manage market risks which may arise from changes in interest rates, as well as limiting its counterparties to major financial institutions.

Foreign Currency Exchange Rate Risk

The Company is exposed to foreign currency risks that arise from its foreign operations in Canada, ~~Mexico,~~Latin America, Brazil and Europe. These risks include transactions denominated in non-functional currencies and intercompany loans with foreign subsidiaries. In the normal course of the business, foreign exchange risk is managed by balance sheet netting of exposures, as well as the use of foreign currency forward contracts to hedge these ~~exposures as well as balance sheet netting of~~ exposures. In addition, exchange rate fluctuations may cause our international results to fluctuate significantly when translated into U.S. dollars. These risks may change over time as business practices evolve and could have a material impact on the Company’s financial results in the future.

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The Company’s ~~Board of Directors~~senior management has approved a foreign exchange hedging policy to reduce foreign currency exposure. The Company’s policy is to utilize financial instruments to reduce risks where internal netting cannot be effectively employed and not to enter into foreign currency derivative instruments for speculative or trading purposes. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currencies and enters into foreign exchange derivative contracts to minimize short-term currency risks on cash flows. These positions are based onupon balance sheet exposures and, in certain foreign currencies, our forecasted purchases and sales. The Company continually evaluates foreign exchange risk and may enter into foreign exchange transactions in accordance with its policy. Actual variances from these forecasted transactions can adversely impact foreign exchange results. Foreign currency gains and losses are included in other expense (income) ~~expense.~~.

The Company has elected not to designate its foreign currency contracts as hedging instruments, and therefore, the instruments are marked-to-market with changes in their values recorded in the consolidated income statement each period. The Company's foreign currencies are primarily British pounds, euros, Mexican pesos, Brazilian ~~real~~reais and Canadian dollars. At March 31, ~~2013~~2014, the fair value of the Company’s currency forward contracts outstanding was a net ~~receivable~~payable of less than $0.1 million. The Company does not utilize financial instruments for trading or other speculative purposes.

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Item 4.	Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer ~~(“CEO”~~("CEO"), Chief Financial Officer ~~(“CFO”~~("CFO") and Principal Accounting Officer ~~(“PAO”~~("PAO") of the effectiveness of the Company’s disclosure controls and procedures as of March 31, ~~2013~~2014. Based on that evaluation, the Company’s management, including the CEO, CFO and PAO, concluded that the Company’s disclosure controls and procedures are effective as of March 31, ~~2013~~2014. During the quarter and nine months ended March 31, ~~2013~~2014, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION



Item 1.	Legal Proceedings

As previously discussed in our Annual Report on Form 10-K for the year ended June 30, 2013, and in our Quarterly Reports or Form 10-Q for the quarters ended September 30, 2013 and December 31, 2013, on January 2, 2013, through our wholly-owned subsidiary Partner Services, Inc. ("PSI"), we filed a lawsuit in the U.S. District Court in Atlanta, Georgia against our former ERP software systems integration partner, Avanade, Inc. ("Avanade"). On September 9, 2013 PSI filed an amended lawsuit against Avanade alleging breach of contract on the part of Avanade in connection with its performance on the ERP project. PSI is seeking recovery of damages that it incurred and believes that it will continue to incur, as a result of Avanade's alleged breach. On September 30, 2013, Avanade filed a response to PSI’s claims and asserted claims of its own against PSI regarding payments that PSI allegedly owes Avanade. The parties have been engaged in a discovery process of exchanging documents in their possession that are relevant to the matter. This process was expected to be completed on April 30, 2014. However, the parties recently agreed to a stipulated stay of the litigation, which has been approved by the court, so that the parties can explore the potential for a litigation settlement.



Item 1A.	Risk Factors

The Company has updated the following risk factors to take into account recent developments relating to the Company's ongoing ERP project as well as changes governing international trade regulations and enhanced disclosure obligations that are generally applicable to all public companies with international operations.

In addition to the risk factors discussed ~~below and~~ in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. ~~“Risk Factors”~~"Risk Factors" in our Annual Report on Form 10-K for the year-ended June 30, ~~2012~~2013 ~~and discussed in Part II, Item 1A. . “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2012,~~, which could materially affect our business, financial condition and/or future operating results. The risks described in our Annual Report on Form 10-K ~~and Quarterly Reports on Form 10-Q~~ are not the only risks facing our Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect the Company’s business, financial condition, and/or operating results.

Systems and the transition to a new Enterprise Resource Planning System - Our ability to manage our business and monitor results is highly dependent upon information and communication systems. A failure of these systems or a new ERP system could disrupt our business.



Item 5.	Other Information

~~We are highly dependent upon~~On May 6, 2014, the Company’s Board of Directors approved and adopted amended and restated bylaws (the “Amended and Restated Bylaws”), which became effective immediately. The Amended and Restated Bylaws were generally revised to update and simplify the Company’s bylaws and included provisions, that, among other things: (1) provide for electronic notice of shareholder meetings, electronic submission of proxy appointments, and “householding”; (2) provide the Board the flexibility to set a ~~variety~~record date at the maximum period permitted by South Carolina law (up to 70 days from the date of ~~internal computer~~the relevant action); (3) eliminate the requirement that there be an odd number of inspectors of election; (4) change the bylaw requiring advance notice of shareholder action and ~~telecommunication systems~~nomination of directors to ~~operate our business, including our enterprise resource planning (“ERP”) systems. In order~~set the period at which notice is required to ~~continue support~~be delivered 90-120 days before the anniversary of ~~our growth, we are making significant technological upgrades~~the preceding annual meeting and to ~~our~~require additional information ~~systems. We are~~to be provided in such notice; (5) eliminate the provision addressing the removal of directors by directors ; (6) simplified some of the mechanics concerning board action and meetings ; (7) provide that the Chairman of the Board need not be an officer of the Corporation; (8) remove the provision concerning the requirements and procedure for voting shares in other entities owned by the Corporation; (9) remove the provisions concerning the form in which corporate records shall be kept; and (10) make other changes to the bylaws to conform the bylaws to the South Carolina Business Corporation Act of 1988, as amended.

The foregoing description of the amendments made in the ~~process~~Amended and Restated Bylaws is qualified in its entirety by reference to the Amended and Restated Bylaws, a copy of ~~developing a company-wide, single ERP software system~~which is attached hereto as Exhibit 3.2 and ~~related processes to perform various functions and improve on the efficiency of our global business. This~~ is a lengthy and expensive process that has and will continue to result in a diversion of resources from other operations. We had engaged a new systems integration partner, Tata Consultancy Services (“TCS”). 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 our previously-disclosed total project cost range. We are currently evaluating our project plan. In April 2013, we moved a significant number of Company team members who were working on our ERP project back into business roles and are evaluating our alternatives for next steps. These actions will reduce our ERP costs for the fourth quarter. Meanwhile, our legacy ERP systems continue to run our business successfully.incorporated herein by reference.

Any continued disruptions, delays or deficiencies in the design and/or implementation of the new ERP system, or in the performance of our legacy systems, particularly any disruptions, delays or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business and potentially for our customers to access our price and product availability information. Further, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations and financial condition may be adversely affected if our information systems do not allow us to transmit accurate information, even for a short period of time. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could adversely affect our reputation, competitive position, business, results of operations and financial condition.

In addition, the information systems of companies we acquire may not be sufficient to meet our standards or we may not be able to successfully convert them to provide acceptable information on a timely and cost-effective basis. Furthermore, we must attract and retain qualified people to operate our systems, expand and improve them, integrate new programs effectively with our existing programs, and convert to new systems efficiently when required. Any disruption to our business due to such issues, or an increase in our costs to cover these issues that is greater than what we have anticipated, could have an adverse affect on our financial results and operations.

Our customers rely increasingly on our electronic ordering and information systems as a source for product information, including availability and pricing. There can be no assurance that our systems will not fail or experience disruptions, and any significant failure or disruption of these systems could prevent us from making sales, ordering and delivering products and otherwise conducting our business. Many of our customers use our website to check real-time product availability, see their customized pricing and place orders. The Internet and individual websites have experienced a number of disruptions and slowdowns. In addition, some websites have experienced security breakdowns. While our website has not experienced any material disruptions or security breakdowns, any disruptions or breaches in security or a breach that compromises sensitive information could harm our relationship with our vendors, customers and other business partners. Any material disruption of our website or the Internet in general could impair our order processing or prevent our vendors and customers from accessing information and cause us to lose business.

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Additional costs, cost overruns and delays with a new ERP system - Significant additional costs, cost overruns and delays in connection with a new partner or a new project plan may adversely affect our business and results of operations.

Our new ERP system has and will continue to involve substantial expenditures on system hardware and software, as well as design, development and implementation activities. We have experienced cost overruns and project delays in connection with the process. Through our wholly-owned subsidiary Partner Services, Inc. (“PSI”) we filed a lawsuit in the U.S. District Court in Atlanta, Georgia on January 2, 2013 against our former ERP software systems integration partner, 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 performance on the ERP project, and PSI is seeking recovery of damages that it has incurred and will continue to incur, as a result of Avanade's misconduct. We are currently evaluating our current project plan. Until the new ERP system is fully implemented, we expect to incur additional expenses and capital expenditures to develop and test the system. There can be no assurance that other issues relating to the new ERP system will not occur. Our business and results of operations have been and will continue to be adversely affected if we experience operating problems, additional costs, unanticipated litigation costs and expenses, or cost overruns during the ERP process. To the extent that the ERP project can not be completed in a timely and cost efficient manner, or there are significant problems with the transition to a new ERP system, the asset may be impaired. The capitalized balance as of March 31, 2013 was $28.6 million.

~~International operations - Our international operations expose us to risks that are different from, or possibly greater than, the risks we are exposed to domestically.~~

We currently have facilities in eight countries outside the United States and sell products in a number of others. A significant portion of our revenue is derived from our international operations. These operations are subject to a variety of risks that are in addition to the risks that we face domestically or are similar risks but with potentially greater exposure. These risks include:

Changes in international trade laws, such as the North American Free Trade Agreement, affecting our import and export activities, including export license requirements, restrictions on the export of certain technology, and tariff changes;

~~Difficulties in collecting accounts receivable and longer collection periods;~~

~~Changes in, or expiration of, various foreign incentives that provide economic benefits to us;~~

~~Changes in labor laws and regulations affecting our ability to hire and retain employees;~~

~~Difficulties in staffing and managing operations in foreign countries;~~

~~Fluctuations of foreign currency, exchange controls and currency devaluations;~~

~~Changes in the interpretation and enforcement of laws (in particular related to items such as duty and taxation);~~

~~Potential political and economic instability and changes in governments;~~

Compliance with foreign and domestic import and export regulations and anti-corruption laws, including the Iran Threat Reduction and Syria Human Rights Act of 2012, U.S. Foreign Corrupt Practices Act, or similar laws of other jurisdictions for our business activities outside the U.S., the violation of which could result in severe penalties including monetary fines, criminal proceedings and suspension of export privileges;

~~Terrorist or military actions that result in destruction or seizure of our assets or suspension or disruption of our operations or those of our customers;~~

~~Potential regulatory changes, including foreign environmental restrictions; and~~

~~Different general economic conditions.~~

The potential criminal penalties for violations of export regulations and anti-corruption laws, particularly the U.S. Foreign Corrupt Practices Act, data privacy laws and environmental laws and regulations in many jurisdictions, create heightened risks for our international operations. In the event that a governing regulatory body determined that we have violated applicable export regulations or anti-corruption laws, we could be fined significant sums, incur sizable legal defense costs and/or our export capabilities could be restricted, which could have a material and adverse effect on our business and reputation.

Because we have operations in Brazil, Canada, Mexico and Europe, we are exposed to fluctuations in foreign currency exchange rates. We manage our exposure to fluctuations in the value of currencies using various derivative instruments. However, we may not be able to mitigate all foreign currency related risk. In addition, exchange rate fluctuations may cause our international results to fluctuate significantly when translated into U.S. dollars. Developing economies, such as Brazil, could have sudden and drastic changes in foreign exchange rates compared to others.

In addition, in foreign markets we are more dependent upon third party providers of key services, such as third party freight forwarders and third party warehouses in Europe and Latin America. We also rely on third party legal advisors to provide guidance on trade compliance issues and information systems providers to provide services related to denied party screening. Adverse changes in any of these third party services could have an adverse effect on our business, financial condition, and results of operations. As we expand our international operations, we expect these risks to increase.

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In addition, the value of our equity investment in foreign countries may fluctuate based on changes in foreign currency exchange rates. These fluctuations may result in losses in the event a foreign subsidiary is sold or closed at a time when the foreign currency is weaker than when we initially invested.

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Item 6.	Exhibits



Exhibit Number	Description

3.2	Amended and Restated Bylaws

10.1+	Distribution Agreement with Symbol Technologies, Inc. dated February 12, 2014

16.1	Letter from Ernst & Young LLP, dated January 6, 2014 (incorporated by reference from Exhibit 16.1 to th Form 8-K filed on January 7, 2014).

18.1	Preferability Letter Regarding Change in Accounting Policy related to Goodwill

31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from our Quarterly Report on Form 10-Q for the quarter and nine months ended March 31, ~~2013,~~2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets as of March 31, ~~2013~~2014 and June 30, ~~2012;~~2013; (ii) the ~~condensed consolidated income statements~~Condensed Consolidated Income Statements for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012;~~2013; (iii) the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~comprehensive income~~Comprehensive Income for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012;~~2013; (iv) the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~cash~~Cash flows for the nine months ended March 31, ~~2013~~2014 and ~~2012;~~2013; and (v) the ~~notes~~Notes to the ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

	+ Confidential treatment has been requested with respect to certain portions of this Exhibit, which portions have been omitted and filed separately with the Commission as part of an application for confidential treatment.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		ScanSource, Inc.

		/s/ MICHAEL L. BAUR
		Michael L. Baur
Date:	May ~~2, 2013~~7, 2014	Chief Executive Officer (Principal Executive Officer)



		/s/ CHARLES A. MATHIS
		Charles A. Mathis
Date:	May ~~2, 2013~~7, 2014	Senior Vice President and Chief Financial Officer (Principal Financial Officer)



		/s/ GERALD LYONS
		Gerald Lyons
Date:	May ~~2, 2013~~7, 2014	Senior Vice President of Finance and Principal Accounting Officer (Principal Accounting Officer)

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EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q



Exhibit Number	Description

3.2	Amended and Restated Bylaws

10.1+	Distribution Agreement with Symbol Technologies, Inc. dated February 12, 2014

16.1	Letter from Ernst & Young LLP, dated January 6, 2014 (incorporated by reference from Exhibit 16.1 to th Form 8-K filed on January 7, 2014).

18.1	Preferability Letter Regarding Change in Accounting Policy related to Goodwill

31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from our Quarterly Report on Form 10-Q for the quarter and nine months ended March 31, ~~2013,~~2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets as of March 31, ~~2013~~2014 and June 30, ~~2012;~~2013; (ii) the ~~condensed consolidated income statements~~Condensed Consolidated Income Statement for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012;~~2013; (iii) the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~comprehensive income~~Comprehensive Income for the quarters and nine months ended March 31, ~~2013~~2014 and ~~2012;~~2013; (iv) the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~cash flows~~Cash Flows for the nine months ended March 31, ~~2013~~2014 and ~~2012;~~2013; and (v) the notes to the ~~condensed consolidated financial statements.~~ Condensed Consolidated Financial Statements.

	+ Confidential treatment has been requested with respect to certain portions of this Exhibit, which portions have been omitted and filed separately with the Commission as part of an application for confidential treatment.

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	North American Distribution Segment		International Distribution Segment			Total
	(in thousands)
Balance as of June 30, 2012	$	20,081	$	33,804		$	53,885
Foreign currency translation adjustment	—		(142		)	(142		)
Balance as of March 31, 2013	$	20,081	$	33,662		$	53,743