ScanSource,
| SOUTH CAROLINA | 57-0965380 | |
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| Large accelerated filer | x | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Class | Outstanding at April | |
Common Stock, no par value per share | ||
SCANSOURCE, INC.
Item 1. Item 2. Item 3. Current assets: Cash and cash equivalents Accounts receivable, less allowance of $26,791 at March 31, 2012 and $26,562 at June 30, 2011 Inventories Prepaid expenses and other assets Deferred income taxes Total current assets Property and equipment, net Goodwill Other assets, including identifiable intangible assets Total assets Current liabilities: Short-term borrowings Current portion of contingent consideration Accounts payable Accrued expenses and other liabilities Income taxes payable Total current liabilities Long-term debt Borrowings under revolving credit facility Long-term portion of contingent consideration Other long-term liabilities Total liabilities 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, 27,553,590 and 27,109,932 shares issued and outstanding at March 31, 2012 and June 30, 2011, respectively Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Total liabilities and shareholders’ equity Net sales Cost of goods sold Gross profit Selling, general and administrative expenses Change in fair value of contingent consideration Operating income Interest expense Interest income Other (income) expense, net Income before income taxes Provision for income taxes Net income Per share data: Net income per common share, basic Weighted-average shares outstanding, basic Net income per common share, diluted Weighted-average shares outstanding, diluted Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Provision for accounts and notes receivable Share-based compensation and restricted stock Deferred income taxes Excess tax benefits from share-based payment arrangements Change in fair value of contingent consideration Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories Prepaid expenses and other assets Other noncurrent assets Accounts payable Accrued expenses and other liabilities Income taxes payable Net cash provided by (used in) operating activities Cash flows from investing activities: Capital expenditures Cash paid for business acquisitions, net of cash acquired Net cash provided by (used in) investing activities Cash flows from financing activities: Increases (decreases) in short-term borrowings, net Borrowings (repayments) on revolving credit, net of debt issue costs Exercise of stock options Excess tax benefits from share-based payment arrangements Repayments of long-term debt Contingent consideration payments Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period . 2012 Numerator: Net Income Denominator: Weighted-average shares, basic Dilutive effect of share-based payments Weighted-average shares, diluted Net income per common share, basic Net income per common share, diluted Net income Unrealized gain on hedged transaction, net of tax Changes in foreign currency translation adjustments Comprehensive income (Loss) Currency translation adjustment Unrealized gain (loss) on fair value of interest rate swap Accumulated other comprehensive income Consideration Initial cash payment, net of cash acquired Fair value of earnout obligation Total consideration Recognized amounts of identifiable assets acquired and liabilities assumed Accounts receivable, net of allowance Inventories Prepaid expenses and other assets Current deferred income taxes, net Property and equipment, net Intangible assets Escrowed pre-acquisition contingencies receivable Short-term borrowings Accounts payable Accrued expenses and other liabilities Income taxes payable Escrowed pre-acquisition contingencies payable Long-term deferred income taxes, net Other long-term liabilities Total identifiable net assets Goodwill Condensed consolidated income statement Amortization expense Provision for income taxes Balance as of June 30, 2011 Additions Fluctuations in foreign currencies Balance as of March 31, 2012 Short-term borrowings Facility. Borrowings under revolving credit facility Industrial Development Revenue Bond, monthly payments of interest only, 1.09% variable interest rate at March 31, 2012 and maturing on September 1, 2032 Unsecured note payable to a bank, monthly payments of interest only and maturing in fiscal 2013 Less current portion Long-term portion Net foreign exchange derivative contract gains (losses) Net foreign currency transactional and re-measurement gains (losses) Net foreign currency gains (losses) Derivative assets(a): Foreign exchange contracts Derivative liabilities(b): Foreign exchange contracts 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). Assets: Deferred compensation plan investments, current and non-current portion Forward foreign currency exchange contracts Total assets at fair value Liabilities: Deferred compensation plan investments, current and non-current portion Forward foreign currency exchange contracts Liability for contingent consideration, current and non-current portion Total liabilities at fair value 2013 other comprehensive income. Fair value at beginning of period Issuance of contingent consideration Payments Change in fair value Fluctuation due to foreign currency translation Fair value at end of period 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. 2012 2012. 2013 Sales: North American distribution International distribution Less intersegment sales Depreciation and amortization: North American distribution International distribution Operating income: North American distribution International distribution Capital expenditures: North American distribution International distribution Assets: North American distribution International distribution these pre-acquisition contingencies and corresponding indemnification receivables in the Company's condensed consolidated balance sheets: 2010. penalties. provision. result of our European Communications business. To the extent the Europe Communications business does not return to profitability as expected, this could affect the valuation of certain deferred tax assets. In the judgment of management, it is more likely than not that the deferred tax asset will be realized. marketplace. Return on invested capital ratio, annualized Reconciliation of EBITDA to net income: Net income Plus: income taxes Plus: interest expense Plus: depreciation & amortization EBITDA (numerator) Invested capital calculations: Equity – beginning of the quarter Equity – end of the quarter Average equity Average funded debt(1) Invested capital (denominator) Return on invested capital (annualized)(2) fluctuations in foreign currency rates, thereby enhancing comparability between reporting periods. North American distribution International distribution Net sales North American distribution International distribution Net sales Axis Communications. other Latin American business units. % of Net Sales March 31, North American distribution International distribution Gross profit % of Net Sales March 31, North American distribution International distribution Gross profit programs compared to the prior year quarter. pressures. % of Net Sales March 31, Selling, general and administrative expense Change in fair value of contingent consideration Operating expense % of Net Sales March 31, Selling, general and administrative expense Change in fair value of contingent consideration Operating expense in costs associated with tax compliance and personnel replacement 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. (Loss) % of Net Sales March 31, North American distribution International distribution North American distribution International distribution bad debt expenses. The decrease for the current nine month period is due to lower sales volumes . second quarter fiscal 2013. % of Net Sales March 31, Interest expense Interest income Net foreign exchange (gains) losses Other, net Total other (income) expense, net % of Net Sales March 31, Interest expense Interest income Net foreign exchange (gains) losses Other, net Total other (income) expense, net Revolving Credit Facility. 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. Quarter Nine months increased to business successfully. 24, 2012. 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. 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 In order to continue support of our growth, we are making significant technological upgrades to our information systems. We are in the process of run our business successfully. in governments;20122013 Page # 4 4 4 5 67Item 4. 28Item 1A.Item 6. Item 4. 29PART II. OTHER INFORMATION30Item 1A.Risk Factors30Item 6.Exhibits323334“hopes”“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” 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, 2011 and our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2011 and December 31, 2011.2012. 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.SCANSOURCE,for share information) March 31,
2012 June 30,
2011 Assets $ 34,295 $ 28,747 445,206 462,102 501,980 467,350 35,460 35,421 16,731 15,894 1,033,672 1,009,514 46,332 36,819 56,363 59,090 71,174 76,765 $ 1,207,541 $ 1,182,188 Liabilities and Shareholders’ Equity $ — $ 3,164 5,061 2,398 397,163 406,453 62,321 60,157 1,341 5,175 465,886 477,347 5,429 30,429 41,491 26,513 14,678 21,396 37,607 39,109 565,091 594,794 — — 137,348 123,608 514,659 460,157 (9,557 ) 3,629 642,450 587,394 $ 1,207,541 $ 1,182,188 March 31,
2013 June 30,
2012Assets Current assets: Cash and cash equivalents $ 93,905 $ 29,173 Accounts receivable, less allowance of $30,996 at March 31, 2013
and $27,349 at June 30, 2012431,264 470,808 Inventories 407,093 475,479 Prepaid expenses and other current assets 42,041 41,846 Deferred income taxes 14,687 14,624 Total current assets 988,990 1,031,930 Property and equipment, net 49,008 48,785 Goodwill 53,743 53,885 Other non-current assets, including identifiable intangible assets 66,698 67,206 Total assets $ 1,158,439 $ 1,201,806 Liabilities and Shareholders’ Equity Current liabilities: Short-term borrowings $ — $ 4,268 Accounts payable 325,658 419,683 Accrued expenses and other current liabilities 68,169 67,776 Current portion of contingent consideration 4,524 4,976 Income taxes payable 2,699 1,698 Total current liabilities 401,050 498,401 Deferred income taxes 2,879 — Long-term debt 5,429 5,429 Long-term portion of contingent consideration 8,797 11,677 Other long-term liabilities 30,372 33,988 Total liabilities 448,527 549,495 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 Retained earnings 582,421 534,445 Accumulated other comprehensive income (loss) (19,484 ) (21,691 ) Total shareholders’ equity 709,912 652,311 Total liabilities and shareholders’ equity $ 1,158,439 $ 1,201,806 June 30, 2011 results2012 amounts are derived from audited consolidated financial statementsstatements.See accompanying notes to these condensed consolidated financial statements. See accompanying notes to the condensed consolidated financial statementsSCANSOURCE, Quarter ended
March 31, Nine months ended
March 31, 2012 2011 2012 2011 $ 707,883 $ 613,466 $ 2,260,827 $ 1,931,641 638,615 547,637 2,032,630 1,731,704 69,268 65,829 228,197 199,937 46,711 40,349 141,753 116,071 1,072 — 1,244 — 21,485 25,480 85,200 83,866 254 429 1,490 1,182 (780 ) (313 ) (2,233 ) (918 ) 206 300 3,363 492 21,805 25,064 82,580 83,110 7,049 8,530 28,077 29,248 $ 14,756 $ 16,534 $ 54,503 $ 53,862 $ 0.54 $ 0.61 $ 2.00 $ 2.01 27,489 26,938 27,290 26,811 $ 0.53 $ 0.60 $ 1.97 $ 1.98 27,926 27,413 27,709 27,182 See accompanying notes to the condensed consolidated financial statements Quarter ended Nine months ended March 31, March 31, 2013 2012 2013 2012 Net sales $ 682,965 $ 707,883 $ 2,164,286 $ 2,260,827 Cost of goods sold 614,133 638,615 1,947,063 2,032,630 Gross profit 68,832 69,268 217,223 228,197 Selling, general and administrative expenses 47,937 46,711 144,392 141,753 Change in fair value of contingent consideration 100 1,072 1,396 1,244 Operating income 20,795 21,485 71,435 85,200 Interest expense 102 254 356 1,490 Interest income (483 ) (780 ) (1,648 ) (2,233 ) Other (income) expense, net (4 ) 206 34 3,363 Income before income taxes 21,180 21,805 72,693 82,580 Provision for income taxes 7,202 7,049 24,716 28,077 Net income $ 13,978 $ 14,756 $ 47,977 $ 54,503 Per share data: Weighted-average shares outstanding, basic 27,847 27,489 27,725 27,290 Net income per common share, basic $ 0.50 $ 0.54 $ 1.73 $ 2.00 Weighted-average shares outstanding, diluted 28,024 27,926 27,960 27,709 Net income per common share, diluted $ 0.50 $ 0.53 $ 1.72 $ 1.97 See accompanying notes to these condensed consolidated financial statements. SCANSOURCE, Quarter ended Nine months ended March 31, March 31, 2013 2012 2013 2012 Net income $ 13,978 $ 14,756 $ 47,977 $ 54,503 Unrealized gain on hedged transaction, net of tax — — — 139 Foreign currency translation adjustment (3,107 ) 4,965 2,206 (13,325 ) Comprehensive income $ 10,871 $ 19,721 $ 50,183 $ 41,317 See accompanying notes to these condensed consolidated financial statements. Nine months ended March 31, 2012 2011 $ 54,503 $ 53,862 7,594 4,350 4,968 5,443 5,515 3,464 (5,387 ) 70 (150 ) 444 1,244 — 90 (19,019 ) (44,859 ) (45,713 ) 1,424 (14,891 ) (486 ) (8,765 ) (297 ) (1,974 ) 3,557 22,410 (2,648 ) (1,227 ) 25,068 (1,546 ) (10,187 ) (10,198 ) — — (10,187 ) (10,198 ) (2,949 ) 1,828 14,296 1,257 8,071 4,878 150 (444 ) (25,000 ) — (2,000 ) — (7,432 ) 7,519 (1,901 ) 801 5,548 (3,424 ) 28,747 34,605 $ 34,295 $ 31,181 See accompanying notes to the condensed consolidated financial statements Nine months ended March 31, 2013 2012 Cash flows from operating activities: Net income $ 47,977 $ 54,503 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,863 7,594 Provision for accounts and notes receivable 8,312 4,968 Share-based compensation and restricted stock 4,565 5,515 Deferred income taxes (4,028 ) (5,387 ) Excess tax benefits from share-based payment arrangements (849 ) (150 ) Change in fair value of contingent consideration 1,396 1,244 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 33,605 90 Inventories 70,626 (44,859 ) Prepaid expenses and other assets (303 ) 1,424 Other non-current assets 3,658 (486 ) Accounts payable (94,951 ) (297 ) Accrued expenses and other liabilities (2,696 ) 3,557 Income taxes payable 1,831 (2,648 ) Net cash provided by (used in) operating activities 76,006 25,068 Cash flows from investing activities: Capital expenditures (4,463 ) (10,187 ) Net cash provided by (used in) investing activities (4,463 ) (10,187 ) Cash flows from financing activities: Borrowings (repayments) on short-term borrowings, net (4,459 ) (2,949 ) Borrowings on revolving credit 515,262 1,132,968 Repayments on revolving credit (515,877 ) (1,117,312 ) Debt issuance costs — (1,360 ) Repayments on long-term debt — (25,000 ) Contingent consideration payments (4,777 ) (2,000 ) Exercise of stock options 2,231 8,071 Excess tax benefits from share-based payment arrangements 849 150 Net cash provided by (used in) financing activities (6,771 ) (7,432 ) Effect of exchange rate changes on cash and cash equivalents (40 ) (1,901 ) Increase (decrease) in cash and cash equivalents 64,732 5,548 Cash and cash equivalents at beginning of period 29,173 28,747 Cash and cash equivalents at end of period $ 93,905 $ 34,295 See accompanying notes to these condensed consolidated financial statements. SCANSOURCE,ScanSource,ScanSource, Inc. and its subsidiaries (the “Company”) is thea leading wholesale distributor of specialty technology products, providing value-added distribution servicessales to resellers.resellers in specialty technology markets. The Company has two geographic distribution segments: onethe North American distribution segment serving North Americathe United States and Canada from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America and Europe from distribution centers located in Florida, Mexico and Brazil, and serving Europe from Belgium.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 ScanSourceScanSource POS and BarcodingBarcode sales unit; voice, data, video and converged communications equipment through its CatalystTelecom sales unit; video conferencing, telephony and ScanSourcecommunications products through its ScanSource Communications sales units;unit; and physicalelectronic security products and wireless infrastructure products through its ScanSourceScanSource Security sales unit. The international distribution segment markets AIDC, POS, communications and security products as follows: ScanSourcethrough its ScanSource Latin America markets AIDC, POS, communications and security products; ScanSource Europe marketssales unit; AIDC and POS products whilethrough its ScanSource POS and Barcode, Europe sales unit; and communication products are marketed through its ScanSourceScanSource Communications, Europe sales unit in Europe.On April 15, 2011, the Company purchased all of the shares of CDC Brasil S.A (“CDC”). CDC is the leading POS and Barcoding distributor in Brazil. CDC, headquartered in Curitiba, Brazil, is now included under the ScanSource Latin America operating unit.ScanSource,ScanSource, Inc. have been prepared by the Company’s management in accordance with U.S.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 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, 20122013 and June 30, 2011,2012, the results of operations for the quarters and nine months ended March 31, 20122013 and 2011,2012, the statements of comprehensive income for the quarters and nine months ended March 31, 2013 and 2012 and the statementstatements of cash flows for the nine months ended March 31, 20122013 and 2011.2012. The results of operations for the quarters and nine months ended March 31, 20122013 and 20112012 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, 2011.201220122013 from the information included in Note 2 of 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, 2011.2012. 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, 2011.twosome zero-balance, disbursement accounts at separatevarious 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 cash disbursements in excess ofchecks written from these accounts against cash on hand are presented in accounts payable on the condensed consolidated balance sheet. Cash disbursementshand. Checks released but not yet cleared from these accounts in the amounts of $45.5$47.3 million and $73.6$48.2 million are presentedincluded in accounts payable as of March 31, 20122013 and June 30, 2011,2012, respectively.In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments in this update are the result of the work of the FASB and the International Accounting Standards Board (“IASB”) to develop common requirements for measuring fair value and for disclosing information about fair value measurements. The amendment becomes effectiveEffective for interim and annual reporting periods beginning after December 15, 2011, which isfor fiscal 2013, the current period ended March 31, 2012 for the Company. This amendmentCompany has had no impact on the Company’s condensed consolidated financial statements.implemented Accounting Standard Update ("ASU") 2011-05, In June 2011, the FASB issued 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. TheThis update will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2011, which will be fiscal 2013 for the Company. The update will eliminateeliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’shareholders’ equity which is the Company’s current practiceor in a separate footnote and will requirerequires companies to present all nonowner changes in stockholders’shareholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company is currently determining which methodhas elected to present a separate condensed consolidated statement of presentationcomprehensive income.be used in future filings.In September 2011, the FASB issuedimplement ASU 2011-08,Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test 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.isallows 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 goodwill impairment tests performed for fiscal years beginning after DecemberSeptember 15, 2011, which will be fiscal 2013 for the Company. Early2012, but early adoption is permitted. The Company is currently assessing the future impacthas elected early adoption for this amendment. The adoption of this ASUamendment did not have an impact on itsthe Company's condensed consolidated financial statements. Quarter ended March 31, Nine months ended March 31, 2012 2011 2012 2011 (in thousands, except per share data) $ 14,756 $ 16,534 $ 54,503 $ 53,862 27,489 26,938 27,290 26,811 437 475 419 371 27,926 27,413 27,709 27,182 $ 0.54 $ 0.61 $ 2.00 $ 2.01 $ 0.53 $ 0.60 $ 1.97 $ 1.98 Quarter ended Nine months ended March 31, March 31, 2013 2012 2013 2012 (in thousands, except per share data) Numerator: Net Income $ 13,978 $ 14,756 $ 47,977 $ 54,503 Denominator: Weighted-average shares, basic 27,847 27,489 27,725 27,290 Dilutive effect of share-based payments 177 437 235 419 Weighted-average shares, diluted 28,024 27,926 27,960 27,709 Net income per common share, basic $ 0.50 $ 0.54 $ 1.73 $ 2.00 Net income per common share, diluted $ 0.50 $ 0.53 $ 1.72 $ 1.97 year-to-date periodnine months ended March 31, 2012,2013, there were 260,9011,119,940 and 597,8721,097,610 weighted average shares outstanding respectively, that are excluded from the computation of diluted earnings per share because their effect would be anti-dilutive. For the quarter and year-to-date periodnine months ended March 31, 2011,2012, there were 475,289260,901 and 371,253597,872 weighted average shares outstanding respectively, that are excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.(3)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.Comprehensive income consists of the following: Quarter ended Nine months ended March 31, March 31, 2012 2011 2012 2011 (in thousands) $ 14,756 $ 16,534 $ 54,503 $ 53,862 — 127 139 337 4,965 6,101 (13,325 ) 12,974 $ 19,721 $ 22,762 $ 41,317 $ 67,173 March 31,
2012 June 30,
2011 (in thousands) $ (9,557 ) $ 3,768 — (139 ) $ (9,557 ) $ 3,629 (4) AcquisitionsCDC Brasil, S.A.On April 15, 2011, the Company completed its acquisition of 100% of the shares of CDC, Brazil’s leading distributor of AIDC and POS solutions. This acquisition gives the Company an established presence in Latin America’s largest specialty technology market and allows the Company to more easily scale its Latin American operations.Under the Share Purchase and Sale Agreement, the Company structured the purchase transaction as an all cash share purchase with an initial payment of $36.2 million, net of cash acquired, and assumed working capital payables and debt at closing. The remaining purchase price will be paid in annual cash installments based upon the financial performance of CDC for the twelve month periods ended on June 30, from 2011 through 2015.In the current quarter, the Company finalized the purchase accounting for the CDC acquisition. The Company has elected to record all purchase accounting adjustments in the current quarter as opposed to retrospective application set forth in ASC 805. We have determined that retrospective application is immaterial to the users of the Company’s financial statements. The adjustments made during the quarter pertain to the finalization of the purchase price allocation to the fair value of customer relationships, pre-acquisition contingency liabilities and corresponding indemnification assets and deferred income taxes. These adjustments are summarized in the following table: As of April 15, 2011 Preliminary
Purchase
Allocation Purchase
Accounting
Adjustments Revised
Purchase
Allocation (in thousands) $ 36,228 $ — $ 36,228 23,952 — 23,952 $ 60,180 $ — $ 60,180 $ 21,378 $ — $ 21,378 30,560 — 30,560 3,575 3,575 1,409 (3,225 ) (1,816 ) 1,741 — 1,741 18,327 4,278 22,605 16,013 7,977 23,990 (1,277 ) — (1,277 ) (34,006 ) — (34,006 ) (3,896 ) — (3,896 ) (2,097 ) 1,174 (923 ) (16,013 ) (7,977 ) (23,990 ) — (3,141 ) (3,141 ) (177 ) — (177 ) 35,537 (914 ) 34,623 $ 24,643 $ 914 $ 25,557 All adjustments above are as of the acquisition date.In the current quarter, we recorded incremental amortization expense to catch up accumulated amortization for the additional purchase price allocated to customer relationships as of March 31, 2012. The impact of the incremental amortization and related tax effect are summarized below: Quarter ended
March 31, 2012 (in thousands) $ 441 $ (150 ) As of the March 31, 2012 condensed consolidated balance sheet, the Company reflected pre-acquisition contingencies related to the purchase of CDC at $4.3 million and $7.1 million in other current liabilities and other long-term liabilities, respectively. These recorded contingencies pertain to Brazilian tax exposures prior to the acquisition date. The Company also had indemnification assets in the same amounts recorded in prepaid expenses and other assets (current) and other assets (noncurrent), respectively. The amounts recorded for pre-acquisition contingencies have decreased from the prior quarter as the statute of limitations on a portion of the contingencies have lapsed. The amount of reasonably possible undiscounted pre-acquisition contingencies as of March 31, 2012, is estimated to range as high as $15.0 million at this time, of which all exposures identified are indemnifiable under the Share Purchase and Sale Agreement. March 31,
2013 June 30,
2012 (in thousands) Foreign currency translation adjustment $ (19,484 ) $ (21,691 ) Accumulated other comprehensive income (loss) $ (19,484 ) $ (21,691 ) 2012,2013, by operatingreporting segment, are as follows: North American
Distribution
Segment International
Distribution
Segment Total (in thousands) $ 20,081 $ 39,009 $ 59,090 — 914 914 — (3,641 ) (3,641 ) $ 20,081 $ 36,282 $ 56,363 There was no acquisition activity during the quarter or nine months ended March 31, 2012. The change in goodwill from June 30, 2011 relates to purchase accounting adjustments for CDC and foreign exchange fluctuations. See Note 4 for further details regarding purchase accounting adjustments recorded this quarter. 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 described in the condensed consolidated balance sheetsheets are net identifiable intangible assets of $30.0$23.0 million and $32.4$27.1 million at March 31, 20122013 and June 30, 2011,2012, respectively. These amounts relate primarily to acquired intangible assets including customer relationships, non-compete agreements, trade names, distributor agreements and debt issue costs.Short TermShort-Term Borrowings and Long TermLong-Term DebtTheA subsidiary of the Company has a €6.0€6.0 million secured revolving line of credit, facility, which bears interest at the 30 day Euro Interbank Offered Rate (“EURIBOR”) plus a spread of 1.5% per annum. This facility is secured by the assets of our European operations and is guaranteed by ScanSource,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”) plus a spread ranging from 1.25% to 2.00% per annum. The spread in effect as of March 31, 2013 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 the €6.0 million line of credit refer to the Leverage Ratio as defined by the Company's $300 million multi-currency senior secured revolving credit facility. The outstanding balances at March 31, 20122013 and June 30, 20112012 are as follows: March 31,
2012 June 30,
2011 (in thousands) $ — $ 3,164 March 31,
2013 June 30,
2012 (in thousands) Short-term borrowings $ — $ 4,268 $250 millionprimary revolving credit facility, due on September 28, 2012.facility. The Company entered into a five-year, $300five-year, $300 million multi-currency senior secured revolving credit facility (“Revolving Credit Facility”) pursuant to the terms of an Amended and Restated Credit Agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein. The NewRevolving Credit AgreementFacility 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 commitments for the incremental capacity from existing or new lenders. TheIn fiscal year 2012, the Company incurred $1.4$1.4 million in debt issuance costs that were capitalized to other non-current assets, including identifiable intangible assets, on the condensed consolidated balance sheet and are being amortized on a straight-line basis through October 11, 2016, the maturity date of the NewRevolving Credit Agreement.Company’sCompany's option, loans denominated in U.S. dollars under the NewRevolving Credit Agreement,Facility, other than swingline loans, shall bear interest at a rate equal to a spread over the London Interbank Offered Rate (“LIBOR”) or prime rate depending upon the Company’sCompany's ratio of total debt (excluding accounts payable and accrued liabilities) to adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), measured as of the end of the most recent year or quarter, as applicable,to adjusted earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) for which financial statements have been delivered to the Lendersmost recently completed four quarters (the “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 loans. The spread in effect as of March 31, 2012,2013 was 1.00% for LIBOR-based loans and 0.00% for Primeprime rate-based 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 NewRevolving Credit AgreementFacility are guaranteed by substantially all of the domestic assets of the Company as well as certain foreign subsidiaries determined to be material under the New Credit Agreement and a pledge of up to 65% of capital stock or other equity interest in each Guarantor as defined in the NewRevolving Credit Agreement.Facility. The Company was in compliance with all covenants under the credit facilityRevolving Credit Facility as of March 31, 2012. The2013. There were no outstanding balances at March 31, 20122013 and June 30, 20112012. Fluctuations in functional currency rates are as follows: March 31,
2012 June 30,
2011 (in thousands) $ 41,491 $ 26,513 Duringreflected in the nine months ended March 31, 2012, the Company borrowed $1,133.0 million on the revolving credit facility. The Company repaid $1,117.3 million during the same period. Including cash payments for debt issue costs for $1.4 million, net borrowings for the nine month period were $14.3 million. Additionally, theactivity.period was $92.8 million.During the nine monthsperiods ended 2011, the Company borrowed $433.62013 and 2012 was $12.5 million on the revolving credit facility. The Company repaid $432.3 and $92.8 million during the same period. Net borrowings for the nine month period were $1.3 million. Additionally, the average daily balance during the nine month period was $9.5 million., respectively.2012,2013, the Company was in compliance with all covenants under this bond.On January 2, 2008, the Company entered into a $25 million promissory note with a third party lender. This note payable accrued interest on the unpaid balance at a rate per annum equal to the 30-day LIBOR plus 0.65% and was scheduled to mature on September 28, 2012. On October 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 2011, the note was fully repaid using funds obtained through the New Credit Agreement. March 31,
2012 June 30,
2011 (in thousands) $ 5,429 $ 5,429 — 25,000 — — $ 5,429 $ 30,429 generally accepted accounting principles in the United States.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. — – 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 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 cash flows. The Company attempts to hedge foreign currencytransaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through short term 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 and debt in non-functional currencies to hedge foreign currency exposure, the Company’sCompany's foreign exchange policy prohibits the use of financial instruments for speculative transactions.purposes.At March 31, 2012, the$69.9$89.2 million and $62.3 million to exchange foreign currencies.currencies as of March 31, 2013 and June 30, 2012, 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 March 31, Nine months ended March 31, 2012 2011 2012 2011 (in thousands) $ (1,666 ) $ (2,352 ) $ (2,863 ) $ (2,310 ) 1,386 1,943 (708 ) 1,565 $ (280 ) $ (409 ) $ (3,571 ) $ (745 ) Quarter ended Nine months ended March 31, March 31, 2013 2012 2013 2012 (in thousands) Net foreign exchange derivative contract (gains) losses $ (2,092 ) $ (1,666 ) $ (759 ) $ 2,863 Net foreign currency transactional and re-measurement (gains) losses 2,237 1,386 1,087 708 Net foreign currency (gains) losses $ 145 $ 280 $ 328 $ 3,571 currency exchange derivative contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the euroBritish pound versus the British pound,euro, the U.S. dollar versus the euro, U.S. dollar versus the Brazilian real and other currencies versus the U.S. dollar versus other currencies.Fordollar.year-to-date period,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$2.5 million non-recurring loss in conjunction with an unfavorable forward exchange contract to purchase Brazilian reais. In mid-August, theThe Company decided to pre-fund a portion of the estimatedcontingent earnout payments associated with the acquisition of CDC acquisition.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$2.5 million loss. Further contributing to the year-to-dateprior year quarter foreign exchange loss, the Brazilian business incurred significant losses on the remeasurement of U.S. dollar denominated exposures in the first quartertransactions that were not hedged at the time. Subsequently, the Company has been including these exposures in its dailyongoing hedging activities.Interest Rates —The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure to interest rates, the Company may enter into interest rate swap hedges. In January 2008, the Company entered into an interest rate swap agreement to hedge the variability in future cash flowstheits condensed consolidated balance sheets and income statements,sheet, utilized for the risk management purposes detailed above: As of March 31, 2012 Fair Value of
Derivatives
Designated as Hedge
Instruments Fair Value of
Derivatives
Not Designated as Hedge
Instruments (in thousands) $ — $ 2 $ — $ 277 As of March 31, 2013 (in thousands) Foreign exchange contracts $ — $ 248 Foreign exchange contracts $ — $ 200 (a) All derivative assets are recorded as prepaid expenses and other current assets in the condensed consolidated balance sheet. (b) All derivative liabilities are recorded as accrued expenses and other current liabilities in the condensed consolidated balance sheet. listed in Note 6 is considered to approximate fair value, as the Company’s debt instruments are indexed to LIBOR or the prime 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, 2012: Total Quoted
prices in
active
markets
(Level 1) Significant
other
observable
inputs
(Level 2) Significant
unobservable
inputs
(Level 3) (in thousands) $ 11,847 $ 11,847 $ — $ — 2 — 2 — $ 11,849 $ 11,847 $ 2 $ — $ 11,847 $ 11,847 $ — $ — 277 — 277 — 19,739 — — 19,739 $ 31,863 $ 11,847 $ 277 $ 19,739 Total (in thousands) Assets: Deferred compensation plan investments, current and non-current portion $ 13,822 $ 13,822 $ — $ — Forward foreign currency exchange contracts 248 — 248 — Total assets at fair value $ 14,070 $ 13,822 $ 248 $ — Liabilities: Deferred compensation plan investments, current and non-current portion $ 13,822 $ 13,822 $ — $ — Forward foreign currency exchange contracts 200 — 200 — Liability for contingent consideration, current and non-current portion 13,321 — — 13,321 Total liabilities at fair value $ 27,343 $ 13,822 $ 200 $ 13,321 Total (in thousands) Assets: Deferred compensation plan investments, current and non-current portion $ 11,635 $ 11,635 $ — $ — Forward foreign currency exchange contracts 21 — 21 — Total assets at fair value $ 11,656 $ 11,635 $ 21 $ — Liabilities: Deferred compensation plan investments, current and non-current portion $ 11,635 $ 11,635 $ — $ — Forward foreign currency exchange contracts 110 — 110 — Liability for contingent consideration, current and non-current portion 16,653 — — 16,653 Total liabilities at fair value $ 28,398 $ 11,635 $ 110 $ 16,653 (current) or other non-current assets (non-current) depending on their corresponding, anticipated distributions to recipients, which are reported in accrued expenses and other current liabilities (current) or other long-term liabilities, (non-current), respectively.See Note 7, “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’ favorable or unfavorable positions.statement.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 Note 3, Comprehensive Income.quarterquarters and nine month periods months ended March 31, 20122013 and 2011 Contingent consideration for the
quarter ended March 31, Contingent consideration for the
nine months ended March 31, 2012 2011 2012 2011 (in thousands) $ 20,002 $ — $ 23,794 $ — — — — — (2,000 ) — (2,000 ) — 1,072 — 1,244 — 665 — (3,299 ) — $ 19,739 $ — $ 19,739 $ — Contingent consideration for the
quarter ended Contingent consideration for the nine months ended March 31, March 31, 2013 2012 2013 2012 (in thousands) Fair value at beginning of period $ 13,090 $ 20,002 $ 16,653 $ 23,794 Payments (61 ) (2,000 ) (4,777 ) (2,000 ) Change in fair value of contingent consideration 100 1,072 1,396 1,244 Foreign currency translation adjustment 192 665 49 (3,299 ) Fair value at end of period $ 13,321 $ 19,739 $ 13,321 $ 19,739 20122013 was $19.7$13.3 million of which $5.1$4.5 million is classified as current. The fair values of amounts owed are recorded in “current portion of contingent consideration” and “long-term portion of contingent consideration” in the Company’s condensed consolidated balance sheet. The U.S. dollar amounts of actual disbursements made in conjunctionconnection with future earnout payments are subject to change as the liability is denominated in Brazilian reais and subject to foreign exchange fluctuation risk. Also, in accordance with ASC 805, theThe 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 in fair value of contingent consideration” line item on the Company’s condensed consolidated income statement 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:a losslosses of $1.1$0.1 million and $1.4 million for the quarter and a loss of $1.2 million for the nine months ended March 31, 2012.2013, respectively. The change this quarterin the three and nine month periods is largely driven by the recurring amortization of the unrecognized fair value discount.discount and changes in actual results. In addition, volatility in the foreign exchange between the Brazilian real and the U.S. dollar has driven significant changes in the translation of thethis Brazilian real denominated liability. Although there is no contractual limit, total future undiscounted contingent consideration payments mayare anticipated to range up to $31.7$18.5 million, based on the Company’s best estimate as the earnout is based on a multiple of adjusted earnings.resellers.resellers in specialty technology markets. The Company has two reporting segments, based on geographic location. The measure of segment profit is operating income, and the accounting policies of the segments are the same as those described in Note 2 of the notes to condensedthe consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011.offers products for sale in four primary categories: (i)markets AIDC and POS equipment sold by the ScanSourceproducts through its ScanSource POS and BarcodingBarcode sales unit, (ii)unit; voice, data, video and converged communications equipment sold by thethrough its CatalystTelecom sales unit; video conferencing, telephony and (iii) ScanSourcecommunications products through its ScanSource Communications sales unitsunit; and (iv) physicalelectronic security products and wireless infrastructure products sold by the ScanSourcethrough its ScanSource Security sales unit. These products are sold toThe Company serves more than 14,50014,000 resellers and integrators of technology products that are geographically dispersed overin the United States and Canada in a pattern that mirrors population concentration.Canada. No single account represented more than 6% of the Company’s worldwide net sales for the quarters or and nine months ended March 31, 20122013 or 2011.sells to two geographic areas,markets AIDC, POS, communications and security products as follows: ScanSource Latin America aggregated withmarkets AIDC, POS, communications and security products; ScanSource POS and Barcode, Europe and offersmarkets AIDC and POS equipment as well as security and communications products, towhile communication products are marketed through its ScanSource Communications, Europe sales unit. The Company serves more than 16,00014,800 resellers and integrators of technology products.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, 2013or2012. Operating income for the international distribution segment in the quarter and nine months ended March 31, 2012 or 2011.businessreporting segment is presented below: Quarter ended March 31, Nine months ended March 31, 2012 2011 2012 2011 (In thousands) $ 541,049 $ 467,628 $ 1,699,106 $ 1,497,531 178,038 151,419 594,587 452,394 (11,204 ) (5,581 ) (32,866 ) (18,284 ) $ 707,883 $ 613,466 $ 2,260,827 $ 1,931,641 $ 935 $ 1,000 $ 2,977 $ 3,161 1,819 395 4,617 1,189 $ 2,754 $ 1,395 $ 7,594 $ 4,350 $ 21,471 $ 20,089 $ 77,501 $ 70,797 14 5,391 7,699 13,069 $ 21,485 $ 25,480 $ 85,200 $ 83,866 $ 3,342 $ 4,354 $ 7,670 $ 9,879 1,333 128 2,517 319 $ 4,675 $ 4,482 $ 10,187 $ 10,198 March 31, 2012 June 30, 2011 (in thousands) $ 792,317 $ 785,057 415,224 397,131 $ 1,207,541 $ 1,182,188 In prior periods, the Company included its intercompany investment and funding arrangements related to foreign subsidiaries in its North American segment assets and the offsetting liabilities and elimination entries were inappropriately included as a reduction to the international segment’s assets. The effectfollows: 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 or results of operations. See Note 4operations or cash flows.discussion ofthe CDC acquisition, several pre-acquisition contingencies associated withwere 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 CDC. March 31, 2013 June 30, 2012 (in thousands) Assets Prepaid expenses and other current assets $ 5,569 $ 3,886 Other non-current assets $ 3,196 $ 5,112 Liabilities Other current liabilities $ 5,569 $ 3,886 Other long-term liabilities $ 3,196 $ 5,112 $2.3$1.1 million and $2.1$1.3 million of total gross unrecognized tax benefits including interest as of March 31, 20122013 and June 30, 2011, respectively.2012. Of this total at March 31, 2013, approximately $1.9$0.7 million and $1.8 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate as of March 31, 2012 and June 30, 2011, respectively.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.fewcertain 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 2008.continuing practicepolicy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2012,2013, the Company had approximately $1.0$1.1 million accrued for interest and penalties, $0.1 million of which was a current period expense.amount. During the quarter, a tax liability of approximately $0.4 million was reversed in Brazil due to the lapse of the statute of limitations.a $0.4 millionstate income tax benefit recognized intaxes.March 2012 quarter.(12) Subsequent EventsIn accordance with ASC 855,Subsequent Events,quarter, the Company has evaluated events occurring betweenreviewed and modified its policy toward permanently reinvested foreign earnings. Prospectively, the endCompany will provide for U.S. income taxes for the earnings of the most recent quarter and the dateits 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 were filed withstatements.Securities and Exchange Commission (“SEC”).OverviewScanSourceScanSource,, Inc., together with its subsidiaries (the “Company”), is a leading wholesale distributor of specialty technology products, providing value-added distribution services to resellers.resellers in specialty technology markets. The Company distributes approximately 100,000 products worldwide. The Company has two geographic distribution segments: onethe North American distribution segment serving North Americathe United States and Canada from ourthe Southaven, Mississippi distribution center, and an international segment currently serving Latin America and Europe from distribution centers located in Florida, Mexico and Brazil, and Belgium.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 offersmarkets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products for sale in four primary categories: (i) AIDC and POS equipment sold by the ScanSourcethrough its ScanSource POS and BarcodingBarcode sales unit, (ii)unit; voice, data, video and converged communications equipment sold by thethrough its CatalystTelecom sales unit; video conferencing, telephony and (iii) ScanSourcecommunications products through its ScanSource Communications sales unitsunit; and (iv) physicalelectronic security products and wireless infrastructure products sold by the ScanSourcethrough its ScanSource Security sales unit. The international distribution segment markets AIDC, POS, communications and security products as follows: ScanSourcethrough its ScanSource Latin America markets AIDC, POS, communications and security products; ScanSource Europe marketssales unit; AIDC and POS products;products through its ScanSource POS and Barcode, Europe sales unit; and communication products are marketed through its ScanSourceScanSource Communications, Europe sales unit in Europe.unit.centrally locatedcentrally-located distribution center located in Southaven, Mississippi, near the FedEx hub. The single warehouse and strong management information system form the cornerstone of the Company’s cost-driven operational strategy. This strategy has been expandedEurope.Our objective$0.7 million in reserves specific to accounts receivable in this country.grow profitable salesincur, as a result of Avanade's misconduct. The Company had engaged a new systems integration partner, Tata Consultancy Services (“TCS”), to replace Avanade.technologies we distribute. In doing so,third quarter. 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 management team faceslegacy ERP systems continue to run our business successfully.compete.We have continued investing in our international distribution segment, particularly in Europe, by temporarily accepting lower than normal returnscompete in the business in an effort to gain market share and customers. In the current quarter, our results in the international distribution segment were weaker than expected as the markets in Europe and Latin America seemed to contract and competitive pressures intensified. While certain international markets are volatile in the current macroeconomic environment, especially parts of Europe, we are continuing to invest in this business to position the Company favorably against our competitors.We are in the process of the design and develop a new Enterprise Resource Planning (“ERP”) system that is intended to be used globally and provide operational efficiencies. We have recently received a project study from a third party service provider, which indicates that the project will take longer to implement and exceed our previously disclosed cost estimates. Based on this study, we have determined that the new system will not be implemented during calendar 2012, and we are developing the appropriate plans to move forward. During the year, we have consolidated the warehousing function of our German communications business into our Belgian operations. This consolidation gives us logistical efficiencies and service level advantages such as greater flexibility and scalability. We committed funds to Brazil to provide for future contingent consideration payments owed to the former shareholders of CDC, and we are continuously working to add new vendors and grow existing vendors in our various geographies. Also, we continue to evaluate strategic acquisitions to enhance our technological and geographic portfolios. This is our third full quarter of results with our most recent acquisition, CDC Brasil, S.A. (“CDC”). CDC is Brazil’s leading distributor of AIDC and POS solutions.returnReturn on invested capitalInvested Capital (“ROIC”) in evaluating and monitoring financial condition and operating performance. We use ROIC, a non-GAAP measure, to assess efficiency at allocating capital under our control to generate returns. ROIC is computed by the Company as earnings beforenet income plus interest expense, income taxes, depreciation and amortization (“EBITDA”) annualized by calendar days and divided by invested capital. Invested capital is defined as average equity plus daily average funded debt for the period.20122013 and 2011: Quarter ended March 31, 2012 2011 13.5 % 18.2 % Quarter ended March 31, 2013 2012 Return on invested capital ratio, annualized 13.3 % 13.5 % communicatedunderstood, 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, 2012 2011 (in thousands) $ 14,756 $ 16,534 7,049 8,530 254 429 2,754 1,395 $ 24,813 $ 26,888 2012 2011 (in thousands) $ 616,103 $ 535,649 642,450 562,072 629,277 548,861 111,247 51,129 $ 740,524 $ 599,990 13.5 % 18.2 % 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 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 15,675 111,247 Invested capital (denominator) $ 719,111 $ 740,524 13.3 % 13.5 % (1)(a) Average funded debt is calculated as the daily average amounts outstanding on our revolvingshort-term and long-term debt facilities.interest-bearing debt.(2)(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 year quarter and 90 days in the prior year quarter.quarters, respectively.13.5%13.3% for the quarter, down from 18.2% for13.5% in the same quarter of the prior year quarter.year. The decrease in EBITDA is largely the result of lower gross margins globallysales volumes and an increase in SG&A investment in Europe. Additionally,expenses related to bad debt expenses and the restructuring of our European operations.year, we incurred a $1.1 million charge forperiod results from currencies other than the change in fair value ofU.S. dollar using the CDC earnout, which was not in prior year. In the prior year, we incurred a nonrecurring $2.4 million charge for the funding of a supplemental executive retirement plan (“SERP”). Invested capital has grown significantlycomparable weighted average foreign exchange rates from the prior year quarter end. The increaseperiod. This information is partially attributableprovided to borrowings onview financial results without the revolving credit facility for the purchaseimpact of CDC and a $22 million cash transfer to our Brazilian subsidiary to pre-fund future earnout payments.Results of Operations20122013 and 2011,2012, respectively: Quarter ended March 31, 2012 2011 $ Change % Change (in thousands) $ 529,845 $ 462,047 $ 67,798 14.7 % 178,038 151,419 26,619 17.6 % $ 707,883 $ 613,466 $ 94,417 15.4 % Nine months ended March 31, 2012 2011 $ Change % Change (in thousands) $ 1,666,240 $ 1,479,247 $ 186,993 12.6 % 594,587 452,394 142,193 31.4 % $ 2,260,827 $ 1,931,641 $ 329,186 17.0 % On a comparative basis, worldwide net sales for the quarter ended March 31, 2012 increased 15.4% to $707.9 million and 17.0% to $2.3 billion year-to-date. For the current quarter, our growth came from our sales units in North America and the addition 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 )% includesconsists of net sales to technology resellers in the United States and Canada that originate from our centralized distribution facility located in Southaven, Mississippi.Canada. For the quarter ended March 31, 2012,2013, net sales increased overdecreased $21.5 million or 4.0%. For the comparative prior year period by $67.8 million or 14.7%nine months ended March 31, 2013, and comparative net sales for the year-to-date period increased by $187.0decreased $64.0 million or 12.6%3.8%.barcoding and securitybarcode product revenues have increased by 13.0%lines experienced modest growth in sales in the current three and 8.6% overnine month periods compared to the comparableprior year. Meanwhile, the ScanSource Security sales unit had high single digit year-over-year sales growth for the quarter, and nine months ended March 31, 2011, respectively. The increase in POS and barcoding products waslargely driven by big dealsvendors such as Ruckus Wireless and strong scanner sales. Additionally, we have continued to grow our security business with growth coming from video surveillance and wireless products.to our customers – the CatalystTelecom sales unit and the ScanSource Communications sales unit.ScanSource Communications. The combined net sales of these units increaseddecreased by 16.6% and 17.1% over10.3% from the comparableprior year quarter and 11.1% from the prior year nine months month period. These decreases were largely attributable to lower Avaya Enterprise and Juniper sales. Our distribution agreement with Juniper Networks ended March 31, 2011, respectively. Aruba, Juniper and ShoreTelin September 2012. These declines however, were partially offset by increased volumes with our wireless communications products were very strong this quarter, which further contributed to another quarter of double-digit growth in these sales units.with vendors such as Aruba.2012,2013, net sales for this segment increaseddecreased by $26.6$3.5 million or 17.6%1.9% from the prior year quarter. On a constant currency basis, net sales were flat with the prior year quarter. Net sales were down in Europe from the prior year quarter primarily due to the loss of Juniper revenues and $142.2weaker deal volume in Germany, both of which affected our Communications business. Meanwhile, Latin America POS & Barcode business unit experienced a decrease in revenues from the prior year driven by difficulties in selling products in Venezuela and Argentina due to economic turmoil in both countries.31.4% for the quarter and year-to-date periods, respectively.5.5%. The sales increasedecrease over the prior year quarter and nine monthsmonth period is largelyprimarily driven by the incremental sales in Brazil with the CDC acquisition. We have seen a decline in current quarter sales in both Latin America and Europe as larger projects seem to be delayed. Additionally, our European business has been experiencing pricing pressure as the economy has been struggling in recent months. For the quarter, foreign currency exchange fluctuationstranslation which had a $5.1$37.7 million unfavorable impact on our net sales. However, foreign exchange had a $4.3 million favorable impact on the year-to-date period from a weaker average exchangesales for the U.S. dollar against the euro. Excluding the impact of foreign exchange rate fluctuation, theperiod ended March 31, 2013. On a constant currency basis, net sales increaseincreased $5.2 million or 1% over the prior year nine month period. Our international segment's growth was 20.9%driven by contributions from our Brazilian and 30.5% for the quarter and nine months, respectively, mainly due to the acquisition of CDC.20122013 and 2011,2012, respectively: Quarter ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 50,187 $ 48,512 $ 1,675 3.5 % 9.5 % 10.5 % 19,081 17,317 1,764 10.2 % 10.7 % 11.4 % $ 69,268 $ 65,829 $ 3,439 5.2 % 9.8 % 10.7 % Nine months ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 164,176 $ 150,794 $ 13,382 8.9 % 9.9 % 10.2 % 64,021 49,143 14,878 30.3 % 10.8 % 10.9 % $ 228,197 $ 199,937 $ 28,260 14.1 % 10.1 % 10.4 % 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 % 3.5%2.3% or $1.7$1.2 million and 8.9%decreased 3.7% or $13.4$6.0 million for the quarter and nine months ended March 31, 2012,2013, respectively. As a percentage of net sales for the North American distribution segment, our gross profit decreased 103 basis pointsincreased to 9.5%10.1% from 9.5% in the comparativeprior year quarter and 34 basis pointsremained flat at 9.9% compared to 9.9% from the comparative year-to-dateprior nine month period. The decreaseincrease in margin percentage is mainlyprimarily due to changes in product and customer mix andas well as timing of vendor incentive programs.increased by 10.2%decreased 8.3% or $1.8$1.6 million and 30.3%7.8% or $14.9$5.0 million for the quarter and nine months ended March 31, 2012, respectively. The increase in gross profit is primarily due2013, respectively, compared to the addition of CDC. Gross profit, expressed asprior periods. As a percentage of net sales for the international distribution segment, our gross profit decreased 72 basis points to 10.0% from 10.7% and 9 basis points to 10.8% over in the comparativeprior year quarter and year-to-date period, respectively. The decreaseto 10.5% from 10.8% in the current quarterprior nine month period. The decline in gross margin percentage is largelyprimarily due to weaker demand and competitive pricing pressure in Europe and Latin America, partially offset by higher margin percentage earned by CDC. 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 % 2012 and 2011, respectively: Quarter ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 46,711 $ 40,349 $ 6,362 15.8 % 6.6 % 6.6 % 1,072 — 1,072 100.0 % 0.2 % 0.0 % $ 47,783 $ 40,349 $ 7,434 18.4 % 6.8 % 6.6 % Nine months ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 141,753 $ 116,071 $ 25,682 22.1 % 6.3 % 6.0 % 1,244 — 1,244 100.0 % 0.0 % 0.0 % $ 142,997 $ 116,071 $ 26,926 23.2 % 6.3 % 6.0 % Selling, general and administrative2012. SG&A expenses increased 15.8% or $6.4 million and 22.1% or $25.7for the March 2013 quarter included approximately $1.2 million for restructuring costs associated with our Communications business unit in Europe. In addition, 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 quarter and nine months endedallowance for bad debts increased to $31.0 million at March 31, 2013 from $29.8 million at December 31, 2012, respectively.while accounts receivable declined. The primary drivers in the increase are the incremental expenses relatedcompared to CDC, additional headcount worldwide and continued investment in our international distribution segment. Conversely, the prior year quartera $2.4$2.1 million charge for the funding of the SERP. a $1.1 million loss on the change in fair value adjustment losses of the contingent consideration. The loss is$0.1 million and $1.4 million, respectively. These losses are primarily the result of the lapserecurring amortization of time in the discount period used for theunrecognized fair value calculation, as well as variance betweendiscount and changes in actual and forecasted results for fiscal 2012. For the nine months ended March 31, 2012, we incurred a $1.2 million loss for the change in fair value. The year-to-date loss is partially offset by the $0.7 million gain recorded in the December 2011 quarter as a resultresults.20122013 and 2011,2012, respectively: Quarter ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 21,471 $ 20,089 $ 1,382 6.9 % 4.1 % 4.3 % 14 5,391 (5,377 ) -99.7 % 0.0 % 3.6 % $ 21,485 $ 25,480 $ (3,995 ) -15.7 % 3.0 % 4.2 % Nine months ended March 31, $ Change % Change % of Sales March 31, 2012 2011 2012 2011 (in thousands) $ 77,501 $ 70,797 $ 6,704 9.5 % 4.7 % 4.8 % 7,699 13,069 (5,370 ) -41.1 % 1.3 % 2.9 % $ 85,200 $ 83,866 $ 1,334 1.6 % 3.8 % 4.3 % 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 % 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 % 6.9%16.3% or $1.4$3.5 million and 9.5%decreased 5.5% or $6.7$4.3 million for the quarter and nine months ended March 31, 2012. In from the prior year quarter we incurred a $2.4 million charge to fund the SERP, contributing to the increase in operating income for the quarter. The increase year-to-date is driven by additional gross margin dollars related to increased net sales.and nine months, respectively. Operating income as a percentage of net sales increased to 4.9% and decreased to 4.1% and 4.7%4.6% for the quarter and nine months ended March 31, 2012. For both comparable periods,2013, respectively. The increase in operating income percentage in North America for the current quarter is unfavorably affected byprimarily due to changes in product and customer mix as well as timing of vendor rebate programs and lower gross margin percentage described earlier.income decreased $5.4losses totaled $4.2 million from the comparative prior year quarter and nine month period. The decrease is attributable to weaker results in the current quarter and a $0.4$1.8 million nonrecurring adjustment of amortization expense related to increased CDC intangible assets from the finalization of purchase accounting. The change in fair value of contingent consideration is included in this segment, in which we incurred losses of $1.1 million and $1.2 million for the current quarter and nine month periods, respectively. Our gross margins decreased from lower sales volume and pricing pressures as a result of economic volatility and competition in markets outside of Brazil. Also, selling, general and administrative expense is up in the international distribution segment from increased headcount, investment in our European business and the acquisition of CDC. As a percentage of sales, operating income decreased to 0.0% and 1.3% for the quarter and year-to-date period.nine months ended March 31, 2013, respectively, compared with operating income for the prior year periods. The decreasedecreases internationally are primarily due to the increases in operating income percentage reflects pricing pressure in Europe,expenses described earlier. For the current quarter, decreases are primarily due to margin issues described above, higher operating expenses as we continue to invest in international marketsbad debt expense and the changerestructuring charges in fair value adjustmentthe 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 CDC contingent consideration. (income) for the quarters and nine months ended March 31, 20122013 and 2011,2012, respectively: Quarter ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 254 $ 429 $ (175 ) -40.8 % 0.0 % 0.1 % (780 ) (313 ) (467 ) 149.2 % -0.0 % -0.1 % 280 409 (129 ) -31.5 % 0.0 % 0.1 % (74 ) (109 ) 35 -32.1 % -0.0 % -0.0 % $ (320 ) $ 416 $ (736 ) -176.9 % 0.0 % 0.1 % Nine months ended March 31, $ Change % Change 2012 2011 2012 2011 (in thousands) $ 1,490 $ 1,182 $ 308 26.1 % 0.0 % 0.1 % (2,233 ) (918 ) (1,315 ) 143.2 % -0.1 % -0.0 % 3,571 745 2,826 379.3 % 0.2 % 0.0 % (208 ) (253 ) 45 -17.8 % -0.0 % -0.0 % $ 2,620 $ 756 $ 1,864 246.6 % 0.1 % 0.0 % 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 % Nine Months ended March 31, % of Net Sales
March 31, 2013 2012 $ Change % Change 2013 2012 (in thousands) Interest expense $ 356 $ 1,490 $ (1,134 ) (76.1 )% 0.0 % 0.0 % Interest income (1,648 ) (2,233 ) 585 (26.2 )% (0.1 )% (0.1 )% Net foreign exchange (gains) losses 328 3,571 (3,243 ) (90.8 )% 0.0 % 0.2 % Other, net (294 ) (208 ) (86 ) 41.3 % (0.0 )% (0.0 )% Total other (income) expense, net $ (1,258 ) $ 2,620 $ (3,878 ) (148.0 )% (0.1 )% 0.1 % agreements.borrowings, as well as non-utilization fees. Interest expense for the quarter and nine months ended March 31, 20122013 was $0.3$0.1 million and $1.5$0.4 million, respectively. Interest expense iswas down 40.8%59.8% and 76.1% from the prior year quarter and nine months, respectively, largely from capitalizing a portion of our interest expense to our ERP project, included in property and equipmentdecreased borrowings on our condensed consolidated balance sheet. On October 11, 2011, we amended and restated our previous $250$300 million revolving credit facility.20122013 was $0.8$0.5 million and $2.2$1.6 million respectively. Interest income increased 149.2%, respectively, and 143.2% over the prior year quarter and nine month period, respectively. The increase is largely the result of interest earned on cash balances in Brazil from a $22 million capital infusion to fund future earnout payments to CDC’s former shareholders. As yields in Brazil are significantly higher than yields in the United States, we have been collecting significantly moreincludes interest income since the date of the funds transfer in September 2011. To a much lesser extent, interest income is generated on longer-term interest bearing receivables and interest earned on cash and cash-equivalent balances on hand outsidecash-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 Brazil. gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the euroBritish pound versus the British pound,euro, the U.S. dollar versus the euro, the U.S. dollar versus the Brazilian real, andthe Canadian dollar versus the U.S. dollar and other currencies versus other currencies.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 offor speculative transactions.For the year-to-date period, the majority ofwere associated with exposures betweenfor the U.S. dollarquarter and Brazilian real.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 September 2011,the prior year, we incurred a $2.5 million non-recurring loss in conjunctionconnection with an unfavorable forward exchange contract to purchase Brazilian reais. In mid-August,August 2011, we decided to pre-fund a portion of the estimated earnout payments associated with the CDC acquisition.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 year-to-dateprior year quarter foreign exchange loss, theour Brazilian business incurred significant losses on the remeasurement of U.S. dollar denominated exposures in the first quartertransactions that were not hedged at the time. Subsequently, we have been including these exposures in our dailyongoing hedging activities.Incomenine months ended March 31, 2013, income tax expense was $7.0$7.2 million and $28.1$24.7 million for the quarter and year-to-date, respectively. The effective tax rates for the same periods were 32.3% and 34.0%, respectively. The effective tax rate for the prior yearsame two periods was 34.0%. The effective tax rates in the quarter and prior year-to-date wasnine months ended March 31, 2012 were 32.3% and 34.0% and 35.2%, respectively. The decreaseincrease in the effective tax rate from the prior year period largely reflectsquarter is due primarily to a changing geographical mix of income to lower rate tax jurisdictions and a $0.4 million discrete tax benefit recognized during the current quarter.Net IncomeThe following table summarizes our net income for the quarters and nine months ended March 31, 2012 and 2011, respectively: Period ended
March 31, $ Change % Change % of Net Sales
March 31, 2012 2011 2012 2011 (in thousands) $ 14,756 $ 16,534 $ (1,778 ) -10.8 % 2.1 % 2.7 % $ 54,503 $ 53,862 $ 641 1.2 % 2.4 % 2.8 % The decrease from the comparative quarter and increase in year-to-date net income is attributable to the changes in operations, as discussed above.AcquisitionsOn April 15, 2011, the Company, through its wholly-owned subsidiary, ScanSource do Brasil Participações LTDA, completed its acquisition of 100% of the shares of CDC Brasil S.A, Brazil’s leading distributor of AIDC and POS solutions. CDC was a privately-held, value-added distributor that sold only to resellers. This acquisition gives the Company an established presence in Latin America’s largest specialty technology market and will allow the Company to more easily scale its Latin American operations.We completed the purchase accounting for the acquisition this quarter. Please see Note 4 to our condensed consolidated financial statements regarding the changes made during the quarter.The acquisition was completed with an initial cash payment on the acquisition date with five remaining paymentscumulative adjustment in the formprior year quarter to reduce tax expense.The Company’stheour $300 million revolving credit facility secured and unsecured(the “Revolving Credit Facility”), borrowings under our industrial development revenue bond, and borrowings under our European subsidiary’s revolving credit facility.€6 million line of credit. 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, as our sales volume increases, our net investment in working capital needs typically increases,increase, which, in general, results in decreased cash flow from operating activities. Conversely, when sales volume decreases, our net investment in working capital needs typically decreases,decrease, which, in general, results in increased cash flow from operating activities.The Company’s$34.3$93.9 million at March 31, 2012,2013, compared to $28.7$29.2 million at June 30, 2011,2012, of which $30.6$24.1 million and $10.9$18.7 million were held outside of the United States as of March 31, 20122013 and June 30, 2011,2012, respectively. There was a significant increase in cash held outside of the United States due to a $22 million cash transfer to our Brazilian subsidiary to provide for future earnout payments to the former shareholders of CDC. We transferred the cash in September 2011 to our Brazilian subsidiary in order to mitigate foreign exchange rate risk.The Company’s currentPrior to this quarter, management’s intent iswas to permanently reinvest these funds in our businesses outside the United States to continue to fund growth in our international operations. Furthermore,During the quarter, we reviewed and modified our current plans do not require repatriationpolicy toward permanently reinvested foreign earnings. Prospectively, the Company will provide for U.S. income taxes for the earnings of fundsits Canadian subsidiary. Earnings from our international operationsall other geographies will continue to fund operations in the United States.be considered retained indefinitely for reinvestment. If these funds were needed in the operations inof the United States, the Companywe would be required to record and pay significant income taxes to the United States to repatriateupon repatriation of these funds.Our working capital increased to $567.8 million at March 31, 2012$532.2 million at June 30, 2011. The $35.6 million change in working capital is primarily due to increased cashoperating activities and inventory and lower accounts payable, partially offset by lower accounts receivable. These working capital investments maintain our commitment to extend reasonable credit terms to our resellers as the channel continues to grow and to strategically stock inventory to accommodate anticipated reseller demand of our vendors’ products. In previous years, increased stock levels have been required due to product supply chain constraints, but more recently, increased levels of certain products have been maintained as their lead times continue to be long. Wesales volumes. Net sales are proactively working at reducing our inventory levels this quarter and have reduced inventory by $14.7down $96.5 million from the December quarter-end.As of March 31, 2012, there was $41.5 million outstanding on the Company’s $300 million revolving credit facility. There were no borrowings on the Company’s €6 million revolving credit facility in Europe.Our number of day’s sales in receivables (DSO) was 57 days at March 31, 2012, compared to 57 and 56 days in the sequential and comparative prior year quarters, respectively, whichwithin our normal rangedown $58.9 million. As a result, cash from operating activities increased to an inflow of expectations.Inventory turned 5.0 times during the quarter, compared to 5.5 and 5.6 times$76.0 million versus an inflow of $25.1 million in the prior year and sequential quarters, respectively. We had 15 paid-for inventory days at March 31stnine, down from 18 days at the same time last year, and up from 11 days at the end of second quarter. Inventory levels are down $14.7 million from the sequential quarter. However, levels are still up $100.7 million from March 31, 2011, as the Company has built up inventory from vendor incentives over the three sequential quarters and longer lead times. We are continuing our efforts to properly size our inventory levels and reduce our carrying costs, without risking sales opportunities with our resellers. month period.Cash provided by operating activities was approximately $25.1 million for the nine months ended March 31, 2012, compared to $1.5 million of cash used in the comparative prior year period. In the prior year, net sales were growing at a rate of 26% without the benefit of CDC, versus 17% in the current year with CDC. Prior year sales growth required higher net investment in working capital, which uses more cash in our operating activities. As sales growth has slowed compared to the prior year, ourslowed accordingly.in the process of the design and development ofdeveloping a new enterprise resource planning (“ERP”)ERP system to standardize our processes throughout the world. The Company has spentand have incurred approximately $30.2$41.4 million on the project from inception through March 31, 2012.2013. Of the total spend, $24.7amount 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 form of capital expenditures. We anticipate ERP spendfourth quarter 2013 while our project is under review.quarter ended June 30, 2012U.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 be approximately $3.5 million. We have recently receivedincur, 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 study from a third party service provider, which indicatesplan 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 will take longercost 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 implement and exceedspend less than half of what we spent in the third quarter. Meanwhile, our previously disclosed cost estimates, which at the high end was $38.5 million. Based on the study, we have determined that the new system will not be implemented during calendar 2012, and we are developing the appropriate planslegacy ERP systems continue to move forward. The project is being financed with cash provided from operations andrun our revolving credit facility.quarternine months ended March 31, 20122013 was $10.2$4.5 million and $10.2 million for the nine months ended March 31, 2012 and 2011, respectively. The capital spending in both years is primarily related to ERP related expenditures.In addition to our domestic revolving credit facility, the Company has a €6.0 million secured revolving credit facility utilized by our European operations which bears interest at the 30 day Euro Interbank Offered Rate (“EURIBOR”) plus a spread of 1.50% at March 31, 2012. At the quarter end, there was no outstanding balance on this facility,, compared to $3.2$10.2 million outstanding at June 30, 2011. This facility is secured by used in the assetsprior year period. Current and prior year investing cash flows are primarily attributable to the investment in our new ERP system. refinanced the $250 million revolving credit facility, due on September 28, 2012. We entered into a five-year, $300 million multi-currency senior secured revolving credit facility pursuant to the terms of an Amended and Restated Credit Agreement (the “New Credit“Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and a syndicate of lenders named therein. The New Credit 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 commitments for the incremental capacity from existing or new lenders. We incurred $1.4 million in debt issuance costs that were capitalized to other assets, including identifiable intangible assets on the condensed consolidated balance sheet, which are being amortized on a straight-line basis through the maturity date of the New Credit Agreement on October 11, 2016.NewRevolving Credit Agreement,Facility, other than swingline loans, shall bear interest at a rate equal to a spread over the London Interbank Offered Rate (“LIBOR”) or prime rate depending upon the Company’sour ratio of total debt (excluding accounts payable and accrued liabilities) to EBITDA,, measured as of the end of the most recent year or quarter, as applicable,to adjusted earnings before interest expense, taxes, depreciation and amortization (“EBITDA”), for which financial statements have been delivered to the Lendersmost recently completed four quarters (the “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 1.25% for prime rate-based0.40%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings under the NewRevolving Credit AgreementFacility are guaranteed by substantially all of theour domestic assets of the Company as well as certain foreign subsidiaries determined to be material under the NewRevolving Credit AgreementFacility and a pledge of up to 65% of capital stock or other equity interest in each Guarantor (as defined in the New Credit Agreement).Guarantor. We were in compliance with all covenants under the credit facilityRevolving Credit Facility as of March 31, 2012.We have significantly increased our borrowing activity on2013revolving credit facility. Amounts outstanding at the end of the quartersnine months ended March 31, 2012 and 2011 were $41.5 million and $2.1 million, respectively. We had $258.5 million and $247.9 million available for additional borrowings at March 31, 2012 and 2011, respectively. The average daily balance was $92.3 million and $9.5 million for the nine months ended March 31, 2012 and 2011, respectively. In the current nine month period, we have increased our usage of our revolving credit facility to support increased sales volumes, grant the appropriate credit to our resellers, expand our inventory levels to support longer lead times and capitalize on favorable vendor pricing. Additionally, we transferred $22 million to our Brazilian bank account in September 2011 in order to pre-fund future earnout payments to the previous shareholders of CDC. Timing of payments to vendors may cause temporary spikes in borrowings. These borrowings are generally repaid as soon as cash flow permits. Interest expense associated with these borrowings and the average outstanding daily debt are disclosed in more detail in the discussion of Total Other Expense (Income) and the Return on Invested Capital (ROIC) calculation presented earlier in this report.In the current nine months,2013$7.4$6.8 million, in comparison with cash provided of $7.5to $7.4 million in the comparative prior year period. The change in cash used in financing activities is driven byprimarily 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$25.0 million unsecured note payable due on September 28, 2012 and the first installment paid on the CDC earnout of $2.0 million. These paymentspayable.partially offset by increasedno outstanding borrowings on our $300 million revolving credit facility as of March 31, 2013and cash generated from the exercise of stock options.June 30, 2012. On$1,133.0$515.3 million and repaid $515.9 million on our Revolving Credit Facility in the nine months ended March 31, 2013. In the prior year-to-date period, we borrowed $1,133.0 million and repaid $1,117.3 million and additionally paid $1.4 million of debt issuance costs. The average daily balance on the revolving credit facilityRevolving Credit Facility was $12.5 million and $92.8 million for the nine months ended March 31, 2013 and 2012, respectively. There were no standby letters of credits issued and repaid $1,117.3outstanding as of March 31, 2013, leaving $300 million during the same period. available for additional borrowings.we paid $1.4to our Revolving Credit Facility, a subsidiary of the Company has a €6.0 million for debt issue costs in conjunction with line of credit, which is secured by the amendment and restatementassets of our revolvingEuropean operations and is guaranteed by ScanSource, Inc. This agreement can be withdrawn by the lender with minimal notice. Our subsidiary line of credit facility. In the prior year, we borrowed $433.6 million on the revolving credit facility and repaid $432.3 million during the comparative nine month period.On January 4, 2008, we entered into an interest rate swap with a notional amount of $25 million and designated this instrument as a cash flow hedge of our exposure to variability in future cash flows with the associated note payable. Under the terms of the swap, we paid a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and received payments from a counterparty based on 30 day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011. On September 28, 2011, the interest rate swap expired and the fair value of the interest rate swap and accumulated other comprehensive income was reduced to zero. We have not entered into another interest rate swap since the expiration.On August 1, 2007, we 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 our Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accruesbears interest at the 30-day LIBOR rateEuro Interbank Offered Rate (“EURIBOR”) plus a spread ranging from 0.85%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 termsinterest rate spread and commitment fee rates related to the €6.0 million line of credit refer to 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. TheLeverage Ratio as defined by our Revolving Credit Facility. There was no outstanding balance on this facility was $5.4 million as of at March 31, 2012,2013 and the effective interest rate$4.3 million was 1.09%outstanding at June 30, 2012. We were in compliance with all covenants associated with this agreement as of March 31, 2012.On April 15,through our wholly-owned subsidiary, ScanSource do Brasil Participações LTDA, we completed the acquisition ofacquired all of the shares of CDC Brasil, S.A. The purchase price was partially paid on April 15, 2011, with an initial payment of $36.2 million, net of cash acquired, and assumption of working capital payables and debt, and variable annual payments through June 30,October 2015, based on CDC’sCDC's annual financial results. As of March 31, 2013, we have $13.3 million recorded for the contingent earnout obligation, of which $4.5 million is classified as current. Future contingent earnout payments will be funded by cash on hand and our existing revolving credit facility. As of March 31, 2012, we have $19.7 million accrued for future earnout payments, of which $5.1 million is classified as current. Although there is no contractual limit, future undiscounted contingent consideration payments may range up to $31.7 million, based on our best estimate as the earnout is based on a multiple of adjusted earnings as defined in the Share Purchase and Sale Agreement.Management believesRevolving Credit Facility.the Company’sour credit agreements, will provide sufficient resources to meet the Company’s present and future working capital and cash requirements for at least the next twelve months.As discussed above, we amended our revolving credit facility by entering into the New Credit Agreement on October 11, 2011, and recently we have increased our borrowing activity on the revolving credit facility. Except with respect to these changes discussed in detail above, there29, 2011, other than those which occur in the ordinary course of business.condensed consolidatedConsolidated Financial Statements in our Annual Report on Form 10-K for the year ended June 30, 2012 for a complete listing of our significant accounting policies.statements.maywill 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 termlong-term debt and subsidiary line of credit for the quarter ended March 31, 20122013 would have resulted in a $0.6$0.1 million increase or decrease, respectively, in pre-tax income for the period.ToCompany’sCompany's variable rate long-term debt,debt. At March 31, 2013, the Company had implemented anno interest rate risk management strategy that incorporated the use of an interest rate swap designated as a cash flow hedge to minimize the significant unplanned fluctuationsswaps in earnings caused by interest rate volatility. The Company’s use ofplace. If used, derivative instruments hadhave 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 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 may change.changing. The Company soughtseeks to lessen such risks by establishinghaving established a policy to identify, control, and manage market risks which arosemay arise from changes in interest rates, as well as limiting its counterparties to major financial institutions. The interest rate swap expired on September 28, 2011, and was not renewed due to the subsequent payment of the related $25 million promissory note from funds obtained through the New Credit Agreement entered into on October 11, 2011.the translation of functional currency balances of foreign subsidiaries, inter-company loans with foreign subsidiaries and transactions denominated in non-functional currencies.currencies and intercompany loans with foreign subsidiaries. In the normal course of the business, foreign exchange risk is managed by 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. In the normal courseminimizereduce 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 uponon balance sheet exposures and, in certain foreign currencies, our forecasted purchases and sales denominated in certain foreign currencies.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 (income) expense.marked to marketmarked-to-market with changes in their values recorded in the condensed consolidated income statementsstatement each period. The underlying exposuresCompany's foreign currencies are denominated primarily in British pounds, euros, Mexican pesos, Brazilian real and Canadian dollars and Brazilian reais.dollars. At March 31, 2012,2013, the fair value of the Company’s currency forward contracts outstanding was a net payablereceivable of $0.3less than $0.1 million. The Company does not utilize financial instruments for trading or other speculative purposes. and, Chief Financial Officer (“CFO”), and Principal Accounting Officer (“PAO”) of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2012.2013. Based on that evaluation, the Company’s management, including the CEO, CFO and CFO,PAO, concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2012.2013. During the quarter and nine months ended March 31, 2012,2013, 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. including our quarterly reports on Form 10-Q for the quarters ended September 30, 2011 and December 31, 2011, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year-ended June 30, 20112012 and discussed in Part II, Item 1A. . “Risk Factors” in our Quarterly Report on Form 10-Q for the quartersquarter ended September 30, 2011 and December 31, 2011,2012, 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. In the current quarter, we have modified two existing risk factors and added another risk factor regarding the design, development and implementation of a new enterprise resource planning system. Please see these risk factors below:People – The departure, transition or replacement of key personnel could significantly impact results of our operations. If we cannot continue to hire and retain high quality employees, our business and financial results may be negatively affected.Our operating results could be adversely affected by increased competition for employees, higher employee turnover, or increased salary and benefit costs. Like most businesses, our employees are important to our success and we are dependent in part on our ability to retain the services of our key management, sales, IT, operational, finance and administrative personnel. We have built our business on a set of core values and we attempt to hire employees who are committed to these values. We want to hire and retain employees who will fit our culture of providing exceptional service to our vendors and customers. In order to compete and to continue to grow, we must attract, retain, and motivate employees, including those in executive, senior management, sales, marketing, logistics, technical support and other operating positions.Many of our employees work in small teams to provide specific services to vendors and customers. They are trained to develop their knowledge of vendor products, programs and practices, and customer business needs, as well as to enhance the skills required to provide exceptional service and to manage our business. As they gain experience and develop their knowledge and skills, our employees become highly desired by other businesses. Therefore, to retain our employees, we have to provide a satisfying work environment and competitive compensation and benefits. If our costs to retain our skilled employees increase, then our business and financial results may be negatively affected.Our continued growth is also dependent, in part, on the skills, experience and efforts of our senior management, including but not limited to, Michael Baur, our Chief Executive Officer. We may not be successful in retaining the members of our senior management team or our other key employees. While we have entered into employment agreements with key executives and have obtained a key person life insurance policy on our CEO’s life, the loss of the services of Mr. Baur or any member of our senior management team could also have an adverse effect on our business, financial condition and results of operations. Recent departures and retirement announcements of senior management has resulted in the transition of many management positions within our company. The process of identifying management successors creates uncertainty and could become a distraction to our senior management and the Board. We may not be successful in attracting qualified candidates to replace key positions when necessary. As a result, the transition process and the identification and recruitment of candidates to fill senior management positions may be disruptive to our business or operations.–- Our ability to manage our business and monitor results is highly dependent upon information and communication systems. A failure of these systems or thea new ERP implementationsystem could disrupt our business.implementingdeveloping a company-wide, single ERP software system 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. Continued execution of theWe had engaged a new systems integration partner, Tata Consultancy Services (“TCS”). In March 2013, TCS presented an integrated project plan or a divergence from it, may result inthat 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 overruns, project delays or business interruptions. In addition, divergence fromrange. We are currently evaluating our project plan could impactplan. 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 timing and/or extent of benefits we expectfourth quarter. Meanwhile, our legacy ERP systems continue to achieve from the system and process efficiencies.productsproduct availability, see their customized pricing and to 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.implementation ofa new ERP system –Significant- Significant additional costs, cost overruns and delays in connection with the implementation of oura new ERP systempartner or a new project plan may adversely affect our business and results of operations.The implementation of ourimplementation 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 selling, general and administrative expenses and capital expenditures to implementdevelop and test the system, and theresystem. There can be no assurance that other issues relating to the new ERP system will not occur or be identified.occur. Our business and results of operations mayhave 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 implementation process, or ifprocess. 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.associated processrisks that we face domestically or are similar risks but with potentially greater exposure. These risks include:significantly.Description 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, 2012,2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the condensed consolidated balance sheets as of March 31, 20122013 and June 30, 2011;2012; (ii) the condensed consolidated income statements for the quarters and nine months ended March 31, 20122013 and 2011;2012; (iii) the condensed consolidated statements of comprehensive income for the quarters and nine months ended March 31, 2013 and 2012; (iv) the condensed consolidated statements of cash flows for the nine months ended March 31, 20122013 and 2011;2012; and (iv)(v) the Notesnotes to the condensed consolidated financial statements **statements.**Pursuant to Rule 406T of Regulation S-T the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. ScanSource, Inc. SCANSOURCE, INC./s/ MICHAEL L. BAUR/s/ Michael L. Baur Michael L. Baur Date: May 9, 20122, 2013 /s/ CHARLES A. MATHIS /s/ Richard P. CleysRichard P. CleysCharles A. MathisDate: May 9, 20122, 2013/s/ GERALD LYONS Gerald Lyons Date: May 2, 2013 ExhibitNumberDescription 31.1Description 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 2012,2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the condensed consolidated balance sheets as of March 31, 20122013 and June 30, 2011;2012; (ii) the condensed consolidated income statements for the quarters and nine months ended March 31, 20122013 and 2011;2012; (iii) the condensed consolidated statements of comprehensive income for the quarters and nine months ended March 31, 2013 and 2012; (iv) the condensed consolidated statements of cash flows for the nine months ended March 31, 20122013 and 2011;2012; and (iv)(v) the Notesnotes to the condensed consolidated financial statements **statements.**Pursuant to Rule 406T of Regulation S-T the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.34