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ScanSource, Inc. (SCSC)

Initiation of Coverage

FinTrust Brokerage Services

Equity Research

March 6, 2015

1 Fintrust Brokerage Services www.Fintrustadvisors.com 124 Verdae Blvd, Ste. #504 864-288-2849 Equity Research Greenville, SC 29607

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Please see pages 33 and 34 of this publication for important certification and disclosure information.

Company Summary: Founded in 1992, ScanSource, Inc. (‘SCSC’, or the Company) is headquartered in Greenville, SC and is the leading international value-added distributor of specialty technology products, focusing on point-of-sale (POS), barcode, physical security, 3D printing, voice, video and data networking solutions. Customers include value-added resellers (VARs), system integrators and technology solutions providers; SCSC never sells a product to an end-user. SCSC has 31 locations in North America, Latin America and Europe. The Company operates a centralized distribution model with distribution centers in Southaven, Mississippi; Miami, Florida; Mexico City, Mexico; Curitiba, Brazil; Recife, Brazil; Sao Paulo, Brazil; Liege, Belgium and Cologne, Germany. SCSC generated Fiscal Year 2014 sales and net income of $2.9 billion and $81.8 million, respectively, representing a 2.8% net income margin.

Fintrust Recommendation

Fintrust Rating: BUYTarget Price: $43.90 Current Share Price $36.88 Expected Return 19.0% 52 Week Price Range $42.99 - $31.22 Fintrust Brokerage Services, LLC rates companies a BUY, HOLD, SELL, or SHORT.

A BUY rating is given when the security is expected to outperform the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

A HOLD rating is given when the security is expected to perform in line with the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

A SELL rating is given when the security is expected to perform below the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

A SELL SHORT is given when the security is expected to decline in value over the next year.

The distribution of ratings across Fintrust’s entire company universe is 53.8% Buy, 38.5% Hold, 7.7%Sell, and 0% Short

Valuation Adj. EPS (14A) $2.52 Adj. EPS (15E) $2.64 Adj. EPS (16E) $3.13 P/E (14) 14.6x P/E (15) 13.9x P/E (16) 11.7x Est. 2015-2016 EPS Growth 18.5%

Industry: Wholesale Distribution GICS Sector/ Sub code: Electrical Apparatus and Equipment / 5063)

Analyst Notes: Analysis by Bruce Roberts (917) 701-3357 & Allen Gillespie, CFA (864) 288-2849

Fintrust Brokerage Services is commencing coverage of specialty technology distributor, ScanSource, Inc., with a BUY rating, and $43.90 target price, representing 19.0% upside. We estimate that given its potential growth rate, strong balance sheet and ability to internally finance acquisition, historic generation of steady gross margin and other financial metrics, and modestly attractive valuation, that SCSC is appropriate as a long term holding for risk-tolerant investors. Our price target is unreflective of future acquisitions, which the Company is highly likely to make. Such acquisitions, if chosen correctly and intgerated successfully, add scale and scope in an industry that rewards both attributes, and could potentially drive share value higher than our estimate. Given our review of the distributor’s historic operating and financial results, we rate management as highly capable, and focused.

We estimate that without making acquisitions, the Company, through market share gains,

should still grow at a brisk pace through 2020. We envision 6.8%, 8.6% and 14.4% revenue, gross profit and net income CAGR through 2020. In the near-term, the distributor just completed 2 high growth / high gross margin acquisitions in Europe and Latin America, respectively. We foresee sales growing to $3.8 billion in fiscal year 2015, or 12.8% y-o-y growth, and a further 11.2% y-o-y growth rate in FY 2016, to $3.7 billion.

We expect Non GAAP EPS to advance just 4.8% this year to $2.64, as one-time ERP expenses drag down profits. In 2016, we foresee Non GAAP EPS of $3.13, or 18.5% y-o-y growth.

Key Figures Key figures pricing data reflects previous trading day’s closing price. Other applicable data are trailing 12-months unless otherwise specified.

ROE 8.0% ROA 4.9% ROIC 10.2% Debt / Capitalization nmf Payout Ratio 0% Revenue (mms) $3,285 Net Income (mms) $68.5 Outstanding (mi) 28.8 Shares Short (mil) 1.23 Market Capitalization ($ mil) $1,041 Beta 1.32x




Equity Research

March 6, 2015


Source: SCSC Documents

Company Introduction – ScanSource, Inc. SCSC is a leading global value-added distributor of specialty technology products focusing on point-of-sale (POS), barcode, physical security, 3D printing, and voice, video, and data networking solutions produced by ~ 350 manufacturers (vendors) and sold to ~ 36,000 resellers; all sales are made to resellers only - never to end users. SCSC assists its reseller customers choose, configure, and deliver products across almost every vertical market in North America, Latin America, and Europe. SCSC is a distributor of products that enable ‘growth technologies’, such as:

Unified Communications Videoconferencing IP Video Surveillance RFID and Barcode Imaging Enterprise Mobility Retail – Mobile POS, Mobile Payments Payment Processing Terminals Cloud-based Services Physical Security Systems 3D Printing




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March 6, 2015


SCSC is built around the ‘2-tier’ distribution model, wherein resellers purchase products through their distribution partner, as opposed to direct from the manufacturer. Through this model, distributors are able to take on many of the support services the manufacturer would have provided, such as sales support, technical support, education, training and financial services (through ScanSource Services Group). By turning these services over to the distributor, manufacturers can focus on the development of new products and resellers can focus on delivering the sales and support their end-user customers’ needs. As a corollary to being able to provide value-added services, SCSC does not sell every product line available for the Communications, POS and Barcode, and Physical Security markets. Rather, SCSC strategically maintains a limited line card that’s narrow but very deep, enabling the Company’s support experts to tailor ‘solutions’ that are more complete and that maximize profitable reseller growth. SCSC encompasses 3 main product groups, and seven sales units in North America, Latin America and Europe. All sales units are led by their own presidents with dedicated sales, merchandising and technical support teams:

1) Communications Products. Through its ScanSource Catalyst and ScanSource Communications business units, resellers access voice, video, mobility, network security and data networking equipment from leading manufacturers such as Sonus (manufacturer of Voice-over-IP (VoIP) products to telecom service providers and enterprises), ShoreTel (major provider of Unified Communications solutions to enterprises) and Polycom (which offers video, voice, and content-management and content-sharing solutions, such as telepresence and conference room systems). With its January 2015 acquisition of Brazil-based data and communications products provider Network1, SCSC’s communications products are sold internationally.

2) Security Products. ScanSource Security is a value-added distributor of the industry’s leading physical security products and

solutions, including network surveillance cameras, and enclosures and lenses to complete access control systems, by manufacturers such as Axis Communications (a market leader in network video and a driving force behind the shift from analog to digital video surveillance), Digital Security Controls (DSC designs and manufactures intrusion alarm control panels and detection devices and alarm communication products) and Altronix (manufacturer and designer of electronic components for the security industry). Security products are sold in North America.

3) Point-of-Sale (POS) and Barcode (automatic identification and data capture) Products. ScanSource POS and Barcode

includes industry-leading manufacturers like Intermec (manufacturer of handheld scanners RFID readers, mobile printers, etc.), Zebra Technologies (a global leader in barcode and RFID technologies), and 3D Systems (DDD, $30, BUY) covering everything from cash drawers and electronic payment terminals to barcode scanners and printers and 3D printers and 3D scanners. Products are sold globally.

Analyst’s Notes....Continued




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March 6, 2015


Value‐Added Services – SCSC’s Competitive Advantage Through ScanSource Services Group’s (SSSG) numerous support offerings, the Company is able to maximize reseller efficiency and growth without adding commensurate and costly overhead, enabling the reseller to focus on maximizing sales. SSSG’s spectrum of services and expertise is broad, and ranges from the offering of traditional marketing advice for resellers to providing highly technical advice and services using certified experts in all major manufacturers. The ‘value add’ for the reseller is to leverage the distributor’s ~ 25 years of experience in selling and implementing voice, data and video systems.

SALES EXPERTISE • FOCUSED PRODUCT MANAGEMENT TEAMS • BUSINESS DEVELOPMENT TEAMS • TECHNICAL SUPPORT/SOLUTION CONSULTANTS •

PROPRIETARY PRICING, QUOTING AND CONFIGURATION TOOLS • CUSTOM CONFIGURATION SERVICES • EDUCATION, TRAINING AND CERTIFICATIONS

• PRODUCT RETURNS MANAGEMENT • RESELLER FINANCIAL SERVICES • PARTNER ENABLEMENT PROGRAMS • STRATEGIC MARKETING SERVICES •

NETWORK ASSESSMENTS AND WI‐FI SERVICES • PROGRAMMING AND IMPLEMENTATION • PROPRIETARY MOBILE APPS • SUMOPARTNER ONLINE

COMMUNITY • S3 (SOFTWARE, SERVICES, SOLUTIONS) For example, the Company provides testing and implementation of end-user’s Wi-Fi networks (Wi-Fi Services) that are sold by resellers. The reseller offers these services under its own name, and SSSG’s Wi-Fi service encompasses a wide range of manufactures such as Aruba Networks, Avaya and Cisco. SSSG services also include Network Readiness Assessments, which test end-user data networks by simulating the deployment of VoIP and IP (Internet Protocol, or simply Internet) Video solutions before the installation is actually implemented. This service offers many advantages including post-production troubleshooting reseller expenses. Another example is SSSG’s Custom Configuration Center (CCC), wherein the Company’s technical team provides integration services such as software loading and IP addressing to more complex jobs so that a reseller’s product is shipped on a ready-to-install basis. As another example, SSSG’s Strategic Marketing Services are customizable and scalable and provide resellers with services including Brand Development, Lead Generation, Strategic Planning, and Online Marketing, which, as an example, focuses on maximizing a reseller’s online ads, search engine marketing, social media marketing and general website development. Reseller Financial Services Programs optimize cash flow, maximize purchasing power, and free resellers to pursue sales opportunities. In addition to a trade credit limit, SCSC offers:

I. Floor Plan Pricing. Aka inventory financing, channel financing, or floor-plan financing. An option for resellers who may require increased purchasing power and extended account payment terms. In a floor-plan arrangement, the reseller is approved for a line of credit with agreed-upon payment terms from the floor-plan partner. The floor-plan partner will advance to ScanSource, on behalf of the reseller, the wholesale cost of goods purchased. The floor-plan partner may take a secured interest in the inventory of the reseller. Floor-plan partners include GE Capital, and Commercial Distribution Finance (CDF). CDF’s financing solutions are an alternative to open accounts or bank lines of credit – their solutions provide better alignment of a reseller’s terms with their cash conversion cycle, providing the liquidity necessary to help succeed in the technology marketplace. Another partner is IBM’s Global Financing which, with its broad knowledge of the IT industry--combined with experience in structuring asset-based and cash-flow lending facilities can implement a customized financing solution for manufacturers, distributors, solution providers, PC resellers, or ISVs, to optimize their capital structures to maximize business growth.

II. Leasing. Adds another method to close more deals, expand profits and optimize cash flow. One leasing option is CIT

Finance LLC. CIT offers its Advanced Funding Program that allows resellers to order equipment without large cash outlays or burdening their existing trade credit limit. Another SCSC leasing partner is Macquarie Equipment Finance, which is part of a global provider of banking, financial, advisory, investment and funds management services, the Macquarie Group.





Equity Research

March 6, 2015


Company Review – ScanSource, Inc. The Company operates in the United States, Canada, Latin America, and Europe and uses centralized distribution centers for major geographic regions. SCSC distributes ~ 100K products to the United States and Canada from its Southaven, Mississippi distribution center; to Latin America, principally from distribution centers located in Florida, Mexico and Brazil; and to Europe from its distribution centers in Belgium, France, Germany and the United Kingdom. Despite industry fragmentation, generally, the Company competes against 2 -3 other distributors in its various markets. Company growth is fueled by (1) acquisitions (2) market share gains (both vendors and resellers), and the ongoing shift to 2-tier distribution by vendors. One of the Company’s distinguishing characteristics is its relationship with key vendors, with which the distributor interacts with vendors through dedicated SCSC merchandising teams that become highly integrated with vendor marketing teams, generating vendor loyalty.

Named Aruba Network’s North America Distributor of the Year for the fourth year in a row Named North American Distributor of the Year by Ruckus Wireless. Introduced new training and certification classes, for which SCSC received awards from Avaya for highest student satisfaction

and highest response rate. Approx. 25% of sales are transacted over the internet. SCSC runs a lean logistics operation employing a minimal number of centralized warehouses, streamlining logistics and

increasing product availability, a key competitive advantage. Currently, SCSC carries virtually no long term debt, and has no usage on its $300 million R/C. However, to lower its WACC,

management is contemplating several ways to increase its debt to 1X EBITDA by (1) organic growth (2) acquisitions and (3) share buybacks.

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ScanSource: 7.9% Sales CAGR, Stable GM$ mms

Net Sales Gross Margin





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March 6, 2015


Worldwide Barcode and Security Segment The Barcode & Security distribution segment focuses on automatic identification and data capture (“AIDC”), point-of-sale (“POS”), and electronic physical security technologies. This segment includes ScanSource POS and Barcode business units in North America, Latin America, and Europe and the ScanSource Security business unit in North America. The Company is one of the largest distributors of security, POS and Barcode products in North America. AIDC and POS products interface with computer systems and are used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling, warehouse management and health care applications. Electronic physical security products include identification, access control, video surveillance, intrusion-related and wireless infrastructure products. During fiscal year 2014, the Barcode & Security distribution segment added 3D printing solutions to their product offerings that are targeted at the manufacturing, healthcare, aerospace, and automotive markets.

AIDC technology provides electronic identification and data processing without the need for manual input and consists of portable data collection terminals, wireless products, bar code label printers and scanners. As AIDC technology has become more pervasive, applications have evolved from inventory control, materials handling, distribution, shipping and warehouse management to more advanced applications, such as health care.

POS products are computer-based systems that have replaced electronic cash registers, and include computer-based

terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment and fully integrated processing units.

Electronic physical security products include identification, access control, video surveillance and intrusion-related products,

and networking. Physical security products are used to protect lives, property and information. Physical security products are deployed across both wired and wireless infrastructures.

SECURITY VENDORS INCLUDE: AXIS COMMUNICATIONS, CISCO, ZEBRA TECHNOLOGIES, RUCKUS WIRELESS, DATACARD GROUP, INTERLOGIX.

POS AND BARCODE VENDORS INCLUDE: INTERMEC, DATALOGIC, ZEBRA TECHNOLOGIES, BEMATECH, PRINTRONIX, TOSHIBA.

o According to VDC Research, the handheld barcode scanner market is expected to grow 5.2% per year through 2017. Zebra Technologies recently guided for 4% - 5% CAGR for mobile scanners, printers, RFID, wireless LAN and other products over the business cycle. Risks to growth include proliferation of lower cost barcode products from new manufacturers and the expanding capabilities to convert smartphones and tablets into barcode scanners using software drivers.

o Driven by mobile POS in retail and hospitality, the overall POS market could grow 11.2% per year through 2020, according to

Transparency Market Research. Fixed POS represents ~ 81% of the overall POS market.

o According to IHS Research, the North American market for physical security equipment and services is poised to grow 6.5% per year through 2018, to $61 billion. The global video surveillance equipment market should grow more quickly.

o In Fiscal Q2 2015, WW Barcode and Security sales jumped 8.1% y-o-y excluding F/X, and 4.9% on a reported basis.

Worldwide Communications and Services Segment The Communications & Services distribution segment focuses on communications technologies and services. Business units within the segment include the ScanSource Catalyst business unit in North America, ScanSource Communications business units in North America and Europe, and the ScanSource Services Group business unit in North America. ScanSource Catalyst and ScanSource Communications business units market voice, video conferencing, data networking and converged communications solutions. The business units serve different sets of vendors. The ScanSource Services Group business unit delivers value-added support programs and services, including education and training, network assessments, custom configuration, implementation and marketing.

Analyst’s Notes....Continued Analyst’s Notes....Continued




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March 6, 2015


Communications products include voice and data products such as PBX, key systems, telephone handsets and components used in voice, fax, data, voice recognition, call center management and IP communication applications. Converged communication products combine voice, data, fax and speech technologies to deliver communications solutions that combine computers, telecommunications and the Internet. Video products include video and voice conferencing and network systems; and data networking products include switches, servers and routers.

COMMUNICATIONS VENDORS INCLUDE: ARUBA, AVAYA, CISCO, SHORETEL, SONUS, PLANTRONICS, EXTREME NETWORKS, MERU NETWORKS.

o In its most recent quarter, Cisco Systems reported 3% y-o-y growth for its core data networking switch business.

o In its most recent quarter, conferencing and Unified Communications equipment vendor Polycom reported 2% y-o-y sales

growth.

o In its most recent quarter, IP PBX, VoIP equipment, and UC equipment vendor ShoreTel reported 1% y-o-y total product sales growth. IP telephony systems growth was stronger, at 3%.

o In Fiscal Q2 2015, WW Communications and Services sales jumped 16.7% y-o-y excluding F/X, but which included results from acquired-company Imago, Europe's leading value-added video and voice communications distributor, for a full quarter. Sales grew ~ 9.1% excluding Imago, well ahead of end-user sales growth, we believe.

In their latest quarterly results, SCSC and Ingram Micro (IM, $26.00, NR) reported 9.0% and 11.0% y-o-y revenues growth, respectively. IM is the largest specialty technology distributor, and offers a range of products similarly as wide as SCSC.

Distributors and Gross Margin The core value of a distributor is having the right product at the right price, time and place, which may mean that distributor value is positively correlated with geographic and market diversity and coverage; an enhanced geographic coverage limits a distributor’s exposure to regional specific cycles and augments its growth opportunities. With its latest acquisitions, we note that SCSC’s international sales comprise ~ 35% of total revenues, up from ~ 25%. In addition, certain products also require unique technical or applications support and the distributor is able to provide that function for its customers and suppliers on a real-time basis. We estimate that a distributor’s value-add, or position as a critical link in the supply chain is manifest in a distributor’s gross margin, defensible market position and barriers to entry. Distributors that serve primarily as a logistics provider should, all else equal, earn a lower gross margin than those that provide technical and applications support.





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March 6, 2015


Source: Company financials

Specialty Technology Products Distribution ‐ Industry Backdrop According to Freedonia, a market research firm (2015), Computer and Office equipment Wholesalers primarily distribute computers, computer equipment, packaged software, and office equipment. Major products include computers, packaged software, copiers, data storage drives, and printers. Other products include mailing and letter-handling machines and large number of peripheral computer devices and supplies, such as networking equipment, scanners, point-of-sale (POS) equipment, and ink cartridges. The US computer and office equipment distribution industry includes about 17,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $265 billion. The US industry is concentrated: the top 50 distributors account for about 75 percent of revenue. Major companies include Ingram Micro, ScanSource, Tech Data, and divisions of diversified electronics distributors such as Arrow Electronics and Avnet (all based in the US). Top tier wholesalers have locations in dozens of countries, and typically maintain major distribution centers in multiple nations. Emerging markets such as China and India are being targeted for industry growth.

The global technology distributors sector is expected to have generated total revenues of $200,429 mm in 2014, representing a

compound annual growth rate (CAGR) of 6.2% between 2010 and 2014. Ingram Micro is expected to have held the largest

market share in 2014, representing an estimated global share of 20.3% of the sector. The performance of the sector is forecast

to remain consistent, with an anticipated CAGR of 6.3% for the five‐year period 2014 ‐ 2019, which is expected to drive the

sector to a value of $271,459 mm by the end of 2019. – Marketline 2015.

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Source: SCSC filings and FinTrust Brokerage Services

The distribution channels for specialty technology products consist of the manufacturers (vendors), wholesale distributors such as SCSC, resellers and end users. SCSC only sells products and services to resellers, who sell the products to end users, a process the Company refers to as ‘two-tier’ (wholesale) distribution. The linear supply chain model shown above is called a two-tier model since two types of businesses – distributors and resellers – handle technology products as they flow from manufacturers to end-user customers. It is estimated that 50% to 60% of all Information Technology products flow through the two-tier channel (source: Global Technology Distribution Council). The wholesale distribution channel for technology products is served by both broad line (full-line) and specialty distributors. Broad line distributors typically provide conventional order fulfillment and offer their reseller customers less support and fewer value-added services than specialty distributors. The specialty distributors that compete with ScanSource are generally smaller, in terms of both revenues and geographic reach.

Benefits to Resellers Rather than adding costs as the ‘middleman’, specialty value-added distributors provide a total costs to resellers that is often less than or equal to the cost a reseller would incur in buying the products from the manufacturer and in providing efficiency and expertise on their own. Distributors, in general, are used to serve a number of resellers needs. These include the desire to reduce purchasing and technical staff and lower the MRO (maintenance repair and operations) or purchasing spend by having just-in-time and lower inventory levels. With the continually increasing complexity of technological solutions, the value-added of the channel is as much about information as it is about products. Market research shows that resellers cite access to informed distribution account representatives as one of the most important pre-sales services distributors provide: Since specialty technology manufacturers develop products that often





Equity Research

March 6, 2015


represent only one part of a total solution, most products are developed to provide interoperability among products from multiple manufacturers, as a variety of manufacturers' products are typically configured together to create a system solution. Therefore, both manufacturers and resellers have become more dependent upon value-added wholesale distributors, such as ScanSource, for the aggregation of products and reseller support services. New product introductions, shortened product life cycles and new product applications have caused resellers to increasingly rely on wholesale distributors for inventory management, financing, and technical support. The provision of credit is a core benefit from distribution, allowing customers to supply, configure and install products without having to finance their entire work-in-progress and receivables from the end customer. This working capital liquidity is often multiplied by sourcing from multiple distributors

Sourcing of products Supply logistics Extended credit Technical training Post sales technical support Project management (coordinating products from several suppliers and shipping to multiple locations) Marketing services

Benefits to Vendors Manufacturers increasingly rely upon value-added wholesale distributors by outsourcing certain support functions, such as product assortment, delivery, inventory management, technical assistance and marketing. The channel provides a geographically dispersed, market focused sales force at a lower cost than manufacturers can achieve on their own. From a supplier standpoint, a distributor is desirable for one or more reasons: (1) end-users order products in limited or ‘one-off’ quantities, (2) the number of end-users (in this case resellers) is large, (3) the market for the products are geographically dispersed, (4) the demand for the product is high, hence the supplier wants multiple channels, (5) there is availability of distributors who can effectively maximize sales volumes, and offer other services like marketing, technical support and after sale services. The distributor’s key function role is as a conduit for vendors seeking to reach a specific segment of the market or an entire market. In broad terms, this role translates into activities in four main areas: (1) Market knowledge and Access (2) Demand Generation and Outsourced Front Office (3) Supply Fulfillment and Outsourced Back Office and (4) Outsourced Services. Distributors provide vendors with detailed knowledge about the specific markets in which they operate (channel intelligence). By building a relationship with a distributor vendors gain a wealth of insight into how to use resellers to access the different parts of the end user customer base. Sales and inventory reporting, updated weekly or daily, provide a key window into the marketplace for vendors. Distributors drive demand generation by working with existing resellers, recruiting new ones, and assisting all in designing, financing and administering marketing campaigns. In a host of ways, distributors can also act as a vendor’s ‘front office’ in the field, by managing end user marketing programs, and by assuming the ‘vendor representative’ role in myriad ways: distributors can administer channel programs (for example, special channel vendor financing and credit offerings) and marketing funds on behalf of the vendor, and generally provide support for a vendor’s office in new markets. Arguably many of the value added benefits to resellers, such as channel conferences, channel training, and channel financing and front line technical support inure to the vendor.

To paraphrase management, SCSC carries products that are ‘sold’ rather than ‘bought’ by its customers. Supply fulfillment role for vendors regarding SKUs mirrors that played for customers, i.e., breaking bulk, providing delivery logistics, and providing reverse logistics (e.g., taking back returned products), where required. In addition, they may provide additional services related to fulfillment, such as vendor stock warehousing, dedicated vendor inventories for major retail customers, or consignment stocking on behalf of vendors. A second core fulfillment function of distribution is to take on and manage on the vendor’s behalf the significant credit risk of thousands of reseller and retailer customers. This is a role which requires the application of all of the distributor’s local market insight to a set of rigorous credit control processes to minimize credit exposure and the cost of bad debts.





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March 6, 2015


Finally, there are specialized outsourced services which distributors provide, including warranty management, break-fix, post-sales support, or specialist legal services which leverage local knowledge, such as trademark registration and protection.

Distributor Economics Distribution businesses consume significant amounts of capital and personnel, and in many cases deliver relatively low returns on these investments. With significant investments in accounts receivables and inventory (working capital), they need to be closely managed in terms of both profitability and asset efficiency. In light of the modest gross margins that are generated, the slightest slip in managing key asset categories (for example, overstocking leading to writing down the value of inventory, extending credit to bad- or non-paying customers or investing too soon in additional warehouse space) can readily turn profits into net losses. The distributor’s business model consists of maximizing margins and minimizing working capital, without affecting the range and availability of products it offers to customers (resellers). ROIC is a key measurement for the distribution industry as it encapsulates the end result – in this case the ROIC as compared to the WACC - of the mix of profit margin generation and balance sheet management. If ROIC exceeds WACC, shareholder value is created. Choosing the right mix of vendors, product and resellers directly impacts margin generation, as well as working capital productivity. Lowering the amount of total assets, in particular, A/R, Inventory and fixed assets (to a lesser extent), and / or increasing A/P and other current liabilities, will expand ROIC, all else equal. We define ROIC as NOPAT / Invested Capital (debt + equity – cash needed to run the business (~ 2% - 4% of sales)).





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March 6, 2015


In the following chart, we cross referenced (NOPAT / Sales) with (Sales / Invested capital), the two components of the ROIC calculation. This breaks the ROIC calculation into (1) profit margin and (2) working capital turnover components.

Distributors in the bottom-right quadrant of the chart excel at marketing and merchandising. Distributors in the top-left quadrant of the chart excel at ‘production’. That is logistics and working capital management. Distributors in the top-right quadrant of the chart excel at ‘production’ and customer skills. In the comp group, distributors tend

to demonstrate a bias to one or the other expertise, but not both. While SCSC demonstrates strong customer skills, the distributor could substantially improve its ROIC, as we discuss later on,

by improving its inventory turns.

Source: Company financials and FinTrust Brokerage services estimates

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Source: SCSC Financials In 2011, falling SGA / sales powered ROIC higher, to 12.09%. In 2012, rising Working Capital turns offset a fall in gross margin and a rising SGA / sales ratio to keep ROIC steady at 12.10%. In 2013, rising SGA / sales and WC turns essentially offset each other. In 2014, falling WC turns drove a decline in ROIC to 11.19%. In the latest quarter, a steep decline in gross margin drove a decline in ROIC to ~ 2010 levels, despite improved SGA management and higher WC turns. Lastly, we looked at a measure of internal growth potential, Potential Growth Capacity. This is equal to Net Income margin x Working Capital Turns. In other words, the maximum percentage growth achievable if a distributor applies all the profits it generates to funding increased working capital, which in turn supports increased sales. In Fiscal Q2 2015, internally funded growth potential came to an implied rate of ~ 11.3% sales growth (note: SCSC has a total R/C facility of $300 million with a $150 million ‘accordion’).

Working Capital How quickly working capital can be converted back into cash determines how much capital is needed. Effective inventory management is critical to remaining profitable. There are a number of variables driving inventory profitability including vendor rebates, vendor cooperative advertising allowances, vendor price reductions, and product obsolescence protection or product rotation terms, and price protection. SCSC establishes inventory reserves to protect against falling inventory value. Days Inventory Outstanding – DIO. If supply is stable and product can be obtained from suppliers within a few days of placing an order, the distributor only needs to carry enough inventory to cover sales in the period between order and delivery to the reseller plus a buffer amount. On the other hand, if the time interval from ordering from a vendor to delivery is longer than the expected delivery interval from distributor to reseller, then the distributor will be forced to expand inventory. Generally, the sale of more complex products lengthens DIO and hence expands inventory and working capital requirements. In addition, inventory will be influenced by the nature and geography of the markets the distributor operates in, with distributors further from the vendor’s own warehouses and in markets with less-developed infrastructure needing to factor in a longer – and possibly more volatile – supply chain.

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6.0%

8.0%

10.0%

12.0%

14.0%

2010 2011 2012 2013 2014 FQ2 2015

SCSC Fiscal Q2 2015 ROIC: ~ 6‐Year LowRight Scale ‐WC Turns

Working Capital Turns SG&A Gross Margin Return on Invested Capital ‐ ROIC





Equity Research

March 6, 2015


Source: SCSC Financials Days Sales Outstanding – DSO. Different sets of resellers, as determined by geography, end user sector (public or private), and product segment, have different sets of A/R terms. Generally international sales have a longer DSO cycle.

“Asking a distributor to support you (the vendor) in a developing market with a long and unreliable supply chain by

addressing resellers who service government projects incorporating complex product sets is likely to bring very different

challenges – and a very different working capital profile – from asking them to support you in a mature market, close to

your distribution hub, selling standard run‐rate products through resellers who pay in line with agreed credit terms.” ‐

GTDC

Competitors Competition is based primarily on factors including price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. The markets in which SCSC operates are highly competitive, on a number of levels: competitors include regional and national wholesale distributors as well as the vendors who are the Company’s customers. Competition has increased over the last several years as broad line and other value added distributors have entered into the specialty technology markets. Examples of broad line competitors include Avnet, Ingram Micro and Tech Data in the Barcode / Security and Communications / Services segments. These distributors generated trailing twelve month gross margins of 11.5%, 5.6% and 4.8% respectively. The metric was 9.9% for SCSC in fiscal Q2 2015.

67 71

66

57

71 65 62 63

55 55 58 55 55 62

56 51

59 53

73 73 65

61

70 68

2010 2011 2012 2013 2014 FQ2 2015

SCSC: Higher A/R Turns Drives Cash Conversion Cycle Days to 68 Days From 73 Days in 2010

Days Inventory Outstanding Days Sales Outstanding Days Payable Outstanding CCC‐Cash Conversion Cycle





Equity Research

March 6, 2015


Generally, SCSC’s gross margin has hovered just above 10%, and we expect it to do so in the current quarter and going forward. Part of the reason the Company’s gross margin has declined by ~ 30 to 50 basis points from its historical rate is due to greater competition from broad line competitors as well as an absence of gross-margin enhancing acquisitions, until recently that is. On the one hand, distributors such as AVT generate higher gross margins in part because they sell to a wide audience consisting of OEMs, resellers, VARS and corporate end –users. The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment. Its reseller business generates EBIT margins in the 4.5% range, which is equivalent to SCSC’s Worldwide Communications’ EBIT margin generation, but higher than that of Worldwide Barcode and POS segment (2.7% in FQ2 2015). The remainder of Avnet’s business – electronic components generates 4.6% EBIT margins. On the lower end of the spectrum, TECD and IM generate much lower gross margins than SCSC (although they generate ROIC margins more in line with the Company). Ingram Micro (IM) for example, whose product lineup overlaps significantly with SCSC, but includes lower margins consumer goods such as TVs and game consoles, sells to resellers exclusively. Both IM and Tech Data (TECD) generate relatively strong ROIC due to more rapid working capital turnover. We roughly estimate that if, for example, SCSC’s Days Inventory shrunk to 40X, that the Company’s ROIC would expand to 15.0%, from 10.8%. We should note however, that there is a positive relationship between product complexity and value add and days inventory.

11.7%

14.4%

10.8%11.3%

9.3%9.9%

13.2%

11.5%

9.9%

7.9%

5.6%4.8%

0.0X

2.0X

4.0X

6.0X

8.0X

10.0X

12.0X

14.0X

16.0X

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

ARW AVT SCSC SNX IM TECD

Industry Gross Margin, ROIC & Working Capital TurnoverAverage Gross Margin: 8.8%

Average ROIC: 11.2%

ROIC Gross Margin Working Capital Turnover





Equity Research

March 6, 2015


Excluding ARW and AVT, the two largest distributors by sales, through acquisitions and market share gains, the group is growing faster than the overall 6.3% CAGR the overall industry is expected to generate through 2019. With respect to revenue growth, SNX leads the group, with ~ 16.1% internal and 24.9% nominal y-o-y revenue growth, respectively. Selling to both resellers and retail customers, the distributor / business processes solution provider distributes peripherals, IT systems including data center server and storage solutions, system components, software, networking equipment, consumer electronics, and complementary products, accounting for 92% of total sales. SNX’ IT systems sales rose 20% y-o-y in 2014. The increase in the sale of IT systems was driven by higher sales (and relatively lower margin) of laptops, tablets and desktops. We estimate that SNX, a distributor with roughly the same number of suppliers and reseller customers as SCSC, drives lower gross margins through more ‘big deal’ sales volumes. SNX’ sales are ~ 5X those of SCSC. The distribution business handles ~ 30K products versus over 100K sold by SCSC.

65X

38X 37X 36X 34X 33X40X

67.8X

42.2X

26.9X

45.0X50.4X

24.2X

42.8X

0.0X

2.0X

4.0X

6.0X

8.0X

10.0X

12.0X

14.0X

16.0X

0X

10X

20X

30X

40X

50X

60X

70X

80X

90X

100X

SCSC ARW IM SNX AVT TECD MEAN

SCSC: Highest Days Inventory Outstanding; Highest Total Days (CCC)

CCC ‐ Cash Conversion Cycle

Days Inv. Days A/R Days A/P CCC Working Capital Turnover





Equity Research

March 6, 2015


Risks The distribution industry is highly competitive, and faces constantly changing ‘economics’; that is, continually lowered pricing of end user products, reseller and vendor consolidation and product obsolescence. For a full list of investment risks, we strongly urge investors to review the latest Company 10K filing:

1. Competition from manufacturers and resellers looking to bypass distributors. Competition has increased as broad line and other value-added distributors have entered into the specialty technology markets. Such incursions often result in price reductions, reduced margins and loss of market share.

2. F/X headwinds from strengthening dollar. International sales present greater risk, including generally longer payment cycles.

3. Loss of supplier business. As an example, recently EMC decided to discontinue selling storage products through Ingram

Micro, as of this coming April. While the reason for the change are not certain, recently, EMC lowered its revenue threshold for solution providers to work directly with EMC from close to $100 million to around $25 million, a move that incentivized direct relationships between vendors and solution providers at the expense of distribution.

4. Acquisition write-downs and integration challenges. In fiscal 2013, SCSC performed its annual goodwill impairment test and

determined that a goodwill impairment charge was necessary for its Brazilian POS & Barcode and European Communications reporting units. The total write down, at $20.5 million, was substantial.

5. Inventory write-downs. Manufacturers frequently lower end-user prices. As well, products can become obsolete in cases

where there’s no price protection or stock rotation opportunities. Generally, none exists where it is established that the distributor ‘failed to execute’.

24.9%

10.7%9.0% 8.1%

3.9%1.8%

SNX IM SCSC TECD ARW AVT

Latest Period Y‐o‐Y Reported Sales Growth





Equity Research

March 6, 2015


Financial Review: SCSC Like most distributors, in light of razor-thin gross margins, SCSC must (1) continually micro-manage and revise selection of vendor, product, reseller and geography (2) correctly forecast and manage working capital accounts, and (3) tightly control operating expenses. With acquisitions, a prominent aspect of the specialty technology distribution landscape, management is also tasked with making and successfully integrating acquisitions of distributor targets:

In September 2014, SCSC completed the acquisition of Imago Group PLC, Europe's leading value-added video and voice communications distributor. Imago ScanSource joins the Company’s Worldwide Communications and Services operating segment. This acquisition supports the Company’s strategy to be the leading value-added distributor of video, voice, and networking solutions for resellers in Europe. Company paid $35.5 million or ~ 0.25x trailing 12 –month sales of ~ $149 million.

In January 2015, SCSC completed the acquisition of Network1, the largest communications value added distributor in Brazil

and throughout Latin America. This acquisition complements their existing successful POS and barcode business in Brazil. SCSC added nearly 400 employees in additional locations in Brazil, Mexico, Colombia, Chile and Peru. Network1 has over 60 vendors, 8,000 customers and calendar year 2014 estimated sales of approximately $300 million. Network1 is the largest Company that ScanSource has acquired to date. SCSC paid ~ $60 million for the acquisition, before earn outs, or ~ 0.20X sales.

Acquisition criteria include (1) earnings accretion in year 1 (excluding acquisition costs), (2) no margin dilution and (3) growth

markets. In the Worldwide POS and Barcode segment, SCSC has made significant investments in three specific value added growth areas: 3D printing, physical security and payment processing. Each of these areas had significant growth in the quarter although the Company did not share specific metrics. With respect to 3D printing, the Company is in the early stages of development: SCSC’s challenge is identifying the right customer, the right resellers and those who are more likely to be successful in 3D. According to SCSC, there is already a channel of a few hundred 3D resellers in the US, and SCSC views its job as helping 3D vendors expand the number of resellers.

Revenues Through market share gains and acquisition, from fiscal 2010 to 2014, total SCSC revenues grew at a CAGR of 8.3%, well ahead of the industry growth rate of 6% to 7%, from $2.11 billion, to $2.91 billion last year. Organically, we roughly estimate that sales advanced 8.1% per year over the 2010 – 2014 period, and that in the latest quarter, sales advanced organically, at a robust 8.4% pace, to $802.8 million, and 9.0% on a reported basis, to a record $807.0 million.





Equity Research

March 6, 2015


In fiscal Q2 2015, we estimate that SCSC sales advanced, organically, at a significantly faster pace than end-user sales growth, and that the Company is taking market share. In fiscal Q2 2015, while the Communications segment enjoyed 9.1% y-o-y organic sales growth, a pace of expansion, we estimate, roughly 2X end-user demand growth, the Company’s Barcode and Security segment enjoyed rapid 9.1% organic growth (offset by F/X headwinds, negatively impacting sales by approximately $16 million with most of the impact in the Worldwide Barcode & Security segment), resulting in record quarterly sales for SCSC. The increase in Barcode and Security sales is primarily due to an increase in big deals and run rate business in the POS and Barcode business units. The Security business also enjoyed an increase in sales of its wireless networking products.

Geographically, driven by Latin America, organic international sales rose ~ 10.4% y-o-y, while North American sales advanced ~ 7.2%. European sales growth is weak; one of its key vendors, Avaya, is not expanding strongly in the region.

24.6%

8.2%0.0% 1.2%

8.4%

2011 2012 2013 2014 Q2 2015

SCSC Organic Y‐o‐Y Sales Growth ‐ Est.Source: FinTrust estimates

9.0%

4.9%

16.2%

8.4%

8.1%

9.1%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

SCSC

BARCODE/SECURITY

COMMUNICATIONS

Fiscal Q2 2015 Sales Growth: Reported v. Organic FinTrust estimates

Organic Reported





Equity Research

March 6, 2015


Sources: Company filings and FinTrust Brokerage Services estimates


Scan Source inc. Ending June 30th Ending 12/31 Y-o-YIncome Statement - (Recurring Costs) 2010 2011 2012 2013 2014 CAGR FQ2 2014 FQ2 2015 Growth

Net Sales 2,114.9 2,666.5 3,015.3 2,876.9 2,913.6 8.3% 740.6 807.0 9.0%

CGS 1,896.1 2,392.2 2,713.3 2,584.1 2,612.5 8.3% 663.4 728.9 9.9%

Gross Profit 218.8 274.3 302.0 292.8 301.1 8.3% 77.2 78.1 1.2%

SG&A 143.1 161.3 188.4 191.2 192.5 7.7% 49.3 51.7 4.9%

Impairment Charges (Legal Recovery) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Chge in FV of Acquisition Earn Outs 0.0 (0.1) 0.1 1.8 2.3 0.5 0.5 -8.0%

EBIT 75.7 113.1 113.5 99.8 106.3 8.9% 27.4 25.9 -5.3%

Interest (income) Expense 0.1 0.5 (1.2) (1.4) (1.6) (0.3) (0.3) -1.7%

Other (income) Expense (0.0) 0.7 3.6 (0.5) 0.3 (0.1) 0.3

EBT 75.6 111.9 111.2 101.7 107.6 9.2% 27.7 25.9

Income Taxes 26.9 38.3 36.9 35.6 37.7 8.8% 9.5 9.1 -4.2%

Net Income $48.7 $73.6 $74.3 $66.1 $69.9 9.5% $18.2 $16.8 -8.0%

EPS $1.81 $2.70 $2.68 $2.36 $2.45 7.8% $0.64 $0.58 -8.7%WA Diluted Shares 26,869 27,246 27,751 27,994 28,602 1.6% 28,597 28,831 0.8%

Ending June 30th Ending 12/31Income Statement Margins 2010 2011 2012 2013 2014 FQ2 2014 FQ2 2015

Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

CGS 89.7% 89.7% 90.0% 89.8% 89.7% 89.6% 90.3%

Gross Profit 10.3% 10.3% 10.0% 10.2% 10.3% 10.4% 9.7%

SG&A 6.8% 6.0% 6.2% 6.6% 6.6% 6.7% 6.4%

Impairment Charges (Legal Recovery) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Chge in FV of Acquisition Earn Outs 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1%

EBIT 3.6% 4.2% 3.8% 3.5% 3.6% 3.7% 3.2%

Interest (income) Expense 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% 0.0%

Other (income) Expense 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0%

EBT 3.6% 4.2% 3.7% 3.5% 3.7% 3.7% 3.2%

Income Taxes 1.3% 1.4% 1.2% 1.2% 1.3% 1.3% 1.1%

Net Income 2.3% 2.8% 2.5% 2.3% 2.4% 2.5% 2.1%

Balance Sheet Summary 2010 2011 2012 2013 2014 CAGR FQ2 2014 FQ2 2015

Total Assets 859.8 1,182.2 1,201.8 1,164.2 1,335.1 11.6% 1,335.1 1,350.5 1.2%

Long Term Debt 30.4 60.1 9.7 5.4 5.4 -35.1% 5.4 5.4 0.0%

Shareholder's Equity 486.6 587.4 652.3 695.6 802.6 13.3% 802.6 818.8 2.0%

Working Capital 436.9 532.2 533.5 614.4 715.9 13.1% 715.9 693.1 -3.2%

Cash 34.6 28.8 29.1 148.1 194.9 54.1% 194.9 121.5 -37.7%

Non-Cash Working Capital 402.3 503.4 504.4 466.3 521.0 6.7% 521.0 571.6 9.7%

A/R 357.8 462.1 458.3 435.1 464.4 6.7% 464.4 490.7 5.7%

Inventory 346.6 467.6 487.9 402.3 504.8 9.9% 504.8 518.4 2.7%

A/P 287.9 406.6 419.6 362.3 421.7 10.0% 421.7 419.6 -0.5%

Invested Capital (used for ROIC calc.) 482.4 618.7 632.9 552.9 613.1 6.2% 613.1 702.7 14.6%

Profitability Analysis 2010 2011 2012 2013 2014 FQ2 2014 FQ2 2015 '10 - '15Gross Margin 10.35% 10.29% 10.02% 10.18% 10.33% 10.42% 9.68%

EBIT % 3.58% 4.24% 3.76% 3.47% 3.65% 3.70% 3.21%

Net Income % 2.30% 2.76% 2.46% 2.30% 2.40% 2.46% 2.08%

Return on Assets - ROA 5.67% 6.23% 6.18% 5.68% 5.24% 5.47% 4.97%

NI / Sales 2.30% 2.76% 2.46% 2.30% 2.40% 2.46% 2.08%

Return on Equity - ROE 10.01% 12.53% 11.39% 9.50% 8.71% 9.09% 8.20%

Return on Invested Capital - ROIC 10.12% 12.09% 12.10% 11.60% 11.19% 11.68% 10.80%

Working Capital Analysis 2010 2011 2012 2013 2014 FQ2 2014 FQ2 2015 '10 - '15Days Inventory Outstanding 67 71 66 57 71 69 65

Days Sales Outstanding 62 63 55 55 58 57 55

Days Payable Outstanding 55 62 56 51 59 58 53

CCC-Cash Conversion Cycle 73 73 65 61 70 69 68

Working Capital Turns 5.0 5.0 5.6 6.0 5.2 5.3 5.4




Equity Research

March 6, 2015


Source: Company filings

Cost of Revenues SCSC’s mix of business led to a 9.7% gross profit margin for the second quarter 2015, the lowest gross margin in many years, in part due to a dearth of gross-margin enhancing acquisitions in the last few years (or until very recently). On a y-o-y basis, total gross profit increased marginally, by 1.0%, to $78.1 million. The Worldwide Barcode & Security gross margin decreased to 8.4% from 9% for the year ago quarter, largely due to a higher volume of big deals (the 3rd quarter in a row) at lower gross profit margins, timing of vendor program recognition and a lower mix of international business from foreign currency changes. In the Worldwide Communications & Services segment, while gross margins dipped to 11.8%, from 13.1 % last year, a decline primarily driven by less favorable fluctuations in product mix for North America Communications and Catalyst businesses, combined with prior year benefits from timing of vendor program recognition that did not recur in the current year, gross profit dollars increased 5% however, to $36.23 million, hence comprising 46.4% of $78.1 million of total gross profit. The segment represented just 38.1% of total sales. Management has indicated to us that its two latest acquisitions generate gross margins in excess of 11.5%. The Company, hence, expects companywide gross margins to hover above the 10% range going forward.

Operating and Net Income and EPS A 4.7% y-o-y increase in operating expense (principally SG&A: higher employee-related costs driven by additional headcount, partially offset by lower bad debt expense in both business segments) drove a 5.4% y-o-y drop in EBIT to $26.0 million, from $27.4 million in the year-ago period. After incurring a 35.1% tax rate (up from the prior-year’s tax rate of 34.3%), the Company generated $16.8 million in net income, down 8.0% y-o-y, as well as $0.58 GAAP EPS, down 8.7% from the year-ago EPS of $0.64. SCSC calculates Non-GAAP EPS, by adding back several items including amortization of intangible assets and acquisition costs. However, acquisition is prevalent in the industry and we view ongoing acquisitions as more likely than not.

$78.1

$41.9$36.2

$77.3

$42.8

$34.51.0%

‐2.1%

4.9%

‐3.0%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

SCSC Barcode/Security Communications

Gross Profit up 1.0% (v. 9.0% Reported Sales Growth)

Q2 2015 Gross Profit Q2 2014 Gross Profit Y‐o‐Y Gross Profit Change





Equity Research

March 6, 2015


FinTrust Earnings Forecast & Valuation Analysis: ScanSource, Inc. To estimate future results, several assumptions were made, including the following:

We did not incorporate any additional acquisitions. The effects of the two latest acquisitions will be to boost sales growth in fiscal 2015 and 2016. We exit 2020E with 5% top-line growth, in line with our expectation for end-user demand expansion.

To estimate a price target, we used 2 methods.

We ran a DCF model, assuming 10% cost of equity, 1.32X beta, and 3.5% perpetuity growth. We compared, contrasted and graphed growth and margin of several key variables to add color to our DCF results.

FinTrust Forecast: 2014E – 2020E We estimate that the Company has the opportunity to grow sales above end-user demand driven growth rates rapidly through 2020, at least, given the Company’s recent historic organic growth rates, focus on emerging technologies like mobile payments and 3D printing and acquisitions of high growth, high profitability operations in Europe and Latin America. From 2014 to 2020, we expect total sales to advance 7.9%, or some 300 basis points over estimated end-user sales growth, and we expect SCSC to exit 2020 with a 5.0% sales growth rate and an 8.6% EPS growth rate. Over the next 2 years, we expect double digit sales growth driven by recent acquisitions. The following chart traces other key metric 2015 – 2020 CAGRs as well.

Source: FinTrust estimates

Specifically, we expect sales growth to accelerate to 12.8% and 11.2% this year and next, driven by solid organic growth, augmented by acquisitions. However, we estimate that profitability will contract in fiscal 2015 due to pre-acquisition gross margin compression and ~ $6 million in added 2H 2015 OpEx taken to deploy the Company’s new ERP system, which recently went live in Europe.





Equity Research

March 6, 2015


Beginning in 2015, we estimate that EPS growth will hasten considerably to 24.9% producing $3.13, on a Non GAAP basis. Assuming no further acquisition, the Company is estimated to generate increasing free cash flow, to levels well beyond that needed to run the business (we estimate that the Company needs just 2% of sales in cash to operate). In particular, we estimate that FCF generation will resume strongly in 2016, due to (1) the deployment of the Company’s ERP system (2) rising gross margin, and (3) improved working capital turns.

Sources: Company filings and FinTrust Brokerage estimates We anticipate that gross margins will slowly rise each year and reach 10.7% in 2020, allowing gross profit to grow 8.6% per year versus a 6.9% revenue CAGR from 2015 – 2020. We anticipate that the Company’s working capital turns will gradually improve each year, and reach 6.4X turns by 2010, up from 5.6X for fiscal year 2015E. Consequently, in conjunction with rising gross margins, we anticipate that profitability – ROA, ROE and ROIC = will gradually rise throughout the forecast period as follows, and that in particular, we expect the Company’s ROIC to exceed its WACC starting in 2016E or 2017E (we estimate that the Company’s cost of equity is 13.2%).

Sources: Company filings and FinTrust Brokerage estimates

Sources: Company filings and FinTrust Brokerage estimates

Liquidity Ratios 2014A 1Q 2015 2Q 2015 3Q 2015E 4Q 2015E 2016E 2017E 2018E 2019E 2020E Days Dales Outstanding 58.2 57.6 55.5 55.0 54.5 54.0 53.5 53.0 52.5 52.0 Days Inventory Outstanding 68.6 63.3 64.9 64.4 63.9 63.4 62.9 62.4 61.9 61.4 Days Payable Outstanding 57.3 54.1 52.5 53.0 53.5 54.0 54.5 55.0 55.5 56.0 Cash Conversion Cycle 69.5 66.8 67.8 66.3 64.8 63.3 61.8 60.3 58.8 57.3 Working Capital Turnover 5.3X 5.5X 5.4X 5.5X 5.6X 5.8X 5.9X 6.0X 6.2X 6.4X

Stakeholder Returns FY2014A FY2015E FY2016E FY2017E FY2018E FY2019E FY2020EROA 5.36% 4.90% 5.53% 5.71% 5.80% 5.95% 5.97%ROE 8.91% 8.24% 9.19% 9.43% 9.53% 9.68% 9.60%ROIC (NOPAT / IC) 11.19% 10.26% 12.63% 13.94% 15.39% 17.22% 18.27%

1,873.12,022.8

2,164.4 2,305.0

2,443.3 2,577.7

2,706.6

1,040.41,262.3

1,489.4 1,586.2 1,681.4 1,773.9 1,862.6 10.3%

9.9%

10.3%10.4%

10.5%10.6%

10.7%

9.4%

9.6%

9.8%

10.0%

10.2%

10.4%

10.6%

10.8%

$0.0

$500.0

$1,000.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

FY2014A FY2015E FY2016E FY2017E FY2018E FY2019E FY2020E

SCSC Sales and Gross Margin: 2014 ‐ 2020E $ MMs

Worldwide Barcode & Security Worldwide Communications & Services Gross Margin





Equity Research

March 6, 2015


Source: FinTrust Brokerage Services estimates

Scan Source inc. Summary Income, Balance Sheet & Cash Flow Statements

($ in millions) 6/30/214 6/30/2015 6/30/2015 6/30/2016 6/30/2017 6/30/2018 6/30/2019 FY2020E '14 - '20FY2014A FY2015E FY2016E FY2017E FY2018E FY2019E FY2020E % of Total CAGR

Revenues:Worldwide Barcode & Security 1,873.1 2,022.8 2,164.4 2,305.0 2,443.3 2,577.7 2,706.6 59.2% 6.3%Worldwide Communications & Services 1,040.4 1,262.3 1,489.4 1,586.2 1,681.4 1,773.9 1,862.6 40.8% 10.2%

Total revenues 2,913.5 3,285.1 3,653.8 3,891.3 4,124.7 4,351.6 4,569.2 100.0% 7.8%

Revenues by Region North America 2,179.9 2,305.9 2,411.5 2,568.2 2,722.3 2,872.0 3,015.6 66.0% 5.6% International 733.7 979.2 1,242.3 1,323.0 1,402.4 1,479.5 1,553.5 34.0% 13.3% Total revenues 2,913.6 3,285.1 3,653.8 3,891.3 4,124.7 4,351.6 4,569.2 100.0% 7.8%

Gross Profit

Worldwide Barcode & Security 168.2 171.8 184.0 198.2 212.6 226.8 240.9 8.9% 6.2%Worldwide Communications & Services 132.9 153.2 193.6 207.8 221.9 235.9 249.6 13.4% 11.1%

Total Gross Profit 301.0 324.9 377.6 406.0 434.5 462.8 490.5 10.7% 8.5%

Operating Expense SG&A 192.4 216.5 243.5 255.0 265.9 275.8 284.7 6.2% 6.7%Change in FV of Contingent Consideration 2.3 2.5 2.8 2.8 2.8 0.0 0.0 0.0%

Total OpEX 194.7 219.0 246.3 257.8 268.7 275.8 284.7 6.2% 6.5%

EBIT Worldwide Barcode & Security 51.5 52.7 64.0 72.3 81.1 91.6 101.1 3.7% 11.9%Worldwide Communications & Services 54.9 53.2 67.3 75.8 84.7 95.3 104.7 5.6% 11.4%

106.4 105.8 131.3 148.2 165.9 187.0 205.8 GAAP EBIT 106.3 105.9 131.3 148.2 165.9 187.0 205.8 4.5% 11.6%

Net Income 71.5 68.5 86.7 98.5 110.2 124.1 136.5 3.0% 11.4%Non GAAP (base) EPS $2.52 $2.64 $3.13 $3.49 $3.83 $4.24 $4.59 10.5%Diluted GAAP EPS $2.50 $2.38 $2.97 $3.33 $3.67 $4.08 $4.43 10.0%

Year-Over-Year Growth FY2014A FY2015E FY2016E FY2017E FY2018E FY2019E FY2020E Worldwide Barcode & Security 2.5% 8.0% 7.0% 6.5% 6.0% 5.5% 5.0% Worldwide Communications & Services -0.8% 21.3% 18.0% 6.5% 6.0% 5.5% 5.0% Total Sales 1.3% 12.8% 11.2% 6.5% 6.0% 5.5% 5.0%

Cost of Goods Sold 1.1% 10.2% 10.7% 6.4% 5.9% 5.4% 4.9% Gross Profit 2.8% 7.9% 16.2% 7.5% 7.0% 6.5% 6.0%

Worldwide Barcode & Security EBIT - 2.3% 21.4% 13.1% 12.1% 13.0% 10.3% Worldwide Communications & Services EBIT - -3.1% 26.6% 12.6% 11.7% 12.5% 9.8%

EBIT 6.5% -0.3% 25.0% 13.6% 11.8% 12.6% 10.0% Diluted EPS 5.5% -4.9% 24.9% 12.1% 10.3% 11.2% 8.6%

Balance Sheet / Cash Flow / Value Creation FY2014A FY2015E FY2016E FY2017E FY2018E FY2019E FY2020E 15-20 CAGRTotal Assets 1,335.2 1,438.9 1,567.0 1,726.4 1,899.0 2,086.6 2,287.4 9.4%Shareholder's Equity 802.7 855.3 944.0 1,044.5 1,156.7 1,282.8 1,421.3 10.0%Cash From Operations 48.0 7.8 107.7 102.0 117.7 135.9 150.9 21.0%

ROA 5.36% 4.90% 5.53% 5.71% 5.80% 5.95% 5.97%ROE 8.91% 8.24% 9.19% 9.43% 9.53% 9.68% 9.60%ROIC 11.19% 10.26% 12.63% 13.94% 15.39% 17.22% 18.27%





Equity Research

March 6, 2015


Share Valuation We performed a 5-year DCF evaluation of SCSC based on our 2015 – 2020 earnings forecast, which is summarized in the preceding charts and graphs. Our key assumptions are that (1) SCSC’s Cost of capital is 12.5% and that (2) the Company’s discounted Terminal Value is driven by an assumption of 5.0% ongoing cash flow growth. Our model indicated that the shares’ target price is $43.90, or 20.7% upside. As the following Share Price Matrix illustrates, the target price is sensitive to very modest changes in WACC or perpetual unlevered free cash flow growth rate assumptions.

Source: FinTrust estimates

DCF Valuation Matrix: ScanSource (SCSC) Assumptions: WACC - 12.5%, Beta - 1.32x

WACC

$43.9 10.50% 11.50% 12.50% 13.50% 14.50%2.00% 41.7$ 37.1$ 33.5$ 30.5$ 28.0$ 3.00% 46.3$ 40.6$ 36.2$ 32.7$ 29.8$ 4.00% 52.3$ 45.1$ 39.6$ 35.3$ 31.9$ 5.00% 60.5$ 50.9$ 43.9$ 38.6$ 34.5$ 6.00% 72.4$ 58.8$ 49.5$ 42.7$ 37.6$ 7.00% 91.0$ 70.2$ 57.1$ 48.1$ 41.6$ 8.00% 124.4$ 88.1$ 68.1$ 55.5$ 46.8$

Perpetual Growth Rate

R² = 0.442

0.x

0.05x

0.1x

0.15x

0.2x

0.25x

0.3x

0.35x

‐4.0% ‐2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

EV / Sales

2015 / 16 Sales Growth

On 2016 Sales Growth, SCSC is InexpensiveSource: Company filings

TECD

IM

AVT

ARW

SNX

SCSC





Equity Research

March 6, 2015


In addition, we compared SCSC to a group of ‘technology distributors’ focusing on EPS growth and PEG ratios. The group is expected to generate 8.8% 2015 / 2016 EPS growth, while we envision 18.6% EPS growth for SCSC from this year to next. Furthermore, we estimate 11.7% Non GAAP SCSC EPS growth from 2015 to 2010.

Source: FinTrust estimates, Yahoo Finance

In broad terms, SCSC’s gross margin and ROIC are in line with its competitors. Prospective SCSC EPS growth rates are in excess of projected near-term EPS growth of its peers. In terms of EV / sales, while SCSC trades at a group premium, the Company’s EV Sales ratios is in line with its gross margin

attributes. SCS trades at an EV / Gross Porfit premium of 2.16x versus 1.39x. However (1) the premium is lower in comparison to the top

three competitors in terms of gross margin (2.16x versus 1.80x). In addition, SCSC’s SG&A / sales ratio is leaner than either ARW or AVT, contributing to more comparable EV / EBITDA ratio comparisons between SCSC and its peers.

Comparative Analysis - Specialty Technology Distributors

FinTrust Dividend Gross EPS EV / EV / EPS EPS P/E P/E 2016Company Ticker Rating Share Price Yield ROIC Days Inv. Days A/R Days A/P CCC WC Turns Margin Growth P / BV EV / Sales G Profit EBITDA 2015E 2016E 2015E 2016E PEG

Arrow Electronics ARW N/R $62.13 0.0% 11.7% 38X 86X 82X 42X 8.6X 13.3% 6.5% 1.43x 0.34x 1.54x 6.3X $6.26 $6.67 9.9X 9.3X 1.4XSYNNEX Corp. SNX N/R $78.77 0.6% 11.3% 36X 50X 41X 45X 8.1X 7.9% 8.5% 1.85x 0.28x 2.58x 7.9X $6.86 $7.44 11.5X 10.6X 1.3XAvnet, Inc. AVT N/R $45.49 1.4% 14.4% 34X 69X 52X 50X 7.2X 11.5% 7.6% 1.31.x 0.26x 1.28x 6.0X $4.59 $4.94 9.9X 9.2X 1.2XIngram Micro, Inc. IM N/R $26.76 0.0% 9.3% 37X 39X 49X 27X 13.6X 5.6% 15.2% 1.02x 0.11x 0.91x 5.6X $2.56 $2.95 10.5x 9.1x 0.6XTech Data Corp. TECD N/R $60.59 0.0% 9.9% 33X 41X 50X 24X 15.1X 4.8% 5.9% 1.11x 0.08x 0.65x 6.1X $5.08 $5.38 11.93x 11.3x 1.9X

MEAN -----------> 11.3% 36X 57X 55X 38X 10.5X 8.6% 8.8% 1.35X 0.21X 1.39X 6.4X $5.07 $5.48 10.7X 9.9X 1.2X

ScanSource Inc. SCSC BUY $36.10 0.0% 10.8% 65X 56X 53X 68X 5.4X 9.9% 18.6% 1.26x 0.31x 2.16x 7.0X $2.64 $3.13 13.7X 11.5X 0.6X





Equity Research

March 6, 2015


Company versus Market Comparison Chart:


Corporate Governance:

The BOD is generally populated by 5 – 7 members. If the Company’s CEO serves as Chairman of the

Board, the Board shall appoint a Lead Independent Director.

The Company is committed to the annual election of all

directors.




Equity Research

March 6, 2015



Scan Source inc. SCSC

Common Sized Income Statement

($ in millions)9/30/2013 1Q 2014A 12/31/2013 2Q 2014A 3/31/2014 3Q 2014A 6/30/214 4Q 2014A 6/30/214 FY2014A 9/30/2014 1Q 2015A 12/31/2014 2Q 2015A 3/31/2015 3Q 2015 6/30/2015 4Q 2015 6/30/2015 FY2015E

Fiscal Period ----> 1Q 2014A % of Total 2Q 2014A % of Total 3Q 2014A % of Total 4Q 2014A % of Total FY2014A % of Total 1Q 2015A % of Total 2Q 2015A % of Total 3Q 2015 % of Total 4Q 2015 % of Total FY2015E % of TotalRevenues:

Worldwide Barcode & Security 450.6 61.6% 476.2 64.3% 455.8 66.7% 490.5 64.7% 1,873.1 64.3% 501.0 63.3% 499.8 61.9% 492.3 61.3% 529.7 59.9% 2,022.8 61.6%Worldwide Communications & Services 281.3 38.4% 264.4 35.7% 227.1 33.3% 267.6 35.3% 1,040.4 35.7% 290.8 36.7% 307.3 38.1% 310.3 38.7% 354.0 40.1% 1,262.3 38.4%

Total revenues 731.9 100.0% 740.6 100.0% 682.9 100.0% 758.1 100.0% 2,913.5 100.0% 791.7 100.0% 807.1 100.0% 802.5 100.0% 883.7 100.0% 3,285.1 100.0%

Revenues by Region North America 558.3 76.3% 545.1 73.6% 498.8 73.0% 577.7 76.2% 2,179.9 74.8% 595.8 75.3% 587.1 72.7% 533.7 66.5% 589.3 66.7% 2,305.9 70.2% International 173.6 23.7% 195.5 26.4% 184.2 27.0% 180.4 23.8% 733.7 25.2% 195.9 24.7% 220.0 27.3% 268.8 33.5% 294.5 33.3% 979.2 29.8% Total revenues 731.9 100.0% 740.6 100.0% 683.0 100.0% 758.1 100.0% 2,913.6 100.0% 791.7 100.0% 807.1 100.0% 802.5 100.0% 883.7 100.0% 3,285.1 100.0%

Network1Cost of Sales

Worldwide Barcode & Security 409.9 56.0% 433.5 58.5% 498.8 73.0% 448.8 59.2% 1,790.9 61.5% 458.0 57.8% 457.9 56.7% 450.4 56.1% 484.7 54.8% 1,851.0 56.3%Worldwide Communications & Services 245.5 33.5% 229.9 31.0% 184.2 27.0% 235.3 31.0% 894.9 30.7% 256.2 32.4% 271.1 33.6% 272.2 33.9% 309.8 35.1% 1,109.2 33.8%

Total Cost of Sales 655.4 89.5% 663.4 89.6% 683.0 100.0% 684.1 90.2% 2,685.9 92.2% 714.1 90.2% 729.0 90.3% 722.6 90.0% 794.5 89.9% 2,960.2 90.1%

Gross ProfitWorldwide Barcode & Security 40.7 9.0% 42.8 9.0% 43.0 9.4% 41.7 8.5% 168.2 9.0% 43.0 8.6% 41.9 8.4% 41.8 8.5% 45.0 8.5% 171.8 8.5%Worldwide Communications & Services 35.8 12.7% 34.5 13.0% 30.3 13.3% 32.3 12.1% 132.9 12.8% 34.6 11.9% 36.2 11.8% 38.1 12.3% 44.3 12.5% 153.2 12.1%

Total Gross Profit 76.5 10.5% 77.3 10.4% 73.3 10.7% 74.0 9.8% 301.0 10.3% 77.6 9.8% 78.1 9.7% 79.9 10.0% 89.3 10.1% 324.9 9.9%

Operating Expense SG&A 47.5 6.5% 49.3 6.7% 46.7 6.8% 48.9 6.5% 192.4 6.6% 48.2 6.1% 51.7 6.4% 55.7 6.9% 60.9 6.9% 216.5 6.6%Change in FV of Contingent Consideration 0.7 0.1% 0.5 0.1% 1.0 0.1% 0.1 0.0% 2.3 0.1% 0.5 0.1% 0.5 0.1% 0.7 0.1% 0.7 0.1% 2.5 0.1%

Total OpEX 48.3 6.6% 49.8 6.7% 47.7 7.0% 49.0 6.5% 194.7 6.7% 48.7 6.2% 52.2 6.5% 56.4 7.0% 61.7 7.0% 219.0 6.7%

EBITWorldwide Barcode & Security 12.0 2.7% 13.0 2.7% 13.8 3.0% 12.8 2.6% 51.5 2.7% 12.5 2.5% 13.9 2.8% 12.3 2.5% 13.9 2.6% 52.7 2.6%Worldwide Communications & Services 16.3 5.8% 14.5 5.5% 11.9 5.2% 12.2 4.6% 54.9 5.3% 16.3 5.6% 12.0 3.9% 11.2 3.6% 13.7 3.9% 53.2 4.2%

28.2 27.5 25.7 25.0 106.4 28.8 25.9 23.5 27.6 105.8GAAP EBIT 28.2 3.9% 27.5 3.7% 25.6 3.8% 25.0 3.3% 106.3 3.6% 28.9 3.6% 25.9 3.2% 23.5 2.9% 27.6 3.1% 105.9 3.2%

Net Interest Expense (0.35) 0.0% (0.46) -0.1% (0.37) -0.1% (0.45) -0.1% -1.6 -0.1% (0.71) -0.1% (0.48) -0.1% (0.45) -0.1% (0.45) -0.1% (2.1) -0.1%Net F/X (gains) Losses 0.16 0.0% 0.11 0.0% 0.05 0.0% 0.00 0.0% 0.3 0.0% 0.45 0.1% 0.53 0.1% 0.95 0.1% 0.95 0.1% 2.9 0.1%

EBT 28.4 3.9% 27.8 3.8% 25.9 3.8% 25.5 3.4% 107.9 3.7% 29.1 3.7% 25.9 3.2% 23.0 2.9% 27.1 3.1% 105.1 3.2%Income Taxes (rate) 9.0 31.7% 9.5 34.2% 9.0 34.7% 8.9 35.0% 36.4 33.7% 10.0 34.3% 9.1 35.2% 8.1 35.0% 9.5 35.0% 36.6 34.8%

Net Income 19.4 2.7% 18.3 2.5% 16.9 2.5% 16.5 2.2% 71.5 2.5% 19.2 2.4% 16.8 2.1% 15.0 1.9% 17.6 2.0% 68.5 2.1%Non GAAP (base) EPS $0.67 $0.60 $2.52 $0.75 $0.68 $0.56 $0.65 $2.64Diluted GAAP EPS $0.69 $0.64 $0.59 $0.58 $2.50 $0.67 $0.58 $0.52 $0.61 $2.38

Weighted average common shares outstanding:Diluted 28,257 28,597 28,730 28,763 28,602 28,794 28,831 28,931 29,031 28,800

Year-Over-Year Growth 1Q 2014A 2Q 2014A 3Q 2014A 4Q 2014A FY2014A 1Q 2015A organic 2Q 2015A organic 3Q 2015 organic 4Q 2015 organic FY2015E Worldwide Barcode & Security -1.2% -2.6% 4.0% 10.3% 2.5% 11.2% 11.1% 5.0% 8.1% 8.0% 8.0% 8.0% 8.0% 8.0%Worldwide Communications & Services 1.4% 2.2% -7.1% -0.1% -0.8% 3.4% 1.7% 16.2% 9.1% 36.6% 8.0% 32.3% 8.0% 21.3%

Total Sales -0.2% -0.9% 0.0% 6.4% 1.3% 8.2% 9.0% 8.4% 17.5% 8.0% 16.6% 8.0% 12.8%

North American Sales 6.7% 7.7% 7.0% 2.0% 5.8% International Sales 12.9% 12.5% 45.9% 63.2% 33.5%

Cost of Goods Sold -0.6% -1.5% -0.7% 7.4% 1.1% 9.0% 9.9% 5.8% 16.1% 10.2% Gross Profit 3.3% 3.7% 6.5% -2.2% 2.8% 1.4% 1.1% 9.1% 20.6% 7.9%

Worldwide Barcode & Security EBIT - - - - - 4.9% 7.5% -10.9% 8.7% 2.3% Worldwide Communications & Services EBIT - - - - - 0.0% -17.1% -5.9% 12.1% -3.1%

EBIT 7.7% 12.7% 23.6% 3.1% 6.5% 2.4% -5.5% -8.3% 10.3% -0.3% Diluted EPS 9.5% 10.2% 18.0% 3.6% 5.5% -2.9% -9.0% -12.3% 5.4% -4.9%





Equity Research

March 6, 2015


Scan Source inc.

Common Sized Income Statement

($ in millions)6/30/214 FY2014A FY2015E 6/30/2015 FY2016E 6/30/2016 FY2017E 6/30/2017 FY2018E 6/30/2018 FY2019E 6/30/2019 FY2020E '15 - '20

Fiscal Period ----> FY2014A % of Total % of Total FY2016E % of Total FY2017E % of Total FY2018E % of Total FY2019E % of Total FY2020E % of Total CAGRRevenues:

Worldwide Barcode & Security 1,873.1 64.3% 61.6% 2,164.4 59.2% 2,305.0 59.2% 2,443.3 59.2% 2,577.7 59.2% 2,706.6 59.2% 6.0%Worldwide Communications & Services 1,040.4 35.7% 38.4% 1,489.4 40.8% 1,586.2 40.8% 1,681.4 40.8% 1,773.9 40.8% 1,862.6 40.8% 8.1%

Total revenues 2,913.5 100.0% 100.0% 3,653.8 100.0% 3,891.3 100.0% 4,124.7 100.0% 4,351.6 100.0% 4,569.2 100.0% 6.8%

Revenues by Region North America 2,179.9 74.8% 70.2% 2,411.5 66.0% 2,568.2 66.0% 2,722.3 66.0% 2,872.0 66.0% 3,015.6 66.0% 5.5% International 733.7 25.2% 29.8% 1,242.3 34.0% 1,323.0 34.0% 1,402.4 34.0% 1,479.5 34.0% 1,553.5 34.0% 9.7% Total revenues 2,913.6 100.0% 100.0% 3,653.8 100.0% 3,891.3 100.0% 4,124.7 100.0% 4,351.6 100.0% 4,569.2 100.0% 6.8%

Cost of Sales Worldwide Barcode & Security 1,790.9 61.5% 56.3% 1,980.4 54.2% 2,106.8 54.1% 2,230.8 54.1% 2,350.9 54.0% 2,465.7 54.0% 5.9%Worldwide Communications & Services 894.9 30.7% 33.8% 1,295.8 35.5% 1,378.4 35.4% 1,459.4 35.4% 1,537.9 35.3% 1,613.0 35.3% 7.8%

Total Cost of Sales 2,685.9 92.2% 90.1% 3,276.2 89.7% 3,485.2 89.6% 3,690.2 89.5% 3,888.8 89.4% 4,078.7 89.3% 6.6%

Gross ProfitWorldwide Barcode & Security 168.2 9.0% 8.5% 184.0 8.5% 198.2 8.6% 212.6 8.7% 226.8 8.8% 240.9 8.9% 7.0%Worldwide Communications & Services 132.9 12.8% 12.1% 193.6 13.0% 207.8 13.1% 221.9 13.2% 235.9 13.3% 249.6 13.4% 10.3%

Total Gross Profit 301.0 10.3% 9.9% 377.6 10.3% 406.0 10.4% 434.5 10.5% 462.8 10.6% 490.5 10.7% 8.6%

Operating Expense SG&A 192.4 6.6% 6.6% 243.5 6.7% 255.0 6.6% 265.9 6.4% 275.8 6.3% 284.7 6.2% 5.6%Change in FV of Contingent Consideration 2.3 0.1% 0.1% 2.8 0.1% 2.8 0.1% 2.8 0.1% 0.0 0.0% 0.0 0.0%

Total OpEX 194.7 6.7% 6.7% 246.3 6.7% 257.8 6.6% 268.7 6.5% 275.8 6.3% 284.7 6.2% 5.4%

EBITWorldwide Barcode & Security 51.5 2.7% 2.6% 64.0 3.0% 72.3 3.1% 81.1 3.3% 91.6 3.6% 101.1 3.7%Worldwide Communications & Services 54.9 5.3% 4.2% 67.3 4.5% 75.8 4.8% 84.7 5.0% 95.3 5.4% 104.7 5.6%

106.4 131.3 148.2 165.9 187.0 205.8GAAP EBIT 106.3 3.6% 3.2% 131.3 3.6% 148.2 3.8% 165.9 4.0% 187.0 4.3% 205.8 4.5% 14.2%

Net Interest Expense -1.6 -0.1% -0.1% (2.1) -0.1% (2.1) -0.1% (2.1) -0.1% (2.1) 0.0% (2.1) 0.0% 0.0%Net F/X (gains) Losses 0.3 0.0% 0.1% 2.00 0.1% 1.00 0.0% 1.00 0.0% 1.00 0.0% 1.00 0.0%

EBT 107.9 3.7% 3.2% 131.4 3.6% 149.3 3.8% 166.9 4.0% 188.1 4.3% 206.8 4.5% 14.5%Income Taxes (rate) 36.4 33.7% 34.8% 44.7 34.0% 50.8 34.0% 56.8 34.0% 63.9 34.0% 70.3 34.0%

Net Income 71.5 2.5% 2.1% 86.7 2.4% 98.5 2.5% 110.2 2.7% 124.1 2.9% 136.5 3.0% 14.8%Non GAAP (base) EPS $2.52 $3.13 $3.49 $3.83 $4.24 $4.59 11.7%Diluted GAAP EPS $2.50 $2.97 $3.33 $3.67 $4.08 $4.43 13.3%

Weighted average common shares outstanding:Diluted 28,602 29,200 29,600 30,000 30,400 30,800

Year-Over-Year Growth FY2014A FY2016E organic FY2017E FY2018E FY2019E FY2020E Worldwide Barcode & Security 2.5% 7.0% 7.0% 6.5% 6.0% 5.5% 5.0%Worldwide Communications & Services -0.8% 18.0% 7.0% 6.5% 6.0% 5.5% 5.0%

Total Sales 1.3% 11.2% 7.0% 6.5% 6.5% 6.0% 6.0% 5.5% 5.5% 5.0% 5.0%

North American Sales 4.6% 6.5% 6.0% 5.5% 5.0% International Sales 26.9% 6.5% 6.0% 5.5% 5.0%

Cost of Goods Sold 1.1% 10.7% 6.4% 5.9% 5.4% 4.9% Gross Profit 2.8% 16.2% 7.5% 7.0% 6.5% 6.0%

Worldwide Barcode & Security EBIT - 21.4% 13.1% 12.1% 13.0% 10.3% Worldwide Communications & Services EBIT - 26.6% 12.6% 11.7% 12.5% 9.8%

EBIT 6.5% 25.0% 13.6% 11.8% 12.6% 10.0% Diluted EPS 5.5% 24.9% 12.1% 10.3% 11.2% 8.6%





Equity Research

March 6, 2015



Commom Sized Balance Sheet

($ in millions)2014A % of Total 1Q 2015 2Q 2015 3Q 2015E 4Q 2015E % of Total 2016E 2017E 2018E 2019E 2020E

ASSETS Current Assets: Cash & equivalents $194.9 14.6% $139.9 $121.5 $151.9 $124.8 8.7% $221.5 $292.1 $377.1 $479.2 $597.1 Accounts Rec 464.4 34.8% 500.0 490.7 483.5 527.6 36.7% 540.3 570.1 598.7 625.7 650.7 Inventories 504.8 37.8% 495.1 518.4 509.9 556.2 38.7% 569.0 600.5 630.8 659.4 686.0 Prepaid Expenses 33.6 2.5% 44.5 39.9 43.0 43.0 3.0% 43.0 43.0 43.0 43.0 43.0 Deferred Tax Assets 18.1 1.4% 18.3 18.2 18.2 15.5 1.1% 15.5 15.5 15.5 15.5 15.5 Total Current Assets 1,215.8 91.1% 1,197.8 1,188.7 1,206.5 1,267.2 88.1% 1,389.3 1,521.3 1,665.0 1,822.8 1,992.3

PP&E, net 31.8 2.4% 38.4 43.2 48.2 53.2 3.7% 59.2 63.0 66.8 70.5 74.0Goodwill 32.3 2.4% 50.9 49.0 49.0 49.0 3.4% 49.0 49.0 49.0 49.0 49.0Other Assets 55.3 4.1% 73.9 69.5 69.5 69.5 4.8% 69.5 69.5 69.5 69.5 69.5 Total assets 1,335.2 100.0% 1,361.0 1,350.4 1,373.2 1,438.9 100.0% 1,567.0 1,702.8 1,850.3 2,011.7 2,184.8

(0.0) (0.0) 0.0 0.0 0.0 0.0 0.0LIABILITIES & SHAREHOLDERS' EQUITYCurrent Liabiities: Accounts payable 421.7 31.6% 423.5 419.6 419.9 466.0 32.4% 484.9 520.6 556.3 591.5 626.0 Accrued and other liabilities 63.6 4.8% 67.9 66.5 67.6 68.7 4.8% 69.7 70.7 71.8 72.9 73.9 Short term Borrowings 0.0 0.0% 0.0 0.0 0.0 0.0 0.0% 0.0 0.0 0.0 0.0 0.0 Current Portion of Contingent Consideration 5.9 0.4% 7.8 7.6 6.6 5.6 0.4% 4.6 3.6 2.6 1.6 0.6 Accrued taxes 8.7 0.7% 15.1 1.9 1.9 1.9 0.1% 1.9 1.9 1.9 1.9 1.9 Total Current Liabilities 499.9 37.4% 514.3 495.6 495.9 542.1 37.7% 561.0 596.8 632.6 667.9 702.4

Long Term Debt 5.4 0.4% 5.4 5.4 5.4 5.4 0.4% 5.4 5.4 5.4 5.4 5.4Deferred Income taxes 0.2 0.0% 4.4 3.9 3.9 3.9 0.3% 3.9 3.9 3.9 3.9 3.9LT Contingent Consideration 5.3 0.4% 2.4 2.4 1.9 1.4 0.1% 0.9 0.4 0.0 0.0 0.0Other liabilities 21.8 1.6% 24.2 24.4 26.7 26.7 1.9% 26.7 26.7 26.7 26.7 26.7 Total Liabilities 532.6 39.9% 550.6 531.7 533.9 579.6 40.3% 598.0 633.3 668.6 703.9 738.4

Shareholders' equity: Common Stock 168.5 12.6% 170.1 171.8 173.8 175.8 12.2% 177.8 179.8 181.8 183.8 185.8 Accumulated earnings 650.9 48.7% 670.1 686.9 701.9 719.5 50.0% 806.2 904.7 1,014.9 1,139.0 1,275.5 AOCI (16.7) -1.3% (29.9) (40.0) (36.3) (35.9) -2.5% (15.0) (15.0) (15.0) (15.0) (15.0) Total shareholders' equity 802.7 60.11% 810.3 818.7 839.4 859.4 59.72% 969.0 1,069.5 1,181.7 1,307.8 1,446.3

Total liabilities and shareholders' equity $1,335.3 100.0% $1,360.9 $1,350.4 $1,373.2 $1,438.9 100.0% $1,567.0 $1,702.8 $1,850.3 $2,011.7 $2,184.7

Solvency Ratios 2014A 1Q 2015 2Q 2015 3Q 2015E 4Q 2015E 2016E 2017E 2018E 2019E 2020E Quick Ratio 1.4x 1.4x 1.4x 1.4x 1.3x 1.5x 1.5x 1.6x 1.7x 1.9x Current Ratio (working capital ratio) 2.4x 2.3x 2.4x 2.4x 2.3x 2.5x 2.5x 2.6x 2.7x 2.8x Total Liabilities / Shareholder Equity 66.4% 68.0% 64.9% 63.6% 67.4% 61.7% 59.2% 56.6% 53.8% 51.1% LTD / Shareholder Equity 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4% LTD / LTD + SE 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4%

Liquidity Ratios 2014A 1Q 2015 2Q 2015 3Q 2015E 4Q 2015E 2016E 2017E 2018E 2019E 2020E DSO 58.2 57.6 55.5 55.0 54.5 54.0 53.5 53.0 52.5 52.0 Days Inventory Outstanding 68.6 63.3 64.9 64.4 63.9 63.4 62.9 62.4 61.9 61.4 Days Payable Outstanding 57.3 54.1 52.5 53.0 53.5 54.0 54.5 55.0 55.5 56.0 Cash Conversion Cycle 69.5 66.8 67.8 66.3 64.8 63.3 61.8 60.3 58.8 57.3 Working Capital Turnover 5.3X 5.5X 5.4X 5.5X 5.6X 5.8X 5.9X 6.0X 6.2X 6.4X

Other 2014A 1Q 2015 2Q 2015 3Q 2015E 4Q 2015E 2016E 2017E 2018E 2019E 2020EWorking Capital $716 $683 $693 $711 $725 $828 $924 $1,032 $1,155 $1,290Asset Turnover 2.2x 2.3x 2.4x 2.3x 2.5x 2.3x 2.3x 2.2x 2.2x 2.1xROA 5.36% 5.64% 4.97% 4.36% 4.90% 5.53% 5.79% 5.95% 6.17% 6.25%ROE 8.91% 9.48% 8.20% 7.13% 8.20% 8.95% 9.21% 9.32% 9.49% 9.44%ROIC 11.19%





Equity Research

March 6, 2015




Statement of Cash Flows

($ in millions)2014A 1Q 2015 2Q 2015 3Q 2015E 4Q 2015E 2015E 2016E 2017E 2018E 2019E 2020E

Cash flow from operating activities: Net income 81.9 19.2 16.8 15.0 17.6 68.5 86.7 98.5 110.2 124.1 136.5 Depreciation and amortization 7.4 1.9 2.4 2.6 2.7 9.5 10.6 11.3 11.9 12.6 13.2 Amortization of debt issuance costs 0.3 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 Provision for doubtful accounts 6.6 (2.1) 0.5 1.8 2.0 2.2 8.1 8.6 9.0 9.4 9.8 Stock-based compensation 5.3 1.4 1.5 1.6 1.8 6.3 6.8 7.3 7.7 8.1 8.5 Deferred income taxes 8.6 (0.9) 1.4 0.0 0.0 0.5 0.0 0.0 0.0 0.0 0.0 Excess tax effect of share based compensation (1.0) (0.1) (0.2) 0.0 0.0 (0.3) 0.0 0.0 0.0 0.0 0.0 Change in FV of contingent consideration 2.3 0.5 0.5 0.5 0.5 1.9 2.0 2.0 2.0 2.0 0.0 Changes in operating accounts: A/R (31.8) (22.5) 1.6 7.2 (44.1) (57.9) (12.7) (29.8) (28.6) (27.0) (25.0) Inventories (99.2) 14.5 (28.7) 8.5 (46.4) (52.0) (12.7) (31.5) (30.3) (28.6) (26.6) A/P 57.5 (12.0) 0.8 0.3 46.1 35.2 18.9 35.7 35.7 35.3 34.5 Prepaid Expenses 6.2 (2.7) 4.2 0.0 0.0 1.5 0.0 0.0 0.0 0.0 0.0 Accrued expenses (5.3) (3.5) 2.5 0.0 0.0 (1.0) 0.0 0.0 0.0 0.0 0.0 Income taxes payable 7.9 6.4 (12.8) 0.0 0.0 (6.4) 0.0 0.0 0.0 0.0 0.0 Other non-current assets 1.3 0.3 (0.7) 0.0 0.0 (0.4) 0.0 0.0 0.0 0.0 0.0 Net cash provided by operating activities 48.0 0.5 (10.1) 37.3 (19.8) 7.8 107.7 102.0 117.7 135.9 150.9

Cash flows from investing activities: Cash Paid for Businesses Acquired 0.0 (35.5) 0.0 0.0 0.0 (35.5) 0.0 0.0 0.0 0.0 0.0 Purchases of PP&E (11.2) (7.3) (6.5) (5.3) (5.3) (24.3) (9.0) (5.8) (5.7) (5.5) (5.3) Net cash used in investing activities (11.2) (42.8) (6.5) (5.3) (5.3) (59.8) (9.0) (5.8) (5.7) (5.5) (5.3)

(59.8)Cash flow from financing activities: Repayment of ST Borrowings 0.0 (4.7) 0.0 0.0 0.0 (4.7) 0.0 0.0 0.0 0.0 0.0 Share repurchase 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (23.6) (25.1) (26.2) (27.7) Debt issuance costs (0.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Contingent consideration payments (3.8) (5.5) 0.0 (0.5) (0.5) (6.5) (2.0) (2.0) (2.0) (2.0) 0.0 Exercise of stock options 12.6 0.2 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 Excess tax benefit of share based compensation 1.0 0.1 0.2 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 Net cash used in financing activities 9.3 (9.9) 0.2 (0.5) (0.5) (10.7) (2.0) (25.6) (27.1) (28.2) (27.7)

Effects of exchange rate changes on cash 0.9 (2.9) (1.7) (1.5) (1.5) (7.6) 0.0 0.0 0.0 0.0 0.0(Decrease) increase in cash and cash equivalents 47.0 (55.1) (18.2) 30.1 (27.1) (70.3) 96.7 70.7 84.9 102.2 117.9Cash and cash equivalents at start of period 148.1 195.1 139.9 121.8 151.9 195.1 124.8 221.5 292.1 377.1 479.2Cash and cash equivalents at end of period 195.1 139.9 121.8 151.9 124.8 124.8 221.5 292.1 377.1 479.2 597.1




Equity Research

March 6,2015


Recommendation: We estimate that given its potential growth rate, strong balance sheet and ability to internally finance acquisitions, historic generation of steady gross margin and other financial metrics, and modestly attractive valuation, that SCSC is appropriate as a long term holding for risk-tolerant investors. Our price target - $43.90 – is unreflective of future acqusitions, which the Company is highly likely to make. Such acquisitions, if chosen correctly and integrated successfully, add scale and scope in an industry that rewards both attributes, and could potentially drive share value higher than our estimate. Given our review of the distributor’s historic operating and financial results, we rate management as highly capable, and focused. Risks: Risk to our recommendation include, but are not limited to, greater competition from broadline distributors, vendors and resellers, loss of key vendors and reseller customers, political and business uncertainty in international markets, F/X fluctuation, and failure to successfully integrate acqusitions. The stock market as a whole and the trading prices of companies in the wholesale electronics industry have been volatile. Companies in the industry experience significant quarter-to-quarter fluctuations.





Equity Research

March 6,2015


Important Disclosures:

Analyst Certification: We hereby certify that the views expressed in this research report accurately reflect our personal views aboutthe subject company and its securities. We also certify that we have not, will not, nor are presently receiving direct and/or indirectcompensation in exchange for any specific recommendation in this report. In addition, said analysts have not receivedcompensation from any subject company in the last 12 months.

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An analyst or a member of his household may not purchase the securities of a subject company 30 days before or 5 days after theissuance of the research analyst’s report or a change in ratings or price targets, trade inconsistent with the views expressed by theresearch analyst, and all transactions in the subject company (ies) securities for the research analyst’s personal trading account mustbe approved.

The research analyst nor a member of his household own any of the securities of the subject company including any options, rights,warrants, futures or long or short positions. Neither the research analyst nor a member of his household own 1% or more of any ofthe securities of the subject company based upon the same standards used to compute beneficial ownership for the purpose ofreporting requirements under 13(d) of the Securities Act of 1934, as amended.

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The firm does not engage in investment banking activities.

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Investment Banking Relationships:

The firm has not managed or co-managed a public offering or received investment banking compensation in the past 12 monthsregarding the subject company (ies).

The firm does not expect to receive or intend to seek investment banking compensation in the next 3 months from the subjectcompany (ies).




Equity Research

March 6,2015


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