Scansource Inc (SCSC) 2012 Q1 法說會逐字稿

Welcome to the ScanSource First Quarter Earnings Announcement Call. (Operator Instructions). I would now like to turn the call over to Ms. Mary Gentry, Director of Investor Relations. You may begin.

Thank you for joining us for the ScanSource earnings conference call to discuss financial results for the quarter ended September 30, 2011. My name is Mary Gentry, Director of Investor Relations, and with me are Rich Cleys, our CFO; Scott Benbenek, President of Worldwide Operations; and Mike Baur, our CEO. We will review operating results for the quarter and then take your questions.

This conference call contains certain comments which are forward-looking statements that involve risks and uncertainty. These statements are subject to the Safe Harbor created by the Private Securities Litigation Reform Act of 1995. The statements made in this call are made as of today's date. We may subsequently make these statements available on ScanSource's website or otherwise.

ScanSource does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after today's date. Any number of important factors could cause actual results to differ materially from anticipated results. For more information concerning factors that could cause a difference, please see the Company's Annual Report on Form 10-K for the year ended June 30, 2011 filed with the Securities and Exchange Commission.

We will be discussing both GAAP and non-GAAP results during our call and have provided a reconciliation between these amounts in the press release. Mike Baur will now begin our discussion with an overview of the quarterly results.

Thanks, Mary. We're pleased to report record net sales for the second quarter in a row. Net sales for our September quarter increased to $770 million, up 21% year over year and 5% over the sequential quarter. This increase reflects record sales for North America, record sales for Latin America and the addition of full-quarter results for our CDC Brasil acquisition which closed April 15.

Our sales for the quarter include strong results for our North America Communications and our Security businesses. Our Security business benefitted seasonally from large school system projects completed during the summer. A favorable mix of products and better-than-expected attainment under vendor programs drove our gross and operating margins higher. For the September quarter our gross margin increased to 10.3% and our operating margin increased to 4.1%, both above the upper end of our plan range.

We split our business across different vertical technology markets and multiple geographies, which blend together to provide attractive margins. While it worked out really great for us this quarter, we expect to return to more normal margin levels in the December quarter. Our strong performance in North America overshadowed the weaker performance for our International markets, especially in Europe. For North America not only were our top-line revenues record setting, we also had strong operating margins due to favorable achievement of vendor programs and SG&A operating leverage.

For our International business, excluding the addition of CDC Brasil, sales increased 9% year over year and declined 5% from the sequential quarter. Lower European sales reflect a challenging economic environment there, which has led to heightened competitive pressures. For both of our European sales units we saw declines in midsize deals and a longer sales decision process. Our European sales team also lost in business to vendor-direct resellers. We had lower operating margins for our International business, but we're continuing to invest in future growth, especially in Brazil and in our European Communications business.

Our CDC Brasil acquisition includes future earn-out payments that are payable in Brazilian Real. In August, we decided to prefund a portion of the estimated earn-out payments and entered into foreign exchange contracts to hedge the cash transfer. We made an error in interpreting the accounting for these contracts, so unfortunately we ended up with an accounting loss when exchange rates changed. As a result, we recorded a $2.5 million nonrecurring loss included in Other Expense, which had a $0.06 per share negative EPS impact. Excluding the loss from foreign exchange contracts, earnings per diluted share for the September quarter would have totaled $0.73 instead of the $0.67 we reported. Rich will provide additional detail on this item in his remarks.

During the quarter, our centralized logistics and better inventory availability gave us operational advantages. We know that if we don't have the product then we can't sell it, so we've turned inventory availability and mix management into a strategic advantage. Our business is about serving our vendors and customers and we're able to win because we have the products available. We ended the quarter with higher inventories on our balance sheet as we want our strategic advantage to continue.

With that, I'll turn the call over to Rich to discuss our first quarter financial results in more detail.

Thanks, Mike. I'll start my discussion with overall sales and operating results for the September quarter. In the first quarter of fiscal 2012, the Company generated worldwide sales of $770.3 million which increased 21% over prior-year first quarter and 5% over the fourth quarter 2011, respectively.

On a geographic basis, sales originating from our North American Distribution segment increased 16%, in comparison to the prior-year quarter, to $573.5 million. The International segment grew 40% from Q1 2011 to $196.8 million. Excluding the impact of foreign exchange fluctuation, International segment sales grew 33%. As a reminder, this is the first full quarter of CDC Brasil sales, which were $43.7 million. So when we factor out foreign exchange and Brazilian sales, our International business had a 2% increase in year-over-year local currency sales.

Within our product lines, which include CDC, we experienced a 22% increase in worldwide sales of our POS & Barcoding and Security product categories over the prior-year quarter. These product categories represent 60% of our total sales for the quarter with the remaining 40% originating from Communications' products. Our Communications sales units experienced an increase of 21% in comparison with the prior-year quarter.

The Company's consolidated gross margin percentage increased to 10.3% in the first quarter from 10% for the quarter ended September 30, 2010, and 10.1% for the sequential quarter ended June 2011, primarily due to a more favorable product mix and a favorable achievement of vendor programs in North America.

SG&A expenses in the quarter increased to $46.6 million, compared to $38.6 million in the prior-year first quarter. The increase in operating expenses is primarily attributable to incremental operational expenses incurred in Brazil as a result of the purchase of CDC Brasil. Overall, we had strong leverage on SG&A expenses considering our sales increase. As a percent of net sales our SG&A ratios remained relatively static, decreasing 5 basis points from the prior year to 6.04% of sales. From the sequential quarter SG&A expenses increased $1.3 million from $45.3 million, but decreased 12 basis points as a percent of net sales.

As a reminder, we had an earn-out for CDC. As a result we have to re-measure the contingent consideration owed to the CDC sellers every quarter. Included in operating expenses and disclosed as a separate line item, a charge of $900,000 for the change in fair value consideration was recorded in the quarter. Operating income was $31.6 million and increased 27% and 8% from comparative prior year and sequential quarters, respectively. Expressed as a percentage of sales, operating income was 4.1% in the current quarter compared to 3.9% for the prior year quarter and 4% for Q4 2011.

Interest expense was $486,000 for the current quarter, up from $366,000 in the prior year quarter and down from $541,000 in the sequential quarter. Other expense for the first quarter 2012 includes the $2.5 million nonrecurring loss from foreign exchange contracts. In mid-August we decided to prefund a portion of the estimated earn-out payments associated with our CDC Brasil acquisition, which are payable in Brazilian Real. We entered into a forward exchange contract to preserve the economics of the currency exchange during the few weeks it would take the transfer the cash into Brazil. Although we incurred the loss, the contracts preserved the economics of the prefunding.

At the time we entered into the forward contracts, we believed that we had an accounting liability and, therefore, the change in Real's exchange rate on the contract and the change in rate on the liability would offset for accounting purposes. Upon further review, we did not meet the accounting requirements to book a liability. Since the commitment to transfer funds did not meet the accounting requirement to record a liability, the hedge of the forward contract did not eliminate the foreign currency exchange rate risk for accounting purposes. From the time we entered into the forward contract settlement in September, the Real devalued by 11.8% resulting in a nonrecurring cost loss of $2.5 million.

The effective tax rate was 34.5% and 35.6% for quarters ended September 30, 2011 and 2010, respectively. This decrease in effective tax rates for the prior year reflects the benefit of changes in geographical mix to tax jurisdictions with lower corporate income tax rates.

Our return on invested capital was 18.2% for the quarter compared to 19.5% for the prior-year quarter. The decrease in return on invested capital was primarily driven by increased borrowings on the Company's revolving credit facility. The borrowings increased due to the prefunding of the CDC acquisition and increased working capital for growth.

In summary, the September 2011 quarter had reported fully diluted earnings per share of $0.67 versus $0.58 in the prior-year quarter.

Turning to the balance sheet, inventory turned 5.8 times during the quarter compared to 6.6 times and 6.1 times in the prior year and sequential quarters, respectively. As inventory increased, the Company had 12 paid for inventory days on hand at September 30, compared to 8 days at the end of the prior year first quarter and 8 days at the end of the fourth quarter.

We continue to increase inventory levels of certain products in response to increased market demand, favorable vendor programs and longer lead times. There are $64.4 million in checks written, but not cleared at September 30, 2011, which are included in the accounts payable balance. At June 2011, this amount was $73.6 million.

Our Days Sales Outstanding, DSO, was 56 days at September 30, 2011, compared to 57 and 59 days in the sequential and comparative prior-year quarters, respectively. DSO at 56 days is within our normal expectations.

The Company had cash and cash equivalents on hand of $37.3 million as of September 30, 2011, compared to $28.7 million at June 30, 2011. During the quarter, the Company spent $2.3 million on capital expenditures, primarily related to our investment in the new ERP system which has been discussed in previous conference calls and filings.

The Company held $104 million of interest-bearing debt at September 30, 2011, up from $50.1 million at our prior year end, driven by borrowings on the Company's revolving lines of credit. After achieving our strongest sales results in history in fiscal 2011, our working capital needs have increased in order to maintain the appropriate levels of inventories and to extend appropriate trade credit to our customers. Furthermore, we prefunded a portion of our expected future earn-out payments for CDC as discussed earlier. These needs were financed from operations and our revolving credit facility.

On October 11, we refinanced our primary revolving line of credit. The facility is a five-year, $300 million multi-term senior secured revolving credit facility. The credit facility refinances the Company's $250 million revolving credit facility and replaces the Company's $25 million note payables that were both scheduled to mature on September 28, 2012.

In our first quarter balance sheet, you will notice $24.6 million in current borrowings under our revolving credit facility. As the previous credit facility came due within one year at the September quarter end, we had to classify any outstanding borrowings that were subsequently repaid prior to the execution of the new facility as short term.

Mike will now comment specifically on the quarterly results and outlook for each of our business units.

Thanks, Rich. We operate through seven separate sales units that are lead by a sales unit president with their own sales and merchandizing teams. This is an important part of our business model. We have dedicated teams that know our vendors and customers well and understand the business and technology products intimately. So let's take a look at highlights for our sales units, starting with those in our North American segment, which includes the United States and Canada and represent 74% of our overall sales. The North American sales of $573 million represent increases of 16% year over year and 5.5% sequentially.

I'll start with POS & Barcoding, our largest and oldest sales unit. Our large deals continued at a level similar to last quarter. While we're not seeing any major supply chain issues, inventory lead times have become longer. We are realizing a customer benefit from having inventory readily available. We've also made some opportunistic inventory purchases. In August, ScanSource POS & Barcoding received the 2011 Gold Vendor of Excellence Award in the Distributors category from the Retail Solutions Providers Association. The Award presentation included a video where customers described our team as innovative, pertinent and a great partner.

In September, we held our annual POS & Barcoding Partner Conference, which we branded "We're Better Together". We had record attendance including more than 300 reseller partners.

In our Security business, our record sales results were driven by market share gains and seasonally strong school system business, as many school projects are completed in the summer months. We had more big deals, nearly double the year-ago quarter, and gained additional benefit from vendor programs. Our sales from Axis, Cisco and Ruckus were very strong, all record sales for the quarter. We also saw strong results from new vendors-- March Networks, Samsung, and ACTi -- with record sales for them as well.

We have clear focus on video surveillance, access control, and ID products. Currently, video surveillance is our largest category. We continue to grow our customer base and increased the number of customers by 8% in each of the last two quarters.

Our Catalyst sales unit had record sales for the second consecutive quarter with strong performance by Avaya Enterprise and Aruba. Large deals were up over the June and prior year quarter mainly from Avaya. Similar to past years, the September quarter is Avaya's strongest sales quarter as resellers work to meet annual sales targets in connection with Avaya's September fiscal year end.

We also saw strong growth from Aruba where the channel shift is still under way particularly for smaller-sized deals. An effective campaign to recruit Avaya resellers continues to bring in new partners for enterprise, small business, video and network. We're investing more resources to support the public sector opportunity primarily with Avaya.

Moving to ScanSource Communications, we had a record quarter led by Polycom, ShoreTel, AudioCodes and Plantronics, and we continue to gain market share. Our big deals more than doubled from the preceding quarter, including a large federal government deal with Polycom and a large ShoreTel transition deal. Our ShoreTel revenue accelerated during the quarter, both from transitioning existing ShoreTel customers to two-tier distribution and also recruiting new resellers. Starting October 1st, we kicked off an annual marketing promotion, "We Work How You Work" with Polycom.

We continue to offer Unified Communications training programs to help our partners succeed. In October ScanSource Communications hosted its annual Partner Conference in Memphis with the theme of "Where You're the King", which included a tour of our centralized US distribution center.

Next, I'll continue sales units' highlights with the results for our International business, which is 26% of our overall business, and had sales of $197 million for a 40% year-over-year increase and a 3% sequential increase. Keep in mind that these increases include a full quarter of sales for acquisition of CDC Brasil, which totaled $43.7 million for the quarter.

Starting with Europe POS & Barcoding, sales declined from the record results for the June quarter with growth varied by region. We had sequential quarter sales growth in the UK, Nordics, Austria and Switzerland, while sales were down in France, Germany and the Netherlands.

From the European debt crisis we're seeing more market unpredictability and increased customer sensitivity to pricing and credit terms. Big deals remained at the previous quarter's level, though midsized deals fell off. We did add distribution with Epson in the Germanic region as of October 1st. Our September quarter was a record quarter for service contracts with Motorola and Zebra and Intermec.

We held our largest French Partner Tour to date with over 230 attendees, and earlier this week held our ScanSource Europe Partner Conference in Brussels. We're still seeing too many distributors in these markets; in part, from manufacturers traditionally using local distributors. So many opportunities remain to gain channel efficiencies here.

For Europe Communications, margins increased from a more favorable vendor mix of higher margin product lines and exchange rates, though we're seeing lower sales than last quarter and the year-ago quarter. It's a cautious environment, one where sales decisions are taking longer. Large projects, while not cancelled, are rolling out more slowly. Our big deals remain on the level similar to the June quarter, but we saw a noticeable decrease in our midsize business.

We had strong year-over-year growth from Avaya, a flagship vendor in Europe for us, and have new opportunities in the UK. In July, we consolidated the European warehouse operations in Liege, Belgium, and transferred our inventory from Cologne to the central warehouse there in Brussels. This consolidation gives us logistic efficiencies and service advantages, such as higher product availability, greater flexibility and more scalability. In August, Europe Communications received the 2011 EMEA Distributor of the Year Award from ShoreTel.

Latin America had record sales results for the Miami-based business and the addition of CDC Brasil. For our Miami-based business we had good sales growth from Motorola, Zebra, Honeywell, Bematech and Epson in POS & Barcoding, and from Polycom and AudioCodes in Communications and Security. We produced strong quarterly sales growth in Chile, Colombia, Argentina, Guatemala, Ecuador and Costa Rica.

In Mexico we had good year-over-year growth, but sales were down from the preceding quarter. The devaluation of the Mexican Peso has delayed projects and receivable collections. Vendors in Mexico with strong results include Motorola, Extreme, Zebra, Honeywell, Polycom and Bematech.

The September quarter was the first full quarter for CDC Brasil with double-digit growth from the preceding full-quarter run rate. This quarter our margins in Brazil include some exchange rate benefit from selling inventory that was purchased at lower rates. Our team delivered strong results from top vendors; Bematech, Motorola and Zebra. The CDC Brasil team continues to make good progress as part of ScanSource Latin America, and we're investing in future growth in Brazil and continue to be excited about our opportunities there.

Turning now to our next fiscal quarter, we believe net sales for the quarter ended December 31, 2011 could range from $755 million to $775 million. Our earnings per share could range from $0.64 per diluted share to $0.67 per diluted share.

At this time, we'll be glad to answer your questions.

(Operator Instructions). Tony Kure, KeyBanc.

I just wanted to make sure I caught the number right. For Barcoding Communications how much did it grow overall during the quarter?

For Communications or for Barcoding?

I'll take both, actually. I just didn't hear it in the script.

Are you talking about year over year or just last quarter?

How much did it grow in this quarter year over year?

It's 22% in POS & Barcoding and Security and 21% in Communications.

Okay. So the gross margin is higher than expected. The guidance implies a pretty sharp decline, or not sharp but a decline down. Is that all because of the vendor programs, or is there something else that would make this switch down a little bit?

It's a combination, Tony. This is Rich. It's a combination of vendor programs and the product mix. As Mike mentioned, we have a good, strong Communications business in North America and a strong North American result. We would expect that our overall product mix and geographic mix might come back a little bit more normal in this next quarter.

In Europe, when did the slowing really becoming noticeable for you? Was it late in the quarter, or was it maybe throughout the quarter? Could you just talk to that?

I would say we really had a -- we saw slowdowns earlier in the quarter and what was probably surprising for us was even at the beginning of September we were seeing a slowdown. What happened was to make the numbers we did we had a very strong last couple of weeks of the September quarter. I really think the resellers worked really hard to get what they could, but it was really a more backend-loaded quarter than we have seen before.

Just based on the order trends, is that what is implied in guidance is sort of flat trends, or are you sort of factoring in this trend or demand trends maybe deteriorate further in the December quarter?

I think our forecast is basically saying that we're going to see a couple of things happen. One, is Avaya's year-end always is a strong quarter for us. When we gave our original forecast for the quarter of September, we weren't sure about that. It did come in very strong, so that would imply some softness for the December quarter out of the North American Communications business.

I think, secondly, we've got a growing business in Brazil, and yet it's still new to us and we don't know yet what that means from a seasonality standpoint. So we've got a little bit of a question about what that business will do for us.

Third, in Europe, we still have a growing business opportunity with our Communications business but it's still small. Whereas POS & Barcoding as you know is more mature and we're not again real confident that the market will improve in the December quarter. So our guidance is suggesting that we're not going to see improvement in the European POS & Barcoding business in the quarter.

As far as this earn-out, I mean $900,000 with quick math, it just looks like about a $0.02 impact to the quarter. Obviously, you called it out and we can do with it what we want. But, how long is that supposed to persist? Is that for the whole fiscal '12, and I guess it depends on CDC does. But, let's just assume CDC goes according to plan here this year, how long would that earn-out headwind be a part of your P&L?

The earn-out adjustment will occur every quarter all the way through the end of the earn-out, which is mid-2015. So that's why we've called it out as a separate line item. The way that it works on a fair value is you have to revalue the fair value of the earn-out every quarter and that fair value can go up or down. If you remember, last quarter we actually had a slight uptick on the fair value. This quarter at $900,000 all else being equal that would be more normal. So our guidance that we gave would be more in line with this kind of fair value adjustment for next quarter. Another thing to understand with the fair value, if all else stays the same, if exchange rates, interest rates and the outlook over the next four years for Brazil stays the same, you'll see a similar number for fair value every quarter. Because it's a discount rate that's a lot more than interest. So the fair value adjustment could be significant if they achieve their numbers over the next four years.

So what we're seeing here, with the $0.02 impact on the quarter was just the delta, the change in the valuation, it wasn't the actual earn-out payment. It was just the change, correct?

Yes, it's the change in the value.

Okay, so in the December quarter here, are you expecting a similar impact to the quarter? In other words, you're going to take another $900,000 hit, or you don't know at this point and you're just calling it as no impact?

What we would say in our guidance right now would be similar, so that would be in our guidance.

So similar to sort of $900,000.

Similar to this quarter.

Okay. The last thing is, just with Security now, it sounds like it had a good quarter. Could you just kind of put some numbers around if you can how fast this is growing? I looked at one of your old presentations, it was up like 60% since inception in 2004. How fast has this been growing the last couple of quarters? Are we still talking 20%-plus growth or 30% growth? Could you just kind of give us a frame of reference there?

I think you're right, Tony. We've been talking about it in some of our presentations about very strong CAGR growth since inception. We've been trying to not disclose specifically how it's doing just so we can keep some competitive advantages, but clearly it's doing very well and it's growing more than double digits. So we're very happy with the way they have focused the business around certain products, certain vendors, and the vendors that we're really working closely with are starting to make the kind of changes in the Security business that we saw in Barcoding and Communications where they're willing to have fewer distributors and more revenue with those fewer distributors. So we think that trend will continue.

Then, just one last question. Any impact expected or trying to factor in on the supply chain for the products you sell for the floods in Thailand?

We are still evaluating which of our vendors might be impacted by that. So we don't have that in our plan. As you know, we've said on our calls for the last year that some of the various disruptions that have happened we've kind of assumed they'll continue for a while. Meaning that even with the Japan crisis we had more inventory, and so right now we feel like we're in an okay position, but we don't have details yet of Thailand to know for sure which of our vendors will be impacted and when.

Okay, well thanks so much for the time.

We appreciate it.

Ajit Pai, Stifel Nicolaus.

A couple of quick questions, I think the first is you talked about it being record quarter for services from Motorola, Intermec and Zebra. Could you give some color as to what the services are and what kind of role you're playing over there?

In general, the services that we talk about are manufacturer services that are provided to the reseller or to the end user. We're a sales agent, if you will, in that process so we're reselling manufacturer-delivered service contract. So as Motorola and other vendors have looked at some areas of their business that flow to the channel that were maybe opportunistic, this was one many of them started working on a few years ago and they're trying to encourage the reseller channel to sell a manufacturer maintenance contract. It's typically a break-fix, kind of like extended maintenance; that's the kind of program it is.

Got it and then for you you're only getting a commission on that. You're not actually providing the service yourself, so it's a fairly low -- it's not intensive on your asset utilization. Is that fair? There's inventory associated with it?

That's exactly correct.

Is it material or a percentage of your raw revenue, or not even close?

I would say it's not material as revenue. It's starting to help on the margin side somewhat.

The second question is, just talking about Northern Europe, you talked about weakness in Germany, France and the Netherlands. Those are the countries that have been somewhat, you know over the last couple of years have been better than the Southern countries. Is that something that you see as continuing to deteriorate, or is there some kind of trend where the countries that were impacted earlier and greater are seeing greater strength? Or, is it something that's just specific for you folks based on your operations in the North and the South of Europe?

I think the overall theme is that the market is nervous, and I think in this particular quarter we saw growth in the UK, Nordics, Austria and Switzerland, but I would not interpolate that that we would see that same trend continue. I think it was driven by, again, some deals that we were able to close. Whereas in France and Germany, we weren't able to close some deals. So even though we said big deals were made on the previous quarter's levels, there were still some deals that we either saw they got delayed, deferred, or maybe lost.

When you talk about the Security vertical, I think the two sorts of areas that you pointed to for greater strength were sort of additional relationships that you had, as well as like schools, etc., so seasonality. But what about end-market demand with unemployment having been high for as long, you've had crime stats begin to start driving gradually. Are you watching access control broadly from companies, corporations; you have occupied various area initiatives all over. Are you watching some of those end markets beginning to see some sort of secular growth, or are the end markets still fairly sluggish, sort of tied with the broader economy and construction economy and you're just gaining share?

I think the areas that we look at are rarely the end market. We're looking at helping the manufacturers be more efficient in their existing distribution channel, and that's what we've seen a bigger impact for us. Manufacturers are trying to figure out a way to reduce their cost of distribution, so we're a factor there. Number two, there is still a technology change going on, moving from analog to digital, and moving to IP cameras. So I think that's the one end-market growth area, Ajit, that we are seeing impact our business. Because we're seeing our resellers and our vendors focusing more on IP cameras and that's been a success story for us.

Right now, you're still not in a position where it is a large enough percentage of the overall revenue that it's going to be called out separately yet? Right, so it's not material. It's not yet close to 10%, is that fair?

Yes, we said at 10% will be a good place to talk about it. The rest of our business has continued to grow well, so these guys have got to keep selling at a faster rate and they're getting close.

The last question is, now that you've got CDC behind you, your balance sheet is still good, and with a moderating growth that you're sort of pointing to on the top line, you're going to start generating a lot more cash. What does the EMEA environment look like and what are the priorities? Is it still going to be geographic primarily, or would it be different?

I think for us right now, from an EMEA perspective, we're not aggressively going out to the market trying to enter a new geography, for example, or a new technology. We believe the investments we've made recently in Brazil, we want to see those pay off and we think that market opportunity is significant. As well as the market that we entered a couple of years ago, which is the European Communication market, so right now from where I'm sitting I want to make sure the European Communications market for ScanSource gets a lot bigger.

We've seen, again, a change there from when we first got there. We saw that we had a partnership with some other vendors that didn't develop as well as we wanted. We started then with Avaya and Avaya now has authorized us in the UK and Germany. We also now have Polycom, which is a new vendor for us in Europe, that we think will also help us grow significantly. So the growth in Europe Communications, the growth in Brazil, and then the continued growth in Security we think will keep us busy for a while.

Thank you so much.

Chris Quilty, Raymond James.

I was hoping you could maybe help quantify for us, at least qualitatively, when you look at the guidance for the December quarter. This will be the first, sort of low, double-digit growth quarter in more than a year and a half. Does that reflect primarily your concern about Europe, or does it also reflect your thoughts about the presence or lack of a traditional December, end-of-year CapEx blowout that you typically see?

I think, Chris, it is more of a view that the International business may not be as strong as we have in the past. If you recall from our comments earlier, if you take out Brazil, our International business only grew 9%. As International business historically has been a key growth engine for us, seeing it decelerate for now, absent Brazil, is partly the reason for our conservatism.

If you add the European confusion that's going on, which I don't know for sure how much of that impacts us, but we know that our customers are saying that there's a lot of confusion. There's a lot of discussion. So that's built into our thinking, too, is that our European business whether it's our Barcoding or Communications, our teams are going to be less likely to say there's a huge opportunity over there right now, meaning right in the December quarter. I think that's what that's reflecting. I think our North America business is older and more mature, but has generated good growth throughout the last year and a half and I think they're still doing okay. So I think it really points more clearly to our European business than anywhere else.

Great and for Rich, I just wanted to quantify your discussion around the foreign exchange charge. That's a noncash accounting charge. The actual transaction that you carried out did what it was intended to do, which was to protect your existing contract terms. Is that correct?

Right, so what we did was for the same amount of dollars we got that many Real to Brazil. But, because of the foreign exchange contract and the accounting error, we end up with a different geography as to where that investment is. So part of the investment, if you will, is in the P&L and the other part is on the balance sheet.

Fair enough, as long as you accomplish what you were supposed to do, the accounting element of it isn't as important. A final question for you on the Security business, are we getting close to the point where we might see that broken out in a more definitive manner?

Again, Chris, we'd like to see those guys make us have to break it out, yes. Meaning that we feel pretty certain that we'll do it at 10%, but they have done a great job and the rest of our business has, too. What makes it more challenging for them is we just bought some more business, the Brasil business, and now they've got to go past that one, too. I'm making it hard for them. I'm buying businesses in the middle of their growth.

Hopefully, their bonus isn't based on that metric.

It's not, they're doing great.

All right, thanks guys.

Thanks, Chris.

Andrew Abrams, Avayan Securities.

Just a quick follow up on the potential shortages coming from the Thailand region can you outline where, if this is significant, what parts of your business you would expect to see it most? I know it's hard to trace back in a lot of cases, but maybe you could shed some light on it for us.

Andrew, the only information I have today, and this is literally just as of today, is that it appears it's around products that use hard disk drives. That the disk drive manufacturers are all forecasting that they will have a difficult time meeting their requirements. So if I look at what products do we carry that might have disk drives in them it's not many. So, we're still waiting to hear from our suppliers, number one, which of them have disk drives in there that are sourced in Thailand and would that be a problem. I believe the data, again, that I saw was that a significant portion of all disk drives are manufactured in Thailand.

Okay. I mean I'm assuming we're two or three weeks away from getting any real feedback there.

Yes, who knows, but we'll be keeping an eye on that for sure. Again, we exited the quarter with good inventory positions across our portfolio of products, so hopefully it won't impact us significantly in the quarter.

Great, and of course I have to ask, can you tell me what the percentage of Security is to your business since everybody else has already asked you?

It's less than 10%.

Less than 10%, thank you very much.

We appreciate it.

Keith Housum, Northcoast Research.

Great quarter. Rich, can you just remind us about the new credit facility and how it's different in terms of your interest rates versus the old one? How we should perhaps look at that going forward?

The interest rate versus the market is going to be favorable. The document itself will be disclosed with our 10-Q that should come out next week. So from an interest rate versus market it's favorable. Compared to what we had, which we negotiated in 2007, it was a fantastic deal in 2007. So it would be logical to think that the rates are going up, but we got a pretty good deal we think.

So, if we would assume that you have $100 million out for the entire year, are we looking at perhaps a 1% or a $1 million impact, going up, or not even that much?

I think if you look at the market ratings for a company of our size, it wouldn't be unusual for the spread to be like 125, maybe a little bit more. We're coming off of a deal that was a 50-point spread, and what I'm telling you is we got a pretty good deal.

Okay, that's all I have. Thanks.

Thank you.

At this time we're showing no further questions.

Great, thanks for joining us. Our next conference call to discuss our December 31st quarterly earnings is expected to be on January 26, 2012.

That does conclude today's call. Thank you all for participating. You may disconnect your lines at this time.