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Steris Corporation (NYSE:STE)

F4Q13 (Qtr End 03/31/2013) Earnings Call

May 7, 2013 10:00 AM ET

Executives

Julie Winter - Director, Investor Relations

Walter Rosebrough - President and Chief Executive Officer

Michael Tokich - Senior Vice President and Chief Financial Officer

Analysts

Konstantin Tcherepachenets - Raymond James

Jose Haresco - JMP Securities

Erin Wilson - Bank of America Merrill Lynch

Jason Rodgers - Great Lakes Review

Mitra Ramgopal - Sidoti

Operator

Welcome to the STERIS' fiscal 2013 fourth quarter conference call. (Operator Instructions) I'd now like to introduce today's host, Julie Winter, Director, Investor Relations. Thank you, you may begin.

Julie Winter

Thank you, Jane, and good morning, everyone. It's my pleasure to welcome you to our fiscal 2013 fourth quarter and full year conference call. Thank you for taking the time to join us this morning. As usual, participating in the call are Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO.

Now, just a few words of caution before we begin. This webcast contains time sensitive information that is accurate only as of today, May 7, 2013. Any redistribution, retransmission or rebroadcast of this call without the expressed written consent of STERIS is strictly prohibited.

I would also like to remind you that this discussion may contain forward-looking statements relating to the company, its performance or its industry, that are intended to qualify for protection under the Private Securities Litigation Reform Act of 1995. No assurance can be given as to any future financial results. Actual results could differ materially from those in the forward-looking statements. The company does not undertake to update or revise these forward-looking statements, even if events make it clear that any projected results, expressed or implied, in this or other company statements will not be realized.

Investors are further cautioned not to place undue reliance on any forward-looking statements. These statements involved risks and uncertainties, many of which are beyond the company's control. Additional information concerning factors that could cause actual results to differ materially is contained in today's earnings release.

As a reminder, during the call we will refer to non-GAAP measures including adjusted earnings, free cash flow, backlog, debt-to-capital and days sales outstanding, all of which are defined and reconciled as appropriate in today's press release or our most recent 10-K filings, both of which can be found on our website at steris-ir.com.

With those cautions, I will hand the call over to Mike.

Michael Tokich

Thank you, Julie, and good morning, everyone. Thank you for taking the time this morning to join us. As usual, I want to point out that we had several items impacting our reported results, all of which are excluded from our adjusted net income and adjusted diluted earnings per share.

As you saw in our earnings announcement, during the quarter, we made a pretax adjustment of $3.1 million to our SYSTEM 1 Rebate Program and class action settlement. By making this adjustment, we have essentially finalized both of these programs as the remaining liability is immaterial.

In addition, we have expenses related to our acquisitions impacting the P&L. During the quarter, we recorded pretax expenses of $5.2 million for intangible amortization and $650,000 for acquisition and integration expenses, which were somewhat offset by $2.5 million gain for the fair value adjustment of contingent consideration. Please see our earnings release for full reconciliation of as reported to adjusted earnings.

Turning to our adjusted consolidated results, total revenue increased 14% during the fourth quarter, driven by an 11% increase from acquisitions, 5% organic volume and 1% pricing improvement, somewhat offset by a 3% decline in our U.S. SYSTEM 1 and 1E business. Currency fluctuations were revenue neutral during the quarter.

Gross margin in the quarter increased to 120 basis points to 41.2%. The improvement in gross margin was positively impacted by the acquisitions and favorable product mix, but was negatively impacted by the medical device excise tax, which reduced gross margin by over $2 million or about 50 basis points.

Adjusted EBIT for the quarter increased 9% to $65.4 million. Adjusted EBIT as a percent of revenue for the quarter was 15.3%, a decline of 70 basis points. The positive impact of acquisitions and product mix were more than offset by the medical device excise tax and over a 200 basis point decline resulting from our annual incentive compensation program. Recall that last year we did not pay any bonuses as part of our annual incentive compensation program.

The effective tax rate for the quarter was 30.3% compared with 38.2% last year. The lower effective tax rate resulted from favorable discrete item adjustments, including the settlement of prior-year tax audits, the recording of the federal R&D tax credit and other discrete item adjustments. Adjusted net income for the quarter increased 18% to $41.5 million or $0.70 per diluted share as compared to $35.1 million or $0.60 per diluted share in the prior year.

Moving on to our segment results. Healthcare revenue in the quarter increased 16%. Contributing to the quarter, consumable revenue grew 42%, service revenue grew 29%, and capital equipment, excluding SYSTEM 1E unit sales increased 8% with growth in both infection prevention and surgical products.

Capital equipment was flat, including SYSTEM 1E unit, due to the replacement program for SYSTEM 1 units in the prior year. Healthcare backlog at the end of the year, excluding SYSTEM 1E units was $104.6 million, an increase of 15% with strength across the business.

Healthcare operating income was $42.9 million or 13.6% of revenue compared with $39.1 million or 14.4% of revenue in the fourth quarter of last year. Excluding the negative impact from both the annual incentive compensation program expense as well as the medical device excise tax, Healthcare operating margin would have expanded by over 150 basis points.

Life Sciences revenue increased 9% in the quarter. Capital equipment revenue grew 13%, consumable revenue grew 6% and service revenue grew 8%. Volume growth in capital equipment continues to stand primarily from pharma customers, who have resumed spending on replacement capital equipment.

Life Sciences operating income was $12.3 million or 19.1% of revenue, representing an increase of 13% compared with the prior year, driven primarily by the increase in volume. Backlog in Life Sciences was $48.4 million at the end of the quarter in line with prior years.

Revenue for Isomedix increased 7% in the quarter. We continue to experience solid demand from our core medical device customers as well as a positive impact from our acquisition of Biotest, which closed March of calendar 2012. Isomedix operating margin fell slightly in the quarter to 26.4% of revenue, as the increased volume was not enough to offset the margin impact of our recently expanded capacity.

In terms of the balance sheet, we ended the quarter with $142 million of cash. Long-term debt at the end was $492.3 million and consists of $410 million from our private placements and $82.3 million from our revolving credit facility. Our total debt-to-capital ratio is 34.3% and our total net debt-to-capital ratio is 27%.

Our free cash flow, excluding the SYSTEM 1 Rebate program and class action settlement for fiscal 2013 was $158 million compared with $108.3 million in the prior year. The improvement in free cash flow is attributable to improvements in working capital management and an $18 million cash benefit associated with the deduction for U.S. tax purposes related to our European restructuring effort, which I discussed last quarter.

Our inventory levels had been reduced by over 8% as compared to the prior year, even with the growth in the business and inventory added from the recent acquisitions. In addition, our DSO now at 68 days has improved by six days compared to the prior year.

Capital spending was $23.5 million in the quarter, while depreciation and amortization was $20.5 million. Total capital spending for the year came in at $87.4 million, slightly less than we had anticipated. For fiscal 2014, our outlook for capital spending is approximately $90 million.

With that, I will now turn the call over to Walt for his remarks. Walt?

Walter Rosebrough

Thanks, Michael, and good morning, everyone. We appreciate you taking the time to spend with us this morning. As you've already heard from Mike, we had a strong finish for fiscal 2013. I will focus my comments on highlights of the year and then turn to our outlook for fiscal '14, and then we'll open for Q&A.

We entered this past year with anticipation and would be a pivot year for STERIS, with growth rates limited by our challenging comparisons due to the strong capital sales of SYSTEM 1E last year. STERIS people exceeded our expectations for the year, growing revenue 6%, completing four acquisitions, providing record earnings per share and making significant working capital improvements.

Each business segment contributed to our topline growth. Healthcare revenue grew 6% in total or 4% organically, excluding the impact of SYSTEM 1. Healthcare organic growth stem from solid performance across the business with improvement continuing to come from our newer products, V-PRO maX, Vision washers, Prolystica cleaning chemistries and new integrated OR products.

We are focused on introducing products that increase efficiencies for our customers, and in fact recently launched several new products. Those includes the iQ 3600 OR integration system, an new line of steam sterilizers, CS iQ, the AMSCO 2500 washer and innovative orthopedic surgical table, and an ultraviolet surface disinfection system.

As with most companies, our European business in both Healthcare and Life Science segment was challenged during the year by difficult market conditions, particularly in Southern Europe. However, our European Healthcare team was able to offset revenue declines with cost savings, so we did not see profit degradation. We expect continued growth challenges in that region in the coming year, but remain cautiously optimistic for the longer run.

The Life Science team had an outstanding year, exceeding our expectations by growing revenue 8% and expanding profit by 14%. They produced double-digit increases in capital equipment and solid mid-single digit growth in both consumables and service. Their profitability improved with this increase in volume and with favorable product mix.

And finally, the people of Isomedix delivered 9% revenue growth in fiscal 2013, with 6% organic growth and the rest from our acquisition of Biotest in March 2012. As we've discussed all year, we have expanded capacity in Isomedix and that has had a near-term impact on our margins, as we feel the new capacity. But even with those expansions, Isomedix increased profit by over 8% year-over-year.

Turning to STERIS total profitability. Our EBIT margin for the year came in as we anticipated at just under 15%, a slight decline from the previous year. This was due mainly to the cost of our annual incentive compensation program that Mike mentioned earlier and the negative impact of the medical device tax.

Adjusted earnings per diluted share grew 5% to $2.34, which was above our expectation and included the impact of one quarter of the medical device tax. One of the key drivers of going-forward margin improvement is our continuing effort to create a lean business, which is beginning to benefit us.

One of the opportunities resulting from that effort is insourcing. As you all know, we have major projects underway to insource component production that is currently provided by third parties. These projects are progressing well and the first one is beginning to pay off.

We spent about $15 million in capital during fiscal 2013 on these projects, and we anticipate spending another $5 million to $10 million more in fiscal 2014. While we are beginning to see cost savings from the first of these initiatives, we are also experiencing the startup cost and depreciation from the others. We do not anticipate that we will see either meaningful savings or significant increased cost in aggregate from these projects in fiscal 2014.

The savings from the first projects are offset by startup cost from the following work. Beginning in fiscal 2015 and beyond, we anticipate saving $8 million to $10 million per year as a result of these efforts. When we look back on fiscal '13, it was a milestone year for STERIS. We completed the SYSTEM 1 transition and are very happy to have that behind us.

We continued to invest in new products and employee processes to defend and grow our core businesses. Simultaneously, we continued execution of our strategy to expand into adjacent markets, with the purchase of U.S. Endoscopy, Spectrum and TRE. And we purchased the remaining interest in our OR integration partner VTS Medical.

These acquisitions are doing well and our integration efforts are on track. I want to personally thank to people of STERIS, including our newest members from U.S. Endoscopy, Spectrum, TRE and VTS for managing through such a busy, but exciting time in our evolution.

As a result of these activities, we did leverage our balance sheet a bit more, taking on an additional $200 million in debt toward the end of the year. Even with this additional leverage, we are very comfortable that our conservative balance sheet and we have plenty of dry powder for continued growth.

We substantially improved our working capital management in FY '13, resulting in free cash flow in excess of our expectations. Last, but not least, we increased our dividend in double digits for the seventh consecutive year to $0.19 per share per quarter.

Due to careful execution of our strategies, our people turned fiscal '13 into a year of growth. And we anticipate carrying this momentum into fiscal 2014, delivering revenue and profit growth in line with our long-term targets. More specifically, we anticipate revenue growth of 8% to 10% in fiscal '14.

As the acquisitions anniversary during the year, we will naturally have a stronger topline growth performance in the first half of the year, and anticipate total organic revenue growth of approximately 4% to 5%. We also anticipate growing earnings somewhat between 6% and 11%, which translates into earnings per diluted share in the range of $2.47 to $2.60. Excluding the medical device impact this year, our earnings would increase double digits versus FY '13.

For your modeling purposes, let me provide a bit more color. We anticipate their earnings will be split approximately 42% in the first half of the year and 58% in the second half. This is somewhat different from our more typical 45%, 55% split of recent years, as a result of the timing of R&D spending as well as the timing of startup cost for the insourcing project that I discussed earlier.

From a margin perspective, we anticipate an annualized expense of approximately $10 million for the medical device tax during fiscal 2014, which will be a headwind to our margin expansion. Our EBIT margin guidance of about 15.5% also assumes that R&D spending will increased to a bit over 3% of sales, reflecting both increased spending in our historic business as well as the higher spending rate in acquisitions. In addition, you will want to keep in mind that our interest expense has increased due to the additional debt taken on this past year.

With these comments, I will hand the call back over to Julie for Q&A.

Julie Winter

Thank you, Walt and Mike for you comments. We're now ready to begin the Q&A session. Operator, would you please give the instructions and we'll get started.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Lawrence Keusch with Raymond James.

Konstantin Tcherepachenets - Raymond James

This is Konstantin in for Larry. I guess if you can just start off on the topline growth. Walt, can you maybe just describe some of the factors that really drove outperformance this quarter. And then just can you maybe provide additional commentary in terms of your organic 4% to 5% growth. And maybe just commentary on the state of the U.S. capital equipment market, during this earning season we clearly heard some mixed messages, and it seems like you guys are actually continuing to have some positive momentum.

Walter Rosebrough

I'll try to break, I think you had three questions there. I'll try to answer them sequentially. First, regarding the growth in Q4. As we mentioned in Q3, we were actually little soft in growth in Q3, and mentioned that the capital, as you know from history, can be a little bit lumpy. And particularly on the Healthcare side, we had very, very strong backlog ending Q3. So we were quite confident, we would have a solid Q4. And in turn we did have good orders in Q4 as well. And so we exceeded our expectations a little bit largely on the capital side, largely in Healthcare. But we also had very strong shipments in Life Science.

So it was more the capital side of the business, both in Healthcare specifically and Life Science, where we did better than we expected. That would be the high level and it's reflected in our patterns. We ended up for the year, we actually grew backlog in Healthcare a few million dollars. So basically we shipped what the orders we took for the year, which is what you want to do. So we're very pleased with that. I forgot the second question, Julie, if you might give me an update.

FY '14 organic is pretty well spread across the business. I suppose I can't think of any particular where it's a big spike in growth. So it's pretty well spread across the business. First of all, we course the acquisitions to get a full year impact. We're still overcoming about $12 million or $13 million worth of S1E mostly in the first quarter, so there is kind of a mix and match there.

But then the second piece is just the generalized growth. We are continuing to see the growth we expected to see in the Spectrum and U.S. Endoscopy acquisition. And we're seeing low-to-mid single digit growth, we see across the board and other businesses. So I wouldn't point to anything significant that that's not something we've already talked about. So we're seeing pretty much in line with what we have been saying in the last six to 12 months, and not out of line with our long-term forecast.

In terms of capital spending, there is pressure on hospital capital spending. There is no question about that. In particular, the IT dollars being spent for physician practices put pressure on that spending, so every dollar is scarce. But we continue to see what I would call solid capital spending in Healthcare. We're not seeing some big robust growth streak or a pent-up demand growth streak, but we're just continuing to see solid capital spending, both our backlog and our pipeline coming in so it's just the same.

We're seeing very similar levels of large project dollars that we've seen, so we have some visibility out of a-year-and-a-half to two years, and we're seeing very similar levels. Although, just as we talked about, I think last quarter or the quarter before, I've forgotten when we discussed this, but we have seen slightly less projects, but the projects are bigger, so they equal out to being similar sized or maybe 2% or 3% greater. So very much in line with what we expected. So that's kind of what we are seeing at this point in time.

Konstantin Tcherepachenets - Raymond James

And then just last question from me. Do you think longer-term out clearly you're doing insourcing and that should help margin. But can you maybe talk about longer-term opportunity in terms of just consolidating your manufacturing footprint or are there opportunities that can be significant driver of operating margin expansion?

Walter Rosebrough

Well, we have talked about the insourcing piece, and in fact that's really what we're doing with the footprint. As we get leaner, we have space available and we have people available to do more work, and there is two ways to solve that problem. One is to grow, which we anticipate doing. But the other one is to bring more of the work in-house, and we clearly are doing that.

We think we can better quality, better cost and better visibility or I'll call it supply chain visibility, reliability for delivery for our customers. So we're doing all the above. So I would say as a general statement, working to continue to make the business more lean is a way that we can improve our cost position. So that's a general statement.

The second is, as we're developing products, it's our desire, if you will, we're trying to develop those products. We wanted all products that can create more value for our customers, as we create more value, we should be able to get some price for that. We are in a particularly price sensitive point in time in this industry. So it's not like we're going to see 10% per year price increases while you structure the imagination. But if you can get a point or two of price by creating more value for customers, that's a good deal for both of us. And that's what our intention would be.

And then, lastly, we do want to continue to watch our overhead cost and spread those overhead cost over larger amounts of business. So just as you've described, it could be plan consolidations, but those more likely occur where we see acquisitions and where there is overlap of facilities or something like that. So that is a possibility going forward and that's something we will always be looking at.

Operator

Our next question comes from Jose Haresco, JMP Securities.

Jose Haresco - JMP Securities

Couple of questions here, so I guess I was just starting to think about next year's guidance for the Healthcare division. Could you parse out the difference between your outlook on capital versus consumables in that business. You also had a very strong Healthcare capital equipment performance this quarter, but as you mentioned they had a really great backlog too. So is it that sustainable or should we dampen that a little bit and wind that in a range of organic 4% to 5% for the capital?

Michael Tokich

If you look at our projections for 2014 for Healthcare, we are looking at low-double digit revenue growth in total and I will bifurcate that to about mid-single digits for our organic growth, about high-single digits from the acquisitions and then more specifically on the capital it would be in the low-single digits that we'll be anticipating. So we continue to see capital growth, although in the low-single digits for fiscal 2014.

Jose Haresco - JMP Securities

The growth in your acquisitions, it's kind of funny, because most of the hospital companies in order to that med-taxes have reported really bad or just unfavorable or not positive trends in patient volumes as we start to look out at the backend of the year. Your numbers in your guidance suggests the opposite, so what's going well in U.S. Endoscopy that seems to be backing that trend? And I guess, in consumables in general, because it's kind of the trend here with regards to what that business needs to be telling us?

Walter Rosebrough

One, you have to separate the types of consumables that are being used and you have to remember almost all of ours are linked to procedures, for example, patient days. And so I can't separate those two things for you. I'm not familiar with everybody else's forecasts as you are. But clearly we are more procedural-linked, than we are, we call it, inpatient day length. So if hospitals for example shorten their length of stay, but do more procedures, our consumables or more linked to those procedures, so that would be the first comment.

The second comment again is underlying volume of procedures. We don't see that falling-off in total in significant ways over the course of the year, and so that our growth is linked to that. And specifically on U.S. Endoscopy a lot of those procedures, there are procedures interventions, but there are also a little diagnostic procedures in that arena. And we support a lot of those diagnostic procedures

And we have a number of new products. So, U.S. Endoscopy growth is largely a function of brand-new to market products that are going from zero to something. And so that zero to something creates growth, and more growth, if you will, then the procedures in total. So that's the long and short story, if you will, of U.S. Endoscopy. I think I have covered what you've asked.

Jose Haresco - JMP Securities

And just the housekeeping, do you think 42% of the earnings would be in first half?

Michael Tokich

Yes, we did. Jose, I wouldn't call it 42.000 though, we're not that good.

Jose Haresco - JMP Securities

As I think, Mike, you said you told me a long time ago for fiscal '14 would be the first kind of a clean year right, where all the SYSTEM 1 is kind of behind us from an operating perspective. So given that you're projecting the end of year 15.5% EBIT margin, where do we go from there? I mean, recognizing, not going to hold you anything, you already say about the years beyond that, but given that you're insourcing a lot of these components to improve your gross margin, you obviously have anniversarying these costs on the acquisitions. I think where does that margin ultimately go?

Michael Tokich

Jose, I think we've talked about that before, we're always working to increase our margins. We're not always particularly successful in it, but we're always working to do that. I don't think that we're at a pick of margin percentage possibility. This year we're eating more the device tax, so presuming that at least stays flat for us and that we don't see increases in that range. We're working to increase our margins, but we're not planning on kind of step function change, 15.5% to 17%.

I would like to see this going from 15.5% to 15.8% to 16.1% to pick a number at the end. I do think again in orders of magnitude, these kind of businesses ranges in the 15% to 20% range, I think it's reasonable if you get over 20%, I think you'll probably set up for being greedy and somebody will break you. You're setting price umbrella for lots of competition. And under 15% you should be working to get over. So we're happy to get back in that 15% range, above the 15% range, but we don't see ourselves stopping that. But we are not looking for step function change. We're looking for margin improvement.

Jose Haresco - JMP Securities

Something related to that, now you've been incredibly disciplined about your dividend increases every year. With cash flow improving, is it even fair in conjecture that overtime you might increase that rate of growth or is that something that's not part of your discipline?

Walter Rosebrough

We are incredibly disciplined about our dividend policy.

Operator

Our next question comes from Erin Wilson, Bank of America Merrill Lynch.

Erin Wilson - Bank of America Merrill Lynch

Just follow-up on insourcing, are the efforts there following behind your expectation or has anything, I guess, materially changed on that front with your strategy there? And it sounds like you don't have anything incorporated into your guidance in the way of cost savings this year or in fiscal '14, but are the cost associated with that implementation incorporated to the guidance.

Walter Rosebrough

Yes, Erin. I mean, I'll answer the general question. And hopefully I will pickup the new answers in yours. But first of all, we think the insourcing prices were moving nicely along. And we characterize them as two big projects, which it is kind of the way we think about it, but inside each of those big projects are many, many, many small projects. So as you might expect some of them are ahead and some of them are behind, but on balance, we're feeling good about where we are in that process. So that's the answer to your first question.

Second question is, indeed we are not expecting any material savings or cost this year. Relatively speaking, due to those projects and what that is that we are achieving savings in the lead projects, which is the Mentor fabrication facility. We're achieving savings there. And we'll continue to grow those savings over the course of the year. But at the same time, we're kicking off other projects that have front-in-costs.

And so what's happening is if you look at the year end total, we think we're going to about breakeven. And so next year we will see the full impact of the Mentor fabrication facility and begin to see the impact of the Montgomery facility, which has the other load of those projects.

So that's why we're saying this year we think it's about breakeven, next year in $8 million to $10 million. So really next year $8 million is the rough estimate over the longer period. As you get down to '16, '17 we expect that to grow into roughly $10 million of savings.

Erin Wilson - Bank of America Merrill Lynch

And then on capital deployment kind of what's your capacity for incremental acquisitions at this point. And where is your focus there? You had mentioned that dividend, I guess, but particularly as it relates to acquisitions in international?

Walter Rosebrough

As I said earlier, we feel pretty disciplined about our dividend policy. We don't have any expectation of moving off that. And then after that our next place to put money is in our businesses, both what you would have historically call the core businesses, but now also into U.S. Endoscopy Spectrum, because we didn't buy those businesses to sit on them, we bought them to grow on. And so we will continue to place money towards those, business in their primary businesses, which is why you're seeing the increase in R&D.

The next piece is acquisitions. We feel very comfortable that we have significant dry powder to do continued acquisitions. And we will be looking in the same spaces of our current businesses as well as in adjacent spaces. And we are not limiting our look to the United States. So we clearly are looking outside the U.S. in that arena.

We now have the bulk of our integration activities behind us in U.S. Endoscopy, I'd say essentially behind us in U.S. Endoscopy. We're well down the path on the Spectrum integrations. So we're feeling quite comfortable there. So we feel, not only do we have the financial capacity, but we feel that we have the management capacity to continue down that path.

Erin Wilson - Bank of America Merrill Lynch

And any geographies you're focused at all?

Walter Rosebrough

We probably just would rather not say, I guess, there. Naturally, if there's trade-offs, the "growing markets" are of great interest to us. So as you know the markets in Asia Pacific, Latin America, that are more rapidly growing than others. And so they have interest in that regard, but where we have our base businesses in North America and Europe are also areas that we would consider. So we're not ruling out, if you will, specific geographies, but we are looking for different things in different places.

Operator

Our next question comes from Jason Rodgers, Great Lakes Review.

Jason Rodgers - Great Lakes Review

Looking at your guidance, I was wondering what you are looking for as far as performance in international market as well as commodity costs?

Michael Tokich

Jason, I will address the commodity cost. Basically, we're looking at modest or I'll call it inflationary increases in raw material costs. Nothing out of line, nothing unique we're seeing this year versus the prior years. And on international, I could say, generally speaking we're expecting faster growth outside the United States with the exception of Europe and Europe is flat-to-down in our expectations.

Operator

Our next question comes from Mitra Ramgopal from Sidoti.

Mitra Ramgopal - Sidoti

Just couple of quick questions. First I'm just wondering on the acquisition front, given the success you are having with your U.S. Endoscopy and Spectrum, how much are you expecting in terms of maybe an EPS contribution with the fiscal '14 guidance?

Walter Rosebrough

We're not guiding, we're treating those businesses as product lines as we do all our product lines and we don't break the guidance into that group. So they are grouped into the businesses. But in terms of, if you looked at our statements when we did the acquisitions, we're not materially different from those feelings at the time.

Mitra Ramgopal - Sidoti

And again, given the success you are having with those, has it changed your inclination in terms of being more aggressive in terms of pursuing acquisitions and do you have anything built into the guidance?

Walter Rosebrough

We have no acquisitions built into the guidance. And I would say as we said last year, we've been looking to do things for the last two or three years. And sometimes, the people we want to acquire, it's not their time and so we work on their time more than our time, but we continue to pursue. I would say there is no difference in level of intensity. In the last couple of years, if you recall four or five years ago, we pretty much got out of business. We felt we had more opportunity to work inside our own business, but for the last two to three years, we have been working on it. We will continue to work down on that path, but we don't control the timing on those deals.

Mitra Ramgopal - Sidoti

Then just a final quick question on, there is a big picture. I know the medical device taxes obviously hitting you above $0.10 this year, but as you look forward to 2014 and beyond in terms of the overall healthcare environment, are you more bullish in terms of where you are today?

Walter Rosebrough

I wouldn't say more or less bullish. The good news is, I am going to separate the underlying demand first and then the capital consumable sides of the business.

First in underlying demand, we have been saying and I think everyone has been saying and understands that the underlying demand is very strong. We are entering the period where the baby boomers are reaching peak healthcare use time between the age of late 50s and 70s. And so that pig is going to the python and I am one of the piglets, by the way, I am a baby boomer.

And I just had a hip replacement. So I am a classic person in that. And I think you're going to see more and more of that in the next decade. So the underlying demand is exceedingly strong. The question is what the government and other third-party payers and individuals do to reduce the cost of that underlying demand and how they utilize that demand and that is what is clear.

On the capital side, the more uncertainty there is, over a short period, it tends to disrupt capital over long periods. Change is almost always good for capital, because if you change things, you have to rejig or something and that is good for capital. So in the current timeframe, I suppose if you were to say vis-à-vis prior the election, when we didn't know if we would be continuing down the path of Accountable Care Act or not, I believe we're more bullish in the short term, because there is less uncertainty.

The hospitals at least know what they are moving towards. If that changes over the next year or two, then that will change in the short run. But in the long-run, the underlying demand, we think is very strong.

Operator

I am showing no other questions at this time. I'll now turn the call back for any closing remarks.

Julie Winter

Thanks everybody for joining us and have a great day.

Operator

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