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CareFusion Corporation (NYSE:CFN)

F2Q 2014 Earnings Conference Call

February 3, 2014 04:30 PM ET

Executives

Kieran T. Gallahue - Chairman and CEO

James F. Hinrichs - CFO

Jim Mazzola - SVP of Global Marketing and Communication

Analysts

Robert Hopkins - Bank of America Merrill Lynch

Matthew Taylor - Barclays Capital

Matt Miksic - Piper Jaffray

Kim Gailun - JPMorgan

David Roman - Goldman Sachs

Rick Wise - Stifel Nicolaus & Company

Larry Keusch - Raymond James & Associates

James Francescone - Morgan Stanley & Co.

Gene Mannheimer - B. Riley & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 CareFusion Corporation Earnings Conference Call. My name is Shaquana, and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. Later we will facilitate a question-and-answer session towards end of this conference. (Operator Instructions)

I’d now like to turn the presentation over to your host for today’s call, Mr. Jim Mazzola, CareFusion Investor Relations. Please proceed, sir.

Jim Mazzola

(Audio gap) results for the second quarter which has ended December 31, 2013 as well as provide an update on our outlook for fiscal 2014. We issued a news release about an hour ago with our financial results, which is posted on our website at carefusion.com and filed on Form 8-K with the Securities and Exchange Commission.

Please note that during today’s call, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into CareFusion’s ongoing results of operations, particularly in comparing underlying results from period to period.

Before I turn the call over to Kieran, I want to remind you that during today’s call, we will be making forward-looking statements, including statements about our fiscal ’14 guidance. Our actual results could differ materially from those expressed in our forward-looking statements due to risks and uncertainties, including the risk factors set forth in today’s release and our filings with the SEC.

So with that, I’ll turn the call over to Kieran.

Kieran T. Gallahue

Great. Thanks, Jim. Good afternoon, everybody, and thanks for joining us. During our second quarter, we continue to make progress against the fiscal 2014 goals we outlined a few last August and our three-year plan that extends for fiscal 2015. Our job is to manage both the short and longer term and I’m pleased with the progress we made during the quarter towards both sets of goals.

Starting with the second quarter, our results came in about where we expected with revenue growing to $922 million and adjusted EPS of $0.54. The story of the quarter is similar to what we told you last August and again in November. Our Procedural Solution segment continues to perform very well led by the strength of our clinically differentiated portfolio and our execution with the businesses we acquired and integrated into that portfolio.

We also saw good execution in the Medical System segment. Execution that will become more apparent in the P&L as we began to install higher volume of dispensing systems in the second half of this year and into next fiscal year.

In Medical Systems, I’m pleased with the momentum we’ve made in our infusion and dispensing businesses. Infusion grew 8% during the quarter as the team continued to win new business and hold pricing relatively stable in a positive competitive environment.

Our CareFusion Alaris System remains well regarded by clinicians and has proven versatile and effective in acute care hospitals of all sizes. Our growth came primarily in the U.S., but was also strong in key European markets where we introduced a new product last quarter.

In Dispensing, we had a record quarter for committed contracts, the third consecutive period of record or new record performance on this measure. It means that our team is winning the business that will be installed in book as revenue in future quarters. Our new CareFusion Pyxis ES platform continues to be well received by customers and comprised more than 40% of the contracts we signed in the quarter.

We saw no change in the competitive environment in dispensing. In fact the response we’ve had to new medication management software products we released in December has been overwhelmingly positive and establishes an even higher competitive bar in the market. We did expect Dispensing revenue to be roughly flat for the quarter, so it was below our expectations. The traditional four to six month timeframe from contract installation is lengthening by a few months as customers balance competitive or competing initiatives and constrained resources particularly in their IT departments.

The CIO is among the busiest and more strategic roles in an IDN today as hospitals consolidate and look for efficiency across their networks. Because Pyxis ES is tightly intertwined with the IT infrastructure, we were -- we’re able to deliver greater benefits today and over time. However, the same benefit requires more involved planning and coordination with the installation and since we record revenue upon installation, the delay had an impact on the quarter. None of this changes our outlook for the business. Our products are being well received and we’re winning new contracts at a high rate that will result in strong revenue and cash flow in future quarters.

Finally, Respiratory Technologies or mechanical ventilation in diagnostics business in the Medical System segment remains soft compared to last year’s results where we’ve the benefit of a large government contract.

Turning to Procedural Solutions. Our team delivered another quarter of strong results in every category. In particular our Infection Prevention business grew 11% led by growth of our ChloraPrep skin antiseptic product and the contribution from our Sendal acquisition.

During the quarter, the Infection Prevention business also introduced several internally developed products, including the new ChloraPrep 1mL applicator, our Chemo Safety System featuring the SmartSite VialShield, and the MaxZero needleless IV connector that features neutral reflux at disconnect. This business is well positioned with clinically differentiated products, strong sales organization and clearly defined clinical and economic value drivers for care providers.

Our Medical Specialties business grew 4% with solid results from the V. Mueller surgical line and another strong quarter for interventional specialties, particularly in our drainage line. Finally, our Specialty Disposables business grew 13% in large part due to volume from our Smiths Medical relationship, but also from continued strength of the Fisher & Paykel line, an excellent execution by the team.

During the quarter we closed on a substantial portion of our Vital Signs acquisition which will be reported in the Specialty Disposables business beginning in the third quarter. During the first five weeks of the year, we’ve had a fast start to the integration of Vital Signs and we continue to work towards closing the remaining portion of the acquisition later this year.

Operating margins came in about where we expected for the quarter. As Jim will explain in more detail, we managed costs well even as we absorbed SG&A expenses from our Sendal acquisition and the impact of the medical device tax. Operating margins were down from the prior year as we expected, but improved 250 basis points from the first quarter. There is no change to our full year outlook for organic revenue growth of 1% to 4% and adjusted EPS of $2.30 to $2.40.

As we said in August and again in November, our plan for the year is weighted towards our second half as we begin to install the higher volume Pyxis systems contracted during the past three quarters. I mentioned earlier that the installation cycle is lengthening a bit for the systems. In the short-term, we expect to minimize the impact of that shift with better performance in other businesses, most notably Infusion and Infection Prevention. And we were stepping up our already disciplined cost controls to provide us with some additional assurance.

In confident in our ability to execute, even when we hit bumps in the operating plan. We’ve done the difficult work of Dispensing business by managing through a major product line transition and winning the customer contracts that gave us visibility into our second half. And we’ve good momentum moving into fiscal 2015.

Finally, we continue to make strategic progress in the second quarter. Our priorities have stayed consistent for more than two years. We are strengthening our internal foundation to improve the customer experience and simplify the Company, thereby freeing resources to number one, reinvest in innovation. Number two; expand margins and number three, growing markets outside the U.S.

The investments we have made in innovation continue to add value to the Company. I already mentioned new products in Procedural Solutions segment. In the Medical System segment, we introduced new technologies to improve enterprise wide medication management, including the Pyxis IV system to provide a more efficient and standardized process for preparing IVs in the central pharmacy and the Alaris Infusion Viewer for Charge Capture.

We agree to invest approximately $100 million for a 40% minority stake in Caesarea Medical Electronics or CME, an Israeli manufacturer of compact and highly portable infusion and syringe pumps for homecare and hospital settings. As a leader in the global infusion market, we intend to build around our core business and into adjacent segments. CME is a longer term play for us in these adjacent segments and in geographies outside of the U.S.

The commitment we made 18 months ago was to deploy at least $2 billion towards share repurchase and M&A during fiscal 2013 to 2015. During the second quarter, we repurchased an additional 4.8 million shares bringing the total capital deployed for acquisitions and buybacks to more than $800 million in the year. I remain very comfortable with the M&A pipeline we’re evaluating and I’m optimistic about our opportunities to add scale via acquisition.

Finally, we made excellent progress during the quarter with an initiative to cross-sell our products within some of the largest health systems in the U.S. As hospitals consolidate, we see them moving towards fewer partnerships and favoring suppliers with the scale to help demonstrate an economic or clinical advantage. This is core to our vision. Our strategy to build scale within and across our segments with software, clinical expertise and superior customer support is differentiating CareFusion during an important time for U.S hospitals.

In the first half of fiscal ’14, we’ve already secured more agreements involving multiple CareFusion businesses in all of fiscal 2013. And we’re continuing improving our support model for these large customers as we invest in innovative products and services to expand the value we can uniquely provide.

As I’ve said before, we’re on a transformative journey. I’m proud of the progress the team continue to make during the second quarter and remain encouraged by the opportunities that lie ahead. I’m looking forward to taking your questions, but first, let me turn it over to Jim. Jim?

James F. Hinrichs

Okay. Thanks, Kieran. Today I’m going to discuss our second quarter results and provide some commentary on our guidance for the remainder of the year. Before I get into the results, I want to start as I always do with what I think are the key headlines for our second quarter.

First, our overall results were inline with our expectations and position us well entering the second half of the year. Strength in our Infusion business line and in our Procedural Solutions segment, continue to help bridge the gap as we transition to the new dispensing platform and prepare for the second half ramp that we previously discussed.

Second, the new Pyxis ES platform continues to have exceptional customer feedback and very strong booking. We had a record quarter for Pyxis committed contracts of which over 40% were for the ES platform and that’s right in line with our expectations and right where it should be at this point in the launch cycle. This strength provides us with a solid backlog to install during the back half of the year.

We also had another strong quarter for Infusion committed contracts as our cross business unit selling and our competitive displacement strategies continue to be successful. And finally we’re reiterating our fiscal ’14 revenue and EPS guidance. Now that we’re half way through the year, we do have some changes in the composition of our guidance, which I will discuss in a minute.

Now if we move to the financial results for the quarter, consolidated revenue of $922 million grew by 1% on both a reported and constant currency basis that was inline with our expectations. Solid revenue growth in Procedural Solutions of 9% was offset by a 2% year-on-year decline in Medical Systems. Strong performance in Infusion, partially offset softness in Dispensing and Respiratory Technologies, although we do expect to see all three these businesses growing in the second half of the year.

Adjusted gross margin for the quarter declined 90 basis points from prior year to 50.9%, as unfavorable revenue mix largely due to the decline in Dispensing was partly offset by continued progress within our sourcing and cost initiatives. As you may recall this decline was anticipated and communicated in our first quarter call.

Adjusted SG&A up 3% to $241 million compared to last year as we had headwinds from the medical device tax and acquired SG&A. Net of these items, SG&A was actually down year-over-year driven by cost savings initiatives primarily from our functional support group. R&D spend decreased modestly to $47 million, as we continue to invest in our next gen products in both Med Systems and Procedural Solutions.

Overall, as we’re hitting key product milestones in our Medical Systems segment, we’re shifting R&D funding to our Procedural Solutions segment, expanding its capacity and continuing to build on our disposable pipeline.

Adjusted operating income of $181 million declined by 4%, adjusted operating margins compressed by 120 basis points versus last year to 19.6%. This margin compression was driven primarily by unfavorable revenue mix and the medical device tax, but as Kieran mentioned, we did see a nice sequential improvement of 250 basis points from the first quarter.

Interest and other was $21 million, that’s consistent with our past few quarters. Our adjusted effective tax rate of 27.3% was better than expected. This was driven by a few discrete items as our tax team closed several smaller overseas tax issues and as we utilized previously reserved foreign tax credits. These particular items were expected to occur this year, but the timing -- the exact timing was not known. So as a result, this discrete lower rate in the second quarter will not have an impact on our full year tax rate guidance.

Adjusted diluted earnings per share were flat to last year at $0.54, again in line with the expectations that we said on the first quarter call. This was driven by the strong contributions we’ve already discussed from our Infusion business and Procedural Solutions segment as well as a modestly lower tax rate that offset a headwind from the revenue mix.

Operating cash flow from continuing ops increased $53 million from prior year to $232 million. We do expect our cash flow generation to moderate in the second half as we consume more capital with the ramp of our Dispensing business and make our previously disclosed payments to the Department of Justice and to the IRS. This will keep it on track for our $500 million to $550 million of operating cash flow that we forecasted for the year.

Wrapping up, the consolidated financial results, on December 31, we had cash of $1.3 billion, of which approximately $1.1 billion was held outside the U.S. Debt totaled $1.5 billion. Just as a reminder, on December 30 we closed on the majority of our Vital Signs acquisition that we used U.S cash on hand to fund that acquisition.

We do expect to ultimately fund the acquisition with permanent debt later in the year and in the meantime we will use our revolver as needed to meet our short-term U.S cash requirements. We also plan to close on our previously announced CME investment by March 31, that will consume approximately $100 million of OUS cash and the income from this investment will be recorded within our operating earnings once the deal is closed.

Our share buyback program, repurchased 4.8 million shares for a total of $186 million in the quarter and as of today we’ve purchased a total of 9.8 million shares for $375 million, slightly ahead of pace for the full year. We expect to complete roughly $500 million of our $750 million authorizations this year and now expect our diluted weighted average shares outstanding to be slightly below 250 million shares.

Moving to the operating performance of the segments, Medical Systems revenue of $587 million declined 2% versus prior year. Within Med Systems, Dispensing Technologies was down 9% to $236 million due to the ES transition that we’ve been discussing for three quarters now. As Kieran mentioned, strong committed contracts are a key indicator that will drive revenue growth in the second half and beyond. And some of these installations will likely shift in the early fiscal ’15 and performance in our other businesses are expected to offset the FY14 impact.

Infusion Systems had another great quarter, growing 8% to $247 million, Price was relatively stable versus prior year and the team worked very hard to exceed installations schedule to meet all of the needs of our customers driving solid growth both in our capital and dedicated dispersible product lines.

Finally Respiratory Technologies revenue declined 9% to $96 million. Similar to the last quarter, we are still comparing to a prior year period in which they fulfilled a large government order that ended in the third quarter of last year. As we have said in the past, this is a tender driven business which will lead to lumpy results. However, we still believe our underlying business remains steady and we're now seeing growth in our diagnostic products now for two straight quarters.

Moving to Procedural Solutions, reported second-quarter revenue of $335 million was up 9% that translates to 6% organic growth driven by meaningful growth in all three business lines. Infection Prevention revenue $168 million was up 11% year-on-year and 4% organically. It's driven by the continued market conversion of our ChloraPrep products as well as the acquisition of Sendal which we closed on October 1 of this fiscal year.

Medical Specialties revenue $89 million increased 4% versus prior year and the Specialty Disposables business increased 13% to $78 million as our strategic partnership continue to build most notably our distribution partnership with Smiths Medical, which we will annualize in the third quarter.

Now looking at our fiscal ’14 guidance. First, we are reiterating our expectation of 4% to 7% constant currency revenue growth or 1% to 4% organic growth and our $2.30 to $2.40 adjusted diluted EPS range. And while we are maintaining these ranges, we do have a few adjustments and how we will get there. We expect Medical Systems growth to remain in the 1% to 4% range that we previously guided to, but we now expect Infusion Systems performing above that range, Respiratory be in line with that range and Dispensing approximately flat with last year.

In Procedural Solutions, we expect to grow revenue at the high-end of our organic 2% to 4% range based on strong core growth in all business lines and expect to be in the 13% to 15% range when including acquisitions. Our adjusted operating margin guidance is now 20.5 to 21.5. As we discussed on our last quarter’s call, we have margin pressure resulting from a key supplier winding down their business as well as with our acquisitions of Sendal and Vital Signs. We are also seeing pressure from our revenue mix, primarily driven by dispensing volumes and some for our lower margin businesses that are growing faster than we anticipated.

We expect to partially offset this margin pressure with additional costs savings measure, however the net effect is a 50 basis point decline in our margin guidance range. We continue to expect our adjusted effective tax rate to be in the lower half of the 28% to 30% range and our capital expenditures to be approximately $110 million.

Our long-term guidance remains unchanged as we expect revenue growth of 3% to 5% for high single-digits including acquisitions and an adjusted EPS CAGR of 12% to 14% from ’13 to ’15 -- FY13 to FY15. We remain committed to using our strong balance sheet in order to help accomplish this, for future acquisitions and or additional share repurchase. Our preference, of course, is to strategically build our business through acquisitions, that has scale in key markets and product categories where we lack presence. However, as we said before, this capital is transferable between both M&A and share repurchase.

Finally before we hit the questions, I want to take one minute just to summarize and talk a little bit about our second-half range. We are essentially where we expected to be at this point in the year. As we said our year-long were a first half, second half story to give you some color on the weighting, we anticipate substantially higher growth in the fourth quarter with third quarter adjusted EPS being approximately 5% higher than last year. Although this does create a steep ramp in the fourth quarter, we believe all the pieces are in place to achieve our full year goals.

We had two very strong record or near record quarters for committed contracts in our two largest businesses, Dispensing and Infusion. These bookings have given us a record backlog going into the back half of the year, improving visibility to hitting our revenue targets. Procedural Solutions continue to grow faster than expected across essentially all business lines and geographies and we are continuing to push hard on the cost line to give ourselves a little question. The organization is responding to this push as it always has in the past, with urgency and efficiency. So we look forward to reporting results to you as we finish out the year. I think with that, we can open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Robert Hopkins representing Bank of America. Please proceed.

Robert Hopkins - Bank of America Merrill Lynch

Thanks guys. Can you hear me okay?

Kieran T. Gallahue

Yes.

James F. Hinrichs

Yes, thanks, Rob.

Robert Hopkins - Bank of America Merrill Lynch

Great. So good afternoon. So a couple questions on guidance. First, to make sure I understand exactly what’s changed in 2014 guidance. So if revenues are unchanged and operating margin is lower, what’s allowing you to keep the EPS the same?

Kieran T. Gallahue

I mean, its really within the range of that -- first of all, operating margins have come down a little bit, there are still points inside the current range that were inside the last range. So we’re just refining that a little bit downward and then of course there is always a range on the revenue line as well. So you need to sort of stay within those ranges, you can still quite easily get to the same EPS number. So it’s just really more moving slightly to better reflect where we think things are going to happen.

Robert Hopkins - Bank of America Merrill Lynch

Okay. I guess more importantly on the operating margin guidance change, I was wondering if you could just kind of break down that 50 basis points into buckets and talk in a little more detail about what’s going on there? And you mentioned two or three things in your prepared comments, but I was just wondering if you can provide a little bit more detail. And then to tack on one more, just quickly on -- given how strong your order flow is and the Terumo deal and a couple of other things are going on, can we start to think about 2015 as a faster revenue growth year?

Kieran T. Gallahue

Sure. Let me tackle that margin question first. I mean, first off, the most obvious impact on margins is -- are the acquisitions we made. And so the Vital Signs acquisition clearly is margin dilutive. The Sendal acquisition was margin dilutive. That actually equates to about 50 basis points of margin dilution. So that right off the bat is a push downward on margins. Now we thought as we made those acquisitions through the year, that we had the room to cover them. And as the year has progressed and with the Dispensing revenue mix coming down and with Dispensing being one of our largest highest margin businesses and it’s certainly is our largest business. Those two things combined are the reason for us moving the range now. So I will say those by far are the two single biggest variances on the gross margin line versus our beginning of the year budgeted and therefore guided range of gross margin -- sorry, operating margins.

From the revenue standpoint, yes, we’ve got certainly things will pick up pretty drastically here in the second half on Dispensing and so you should expect to see that trend continue into fiscal ’15 and that being our largest business should provide a nice tailwind for us into ’15 and again with some of these other things coming through we should expect to see some nice tailwinds in FY15. It is too early for us to be giving any specific guidance on ’15, but there should be some very positive trends and some nice tailwinds as you referenced.

Robert Hopkins - Bank of America Merrill Lynch

Okay, great. Thanks for the color.

Operator

Your next question comes from the line of Matthew Taylor representing Barclays. Please proceed.

Matthew Taylor - Barclays Capital

Hi. Thanks. I just wanted to ask a capital allocation question. You mentioned some comments in your prepared remarks that having done the Vital Signs deal and now the investment in the Israeli pump manufacturer, I guess I wanted to understand, A, how are the integrations going? Can you give us any more color on the pump deal and whether that is going to be a contributor to revenue, and then does this change your priorities at all, given that you have some things to digest?

Kieran T. Gallahue

So thanks for the questions. Yes, we’re quite pleased actually with the progress that we’re making in putting our balance sheet to work particularly in some of these areas of building strategic capability. The Vital Signs acquisition, yes of course we are not fully -- we haven’t acquired the whole thing yet. We still have some parts of it that we need to close such as some of the parts of Western Europe. But the early days of it has been great. We’ve got working teams from both sides that are getting together. We’ve had meetings with the sales forces, with the R&D team, with the manufacturing teams etcetera. I can tell you that we’re very excited to have them onboard and the feeling is mutual that the Vital Signs team are – seems thrilled to be part of the CareFusion team. So I’d say that one is going at or better than we had anticipated and still feeling very comfortable, it will be quite a profitable addition as well as being quite a strategic addition as we get some capabilities in the anesthesia.

With regards to CME, it’s a great long-term play. I do want to highlight for you that that is at this point will be an investment when we close on it and it's a minority interest at this point. So you're not going to be seeing it accounted through the revenue line, but rather it will have a sort of separate line item and you will see the results from an equity perspective. So Jim …?

James F. Hinrichs

Yes, that’s right. So because we only have 40%, we don’t consolidate the results. So we pick up our share, which would be 40% of the company’s net income in a single line on the P&L called equity investment -- our income from investment and equity affiliates or something, income from equity investment and affiliates, and so you will see that broken out separately until we own the majority of the company and then of course we consolidate. So it’s a great company. We’re thrilled to be partnered with.

Matthew Taylor - Barclays Capital

Thanks.

James F. Hinrichs

Thank you.

Operator

Your next question comes from the line of Matt Miksic representing Piper Jaffray. Please proceed.

Kieran T. Gallahue

Hi, Matt.

Matt Miksic - Piper Jaffray

Thanks for taking my questions. So one on the change in your thoughts on composition of growth for this -- the remainder of the year, wondering if you can talk a little bit about what factors played into that on the pump side, and maybe how to think about the committed contract comments that you have made with respect to the Dispensing side? Then I have one follow-up.

Kieran T. Gallahue

Sure. Why don’t I start and then Jim you can jump in. So what factored into it is simply what we’re experiencing. On the Infusion side of the business we continue to see very strong committed contracts and the cycle time of getting the -- that from a committed contract into the -- into being a revenued item continues to be relatively similar to what we have seen in the past. We are very well positioned competitively in that marketplace. Our sales force is well tuned. We are striking a chord with the customer, and the whole medication management strategy which leverages the strength of both our Pyxis or dispensing franchise along with the infusion and the mating of those two through software and through processes, something that we highlighted at the American Society of Health Systems Pharmacists was a -- is really resonating and so it’s a pleasure to see that.

With regards to Dispensing, we’re seeing the committed contract volume to be very strong. Jim mentioned record levels of committed contracts. Three strong quarters of orders that we have now. It’s just taken a little bit longer to get them installed. And its really just -- its interesting because the strength of that platform, the ES platform that we’re launching and what makes it stickier over time and what allows it to provide greater benefit to the customers is all about the integration with the informatic backbone of these health systems as well as being able to operate in a multi-hospital health system, operate across that entire system. So when you take those two things, it's fantastic from a usability, that's why we are getting the record number of orders. On the other side, it does take a bit more coordination and a bit more time in order to get the installs and therefore see it in the P&L. So from my view it’s just a little bit of a short-term hiccup as far as timing, but from the fundamentals, all the fundamentals look great.

Matt Miksic - Piper Jaffray

That’s helpful. Thanks, Kieran. The follow-up, just on your infrastructure, I guess, if you will, when we look at CareFusion, we think about the branding which have the presence in the hospitals that you have, the service, sales, and support folks that you presumably have coming into the hospitals to service Dispensing, Infusion, Procedural Solutions. I’m wondering as you look for opportunities to drive greater growth through strategic acquisition over time, I mean, is that a platform where you feel like as you add business -- product lines, if you will, or whatever these investments might be, that you would be adding sort of infrastructure distribution or I would love to get your sense of, is there leverage or bandwidth in that structure to sort of run more products, revenue, through your various channels? Any comments you have would be very helpful.

Kieran T. Gallahue

Sure. Yes. We are actually quite fortunate that there are a number of different points in our portfolio of capabilities, both technologies and people and processes that would allow us to combine with other assets and make those assets better. So you rightly pointed out that particularly in the Medical Systems side of the business that we have a large number of people that are well trained, well respected in the field that do installations, that do support of their customers and those instruments and certainly we look at opportunities from time to time to be able to add products into that flow where we could leverage that installed footprint. You can gain some scale by putting together other technologies that need access to the market or need to be repaired etcetera and certainly from a cost synergy side, you should be able to take advantage of that. You also have the ability to potentially plug into our mortar or our software which allows for the simplification of processes between these what we call our bricks or these different bricks in the foundation on Medical System.

On the Procedural Solutions side, we have the added benefit that we have a certain amount of commercial infrastructure knowledge and success at various call points. It was one of the reasons why you saw us pick up -- on one side. You saw us through an acquisition with Vital Signs take advantage of that, it both leveraged our respiratory sales force as well as extending us out into anesthesia. On the other side, it also took advantage of some of our national contracting capabilities and then you saw us do other deals, Terumo deal was one of the one that was mentioned where we can get access to certain technologies that takes advantage of the vascular access call point and our expertise in our products in the portfolio that we can bring together. So we’re continually looking at growing our market presence and our access to customers by leveraging the different parts of our portfolio. And there is lots of different examples where we’ve been doing it and we intend to continue to do that.

Matt Miksic - Piper Jaffray

Okay, thanks. I appreciate it.

Kieran T. Gallahue

Great.

James F. Hinrichs

Next question operator.

Operator

Your next question comes from the line of Mike Weinstein representing JPMorgan. Please proceed.

Kim Gailun - JPMorgan

Hi, Jim. Hi, Kieran. It’s actually Kim here for Mike.

Kieran T. Gallahue

Hi, Kim.

Kim Gailun - JPMorgan

Hey, so question, I guess, on the Dispensing business. So it sounds like you guided essentially for that business to be flat for the full year, which points to kind of double-digit sales growth for the second half of the year. But also, in Jim’s comments on the outlook for EPS for the third quarter, it looks like you’re pointing to a number around $0.62, which is below the Street. So, I guess what the question is how should we think about the growth ramp in the third quarter and then the fourth quarter for dispensing, because given that’s a high margin business, I imagine that’s some of the -- that’s some of what leads to the lower third quarter guide.

James F. Hinrichs

Yes, that’s right. So Q4 will build -- sorry, Q3 will build, Q4 will be stronger for the Company and definitely for Dispensing, which of course drive the biggest part of the Company’s result. So you should expect to see better revenue growth from Dispensing in the third quarter and then even better than that in the fourth quarter to get to the numbers you needed to get to Kim.

Kim Gailun - JPMorgan

Okay. So are you talking about kind of just ballpark, maybe mid single-digit growth for Dispensing next quarter and then some really healthy growth in the fourth quarter?

James F. Hinrichs

That’s directionally correct, yes.

Kim Gailun - JPMorgan

Okay, all right. Thanks.

James F. Hinrichs

Thanks, Kim.

Operator

Your next question comes from the line of Kristen Stewart representing Deutsche Bank. Please proceed.

Unidentified Analyst

Hey guys. It’s actually Rob in for Kristen.

Kieran T. Gallahue

Hi, Rob.

Unidentified Analyst

I just wanted to touch on the Respiratory Technologies business. I know there has been some moving parts with government tenders and all, but I think you guys said that will also return to growth by the end of the year. Can you just talk a little bit more on what’s going to be driving that?

James F. Hinrichs

I will just talk about the numbers, Kieran will talk more strategically. We are lapping -- this is the last full quarter of that government order, second quarter would be a partial part of that order in the quarter, last year in the third quarter. So this is the last full quarter we’re comparing to that government order. So just by definition the comps are getting a little bit easier. So that I would say is the first and foremost, the most important aspect of us returning to growth in the back half of the year in that business. And in fact if you net out the -- that government order last year at front, and you do a comparison to this year, the business is actually flat to up a little bit. So that’s kind of the way we’re headed for in the third quarter and then beyond that in the fourth quarter. Kieran do you ...?

Kieran T. Gallahue

I think that pretty much underpins. The only thing I will mention is we tend to think pretty much of mechanical ventilation because it’s the majority, but in that business its also our Respiratory Diagnostics business and they had been in the process of launching new products over the course of the last 12 months or so and they have been -- the products have been very well received in the market and we’re seeing a healthy growth out of that portion of the business.

James F. Hinrichs

Exactly.

Unidentified Analyst

Thanks, guys.

Kieran T. Gallahue

Yes, thank you.

Operator

Your next question comes from the line of David Roman representing Goldman Sachs. Please proceed.

David Roman - Goldman Sachs

Thank you and good afternoon. I know a lot of focus on the call has been on the second half earnings as well as the Dispensing business. So I was hoping you could actually just go into a little bit more detail on the competitive landscape in Infusion. It’s clearly an area where you’ve the upper hand right now and while your competitors have talked about one filing a CE Mark and one sort of getting their act together, it’s probably going to be slow for their efforts here. Maybe just go into a little bit more detail about how you see that business unfolding versus your expectations, and how we should think about it going forward?

Kieran T. Gallahue

So you’re right with point that we’re in a very good competitive position at the moment. But we’ve got very worthy competitors and these are very good companies that normally have a pretty broad portfolio of products and they frequently use those products to create packages of solutions that are well received by customers. So I no way want to suggest anything other than these are good companies with good products that know how to execute. I think our team has just done a very good job of taking some temporary dislocations in the market of taking, most importantly of solution that’s very differentiated at a time when its very critical to our customers that they’re able to optimize the way that they operate, that they’re able to get the most out of their waiver, particularly with the nurses and the nurse to patient ratios and they want to do it in a way that allows them to improve the safety profile of the care that they provide. Virtually every customer we talk about with infusion, the conversation talk starts either with us or with them, but normally them, talking about how important patient safety is to them. And so our solutions both within Infusion and also the link that we’ve created between Infusion and Dispensing creates a very unique set of opportunities for the customer to improve the safety of medication management while reducing their cost profile. So -- and that's going to keep you -- when these competitors come back in the market, we’re not loosing that advantage. So that's the general, I will call, strategic vision that we have in the business. Now the reality is that we’ve had a good run with the equipment not unlike we did when a different competitor was dislocated during those time periods you see an increase in the capital that’s placed at some point in time, that will slow down a bit and you will see that the mix of dedicated consumables which by the way continues for five, seven years plus which is very high margin you will see that increasing as a percentage of our total revenues there, which is good for the margin profile.

David Roman - Goldman Sachs

And then maybe as a follow-up, it’s a little bit more, I guess, of a macro question. Maybe just talk about the pricing environment and sort of health of your customer right now in terms of CapEx spending? I know on infusion, you’ve had a dedicated effort to take advantage of some of the competitor dislocations that are out there, but maybe more broadly across the portfolio just to touch on pricing dynamics and also CapEx trends?

Kieran T. Gallahue

Yes, I think from a parts and perspective it’s been relatively the same news over the last number of quarters. Certainly our customers around the globe are feeling a pinch in their economics and they’re looking for relief. I think that we have been doing a reasonably good job of helping them understand why our technologies help them reduce their costs and take some of the burden off of the price of the technology while focusing them on the benefits that we can bring to them that are far greater than a couple of pennies off a consumable venue can reduce labor, you can reduce medication errors or get patients out of the hospital more quickly. And so that's what we tend to focus on. But look there is always going to be pressure from customers on price. As you mentioned, in Infusion we did hit targets on very selected customers that represented some substantial value, but we’ve got a lot of controls on that. Actually the teams have done a very good job of maintaining price in that marketplace, so we are quite pleased with that. The general capital market, I'd say remains relatively unchanged. We happen to be in a really good cycle I think. A lot of those are dependent on some anomalies with our customer -- our Company. So for instance, we’re in a really good phase with the Dispensing Pyxis ES launch, that leads to some dynamics which maybe a bit more favorable than the underlying market overall. We are -- and the same thing on Infusion. So I think the general comment I would make on the capital market is, we don’t see really a lot of change over the last several quarters. Jim do you have anything to add to that?

James F. Hinrichs

No, I agree with you completely.

Kieran T. Gallahue

Okay.

David Roman - Goldman Sachs

Thank you.

Kieran T. Gallahue

Sure.

Operator

Your next question comes from the line of Rick Wise representing Stifel. Please proceed.

Rick Wise - Stifel Nicolaus & Company

Good afternoon everybody. Couple of things. You’ve talked about the longer Pyxis install times. Maybe just another angle, just to make sure I have got it right. To what extent, if any, it may be none; does this have anything to do with the actual cap spending environment versus the complexity of the install? We’ve been hearing mixed signals from a variety of players about the cap spending slowdown or hesitation or delay, anything there? And I have a follow-up related to it.

Kieran T. Gallahue

Yes. So, I think my simple answer would be its really less related to overall cap spending. I think if anything you'd see that in the committed contracts that we're getting and we're doing quite well in generating committed contracts. Where it does affect us, look lot of these hospitals, the CIO is still the center of the wheel for a lot of their strategic activities and quite frankly is an important actor and frequently a bottleneck. So they’re still extremely involved in implementing their HIT systems and if they’ve already implement them, they’re optimizing them. So they’ve got a very, very long list of priorities. Then you get a technology like ours which is again the strength of it is how intertwined it is with the operation of the hospital. That’s what makes it sticky, that’s what it makes it valuable. And then you put on top of that the fact that a lot of hospitals are going through changes in personnel. They’re looking at saving costs. That just creates a little bit of confusion with the people that are involved in implementation. So I’d just say its just sort of standard stuff that they’re going through. They got a lot of priorities. The good news, really good news is that the committed contracts where they say we’re going to buy this, you want to install it, we’ve got those [side] [ph]. It's just a matter of the implementation timing.

James F. Hinrichs

Yes, I mean, I’d agree. I would say Rick that has very little to do with constrained capital spending. Remember, the vast majority placements of Dispensing Systems are on a five-year lease. The customer is going to need to continue to pay the rent whether they upgrade or not. In fact in many cases if they run out through the end of their lease, there is actually -- because of higher service costs that are put on all their equipment, they may actually save money if they install a new equipment and certainly with the work flow and the added integration with the IT systems, in many cases they will save a lot of money just in terms of integration. So I would say that there is probably very little correlation between any constraint of capital spending and the Pyxis install cycle. It's really just more very company specific, install specific and customer resources specific.

Rick Wise - Stifel Nicolaus & Company

Right. Just a follow-up on that, Jim -- so do we think about the whole -- given the complexity and given what you’re trying to do, does the whole install ramp just proceed more slowly over the next several years?

James F. Hinrichs

Well, that’s a good question. And I don’t think we have full answer yet. At this point, I think we have to anticipate certainly for the next year. So let's just call the year at this point, that CIOs are going to be quite busy. It's a big part of their strategy if they’re doing M&A or if they’re just -- be it a meaningful use; you’ve got just the desire for productivity enhancement. So I think we have to go with the assumption that they are going to continue to be busy and what we need to do is just help them out and we’re all the time we’re learning ways that we can be even more efficient in our interaction with some and to be able to help them simplify the integration. It's a good -- we do things like the CCE, the CareFusion Coordination Engine. These kinds of solutions are intended and directed at simplifying the life of the CIO and we're going to continue to do things like that.

Rick Wise - Stifel Nicolaus & Company

One more quick one, if I could. Just -- it’s so early in the integration of Sendal and Vital Signs. Any additional or early thoughts on cross-selling opportunities or more cost savings you’ve thought, any color there? Thanks.

Kieran T. Gallahue

I think it's a bit early to get ahead of ourselves. I'll say that everything that we had seen, we’ve been pleased with. And there are two very different acquisitions, and one is a carve-out and one -- in the U.S or actually around the globe. The other one obviously a -- sort of a family owned business in Spain, but both of them -- I'd say if there is one commonality, it is we acquired great people. People that really know their business, there are dedicated, that have a long history of success and we value them and I think they are going to add a tremendous amount of value to the Company over time.

Rick Wise - Stifel Nicolaus & Company

Thanks so much.

James F. Hinrichs

Thanks, Rick. Next question.

Operator

Your next question comes from the line of Larry Keusch representing Raymond James. Please proceed.

Larry Keusch - Raymond James & Associates

Hi. Good afternoon. Kieran, not to beat a dead horse on the installation timeline for the Dispensing Systems, but I'm just curious, look, the obvious question people are going to have is how much visibility do you guys have into this extended timeline and how do we get comfortable with the second half of the year? So I’m just wondering again if you could walk us through at this point in time, given all the strength in committed contracts, how much visibility do you really have in the installation timing. And as part of that question, have you factored that into the guidance for this year?

Kieran T. Gallahue

Sure. I -- Jim, why don’t you ran the GCS for the Company, why don’t you (indiscernible).

James F. Hinrichs

So Larry before I had this job, I was actually was running that part of the business. So I’ve a fairly deep understanding of how this works. Just in general, first of all I would say, just from the big picture you would say, how much visibility we have, I mean with the biggest backlog we’ve ever had going into the back half of the year in both of our two biggest businesses that helps visibility quite a lot, but let’s be clear you begin every quarter without being 100% scheduled and these next two quarters are no exception to that rule. You start every quarter usually scheduled somewhere between 60 and 70 -- usually starting the quarter somewhere between 60% and 75% scheduled and then you start to build the installation scheduled for the rest of the quarter and at the end of the quarter as time passes and then inevitably some customers fall out, other customers come in. So it’s a very dynamic process and it’s never 100% scheduled. What I will tell you in terms of our assumptions for the back half of the year for both the third and the fourth quarter, neither the third nor the fourth quarter in Dispensing will be -- if we hit our numbers, it will be the highest level of installs that we’ve ever done. So we do not require record level of installs or record level of revenue in Dispensing as part of our plans in the back half of the year. Having said that, it’s a big ramp up from where we have been in for a couple of quarters, so its certainly not without challenges and certainly we’ve got more scheduling and more work to be done before we get there. But it is not we’ve got the biggest backlog we’ve ever had, we don't require record installs in the third and fourth quarter. Ro we feel pretty comfortable that all the pieces are in place for us to be able to get there. Did that answer your question?

Larry Keusch - Raymond James & Associates

Yes. That was perfect. And just on a separate note, if I have my numbers right, I think you’ve done $375 million in your share repurchase in the first six months and I think you were sort of targeting about $500 million for the year. I guess, the two-part question is you’ve got limited U.S cash at this point and if you could remind us again of your revolver situation. And again, since you’re 75% done of -- again of that target amount at the midpoint of the year, could we potentially see you go higher than what you’ve initially targeted?

James F. Hinrichs

So first is the $375 million with the year-to-date, so that basically reflects through the end of last week. So that takes up another month or sort 7/12 of the way through. The -- yes, I think the answer is we could potentially go higher, now we're as you appropriately pointed out somewhat cash constrained in U.S., particularly since we paid for Vital Signs with just cash on hand. So we do a revolver, it’s a $750 million revolver, it is untouched. We will be drawing on it over the course of the next 3 to 6 months as we -- before we get a permanent debt funding put in place. It is possible that we could go above the $500 million right now. We are just targeting the 500 for the year, but we're definitely ahead of that pace. I think next quarter we will give you little bit more color on whether or not we think it will be ahead of that $500 million for the full year. Right now I just stick with the guidance we’ve given, which is $500 million for the year, slightly less than $250 million weighted shares out for the full year.

Larry Keusch - Raymond James & Associates

Okay. That's great. Thanks guys, I appreciate it.

James F. Hinrichs

Yep.

Operator

Your next question comes from the line of David Lewis representing Morgan Stanley. Please proceed.

Kieran T. Gallahue

David?

James Francescone - Morgan Stanley & Co.

I'm sorry. This is James in for David. Thanks for taking the question. Please talk a little bit about the first half versus the second half trends in Dispensing? I wanted to get at the same issue in Procedural Solutions. By our math, Procedural Solutions grew about 6% to 7% organically in the first half. So even if that business were to come in at the high-end of your range, that suggested that growth will still take a noticeable step down in the second half despite the first half outperformance? Am I reading that right and if so, can you help me understand what’s driving that or is that simply a conservative outlook?

Kieran T. Gallahue

So you're reading it correctly. We are anticipating slower growth in the back half for PS, part of it is just comp based. So if you're looking at respiratory disposable for example, we had the benefit in the last four quarters of this Smiths deal, which will lap and so that growth will slow quite a bit from what has been double-digit growth down to more of a market growth rate kind of a flattish or low single-digit kind of growth for that market. Medical Specialties had some easy comps in the first half, particularly in the first quarter of the year, so you'll see that and then Infection Prevention it is -- kind of plugging along on -- at its own rate clearly similar way. So I think the biggest issue is probably -- I mean the biggest driver is probably respiratory disposable with the fall off of the Smiths acquisition or lapping the Smiths not acquisition, but strategic distribution agreement and the Medical Specialties with easier comps, but it does fall off a bit in the second half, yes.

James Francescone - Morgan Stanley & Co.

Okay. And then second Jim, can you just give us what was the year-over-year impact of acquisitions on revenue in the quarter and what are you looking for in the third and fourth?

James F. Hinrichs

It was about 10 million bucks in the third -- I'm sorry, second quarter. And for in the back of the year, well its same dollars about 10 million bucks a quarter and then Vital Signs is going to be about $100 million in the back half of the year (indiscernible). Next question. We have time for maybe one more here.

Operator

Your next question comes from the line of Gene Mannheimer representing B. Riley. Please proceed.

Gene Mannheimer - B. Riley & Co.

Well, thanks. Congrats on a good quarter. I just want to sort of ask a previous question in a different way. Kieran, you used to talk about the timeline in Dispensing from commitment to revenue rec as three to six months. So given the lengthening of this cycle, how would you characterize that today? Is it 6 to 12, or what would you say on that?

Kieran T. Gallahue

I think we need a little bit more experience before I would give an absolute range. Its certainly I would say above six months and it certainly could go several months beyond that. But I think I have to say that as the roll this out, I think we will have a much more definitive answer for you. But just think of it as extending beyond the six months.

Gene Mannheimer - B. Riley & Co.

Sounds good. And you know with respect to the guidance, I think you’ve some pretty good visibility into the second half. I think you also had the benefit of a step up in inventory, which gets added to your pro forma guidance. Are you in a position to say whether you’re tracking to the upper or lower half of your range at this point?

James F. Hinrichs

I’d probably rather not do that, just leave the range where it’s that and depending on the assumptions we use, particularly for Pyxis installed in the back of the year and Infusion growth, those are the two biggest businesses, obviously the two biggest swing factors you can get to different parts of the range. I’d say we have scenarios that can get us to all parts of the range and I’d rather just leave it at that.

Gene Mannheimer - B. Riley & Co.

Fair enough. Thank you.

James F. Hinrichs

Okay, great. Thanks for the question, Gene. Kieran, you want to say anything before we wrap for the day?

Kieran T. Gallahue

Well, first of all, thank you again as always for your attention. I want to thank the CareFusion team throughout the globe. Once again, they’ve done an excellent job of producing results and setting us up for both in short-term and long-term success and strategic growth. So thanks everybody. Look forward to updating you as we move throughout the quarter into next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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