Steris Corporation CEO Discusses F3Q2014 Results - Earnings Call Transcript

Feb. 5.14 | About: Steris Corporation (STE)

Steris Corporation (NYSE:STE)

F3Q2014 Earnings Conference Call

February 5, 2014 10:00 AM ET

Executives

Julie Winter - Director of IR

Mike Tokich - SVP and CFO

Walt Rosebrough - President and CEO

Analysts

Dave Turkaly - JMP Securities

Larry Keusch - Raymond James

Chris Cooley - Stephens Inc.

Erin Wilson - Bank of America Merrill Lynch

Greg Halter - Great Lakes

Mitra Ramgopal - Sidoti

Operator

Welcome to the STERIS’ Fiscal 2014 Third Quarter Conference Call. All lines will remain in listen-only until the question-and-answer session. At that time instructions will be given should you wish to participate. At the request of STERIS, today’s call will be recorded for instant replay.

And now, I would now like to introduce today’s host, Julie Winter, Director of Investor Relations. Thank you. You may begin.

Julie Winter

Thank you, Jane, and good morning, everyone. It’s my pleasure to welcome you to STERIS’s fiscal 2014 third quarter conference call. Thank you for taking the time to join us this morning. As usual, participating in this 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. Any redistribution, retransmission, or rebroadcast of this call without the expressed written consent of STERIS Corporation 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. Company does not undertake, 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. Statements involve 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 may 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.

Mike Tokich

Thank you, Julie, good morning everyone. It is my pleasure to be with you this morning to review our third quarter financial results. Following my remarks Walt will provide his perspective on key elements of the quarter and review our outlook for the full fiscal year. As usual my comments this morning will focus on our adjusted results. We see reconciliation table included in our press release for additional details.

Let me now begin with a review of our third quarter income statement. Total revenue grew 7% during the third quarter driven by a 5% increase in organic volume, a 1.5% increase from acquisitions and a 50 basis point improvement in pricing. Foreign currency was neutral to revenue during the quarter. During the quarter, we experienced double digit revenue growth in the United States offset by an 8% decline in international revenues.

Gross margin dollars increased 6% in the quarter, due mainly to the increase in revenue. Gross margin as a percentage of revenue for the quarter was flat at 40.4%. We have several factors impacting gross margin in the quarter. Medical device excise tax continue to reduce gross margins by 50 basis points year-over-year. On top of that, we had anticipated that our in-sourcing projects would be net P&L neutral in the third quarter; instead, we incurred almost $2 million in expense during the quarter.

For the full year, our expectations now include approximately $6 million insourcing expenses, about double from what we anticipated last quarter. In addition, gross margin during the quarter was impacted by approximately $1 million due to organic investments we have made to expand our Spectrum instrument repair business into new territories throughout the United States. The increase in volume didn’t improve EBIT by 8% to $62.5 million in the quarter. EBIT at 15.4% of revenue increased both sequentially and year-over-year driven by increased volume offset by higher R&D expenses, which increased $1.2 million compared to the prior year.

The effective tax rate in the quarter was 39.9% compared with 36.4% last year. The effective tax rate in the third quarter was higher than our typical operating rate, primarily as a result of discrete item adjustments and our inability to recognize the potential tax benefits of operating losses in certain international locations. As a result, net income increased to $34.9 million or $0.59 per diluted share compared with $34.3 million or $0.58 per diluted share last year.

Moving on to our segment results, healthcare had a good quarter, growing revenue 8% in total and 6% organically. Healthcare capital equipment revenue grew 4%. Consumable revenue increased 6% and service revenue grew 15%. Service organic revenue growth which excludes Spectrum was 10% in the quarter, driven by strength in the United States. Even with strong shipments of capital equipment, healthcare backlog increased double digit sequentially and year-over-year, ending the quarter at a record $156 million.

Healthcare operating income increased 5% to $37.5 million in the third quarter. The increase in operating income year-over-year primarily driven by increased volume somewhat offset by the medical device excise tax, increased R&D expenses and investments in both in-sourcing Spectrum as discussed earlier.

Life Sciences revenue decline 1% during the quarter. Strong performance of consumable revenue which grew 8% and 2% growth in service revenue were more than offset by a 10% decline in capital equipment revenue. As you know, capital equipment shipments within this segment tend to vary from quarter-to-quarter. Backlog in Life Sciences ended the quarter at $48.5 million; a decline of 2% compared with the prior year but remained at a level consistent with historic backlog level. Life Sciences’ third quarter operating margin of 18.9% of revenue is down slightly from the prior year.

Revenue for Isomedix increased 30% in the quarter to $49.2 million, expanded capacity contributed to revenue growth within the segment. In addition, the prior year includes business disruption from Hurricane Sandy, [making] the comparison versus prior year somewhat easier. Isomedix’s operating margin was 28.6% of revenue, an increase of 300 basis points as compared to the prior year. Remember, this is the high fixed cost business, so the additional volumes benefit margin substantially.

In terms of the balance sheet, we ended the quarter with $157 million of cash and $475 million in long term debt. For your modeling purposes I do want to point out that we had paid out $70 million of private placement debt, which matured throughout the fiscal year, using a combination of cash on hand and our existing credit facility. By doing this, we should be able to reduce our interest expense by approximately $0.5 million in the fourth quarter based on current short term interest rates.

Our accounts receivable balance of $267.7 million is up from the prior year due to increased volumes. DSO however has improved by one day and is currently at 62 days. We remain comfortable with our current leverage profile of debt to total capital of 32% and debt to EBITDA of 1.7 times. Our free cash flow for the first nine months of fiscal 2014 was $82.1 million compared to $117.1 million in the prior year. Similar to last quarter, the expected decline in free cash flow is primarily due to payment of our annual incentive compensation program, which did not occur in the prior year as well as the impact of strong working capital improvement in the prior year. Capital spending was $17.7 million in the quarter while depreciation and amortization was $19.6 million.

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

Walt Rosebrough

[Technical Difficulty] there are a few reasons for that which I will address in my comment. Mike has already reviewed our segment so I’d like to touch on a few broad highlights. From a geographic perspective, we had very good growth in the United States where revenue grew 12% in the quarter. This reflected double digit organic growth in all three segments and we are clearly very pleased with that performance.

Within healthcare we were also pleased to see strength on an organic basis in the U.S. across all product areas capital equipment, consumables and service. We continue to see a stable to modest growth business outlook in the U.S. and our strong third quarter shipment bubbles and record backlog in healthcare at the end of the quarter reflects that strength.

Outside the U.S., we faced challenges in several markets that have hindered our revenue growth and profitability. This is due to weakness in certain countries that have historically been strong for STERIS. Much of Southeast Asia and certain countries in Latin America have been particularly hard hit this year from STERIS perspective.

Saudi issue is the general economic dynamics within the given countries and regions and that is compounded by the strengthening of the U.S. dollar and of the euro which makes our products more expensive than local market competitors. This currency movement has been generally true in both Asia-Pacific and Latin American regions. In terms of our overall profitability, currency has had a negative impact of about 2% on both the Q3 and the year-to-date profit performance even though it has had negligible impact on revenue.

Turning to our business development efforts, we have now passed the one year anniversary of the US Endoscopy acquisition and the business continues to meet or exceed our expectations. During the third quarter we also hit the one year mark for Spectrum which is also doing well. As we have told you from the announcement of the Spectrum deal, we plan on growing this business through a combination for organic growth and M&A.

We’ve begun to invest in organic growth by adding trucks and staff in additional regions. This investment has had a modest impact on our profit and will until those new assets and people generate enough revenue to cover their cost which generally takes about a year. In addition we’ve made an acquisition during the quarter in this space as we acquired a regional player in the Southeastern United States on December 31st. We paid about $6 million for that business.

Our pipeline for M&A remains full, our BD team has been busy looking at a number of opportunities. Of course we’re generally not able to dictate the timing of those projects but we’re working to continue our strategy of expanding into adjacent markets through business development.

From a profitability perspective Mike has already covered the main issues in the quarter. I would like to expand a bit on our insourcing projects before moving on to our outlook. We continue to believe our in sourcing projects will create the value we expected, these are not trivial projects. In hindsight we were a bit aggressive in our timeframe plan and have had a few glitches that have slowed our progress.

As we discussed last quarter one issue is the hiring and training of the appropriate skilled labor needed in our facility. While we made progress on that front we’re still not yet where we plan to be. In addition some of the design issues of insourced products and parts have taken longer than we planned. Finally some of the projects required changes in building and equipment, which have experienced some delays.

We have every confidence that we will complete these projects and generate the improvements in cost, quality and delivery as expected. We continue to believe that we will see $8 million to $10 million in annual cost savings when the projects are complete. It is just taking us a bit longer to get there than we anticipated.

For those looking on to our FY15 year, we still expect to achieve the 4 million to 7 million in pre-tax cost savings next year from these efforts that we discussed last quarter.

Moving on to our outlook, we are expecting a record fourth quarter in both revenue and profit and anticipate that the full year revenue growth will be within our prior 8% to 10% range at approximately 9%. As I have mentioned already, this is largely a result of the strength in the U.S. business. However we feel it is prudent to trim our earnings per share outlook for the full year to reflect the impact of a higher effective tax rate, the decline in international results and continued investments in in-sourcing in spectrum.

We are adjusting our EPS guidance for the full year to be in the range of $2.42 to $2.49 compared with the previously provided guidance in the lower half of the range $2.47 to $2.60. [Indiscernible] impact of a medical device excise tax, this revised guidance would have us at 6% to 9% growth above last year’s results. Although not quite where we had hoped to be still a solid year when the impact of the device tax and currency movement is taken into account.

We continued to be encouraged by our progress as well as the long term prospects of our business. For modeling purposes for the fourth quarter, I would like to add a few comments. First we are anticipating expansion of both gross margin and EBIT margin driven by organic top line growth and careful cost control.

Clearly the majority of the leverage in the quarter will come from SG&A. in particular in the fourth quarter of last year we incurred substantial expenses related to our annual incentive compensation program, which we anticipate being meaningfully lower this year given that our 100% bonus target is in line with the top of our original EPS range.

In addition as Mike mentioned our non-operating expenses have benefited from paying off higher rate debt over the last two quarters. With that being said we know we have a lot of work to do to deliver on our expectations for the quarter and we feel positioned to do so.

With that I will hand the call back over to Julie to begin the Q&A session.

Julie Winter

Thank you Walt and Mike for your comments. We’re now ready to begin the Q&A, so Jane would you please give the instructions and we’ll get started.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our next question comes from Dave Turkaly with JMP Securities. You may ask your question.

Dave Turkaly - JMP Securities

It looks like in Healthcare, a good performance and even pricing overall for you guys positive. I guess I can't help myself now that we're into this ACA, and the calendar changed. Any new thoughts there on the capital spending environment? I know your backlog is large, so I imagine, on any update in terms of how you see things playing out this year and next?

Mike Tokich

I am certainly not going to try for next year but for this year I would say we are generally experiencing similar kind of trends as we were last year. That is most of our customers we talk to them are saying that they are going to be spending about the same in capital for our type of equipment that they did in 2013, or maybe up a little bit couple of percentage points, very similar to our conversation last year at this time. Having said that we have heard from a number of customers that they are going to -- even though their plan is to do kind of flat or up a couple of percentage points that they are going to hang on to few of those dollars early on in the year to see how things work out for them and so we’re seeing some people being more cautious at this front end of the year.

The counter of that is we have actually seen several of those people who said they were holding on starting to release funds, so at this point I would say it’s too early to call. I think hospitals will be a bit cautious going into this year. But we’re already seeing them beginning to implement their plans and you are right, we do have a solid backlog right now which is a good thing to have at this point in time.

Dave Turkaly - JMP Securities

As a quick follow up, you mentioned M&A and the pipeline being formed, how broad do you envision that spectrum this is becoming and what kind of coverage do you have today, are there other, a lot of opportunities specifically in that area as you guys get larger, thanks.

Mike Tokich

Well, we believe that there is a lot of opportunity, first we think that business is a growing business and second we think we can grow within that business. We do have parts of the country where we’re geographically stronger and parts of the country where we’re geographically weaker and like all service businesses it is somewhat local, and so we think we have opportunity there.

Operator

Our next question comes from Larry Keusch with Raymond James, your line is open.

Larry Keusch - Raymond James

Good morning, well I just want to make sure that I’m understanding one aspect here, you mentioned that or Mike may have mentioned it, on a pretax basis you’re still anticipating the same amount of savings associated with the insourcing programs but at the same time you obviously spoke to delays and issues that cropped up as you kind of put this all together, so what allows you to catch up to get to where you thought you were going to be in that, how do we get comfortable with that.

Mike Tokich

Yes, you know I would say it would not be a fair characterization to say that we will catch up, that is and I’m going to separate two conversations, one is where we will eventually be and the other is when we will eventually be there. So far in the work that we are doing we are with the, I’ll call it the percentage of work that’s complete, the number of parts in or products that we had completed, we are seeing the expected level of savings in those parts and products and so we’re not seeing anything that discourages us from feeling that the ultimate savings objectives and for that matter, quality and delivery objectives will not be met. The issue is and this percentage is not at all correct, but let’s say we thought we were supposed to be 40% down the path today or 50% down the path today, we’re only 20 or 30% down the path today, so we will be slower than we originally expected and that slowness creates the front end cost that we load in, we purchased machinery which we’re not appreciating which was not, some of it not running at full capacity or the capacity we expected, we have spent money in order to do the work and we’re not receiving as much benefit as we expected, so it’s strictly a matter of kind of the percentage of amount of work we have done and we’ve probably bit more work than we thought originally to get that amount done, but the percentage of work that we have done compares to the percentage we thought we would be, so we’re not at all dissuaded from our view of $8-10 million, it’s just a matter of when it comes in the door and our expectation still is that relatively speaking we’ll be in that 4-7 million range for next year, but this calendar year, our fiscal next year it will be in that 4-7 million range. If we’re not feeling like we’re going to off of that, but so I think, I hope I’ve been clear on kind of the ultimate objective which will be later than we originally expected, and the timing of that objective, but in terms of the actual work that we had done to date we are seeing the kind of improvements that we expected.

Larry Keusch - Raymond James

Okay, that was really helpful, and then just two quick financial questions. So again I just wanted to make sure that I’m clear as you think about the fourth quarter that you are suggesting that you do anticipate gross margin being higher but to get to the implied EPS that you’re talking about, the majority of the leverage is going to come from SG&A, that’s one question and then also on the effective tax rate given where you are for the nine months and what you’re suggesting for the year end, the fourth quarter tax rate implied would be lower than the first half of the year which I’ll call more normalized and again I just wanted to make sure I’m thinking about that and if that’s true why would that be the case.

Walt Rosebrough

Yes, let me address the tax issue first. Most of that differential that we have seen is due to specific discrete item adjustments which has caused our rate to be higher in the third quarter and we anticipate favorable discrete item adjustments in the fourth quarter which is going to cause our rate to be lower, to give you some perspective there as to why we believe your thinking is correct on the tax rate, and as far as improvements in the fourth quarter, obviously the biggest one that Walt talked about is our bonus and that is about a $5 million impact, year over year reduction in SG&A expense for its higher SG&A expenses in last year’s fourth quarter so that is the big improvement. In addition to the volume that we anticipate coming through which should help our gross margin both dollars and percent in the fourth quarter.

Larry Keusch - Raymond James

Okay, terrific, thanks very much, appreciate it.

Walt Rosebrough

I think you used that word loosely when he says improvements as it relates to our bonus, but we are a pay for performance company and we have that culture and last year we had exceedingly strong finish and so we were above our bonus level, our 100% level, this year we we hit we will be below our 100% bonus level. So the differential is something under 100% for this year versus something over 100% last year.

Operator

Our next question comes from Chris Cooley, with Stephens. You may ask your question.

Chris Cooley - Stephens Inc.

Could you help me out just briefly first on the margin side and specifically what I want to better understand is the operating margin for life sciences in the quarter? Strong growth there in both consumables and service for the lower capital component, I thought that the operating would have been higher. Can you just kind of walk us through the puts and takes there and I guess what’s implicit and why it snaps back in the fiscal 4Q and kind of along those same lines, with Isomedix it’s pretty much in line with expectations for us. But I am wondering if we can get that business back up over 30% again or at 30% is that just a function of utilization and I just got one follow up. Thanks.

Mike Tokich

Yeah Chris in regards to the life sciences operating margin, I mean last quarter we set a record operating margin of almost 22% or so and we said that that is not something that we believe is sustainable, we believe that upper teens in this business is where our sustainability lies. And your point is well taken about capital but it really is the mix as every quarter we have different products that are selling and those products tend to have higher or lower gross margins generating that. So it’s really all about the mix within this quarter and the lower volume compared to the prior year that is driving that EBIT margin percent a little bit lower.

Walt Rosebrough

I guess the follow on to Isomedix is Isomedix will lack some vein somewhat as we bring capacity on and fill that capacity and we did again set kind of a high water mark earlier in the year and we are going to as always -- we used to have kind of larger chunks of capacity coming in and out, we're trying to have those capacity increases or improvements build more ratably over time. Every once in a while you have to build a whole new facility and then you see significant capacity cost early on. But we always strive for improvements in our margins but I think I smell it was getting quite up there. It is worth mentioning that they have significant capital expenditure exposure, so they need to have those good margins on an ROS basis to have appropriate capital returns which they do have, but we’re pushing pretty high watermarks on price right now.

Chris Cooley - Stephens Inc.

Understood. And then if I could just follow back up on the insourcing discussion, I appreciate remarks and then you still expect to see the 4 million to 7 million in pretax cost savings from related initiatives there in fiscal ‘15. But what I wasn’t clear about was if there was a updated timeline and when you thought you could actually bring those project to completion as -- I know you don't want to give ‘15 guidance, but can you give us maybe some color around a little bit of a delay here but when you think you might bring this to a close? And I’ll get back in queue, thanks.

Mike Tokich

Sure Chris and I think I spoke about this last quarter if not the quarter before a little more broadly about what we’re kind of loosely characterizing is this project. It’s really not this project, it’s really kind of the way forward for us and that’s the first point. The second point is that this is not a project; this is six or seven projects, some of which are across multiple plans. And so some of those projects are dependent on each other and some of them are independent of each other. And so there is not a real answer to when will the project be concluded. Now what we have described to you all in terms of the orders of magnitude spending and the orders magnitude savings, we’re clustering those several projects into a project if you will. But we’ll start new ones next year, next year, next year I am sure. The order of magnitude of these are fairly significant which is why we group them together and look for that $8 million to $10 million savings.

Some of them are coming kind of to conclusion right now and others are continuing, I think now we would say obviously the 4 million to 7 million since that’s roughly half of what the objective is. We should expect that we’re about half complete in this coming current fiscal year, and then the balance will come in the following year. I would think that all virtually all would be completed in the FY16 timeframe. Certainly we would be expecting that $8 million to $10 million to be almost all captured if not all captured in that FY16.

Operator

Our next question comes from Erin Wilson with Merrill Lynch. Your line is open.

Erin Wilson - Bank of America Merrill Lynch

Could you speak to I guess the factors impacting the gross margin in the quarter, it was a little soft in light of the seemingly capable product mix. Has there been in any meaningful changes in how your customers are purchasing your product? Is it shifting more to GPOs or what have been the dynamics on that front over the past few years? And how should we expect that to trend over the next three to five years?

Mike Tokich

You know, Erin I would say there has been no radical change in percentage of business being purchased in GPOs or by GPOs, there has been no significant change pricing, per se. I think this -- and I am talking now about healthcare I think where you’re primarily pointing. If I remember right, our healthcare pricing was up about half a point for the quarter that’s not unusual kind of numbers. So, I don’t think that we’re seeing any radical shift there. I think most of our products by far, the vast majority of our products have been on GPO contracts for years if not decades and we have been working with all of the major GPOs for years if not decades. Its unlike, I will say unlike, what I'll call the classic physician preference type of medical devices where any of them have not been significantly impacted by GPO pricing in GPO interaction that’s virtually unheard of in our 85-90% of our product. We are almost always under some form of contracts. I don’t know if any significant change this quarter versus last. So the only differences would be those of mix and volume in the factors that drives the change in gross margins on the healthcare side.

Walt Rosebrough

In addition, I just want to add that the insourcing and spectrum investment are all healthcare in gross margin and also…

Mike Tokich

We put the med device tax in gross margins. Some companies put it in OpEx so we had to pay attention to that but we’ve discussed all those before but those would be the drivers as opposed to any kind of, I’ll call it general change in contracting and pricing.

Erin Wilson - Bank of America Merrill Lynch

Okay. Got it. That’s helpful. On guidance it's still a pretty broad range for the fourth quarter what are kind of the key risks or kind of points of upside that gets either to the high versus low end of that range. I know you spoke just a little bit but I’m just trying to get more confident in about what gives you confidence I guess in the ramp up in the fourth quarter.

Mike Tokich

The range is relatively large for a one quarter guidance. We agree with you and the reason for that it’s also one heck of a big quarter in terms of the performance we’re expecting. I would say the single -- if you took a single point question, the single point is volume, we have a very big volume keyed up for the quarter and when you see a backlog as high as ours is that is not surprising, so the backlog is high, the volume is high, the biggest question will always be in the last three weeks.

Does this customer who had this $3 million project that he supposedly wanted on March 15, all of a sudden their project is four weeks late therefore they wanted on April 15. And so the biggest single issue and that’s true in capital, it's true in both Life Science and healthcare. On a percentage basis its more true in Life Science because they’re smaller so one big $3 million order changes their numbers a lot. On healthcare you know, one $3 million order changes it not so much on a percentage basis but it's still can grab $1 million or $1.5 million or $2 million to the bottom line depending on what the products are. So, it is purely a matter of volume almost exclusively capital volume that we would expect to be the driver of that question.

And as I said, how the hospitals act in their first quarter of this year, with ACA is our fourth quarter. So, we put a little more range of uncertainty around that although from everything they’re telling us, we think this calendar year will probably turn out about right. So, that’s at a high level. There will be other bits and bobs, what happens in currency, what happens on a couple of other issues what I would say the big driver volumes.

Operator

[Operator Instructions] The other question is from Greg Halter with Great Lakes. You may ask your question.

Greg Halter - Great Lakes

Yes, good morning. Wonder if you can update us on the share repurchase program, looks like there was maybe 5 million or so in the quarter but just don't want to get an update there.

Mike Tokich

Yes, Greg for the year we’ve spent about $22.5 million and that is about just over 515,000 shares that we bought and of that about $4 million are just below 90 million shares we bought in the quarter -- so not 90,000, yes, yes 90 million, sorry. We have 89 million left on the authorization in total that was granted by the Board a couple of years ago and again remember, we’re trying to offset any dilution from the option, grants and exercises, I mean that’s really our main purpose right now with our share repurchase program.

Greg Halter - Great Lakes

Okay. And relative to the tax rates and your indication of not being able to use I think some of the operating losses in certain international locations. Any idea when those could be realized or utilized.

Walt Rosebrough

Well the one nice thing about it, obviously we’ve made a decision that this year we will not be able to use them which is different than our original plan obviously as we’ve increased our expected tax rate for the year. The two areas that the valuation allowance are put; we have valuation allowance of a couple of different entities. Most of those are indefinite lives so we don’t have a risk of losing those, so as we improve our operations in those foreign entities we will be able to get a really a double benefit as we do get income from those operations and we will be able to use the deferred tax asset here, to also offset the, and improve the effective tax rate.

Mike Tokich

And I would even add further Greg that it’s not, not like we had these huge NOLs in these countries, these are relatively small NOLs, so it’s not an overwhelming task to get those back.

Greg Halter - Great Lakes Review

If you had to put a percent on the two components that you mentioned for the 40, approximate 40% of tax rate the discrete items and then these operating losses not being able to use, what kind of percentage would you attribute for each of those.

Mike Tokich

Yes, about one-third, two-thirds, percent wise.

Greg Halter - Great Lakes Review

Two-thirds for the discrete items?

Mike Tokich

Yes, I would say definitely two-thirds for the discrete items.

Greg Halter - Great Lakes Review

Okay and on the insourcing, I believe last quarter while you may have mentioned that you’ve been having some difficulty as a lot of people have in obtaining welders, skilled labor issues and so forth, just wondered if you could update us on what you’re seeing in that regard.

Mike Tokich

That’s exactly right, that was one of the -- in one of the projects that was one on the delaying factors, and we have had, we made progress in hiring both types of people both welders and skilled laborers, machine operators really and we’ve had success adding those people but we continue to add more so or want more and need more and add more so we’re still behind where we’d like to be, but we’ve made progress.

Greg Halter - Great Lakes Review

And relative to your backlog…

Mike Tokich

I might mention Greg we consider all three of those items discrete item adjustments so, the characterization, the breakdown of those are all, they were all temporal discrete item adjustments and so, kind of the breakdown of why they were discrete item adjustments is a bit arbitrary, so and there's all these apply back to longer periods than the quarter and so we’re taking them in the quarter and that’s why we don’t expect to see a similar number that's in the next quarter for example.

Greg Halter - Great Lakes Review

Okay that was back on the tax rate, correct.

Mike Tokich

Back on the tax rate.

Greg Halter - Great Lakes Review

And moving to the backlog is it at a record due to Steris not being able to deliver anything or is the demand running ahead of shipments?

Mike Tokich

No, it’s demand ahead of shipments and or oftentimes Greg we have -- basically our business is in two buckets, one we call it replacement and the other is big projects and the big projects almost always have a future delivery date out three months, six months, nine months, those kind of things and the replacements tend to be more, ship it when you can or ship within a month type of products and so it’s a mixture of those and that’s what creates the shipping schedules but we have been ramping up our facilities to be able to ship the numbers that we’re talking about and we did have -- we have had over the last month and a half, some of our facilities a little weather delay kind of issue, so we’ve had a couple little shutdowns, I’m talking like a day or a day and a half because ice or snow or power like everybody’s having these days, but other than that, we’re not seeing any significant difference.

Greg Halter - Great Lakes Review

Any new products on the horizon that you may want to update us on?

Mike Tokich

We don’t -- as you know we don’t talk about products going forward, anyway we have, we are very pleased with our products that we have in the marketplace now, we’ve updated our sterilizer line, it’s doing nicely, we’ve update our [indiscernible] products, they are moving nicely. On the US industry side, that’s a business where front development is a key to their success and if you look at the products that they put out in the last couple of years, they are doing very nicely. They’re probably 40-50% of the growth of that business, so kind of across the board we’re feeling good about the products that we have out there, as always some better than others, but as a general statement we like our product development what we have in the market, we have more coming but nothing that I would kind of point out as a single point or one at this point.

Greg Halter - Great Lakes Review

All right and one last one, I believe that we had an estimate for capital expenditures of about 90 million for the year, fiscal year, is that still on track?

Walt Rosebrough

Yes, Greg that is still our estimate, 90 million for the year.

Greg Halter - Great Lakes Review

Thank you.

Operator

We have another question from Chris Cooley. Your line is open.

Chris Cooley

Hey. Good morning. Thanks for just allowing me to take this follow up, just two quick. Could Mike, could you maybe give us some color on the tuck-in acquisition. This is a lot smaller obviously than spectrum or TRE. I’m just trying to get a feel for the multiple and kind of what you got with that and then maybe from a bigger picture standpoint from Walt’s perspective you had a great quarter when you look at capital and you have a record backlog as we go into the fiscal 4Q yet capital spending turns really aren’t changing much information what we can see here new builds aren’t increasing. Can you just maybe -- and you touched on this a little bit in the prior call but are you seeing any change in the mix between maybe replacement or competitive bid? Just trying to get a feel for the underlying drivers in the short term. Thanks so much.

Mike Tokich

Sure Chris. The first question about the tuck-in, it does exactly what it is, it is a tuck-in regional player in this space that spectrum is in and it is a nice tuck-in through that, they had a strong market presence in that region and we were able to work it out with the owners and who are staying with the business that we would purchase the business and bring it in from the spectrum family. So, it’s a pure spectrum tuck-in. The -- you know, for business of this size, we don’t get into the multiples but I can say we’re certainly in the range of what we paid for the spectrum acquisition. So ballpark they’re similar. But, you know, 6 million so it’s not a big business relatively speaking.

The second question you asked about capital spending in general and I think I’ve tried to answer it and I’ll try to be more clear in terms of the year going forward, it appears to us from the best information we have, the hospitals will be spending something on the order of flat to slightly up in total capital spending and so not -- this in the 10% growth here in go forward capital spending looks more like again flat to a bit couple of percentage points.

And then the follow-on is do you think -- it wouldn’t surprise us if we see a little bit of hesitancy in their first quarter, in terms of order rates and as a result may see a little slowdown in orders. We haven’t really experienced that to date although there have been people who have projects, we’re going to hold on for a couple of months, see how things go before we make the final commitment, we’re still planning on doing it. And we’ve actually seen a couple of those release those orders where they were holding on and they were feeling confident enough that they’ve gone ahead and released. So, it’s a little bit of a mixed bag but at this point we don’t call it any difference than we called it last year same time.

I think that’s pretty much it and we will, obviously be watching that because it’s important and we’ve had just, we’ve had a very nice kind of back half for the year in order rates. So, we got a good backlog to go into that which you’d like to have if there is a little softness in the quarter. It’s nice to have some backlog going in.

In terms of replacement versus project, you know, I wouldn’t characterize it as competitive or not competitive, we think everyone is competitive. It’s just that the large projects come in lumpier, lumpier portions but the individual orders in the large projects we have those numbers in the last year and a half. They kind of moved around during the crises that we saw the projects hold up and the replacements go away during the financial crises two, three years ago and then they’ve kind of moved back into the normal line.

Operator

We have a question from Mitra Ramgopal with Sidoti. You may ask your question.

Mitra Ramgopal - Sidoti

Yes. Good morning. Just following up on that first, Walt you said the mix that relates to new build out versus renovation is still around that 60-40 level.

Walt Rosebrough

Yes.

Mitra Ramgopal – Sidoti

And again, when you look at the healthcare backlog level…

Walt Rosebrough

Either way, renovation is more than 60 than new build out. We don’t really break it that way we break in a, is it a big project because a new tower or a gutted and redone tower for us is the same kind of project. It’s a big project, there is usually lot of dollars involved, there is lot of effort involved. So, we kind of look at it as large project versus relatively small in two table orders and two light orders that kind of things.

Mitra Ramgopal – Sidoti

Okay, I know that’s good. Thanks. And again, coming back to the backlog levels that we’ve seen healthcare its clearly I think about the highest we’ve had in about three years. Is it really a case where you’re really encouraged in terms of what you’re seeing with the overall capital spending environment in hospitals et cetera starting to be a lot freer with your budgets?

Walt Rosebrough

You know, I’m encouraged when they say they’re going to grow 10% and they’re not saying that, I’m just not discouraged because they’re not saying they’re going to go down 10% or 20%. I think they’re staying -- we're staying the course of about what we spent last year and maybe up a couple of percentage points. So, it’s not like gang buster look in the short run, but nor is it a boom and doom look. So I'd say we're in the middle, but relatively speaking to what capital can as you know when uncertainty rises, capital can slow down, and at this point we're not seeing.

Mitra Ramgopal - Sidoti

Okay. And finally just on the international front, I know you said sales were certainly a little soft because of lot of country specific issues. Is there anything you can do in terms of sort of offsetting that or is this pretty much you just have to take a wait and see approach?

Walt Rosebrough

Of course we work to do better in the countries that are having issues with -- I mean if you just kind of think through what's going on in Venezuela, Thailand, Egypt, Argentina, you know those countries have significant economic and political disruption. And since most healthcare is run by government entities or much of healthcare is run by government entities, that can impact particularly capital spending. It may not impact the routine spending as much. So people are still going to the hospital but folks may not be, governments may not be deciding to spend a lot of money on capital when they are under significant pressure. Because as most governments as you know capital is not treated, capital is treated as an expense so their budget is kind of a cash budget and or they may have cash issues.

The secondary, the piece that pushes that even further is the fact that they are -- is that their currency have fallen in, where we have the areas that I mentioned in Latin America and Asia Pacific, they have fallen versus the dollar and the euro since we tend to manufacture things in the U.S. and Europe that raises our cost relative to either their ability to pay and or to local manufacturers. So that puts the pressure on our business. But of course our job is to find ways to lower our cost and end products that are better and look for the opportunities where they apply. That’s what we are doing.

Operator

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

Walt Rosebrough

Great. Thanks Jane and thanks everybody for joining us today, and have a great day.

Operator

That does conclude today's conference. Thank you for participating, you may now disconnect.

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Steris Corporation (STE): FQ3 EPS of $0.59 misses by $0.1. Revenue of $405.6M (+6.6% Y/Y) misses by $0.8M.