Executives
Carol Cox - SVP, IR
Dwight Winstead - Chief Operating Officer
David Schlotterbeck -
James Hinrichs - Chief Financial Officer
Kieran Gallahue -
Analysts
David Turkaly - Susquehanna Financial Group, LLLP
Michael Weinstein - JP Morgan Chase & Co
David Roman - Goldman Sachs Group Inc.
Kristen Stewart - Deutsche Bank AG
David Lewis - Morgan Stanley
Paul Choi - Caris & Company
Richard Newitter - Leerink Swann LLC
Valerie Dixon
Margaret Kaczor
Matthew Taylor
CareFusion (CFN) Q2 2011 Earnings Call February 3, 2011 5:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 CareFusion Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms. Carol Cox, Vice President, Investor Relations. You may proceed.
Carol Cox
Thank you, Derek. Good afternoon, everyone, and thank you for joining us on today's call as we provide an overview of CareFusion's results for the three and six months ended December 31, 2010, and provide an update to our guidance for our fiscal 2011.
Our press release was issued today, 1 p.m. Pacific Time, and posted on our website at carefusion.com, as well as filed on Form 8-K with the Securities and Exchange Commission. We also filed and posted several slides to accompany today's webcast, which may be found on the Investor Relations homepage with our earnings materials.
While we will not review each slide on today's call, these slides should be used as a reference guide by investors. The slides include comparisons of the results for the three and six months ended December 31, 2010, to the prior year period, as well the financial outlook for fiscal 2011 and definitions of our non-GAAP items and reconciliations to GAAP. The slides also include information regarding the financial impact of the international surgical products and OnSite divestitures.
Joining me on today's call are our new Chairman and CEO, Kieran Gallahue; Dave Schlotterbeck, our outgoing CEO; and Jim Hinrichs, our Chief Financial Officer.
Before I turn the call over, I'll just make a few quick remarks. In today's call, we will be presenting our results on a GAAP and an adjusted basis. Our adjusted results exclude restructuring and acquisition, integration charges, nonrecurring-related costs, nonrecurring tax items and discontinued operations. We believe that 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.
Our management team utilizes adjusted financial measures internally and financial planning to monitor business unit performance and in evaluating management performance. We have included reconciliations of these non-GAAP measures with today's release.
I would like to remind investors that during today's call, we will be making statements that are forward-looking and consequently are subject to risks and uncertainties. Examples of these statements include statements regarding the timing of the anticipated sale and post-sale plans and intentions related to our ISP products and OnSite Services businesses; our fiscal '11 guidance; expectations regarding hospital capital spending; expectations related to our restructuring program, including anticipated timing, costs and expected savings; our expectations regarding acquisitions and divestitures and statements regarding business and revenue growth as well as foreign currency fluctuations.
You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risks set forth in this afternoon's press release, as well as those in our Form 10-K and in our other filings with the SEC.
We urge you to consider these factors, and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.
And with that, I'll turn the call over to Dave.
David Schlotterbeck
Thanks, Carol. As you've read in the releases we issued this week, there's a lot to cover today. And I intend to leave plenty of time for your questions.
Let me start by saying a very pleased to welcome Kieran Gallahue to CareFusion. We announced on Tuesday that Kieran had joined us from ResMed to succeed me as CEO. He brings to CareFusion 20 years of experience in med tech and most recently an impressive track record during his eight years at ResMed.
He significantly increased revenue and earnings and expanded operating margins and drove substantial international growth. We had an enviable slate of candidates that the search committee of our board and I interviewed for my replacement. Speaking as a large shareholder, I believe we found the best leader to take the company to the next level. As I announced in November, my plan remains the same; to retire in February 28, providing plenty of time for an orderly transition.
Now let me give Kieran the opportunity to say a few words. Kieran?
Kieran Gallahue
Thanks, Dave. I'll certainly have a lot more to say in coming weeks and months, but for now let me just say how energized I am to be here. As I have met with the board and through my initial discussions with members of the management team, I see a company performing well, with abundant opportunities ahead and that is executing against a sound strategy.
It's a rare opportunity to join an organization with an end-to-end portfolio of category-leading products yet with such growth potential of the top and bottom lines. The opportunities for margin expansion are clear and will remain a top priority for me.
As Dave said, I've spent a fair amount of time in the industry and I look forward to both applying my experience in CareFusion, but also learning from and working with a very talented management team. However, at this point I've been on the job for a grand total of about two days, so Dave and Jim will be answering the questions on today's call.
I look forward to meeting many of you in the coming weeks and talking in more detail when we get to our Q3 earnings call in May.
David Schlotterbeck
Thanks, Kieran. Now I'll make a few comments about Q2, our divestiture, and our outlook before turning it over to Jim Hinrichs to get into the detail of our results and updated guidance.
I'm very pleased with our results for the quarter, and particularly the performance of our Dispensing, Infusion and Infection Prevention businesses. The revenue growth and double-digit operating earnings growth from these three businesses combined with some favorability on the tax line were primary contributors to an 11% increase in consolidated adjusted income, and a 13% increase in adjusted EPS.
With adjusted EPS for Q2 about $0.44, we're on track with full year guidance we provided last August and have tightened that range today to account for several factors that Jim will cover, including the divestiture we announced this morning. Our updated range of $1.58 to $1.65 represents an increase of 19% to 24% over the comparable prior year.
We also revised our revenue guidance down from mid-single-digits to low single-digit growth. This change accounts for the exclusion of revenue from the ISP and OnSite divestitures and is revised down primarily due to a shift. We're now anticipating an Infusion revenue from the second half of this year to the first half of next year.
As I said last quarter, we expected to know by this earnings call whether we would meet our full year goals for the Infusion business, and while we still have scenarios that will get us there, I now expect a portion of the Baxter opportunity will extend into our next fiscal year. Nothing has changed in our expectations for the number of channels we expect to gain during this period of transition. In fact, we feel stronger than ever about the accuracy of how we analyzed this market opportunity.
Let me give you some additional color. We continue to see customers choosing the Alaris System when we are in competitive situations. And as evidence, we won about 80% of the deals where we competed during the quarter. Q2 was our best quarter ever in terms of the number of new channels we booked as committed contracts. Of those competitive wins in Q2, we gained 10,000 channels from Baxter accounts, bringing the total number of Baxter channels we have won during the past 18 months to 42,000.
We have excellent visibility to the pipeline. We're tracking 70,000 Baxter channels that are currently in play, meaning those customers are in the process of making their purchase decision.
As I also said last quarter, I believe it is not a question of if we'll win this business, it's a question of when, which we now expect to be partially delayed until the first half of fiscal '12.
Continuing with our Critical Care Technology segment. The Dispensing business had another excellent quarter. The momentum we saw building in Q4 of last year continued through the first half of this year. In the quarter, we displaced competitors at a rate of 5:1, and our committed contracts for the first half of fiscal 2011 set us up for our typically strong second half of the year, which we expect to carry through to FY '12.
We also made strategic progress, signing a five-year exclusive agreement with PHACTS, LLC to offer solutions that helped hospitals better manage pharmacy inventory and reduce cost. And we continue to make good progress with the Cerner relationship, including defining the next phases of our integration roadmap.
Finally, in the Critical Care segment, our Respiratory business continued the trend I highlighted last quarter with lighter revenue and earnings contributions than we had anticipated at the beginning of the year. The strong buying last year associated with H1N1 and a lighter census this year will put pressure on our Respiratory results through the fiscal year. We have been able to partially offset the impact through expense controls and the performance of other businesses. We're very encouraged by the release of our EnVe Ventilator and have a strong innovation pipeline to drive growth over the longer term. And we expect this business to stabilize next year.
We made good strategic process in the Medical Technologies and Services segment this quarter. At the start of the year, I emphasized our strategy to optimize the portfolio. In this quarter, we reached two significant agreements to divest businesses that do not fit with our long-term profile.
On January 11, we announced the sale of our OnSite instrument repair business, and this morning we announced the sale of our International Surgical Products business to Medline for $130 million. With the ISP divestiture, I want to emphasize that our commitment to growth outside the United States remains stronger than ever. The International Surgical Products unit is a distribution business, which is fundamentally different than the Device and Disposables businesses we operate in the rest of CareFusion.
While it will continue to be a distribution partner for us in certain geographies, it's better suited for a company such as Medline. I'm very pleased with this divestiture. We sold the business at a fair market price to a strategic buyer that will be a great fit for our employees and customers. The divestiture will enable us to focus our resources on the global growth opportunities that exist in our core Device businesses.
One final note in our Medical Technology segment, the Infection Prevention business again made a meaningful contribution to our consolidated results. ChloraPrep, our skin antiseptic product, continued to grow substantially in the United States and we're optimistic about its upcoming launch in France and Germany, and we expect double-digit growth to continue through FY '12.
Overall, I am pleased with where we stand midway through the year. We continue to make progress against the global restructuring we undertook in August to deliver more than $100 million of annual ongoing savings. The decisions we've made to divest certain businesses will have a very positive impact on our operating margins, and we continue to invest in R&D and our innovation pipeline to deliver products that will fuel our long-term growth.
This will be my last earnings call as CEO of CareFusion. Nearly three years after we began contemplating our spinoff from Cardinal Health, I'm proud of where CareFusion stands today. We serve a large and growing base of global customers who are dedicated to making a difference in healthcare. We have a team of equally dedicated employees developing and supporting the clinically differentiated products that make our customers successful.
Under Kieran's leadership, I look forward to following this team as they execute many of the strategies we've put in motion following our spin off. Now I'll turn it over to Jim.
James Hinrichs
Thanks, Dave. This afternoon, I'm going to talk about three things: First, I'll provide some detail on the financial impact of the ISP and OnSite divestiture; second, I'll give some additional commentary on the Q2 results; and then finally, I'll do a walkthrough of our updated guidance.
In particular, the divestiture of ISP is a significant transaction for us. It affects our financials and our guidance in a reasonably complex way so I want to make sure I spent enough time on it to make it crystal clear to everyone.
Before I do any of that, though, I want to take a quick step back just to summarize what I think are the key financial headlines from the release. First, we had a very solid quarter on the bottom line. It was ahead of our internal expectations and driven by strong results in dispensing and infusion, also benefiting from our restructuring and expense controls as well as the lower tax rate.
Second, net of our two divestitures, which we estimate to be about $0.07 diluted for the full year '11 EPS, we are narrowing and raising the bottom of our adjusted EPS guidance range to $1.58 to $1.65, which equates to EPS growth of 19% to 24%.
Third, we're lowering our revenue growth guidance from the mid-single-digits to the low single-digits, primarily in anticipation of a 90 or so day push-out of the Baxter COLLEAGUE pump conversions.
So let me start by talking first about the impact of our recently announced OnSite and ISP divestiture, which we expect to reduce FY '11 revenues a total of approximately $453 million and EPS by roughly $0.07 per share.
So I'm going to start with the easy one and that's OnSite. OnSite is expected to close in the fourth quarter and therefore will not be part of our results in that quarter. So for modeling purposes, we expect this business to dilute our fourth quarter results by about $13 million on the top line and about $0.01 on the bottom line. If you multiply that by four, you're going to get pretty close to what the annual effect will be for future year.
The ISP divestiture is a bit more complex as it's going to be included in discontinued operations for the full fiscal year, and as a result of this accounting treatment it is expected to dilute our full year '11 revenues by about $440 million and our earnings per share by about $0.06.
This solution comes not just from the lost operating margin, which we've said before is quite a bit lower than the corporate average but it also comes from the stranded corporate costs in combination with the discontinued operations accounting treatment. So to make this as clear as I possibly can, I'll tell you exactly what's happening here, ISP covered approximately $23 million in annual corporate overhead that will not transfer when we sell the business.
The good news is we do have a plan to cut about 60% of these costs, and that will result in about $3 million to $4 million of savings in the fourth quarter. The bad news is that the DO accounting treatment has us include those stranded costs in continuing operations for the first three quarters, meaning that total dilution to us is the $23 million of stranded costs minus only the $3 million to $4 million of savings that we can generate in the fourth quarter. So that net amount is what our dilution is for the full year due to the treatment.
Next year, we expect the total dilution of this divestiture to be only about $0.02 to $0.03 as we remove the majority of the corporate allocated costs that don't transfer with the sale of the business, and this $0.02 to $0.03 is really the ongoing dilution of this divestiture, of course, assuming no use of proceeds.
Just to be clear, to finish this up, the results of ISP operations have not been classified as discontinued ops for the quarter that we're reporting today because they didn't meet the criteria for such classification.
Tomorrow, we're going to file historical quarter financial 8-K for fiscal 2010 and for the first two quarters of '11, that reflect the impact of removing ISP from our results. You're going to find these schedules extremely useful as you update your models to reflect the impact of removing this business from our results.
So now turning to the second item, which is the result for our second quarter. Total revenue decreased 2% compared to the prior-year period or 1% on a constant-currency basis. Gross margins improved by 50 basis points to 47.4% and adjusted operating margins were up by 80 basis points to 15.4%, primarily from favorable mix, manufacturing savings, the benefit of our August structure and generally I'd say strong spending control.
Overall, I'm pleased with the progress against our long-term margin expansion project. We're making good progress on the cost-reduction and margin improvement front. I'd say we can always do better, but we're definitely moving in the right direction.
For FY '11, we now expecting gross margins of 50% to 51%, that's an increase from our previous number of 48%. Again, driven largely by the divestiture of ISP, but also due to strong performance by our higher-margin product driving a mix benefit.
Interest expense was $21 million in the second quarter, it's a decrease of $3 million primary related to foreign currency losses in the prior year. And just to talk about currency for a minute, during the second quarter, currency had a very modest positive impact on our earnings, increasing EPS by less than $0.01 per share.
Our adjusted effective tax rate of 26.8% for the quarter was lower than our previous guidance when it compares to last year's rate of 30.2%. This decrease was driven by several items, including a higher mix of pretax income in our lower tax rate jurisdictions and a benefit from the retroactive reinstatement of the R&D the tax credits, which you've heard about from other companies.
If I could pause just for a minute here. On the tax rate, I know our tax rate has been somewhat volatile since the spin. Over the last year we've been working really hard to optimize the structure for CareFusion for our tax forecasting. We knew this work might result in some volatility and we've been appropriately conservative I think in our great forecast and our guidance.
But based on the recent work that we've been doing, both internally and with the help of outside experts, we actually have a much better understanding of our income mix going forward, and we now believe that our ongoing tax rate for FY '11 and beyond will likely be in the 28% to 30% range, not in the 30% to 32% range that we've previously discussed.
So this decrease has benefited us in the second quarter by about $0.02 a share and we expect the full year benefit to be about $0.04 a share. And let me just say the concept of the ongoing rates is important here. Our estimate of our full year tax rate does not include any discrete items that may pop during the course of the year that are unpredictable in nature such as the change in the tax law or the release of a tax reserve upon completion of an audit.
An example would be the recent legislation that reinstated the R&D tax credit that moved our full year projected rate down by about a point. So going forward, I'll be talking about the ongoing tax rate and I will also call out these unusual items, so you can have a better understanding of what the ongoing rate is holding up versus these unknown rates that might move the rate in any specific quarter.
Moving down to P&L. Adjusted income from continuing ops was $98 million or $0.44 per share. That compares to $88 million or $0.39 a share a year ago. Excluded from the adjusted income from continuing ops in the second quarter are $29 million or about $0.10 a share of onetime expenditures related to our August restructuring, spinoff and other nonrecurring cost as well as merger and integration costs.
Moving to our segments. Critical Care Technologies had revenue of $684 million, essentially flat compared to last year. Adjusted segment profit was $128 million, a 2% increase over last year. The critical care revenues were driven by increases in Infusion and Dispensing, essentially offset by expected declines in Respiratory business, which we talked about in the past quarter.
While we have previously guided to Infusion growth in the high teens this year, as Dave mentioned, the time customers are taking to make their conversion decisions is extending beyond our original assumption. So we're pushing a portion of the revenue for fiscal '11 to fiscal '12 and given the shift we now expect Infusion revenues to grow in the low teens this year.
In our Medical Technologies and Services segment, revenues are $318 million, that's a 6% decrease versus last year. The decline in revenue primarily driven by the loss of sales from our Research Service business, lower ISP revenues and the benefit from the sales of surgical mask due to H1N1 that occurred last year, but was not repeated this year. All these negative factors were partially offset by increased sales from our [indiscernible] products, which as Dave mentioned, continued to take share and grow very rapidly.
Also, I did an adjustment here just to get a better idea of the results of the core businesses in the segments that we're retaining. When I back out ISP, I back out OnSite and Research Services and all those revenues, the MT&S segment actually grew about 5% in the second quarter compared to prior year. The profit in this segment increased 17% to $27 million, again driven by restructuring savings, strong cost controls and a positive sales mix.
Moving down to operating cash flow for the six months ended December 31. Our operating cash flow from continuing ops was about $112 million. Capital spending was $66 million, and depreciation and amortization was $93 million. We continued to expect operating cash flow to be in the range, as we've said before, of $425 million to $475 million. And as of December 31, we had about $1.1 billion in cash.
One additional comment on cash flows. For the full year, we're now lowering our capital spending guidance to a range of $150 million to $160 million, down from the $160 million to $180 million that we've said in the past. Spending in some of our large IT projects is in below what we projected at the beginning of the year, driving that change.
A quick update on the restructuring. In the second quarter, we made good progress on our restructuring goals. Savings during the quarter totaled $26 million, and we remain on track to achieve the $85 million to $95 million that we had set out to save in FY '11 and for that amount to increase next year by an additional $25 million.
Moving on now to guidance. Looking ahead for the remainder of the fiscal year, we are updating our outlook to reflect the following items: First, a reduction in our Infusion revenue estimates due to the shift in sales from FY '11 to FY '12 to account for the extended time period for pump conversion. Second, a lower than planned spending, which will offset the aforementioned revenue reduction. Third, a lower tax rate of 28% to 30%, down from 30% to 32%, which as I mentioned earlier, gives us about a $0.04 positive EPS impact. And finally, the anticipated impact of the divestiture of the ISP and OnSite businesses, which as I mentioned earlier, about $0.07 a share.
So if you pull up the guidance slide that we provided today, I think it's Slide 10 in the deck, I'll walk you quickly through the transition from our old outlook to our new outlook. It's really a two-step process, but if you look at the left column on that slide, which shows the previous outlook, the key numbers are revenue guidance in the mid-single digits and EPS of $1.58 to $1.68.
The next step would be to update the guidance based on fundamental changes in our business, so that still assumes ISP and OnSite are on our results. That's really the true apples-to-apples comparison of what we're changing. So the key changes here are we're lowering our revenue growth guidance to the low single digits. We're lowering our operating expenses from 33% of revenue down to 32% to 33% of revenue, reflecting the cost savings flexibility that we got to offset the revenue growth reduction.
And then finally, we adjusted our EPS range, the entire EPS range upward for two things: First, the entire EPS range goes up by $0.04 to account for the lower tax rate and then we are lifting the bottom of the range by $0.03 to narrow it for the second half of the year, so you end up with the $1.55 to $1.72 range.
The final step then, as we move to the far right column is to adjust for the divestiture. Again the key things to point out here is that the revenue growth stays on the low single digits and EPS declines by $0.07 of dilution that I talked about earlier so you end up with an EPS range of about $1.58 to $1.65.
I hope this is clear. There are a lot of moving parts. Obviously, we'll answer any questions you've got in the Q&A.
Finally, before we wrap up, I want to make a few comments about the second half in the future and beyond. Our earnings for the first half of this year exceeded our expectations. That gives us some relief on the backloaded income split that we previously guided to, so while second half earnings are still more heavily weighted than the first half, it won't be the 40-60 split that we described earlier.
Additionally, based on the very normal strong fourth quarter that we experienced in our Capital Equipment business and the sequential growth that we continue to see on our Infection Protection business, we do expect our second half results to be more heavily weighted towards the fourth quarter.
Finally, I just want to add a comment or two on the progress that we've made versus our long-term financial goals. So if you recall at the spin we said we could grow revenues over the long term in the mid-single digits, operating earnings, 11% to 15% and we would get to operating margin in the high teens within our three- to five-year planning period, which implies sometime between fiscal '12 and fiscal '14.
All of these goals are still in place. We believe they are very achievable based on our current plan. The divestiture by ISP and OnSite certainly accelerates the move on margins, but there remains significant organic opportunities to improve margins in at least four areas: First, product sales mix is our friend. As I've mentioned to many in the past, our higher-margin products are growing faster than our lower-margin products throughout our planning period.
Second, manufacturing efficiencies, rationalizations, and strategic sourcing will help the cost of goods line. Third, as we exit the transition service agreements with Cardinal Health and as we enter fiscal 2012, we're on track to achieve the 10% to 15% savings that we talked about on the $100 million expense we have them.
And finally, our overall SG&A cost are available in numerous areas throughout the organization, and we believe these things can come from simplification of our businesses and processes and our systems and just an overall leaning out of the infrastructure.
The bottom line, these goals remain in place. We have good visibility in them, and I'm personally very enthusiastic about the opportunity to work with Kieran and the management team to get after them.
So with that, I'll turn it back to Carol.
Carol Cox
Thanks, Jim. We'll open up to questions. I would just like to ask if you could limit to one or two questions. Derek, if you could open it up to questions, please?
Question-and-Answer Session
Operator
[Operator Instructions] And I have the first question coming from the line of David Lewis from Morgan Stanley.
David Roman - Goldman Sachs Group Inc.
Thinking about the balance sheet, the divestiture today kind of raises the question of better free cash flow dynamics. It appears as if you will be net cash positive and maybe six to nine months, certainly, maybe, by year end. So thinking about your cash, your somewhat inefficient balance sheet, Dave's comments about the commitment to international, is it safe to assume that you may look for strategies in '12 to get more efficient on this balance sheet and can we assume that one of the first priorities maybe to use some of the OUS cash to stimulate growth outside the U.S.?
James Hinrichs
Absolutely capital structure is at the top of my list in terms of things I'm looking at right now. I'm a believer in that. The optimal capital structure will follow the strategies that we're in the midst of completing our strategic planning process. Kieran is here now and he will obviously weigh in on that and we'll set our strategy in place. At that point we'll get our capital structure optimized to support that strategy and from that will come a capital deployment policy that supports that strategy. So I probably wouldn't want to be too specific about exactly what we're going to do, but certainly we do have lots of dry powder. We are in a great cash position and certainly we can use that cash to generate positive earnings and positive return for everybody. So without being too specific, I think you're on the right track there.
David Lewis - Morgan Stanley
Just thinking about margins, your last comment when you finished up your prepared remarks, you had talked about double digit or upper teens margins. Obviously, the divestiture gets you there faster. If you think about a 15% margin business, which is your old guidance, upper teens would have implied sort of a 200 to 300 basis points of expansion. Given the outlook you described in terms of the opportunities for margin expansion, is it safe to assume over the next several years you'll still see a 200 to 300 basis point expansion from existing levels?
James Hinrichs
After the divestiture, we're at 17%, and between 17% and 20%, we've got 300 basis points of opportunities. So I think the answer to that is yes.
Operator
Your next question comes the line of Mike Weinstein from JPMorgan.
Michael Weinstein - JP Morgan Chase & Co
Can you just talk about the health of the Pyxis business this quarter and give us a better read on its performance? And then one of the line items that surprised us was the R&D spend. I think that Ed [ph] had commented on the last call that you expected R&D to be up $4 million or $5 million sequentially this quarter, but it was actually the opposite, it was down a few million sequentially. So any insight as to why that was would be appreciated.
David Schlotterbeck
I'll take the Pyxis question. By the way I want to mention that we have Dwight Winstead here with us also. So at some point he maybe chiming in. The Dispensing business really did have an excellent first half in terms of bookings. They've basically set a record for committed contracts in the first half of the fiscal year and really set us up for what has always traditionally been a strong second half. I added a comment that we do expect that to carry through to FY '12 and that's going to be the result of some new things that we will be bringing to market. We're excited about the Cerner agreement in the first quarter of the year. We generated $10 million from that agreement and that was the first 90 days that it was in place. In the second quarter, we generated $13 million and currently have a pipeline of over $123 million associated with that relationship. We've got a very strong pipeline with the PHACTS Pharmacy inventory offering and very excited about that. So I think as I've said at your conference and previously, that we're going to show strength in the second half of the year and that's going to continue into FY '12.
James Hinrichs
With respect to the R&D question, Mike, I noticed that, too. And I probed a little bit with the different project teams. The answer that I discovered was that essentially this is just a delayed spending and we're anticipating that it will pick up in the back half of the year. I also probed on are the projects proceeding as planned? Because certainly when you see reduced spend, that's what you worry about. What I have discovered was all projects are proceeding well. All significant projects are proceeding as planned and it's really a delayed spending into the second half. So that answers that question.
Michael Weinstein - JP Morgan Chase & Co
So at the start of the year, the company have guided to $170 million to $180 million of R&D spend for the year. Do you have a new range?
James Hinrichs
I wouldn't change that significantly right now. Maybe be at the lower end of that. But I wouldn't change it right now.
Operator
Your next question comes from the line of Amit Bhalla from Citi.
Valerie Dixon
It's actually Valerie in for Amit. On the Infusion business, is this strictly a timing issue or it sounds like you're being a little bit even more optimistic today so is this also a revision up in the size of the share gain opportunity?
David Schlotterbeck
No. We've never been specific on what we really have set as our internal expectations on share gain. Some of the studies that we've seen, done by sell side analysts have been in the 20% to 30% range. And I've been very public about saying our internal expectations are above that. This is strictly a timing issue because customers are taking longer to make their decisions. And I think that you've heard that from other players in the Infusion business. We're still very bullish, but I wouldn't say that we've actually increased our expectations.
Valerie Dixon
It could be a little premature, obviously, Kieran has only been in the job two days, but the board has a vision for the strategic direction of the company. I was wondering if you can comment on what that included in the hiring process.
Kieran Gallahue
Sure. It is the early days, so I'm going to say much less today than I will in the future. And for those of you who know me well know that saying less is not my strong point. But this is an organization that has been executing extremely well. There is a strategy that's been put in place that leverages margin expansion, that takes advantage of the fact that there is a broad portfolio of products that are market leading. So as we look forward, let's just say as steady as she goes. Obviously, we'll be refining the strategy as we move forward, but let's just say that as of now, it's steady as she goes.
Valerie Dixon
Does that include any additional divestitures for this year?
James Hinrichs
At this point, there's nothing imminent that we see -- this is Jim, that we see on the divestiture front. No.
Operator
Your next question comes the line of David Roman from Goldman Sachs.
David Roman - Goldman Sachs Group Inc.
I was hoping we could come back to Infusion pumps for a second. It seems like on each call, the pacing of your orders or your capture rate seems to get better, yet the revenue opportunity also is pushed out to some extent. Is there something -- could you maybe help us better understand the timing between orders and winning these contracts and when the plan is actually to make the swap slash when you recognize revenue and where the disconnect might be in the success you're having versus the timing of the revenue?
David Schlotterbeck
First of all, the conversion of an order into revenue is about 120 days, maybe sometimes a little longer as is normal cycle. Frankly, the 10,000 channels that we picked up in our second quarter, we didn't consider it to be a very large number. Now there were 12,000 channels in play that we participated in. We won 10,000 of those. That isn't the kind of revenue, ultimate revenue expectation that we have for that business. And our only conclusion is that most of the larger customers really have not made a decision yet. There's a handful of what I would call large customers where there are a thousand bed systems and maybe slightly more than that. Handful, meaning three or four that we've picked up in the first two quarters of the year. There's a long way to go. And remember, I pointed out that we are involved in 70,000 channels that are currently in play. If those all got signed tomorrow, you'd probably see a lot of those spill into next fiscal year simply because of an installation capacity issue but we're well equipped to be able to deal with tens of thousands of channels being installed on a quarterly basis. And my expectation is that we're going to land a nice portion of that 70,000 that we're currently tracking.
David Roman - Goldman Sachs Group Inc.
The one other thing I was hoping you could clarify was in the slides. On Slide 11 you talked about hospital CapEx spending grow in the low single digits range with customers continuing to prioritize spending. Can you maybe just provide a little more detail on what the prioritization scheme looks like? Has that changed at all over the course of the year and how you're expecting that to unfold to the balance of the year?
David Schlotterbeck
What we've seen in the first half of the year is low single digit growth over last year. Our assumption in our guidance for the balance of this year is that we expect that to continue, and I think you've heard from other med tech companies that healthcare IT is a top priority item for hospital’s CapEx spending as a result of the stimulus money. The good news is, and I've pointed this out historically, is that in the top 10 items that hospitals have on their purchase list, you see Infusion pumps and ventilation equipment. So we're basically assuming no change for the balance of the fiscal year.
Operator
Your next question comes from the line of Rick Wise from Leerink Swann.
Richard Newitter - Leerink Swann LLC
This is Rich in for Rick. Maybe I could just start with a question of the larger environments. Many of our companies so far this earning season, they're still talking about declining admissions procedures, pricing pressures. Just curious if you could comment on what you're seeing on those kind of more macro trends in the quarter and what you expect for the rest of the year.
David Schlotterbeck
I think the comments would be similar to the answer to the same question last earnings call and that is we're continuing to see growth in ChloraPrep because we're taking market share. We are seeing softness in Respiratory disposables as a result of a very limited flu season and low birthrate. We are seeing growth in Infusion Disposables in spite of the fact that census is flat to down primarily as a result of taking market share. Had we not been taking market share, we wouldn't see that number be going positive. So it's sort of varies by business. I think the good news is that we've really only got one business where we've seen the impact of a bit of census pressure show up in the top and bottom line.
Richard Newitter - Leerink Swann LLC
One follow-up on the Pump side, just given the push out that we're kind of seeing into the first half of next fiscal year, what gives you confidence that you're going to see most of that 70,000 kind of channels share shift play out in that specific timeframe and not perhaps move into the back half of fiscal '12? Can you talk about that, the timing there?
David Schlotterbeck
I think one of the things, ultimately, that hospitals are cognizant of is that there is a time limit imposed by the FDA as to when they have to have these pumps exchanged, and that is either July or August of 2012. And I think the rough numbers on channels available that need to be exchanged is 200,000 plus. We've already captured 42,000 of those. The 70,000 there in play puts that number up above $100,000. When you look at our historical win rates of about 80%, the fact that we did better than 80% in the deals that we participated in against Baxter in Q2, you do the math. And I think the numbers speak for themselves.
Operator
Your next question comes the line of Matt Taylor from Barclays Capital.
Matthew Taylor
Just a question on the pumps. I'm curious, you said there was 12,000 channels in play. I'm just curious as to how you define that or said differently, where did the other 2,000 go? Did they go to other competitors or back to Baxter?
David Schlotterbeck
What I said was there were 12,000 channels where a decision was made in Q2. We won 10,000 of those. The other 2,000, I believe, went to Baxter. And if you do the math on 10 out of 12, that's over 80%.
Matthew Taylor
I'm just curious given the Hospira reporting yesterday and having some problems with Plum, how do you think that changes the situation here in the second half of your fiscal year, the first half of their calendar year?
David Schlotterbeck
Well, it's not going to hurt us. I've often joked that we're the tallest midget in the Infusion business, and I think we still are. I want to point out that just to clarify the channels in play from my earlier remarks are 70,000. And frankly, having been in that business for 11 years now, that's the most channels I've ever seen in play at any instant in time just to help put it into perspective. In a normal year annually, it might be 120,000 to 130,000 channels. So we've got over 50% of year that is currently in play at a snapshot in time. So back to your question on the Plum recall, frankly, I think in the Infusion business, the bar has gone up. We found ourselves making decisions to decide to do failed recalls when we've had one complaint from a given customer. And I think you're going to continue to see that across all the Infusion players. I think as you know, the SIGMA product is undergoing a recall now too.
Matthew Taylor
It seems to be a little bit of a disconnect between the channels that you're taking and Baxter said they only lost a few accounts. Were they just really big accounts or is something else going on there?
David Schlotterbeck
We signed up 35 hospitals in the second quarter. I don't know how you can call 35 a few. That was a total of 26 contracts. So I think, of all of the players, we're the ones the most willing to give you actual specific, hard data. And I'd be looking for that out of my competitors, likewise.
Operator
Your next question comes in the line of Kristen Stewart from Deutsche Bank.
Kristen Stewart - Deutsche Bank AG
Going through the slide deck, I noticed that the numbers for nonrecurring charges looks like on your revised outlook goes up a little bit. It was 100 to 110, now it's 120. What accounts for that difference? Are there any additional charges to be taken as part of their structuring program to achieve the targeted savings that you outlined earlier?
James Hinrichs
I would say that there's nothing in there that significantly different. It's really just a fine tuning of the estimates so I wouldn't point to any one specific thing and more just a fine tuning of the estimate upwards with structuring, with our management transitions, with the mergers and integration coming in just slightly differently leads than we thought they would. There's nothing really significant that I can point to and say there's one big driver. It's just a handful of smaller things.
Kristen Stewart - Deutsche Bank AG
And then the pro forma numbers that you gave for 2010 excluding some of the divested business that showed gross margins at 49 9 and your revised guidance would project 50 to 51. Can you just talk about what your mind is driving the expansion of gross margins and just kind of talk about the general pricing environment?
James Hinrichs
I'll talk about what's driving gross margin. Gross margin is largely being driven by mix in manufacturing savings and manufacturing and service savings. So is what I've been saying all along in these businesses. Mix is our friend and will continue to be through our planning period. Our higher margin products are going faster than our lower margin products. It's what everyone love to see or at least what I love to see. We're also seeing some very nice savings of our manufacturing teams. They're going through the plants and driving efficiencies within the plants and also doing a lot of things around the service implementation cost and as new products come out, they're more reliable, cheaper to implement. That kind of work that's driving the gross margin improvement. I don't know if Dwight or Dave, if you want to take a crack at the pricing piece?
Dwight Winstead
I would say, Jim, that pressing on the Infusion side has been competitive in the marketplace with the Baxter opportunity, but across the remainder of our businesses, not much difference had we've seen than the last few quarters, so I don't think there's any major news around pricing that we haven't already baked into our forecast and year-over-year.
Kristen Stewart - Deutsche Bank AG
Would it be possible just to get the specific growth rates for Infusion, Dispensing, Infection Control and rest of MTS?
James Hinrichs
We actually don't disclose those businesses individually their growth rates.
Kristen Stewart - Deutsche Bank AG
Can you give a rough sense?
David Schlotterbeck
Yes. That's right.
Operator
Your next question comes from the line of Dave Turkaly from Susquehanna.
David Turkaly - Susquehanna Financial Group, LLLP
When we look at the total channels and thanks for the color you're giving us, would it be fair to say as a total target from this COLLEAGUE situation, is it close to 300,000? Is that a fair number in estimate of how many channels you believe are out there to be replaced?
David Schlotterbeck
I've heard that number, David and quite frankly I'm not sure anybody has a good handle on it right at the moment. Things have been seeming to move around. I think the initial announcement out of Baxter said that there were 200,000 units that -- 150,000 of those were single channel and 50,000 of those were triple channel, which would make it 300,000. But frankly, it's really difficult to draw a good beat on that and it's pretty tough to give you a precise estimate. Now I would say that since Baxter's announcement, they have had to contact their hospital customers and understand their plans for changing out their COLLEAGUE units. And I would think that Baxter probably has the most specific information on the number of channels remaining in the market that they have because they've gotten these reports back from these customers probably in the last 90 days.
David Turkaly - Susquehanna Financial Group, LLLP
If we're looking at this quarter being a record in terms of the number in place, 70, and we're just trying to kind of look at what that could mean for the rest of the year and next year, it would be feasible then that, that number could be what you used to see in a normal year could come up to be in play in a given quarter. Would that be fair to say?
David Schlotterbeck
In play doesn't mean they're all going to close in this quarter. We're here nearly at the middle of February with six weeks to go. I'd be very surprised given my experience if all 70,000 of those closed. In fact, I'd be shocked. So some of those are going to bubble over into probably our Q4 and our Q1, but my only point is that this is the most units or the most channels that I've seen ever in play as a snapshot at time. That does not translate into -- and they're all going to close this quarter.
Operator
Your next question comes from the line of Ben Andrew from William Blair.
Margaret Kaczor
This is Margaret in for Ben, actually. First, Jim, maybe if you could you tell us what your take is on the operating margin outlook over the next few quarters strategy wise, and as you guys try to go into those upper teens or even higher numbers?
James Hinrichs
Certainly I described what I thought the opportunities were down the line in terms of mix driving a benefit in manufacturing and service dating as well as overall SG&A take-out, and we've got some things that we're working on as I mentioned in terms of coming off those transition service agreement from Cardinal Health. But those are all the strategies that are in place. I'm not ready yet to give a specific number for FY '12, but continuing on the conversation that we had, had earlier or the question that came in earlier, how much room do we have to grow? I think over the course of the next couple of years, we've got quite a bit of opportunity out there. So I'm not sure if there's a whole lot more to say than that. Is there a different part of the question you're looking to have answered?
Margaret Kaczor
Maybe you could go over some of the details of those TSAs with Cardinal, because I think those roll off in September. And then how big of an impact that would be on your operating margin.
James Hinrichs
The TSA is actually -- the vast majority of them are aspiring between now and June 30. June 30 is the really big date because that's sort of the two-year mark from when we became a stand-alone company from an internal spin standpoint. July 1, 2009, was actually our original internal spin when he became an independent company. That's when the transition service agreement started so they rolled off -- the vast majority rolled off on June 30. We are paying Cardinal Health as part of the transition service agreement we've, been very public in talking about, net of the benefits charged that's a straight pass-through from them, it's about $100 million a year in service fees. We believe that we can save and we have good visibility frankly to savings, 10% to 15% on those TSAs. So that equates to about $10 million to $15 million of savings that we'll be carrying with us as we enter 2012.
Margaret Kaczor
Maybe if you guys could tell me a little bit about how EnVe is doing in the market and how you're maybe expecting it to impact Respiratory growth? Any kind of upside on that.
David Schlotterbeck
I think we've said that our forecast for this fiscal year is modest. The good news is that since the first or second week in December when we introduced the product, we've shipped 100 revenue units, which frankly is a pretty big number given the sales cycle is nine to 18 months.
Operator
Your final question will come from the line of Paul Choi from Caris.
Paul Choi - Caris & Company
Maybe if we could just start with one product question, on the spinal side. David, if you could maybe comment on how MMX was doing -- it did in the last quarter and maybe where you see the market currently?
David Schlotterbeck
We had a modest forecast for the fiscal year. We're sticking with that, and I believe we're at about 125 customers at the moment, and we continue to believe that this is going to become a popular product and clearly, the market has shown some level of volatility based on payor comments and actions. We really haven't seen that, in particular because, we're at a very small market share. So this is the kind of thing that's going to take a little time to gain traction in the market, so I'm happy with where we are.
Paul Choi - Caris & Company
For Jim, if we think about the MTS business following the divestitures, you posted four or five quarters of improvement in the adjusted operating margin for that business. Should we think about that on a going-forward basis as still sort of a aspirationally high single-digit margin type business or will it be a low double-digit type business?
James Hinrichs
This divestiture is going to bump, and I'm looking at Carol for confirmation here, bump our margins by about 200 basis points. So that's where we're expecting this thing to come out now. This is another business, frankly, where we've got higher-margin products growing quite rapidly. So I think that will improve over time. Again, this is one of the places where mix is our friend, but this specific divestiture bumps the margins by about 200 bps.
David Schlotterbeck
In closing, thanks a lot for joining us. Again, I'm pleased with the quarter and I'm looking forward to being a listener on the next call.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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