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CareFusion (NYSE:CFN)

Q1 2013 Earnings Call

November 08, 2012 5:00 pm ET

Executives

Jim Mazzola - Senior Vice President of Global Marketing and Communication

Kieran T. Gallahue - Chairman and Chief Executive Officer

James F. Hinrichs - Chief Financial Officer

Analysts

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Jonathan J. Palmer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

David R. Lewis - Morgan Stanley, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 CareFusion Corporation Earnings Conference Call. My name is Darcelle and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Jim Mazzola. Please proceed.

Jim Mazzola

Okay. Thanks, Darcelle, and thanks, everyone, for joining us today. On today's call, Kieran and Jim are going to discuss our preliminary select financial results for the first quarter, which ended September 30, and provide an update on our consultation with the SEC about the accounting for sales-type leases in the Dispensing business unit.

Before they do, I want to reiterate a few points we previously made. The first one is that until we are current in our SEC filings, we will not provide revenue for the Dispensing business unit, which means we're not in a position to provide certain consolidated results, including revenue, gross margins, operating margins and EPS. You should, however, hear plenty of commentary on today's call to understand our qualitative assessment of progress in the Dispensing business and CareFusion overall. Our intent in holding today's call is to be as transparent as possible within the constraints that we have.

We will provide revenue for our other reported business units, including segment results for Procedural Solutions, and we will also provide certain consolidated results that are not dependent on Dispensing revenue, including SG&A and R&D spending levels, as well as some commentary on gross margins. Again, our intent is to be as transparent as possible to help you assess our progress against the goals we've publicly set.

We issued a news release about 1 hour ago with our preliminary financial results, which is posted on our website at carefusion.com and filed on our Form 8-K.

During today's call, we will discuss some non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into CareFusion's ongoing results of operations, particularly in comparing underlying results from period to period. A reconciliation of these non-GAAP measures to their GAAP equivalent was included in the news release on our website and in today's filing.

I'll also remind you that during today's call, we will be making forward-looking statements, including statements about business and financial expectations for fiscal 2013 and related to our accounting for sales-type leases, including the impact on our financials and our filings with the SEC. Our actual results could differ materially due to risks and uncertainties, including the risk factors set forth in today's release and our filings with the SEC.

Please refer to these materials for a more detailed explanation of the inherent limitations of such forward-looking statements.

So with that, let me turn the call over to Kieran.

Kieran T. Gallahue

All right. Thanks, Jim. Well good afternoon, and thanks for joining us today. We had another quarter of strong execution across the business, including balanced contributions from both segments. While we're not in a position to discuss our complete results today, we wanted to provide a preliminary update with enough detail to help you see the progress that we're making against the goals that we've set. Our finance team has been working to resolve the manner in which we account for sales-type leases, but you'll see in our results that the rest of the organization has been undistracted by it.

We've stayed focused on our customers, on R&D, on competitors, and we remain absolutely on track for the year. We have conservatively and consistently accounted for our Pyxis sales-type leases for more than a decade, so it will take some time for our finance team to work through the details of changing that methodology. However, I will remind you that this is purely a technical accounting matter and has no bearing on the underlying fundamentals of the business, including our cash flows.

So our team is off to a good start for the year. The 3 business units in our Medical Systems segments are performing in line or better than our expectations. Beginning with Dispensing, we executed well in the field and delivered solid results for the quarter, right in line with our expectations. While we cannot provide the specific financial performance of this business until we are current in our filings, nothing has changed in the U.S. competitive landscape and our expansion outside of the U.S. continues to go well.

Moving on to Infusion. We finished the quarter ahead of our plan and on track for the full year. As we told you 2 quarters ago, this business unit will contract in fiscal '13 due to the large volume of Infusion pumps we installed in fiscal 2012. Our team did a nice job securing a number of key competitive and upgraded accounts during the quarter, and we are comfortable with the trend in average selling prices. As we get into our Q2, we will see higher sales of dedicated Infusion Disposables providing additional benefit to our gross margins.

Finally in the Medical Systems segment, our Respiratory Technologies business unit had another strong quarter in Ventilation, which was partially offset by weakness in Diagnostics. Beginning this quarter, we are reporting Ventilation and Diagnostics revenue together to align how we are now managing these businesses. Our systems strategy in Ventilation, moving from a feature function sale to an information-based solutions approach, continues to position us well with our customers. We also continued to benefit from the large government order that will be a tailwind through our second quarter.

Turning to our Procedural Solutions segment. I'm pleased with the progress we are making and the more balanced contributions we are beginning to see from this segment. The changes we made in fiscal 2012 are taking hold, particularly in our field organization, where we added clinical resources and reorganized nearly 1 year ago into Vascular and Surgical specialized sales teams. We are seeing normalized performance after the challenging year we had in fiscal 2012, as we transitioned our third-party logistics provider and focused our portfolio of businesses.

During Q1, we saw segment revenue grow in line with our guidance for the year, with a nice improvement in gross margins and expansion of adjusted segment profit. Looking at each business unit in this segment, we continue to demonstrate the value of our clinically differentiated products in Infection Prevention, with strong growth for our ChloraPrep and our MaxGuard MaxPlus product lines. It's early in the year and I don't want to get ahead of our plan, but the progress we are making is a good indicator and certainly keeps us on track for the year. Outside the U.S., we continue to invest in our clinical and selling resources and made good progress broadening the adoption of ChloraPrep.

Our ChloraPrep franchise remains small in Western Europe, but it is beginning to make contributions that, over time, should be meaningful. The strength we saw in our clinically differentiated product lines was partially dampened by the weaker sales of our less clinically differentiated offerings.

In Medical Specialties, we saw growth in the quarter from our clinically differentiated drainage line and other interventional specialties, plus the contribution from our U.K. medical acquisition. In our V. Mueller surgical instruments, we continued to see softness in open surgical procedures, but our team is building momentum with our new take-apart line that we announced last March.

Finally in Specialty Disposables, revenue declined in line with our expectation, as we continued to transition this portfolio of products to take advantage of our clinical selling expertise. We made good progress during the quarter, which I expect will show in our future results.

Just to wrap up the quarter, I'd reiterate this was another consecutive period of strong execution, doing what we said we would do and keeping us on a trajectory we set for this year.

Now turning to strategic progress. We took additional steps during the quarter to execute against our 3-phase plan. As most of you know, we transitioned last fiscal year from our standup phase, which was all about separating from Cardinal Health, to the second phase in our transformation. This second phase is called Building the Foundation for Growth, and sets us up to be more customer-focused and efficient.

After the close of the quarter, we announced plans to acquire Intermed in Brazil, which follows our acquisition of U.K. Medical. Like the Rowa acquisition last year, both Intermed and U.K. Medical begin to address our substantial opportunity to expand outside the United States. Intermed brings a new line of ventilators that fills a gap in our portfolio, and the knowledge and network of distribution and service partners for CareFusion to be successful in the growing Latin American market. We look forward to closing later this month.

We also continue to make strong investments in research and development, as we decreased our G&A expenses. Our R&D spend is consistent with where we exited Q4 and 27% above Q1 of last year. As we spend more in R&D, we remain disciplined and targeted with the goal of increasing the value of our core franchises. We have highly differentiated medication management, infection prevention and respiratory care offerings, and we are focused on making investments to strengthen those positions for the long term.

Last quarter, we laid out a 3-year plan to deploy $2 billion in capital and meaningfully increase our adjusted EPS growth. During the quarter, we made good progress on the M&A front, with activity above and below the water line. Above the water, I talked about Intermed in Brazil. Below the water, our M&A team continued to do its work on other companies and technologies that would complement CareFusion. I remain comfortable with our pace in the pipeline of acquisition opportunities that could complement our business. You should expect us to remain selective and disciplined in our approach to acquisitions.

To the extent potential targets do not meet our strategic and financial requirements, we will shift our use of capital towards share repurchase pursuant to our plan. As I mentioned last quarter, we have an enviable balance sheet and strong cash flows that provide important levers as we create a more valuable company.

Last quarter, I discussed our more conservative view of the health care market. We do not see a meaningful change in the market conditions during the quarter, nor do we anticipate any meaningfully near-term changes as a result of Tuesday's U.S. elections. U.S. hospital capital spending remains constrained and customers continue to prioritize their spending. We are comfortable with the deal flow we see across our capital product categories. Western Europe spending remains weak. Though we are less exposed outside the U.S., we saw low growth but a generally stable environment in most markets.

In other strategic geographies, including the Middle East, Eastern Europe, Southeast Asia and the BRICs, our capital businesses continue to experience meaningful growth, albeit off a small base.

As I look ahead to our goals for fiscal 2013, we are on the right trajectory and we will continue to manage conservatively, given the global environment and where we are at in our transformation. We remain in good position to help our customers in this environment with our product and service offerings that can help lower cost, improve hospital productivity and increase patient safety.

I'm looking forward to taking your questions. But first, let me turn the call over to Jim.

James F. Hinrichs

Okay, thanks, Kieran. Good afternoon, everyone. As Kieran mentioned, we are somewhat limited in the financial information that we are able to discuss on today's call. However, within the context, I do plan to provide a level of insight into our first quarter results that I hope will help you evaluate our performance during the period.

As usual, I want to start off with today's headlines. First, we are very pleased with our first quarter results. Balanced contributions from both segments have provided the company a head start in accomplishing our goals for the full fiscal year. Second, we continue to make progress on our strategic plan. That's evidenced by strong margin expansion, a meaningful increase in R&D expense, continued SG&A leverage and our acquisition of Brazilian-based Intermed, which was another important step in the globalization of CareFusion. Finally, we remain comfortable with the operating goals that underlie both our internal budget and the financial guidance that we presented on our fourth quarter call.

Moving to the results for the quarter. Revenues for each of our business were generally in line with our expectations. Infusion Systems revenue declined $3 million, or 1% versus last year. Our pump ASPs, our capital volumes and the mix shift toward dedicated disposables were all in line with our expectations. Moving forward through the year, we do expect Infusion revenue to decline on a higher percentage basis, as the comps get tougher and tougher through the year. As you all probably remember, we began installing a large number of pumps in the second quarter of last year. We do continue to expect that the increased volume of dedicated disposables and an increase in pump selling prices will result in a net increase in gross margin dollars in this business line during fiscal '13.

Respiratory Technologies revenue increased $4 million, or 4%. Beginning this quarter, we are presenting our Respiratory Diagnostics business unit within the Respiratory Technologies business line. Respiratory Diagnostics is, as a point of reference, annually about $130 million business, and was previously reported in the Other category of Procedural Solutions. This reclass has been made for each presented.

Respiratory Technologies revenue continued to benefit from the government order that we've been talking about, that contributed about $10 million to the top line during the quarter. Global demand for ventilators remain stable, in line with recent quarters and our expectations, while demand for diagnostic equipments slowed.

Infection Prevention revenue increased 4% year-over-year. Demand for clinically differentiated products, including ChloraPrep and MaxGuard MaxPlus was strong, as these products continue to take share in their marketplace. The global growth for this business line continues to be dampened, however, by the performance of our legacy non-differentiated products.

Medical Specialties revenue increased $2 million, 3% year-over-year. Consistent with our expectations, growth was driven primarily by year-over-year growth in our PleurX franchise, results were pressured by the anticipated decline in surgical instrumentation.

Finally Specialty Disposables declined $4 million, at 6% year-over-year. That was expected, although we forecast a decline in revenue for this business in fiscal '13. We continue to make good progress in securing distribution rights for additional clinically differentiated products through sole source arrangements with strategic vendors.

And though we can't provide specific financial results for the Dispensing business unit, I would say, qualitatively, we had another good quarter. Operationally, we're on track with our full year plan and management's expectations for the business. I'm comfortable with the number of committed contracts that we secured, and the backlog we had exiting the quarter. Our rollout of the new Pyxis ES platform remains on track with our expectations, and we're looking forward to showing it off at the upcoming ASHP meeting next month.

From a gross margin standpoint, while we can't discuss overall corporate gross margins because the Dispensing numbers are not available, I can tell you that the non-dispensing gross margins showed nice year-over-year favorability, primarily driven by the lack of product recall charges that we had last year. Additionally, non-dispensing gross margins during the quarter exceeded our expectations, and we believe we're on track to meet the full year goals we expect on our last call.

Moving down the P&L. We saw continued decline in adjusted operating expenses. Beneath this decline, we significantly increased our R&D spend, which rose $10 million or 27% to $47 million during the first quarter. As with prior quarters, the increased spend is focused primarily on next gen programs in our key businesses.

Moving forward, we expect the R&D run rate to increase modestly to about $50 million per quarter. And while we are increasing R&D, we continue to decrease SG&A through aggressive simplification, reduction of our corporate and administrative overhead, adjusted SG&A, which now excludes deal-related amortization for all periods, decreased $13 million or 5% to $229 million on a year-over-year basis.

Entering the second quarter, we are expecting a roughly $10 million to $15 million increase in our adjusted SG&A quarterly run rate. That's the result of incremental investment in domestic and international commercial resources, as well as fees associated with our indirect sales regions, which were unusually low in the first quarter. We expect another step-up in our quarterly SG&A run rate in Q3 of approximately $8 million as a result of the med device tax, which commences on January 1.

Interest and other totaled $20 million, that's a reduction of $5 million from last year, primarily due to lower interest expense after having repaid the $250 million of debt that matured in August. We're now forecasting quarterly interest and other expense to be approximately $2.5 million lower than comparable periods from -- in fiscal '12 for the remainder of this year as a result of the repayment of these notes.

Wrapping up the financial results, operating cash flow from continued ops total $78 million. That's an increase of $75 million over the same period last year, due in part to improvements in working capital. Capital expenditures totaled $18 million during the quarter. At September 30, our cash balance is $1.5 billion, $1.2 billion of which was outside the U.S, and our total long-term debt balance was $1.2 billion.

Quick update on our share buyback program. We did not repurchase any shares during the quarter, do not anticipate repurchasing any shares until we become current in our SEC filings. However, we do continue to model a decrease in shares out for the fiscal year, consistent with our guidance last quarter. We do believe there will be an upfront way to catch up to our plan once we are able to become current in our SEC filings.

Speaking of the 10-K filing, as you know, we delayed the filing of our fiscal '12 Form 10-K due to our consultation with the SEC, regarding our accounting for Dispensing sales-type leases. And while we have accounted for our Pyxis sales-type leases consistently for over a decade, we became aware of a potential alternative accounting methodology after we released our preliminary fourth quarter results. At that time, we determined it would be appropriate to consult with the SEC on the matter prior to filing our fiscal '12 Form 10-K.

While our dialogue is ongoing, as a result of these discussions, we have decided that we will modify the manner in which we apply lease accounting principles to our Dispensing sales-type leases. We are now in the process of analyzing the impact on our financials. Just to be clear, we do not expect that these sales-type leases will be recharacterized as operating leases as a result of this process.

The revised manner in which we apply the lease accounting principles to our sales-type leases will impact how we determine the fair value of the equipment underlying these leases and will ultimately result in increasing the recorded fair value under certain leases and decreasing the recorded fair value of our equipment under others.

As a result, the amount of revenue recorded the inception of each lease and the amount of recorded as finance income over the life of each lease may change. However, the total amount of revenue recognized over the term of the lease will not change. At this time, we expect the impact on our financials will reflect the number of offsetting factors, and we do not know yet whether our historical financials will ultimately require a restatement. If we determined that a restatement is required, we'll provide you notice via press release and a Form 8-K filing.

Once we complete our analysis, we intend to file our Form 10-K, first quarter 10-Q as soon as possible. At this time, it's impossible to determine a specific time line associated with the process.

While we still have work to do, we now have a clear path to completion. We look forward to resolving the matter as quickly as possible. As we continue through the process, I want to be clear on 2 pertinent issues as it relates to our quarterly financial information. First is we will not file our first quarter 10-Q by tomorrow's deadline. We intend to file the first quarter 10-Q as quickly as possible after filing our fiscal '12 Form 10-K.

Second thing is both the fourth quarter of fiscal '12 and the first quarter of fiscal '13 are still considered to be open accounting periods. When the financial periods remain open, there's always the possibility that a preliminary financial results as reported could change due to subsequent events and or revisions of accounting estimates as of those results occur. So I want to stress again as we close this item out, the technical accounting issue does not impact the underlying fundamentals of the Pyxis business, does not impact our Pyxis customers or the cash flows associated with this business.

One other item worth mentioning. We're currently in the process of evaluating the potential impact of any, if any, of Hurricane Sandy on our second quarter, full year results. As you'd imagine, many of our customers on the East Coast faced disruptions as they recover from the storm. These disruptions may result in lower procedure volumes, as well as capital delays -- sorry, in capital equipment installations and purchasing decisions. I suspect if we are impacted by the storm we won't be alone, but I just want to give you a heads-up we're looking at it.

To conclude our prepared remarks, I want to reiterate we had a strong quarter, good start to fiscal '13, balanced contributions from both med systems and procedural solutions, strong cash flow while all the while we made meaningful progress in our 3-phase strategic plan. At this point, we remain confident in our ability to achieve the business objectives, which underlies the fiscal '13 financial guidance provided during our August call.

Finally, as we take your questions, please understand we're unable to talk about Dispensing revenue or any of the financial metrics which are a function of Dispensing revenue. We recognize these limitations are less than ideal and they feel somewhat unsatisfying, and we truly appreciate your patience as we continue to work through our analysis.

As Jim mentioned, it's important for us to be transparent as possible at all times, especially given the situation we're in. We decided that a partial release of information was the best choice versus remaining silent through situation. So with that, I think we'll open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mike Weinstein with JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

A couple of questions just to start off and these are kind of expense questions. But the ramp in R&D is obviously significant. Just about where you were in the fourth quarter, but the clear direction as they've been moving R&D higher. And can you characterize it as being next-generation technology investments? I was hoping you could provide a little bit more. And the other OpEx line, SG&A, was obviously down substantially, and I was hoping if you could give us a little bit better visibility that down in this quarter because that was fairly notable.

Kieran T. Gallahue

Great. We’ll tag team on this, Mike. So on the R&D expense, you're right. The investment has gone up throughout last year. Sequentially, it remained relatively similar from Q4 to Q1 and we're not looking at significant increases over the Q1 number for the rest of the year. We may get some creep up on that as we see opportunities, but we're not looking at the same level of increase that we've seen in prior years. It is very much oriented towards building around the core of our franchises and clearly, we had been doing a substantial amount of investment in sustaining engineering over time, much of this increase is oriented towards next-generation technologies and filling in the white space around our technologies where we see opportunities for growth and profitable growth and meeting the needs of the markets. So this is all about our program of investing for the future, setting the foundations for [indiscernible] and growth in the future. Jim, you want to take the SG&A?

James F. Hinrichs

Yes, on the SG&A side, Mike, it was a significant decrease year-over-year. There's not 1 specific thing to point to. If you recall, last year around this time, we announced what we call the CareFusion simplification initiative. That initiative had a number of work streams attached to it, part of which was around reorganizing the company down from 3 to 2 operating segments. Due to a number of corporate administrative reorganizations, we kicked off a strategic sourcing program, and we looked around the entire organization for ways to simplify and take infrastructure out of the administrative and support functions. What you're seeing now is the fruits of those labors. And so the vast majority of the year-over-year decrease comes from those things that I just described, which were deliberate efforts to simplify the business, simplify the organization and do essentially more with less as the support function.

Kieran T. Gallahue

So just to wrap those 2 things together, Mike, this is all part of our strategy of moving, funding and investment from those areas that don't touch customers to those areas that we think we can drive substantial benefit over time. So this is very much all part of our building the foundation for growth effort.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Kieran, can you just talk a bit about the market environment and maybe both classify it in terms of geography, Europe versus the U.S., which you might have seen this quarter that was different was Europe a little bit weaker, some other companies have suggested and then the other classification would be disposable procedural revenues versus capital equipment?

Kieran T. Gallahue

So a couple of things there. One, is -- from a procedural volume, I thought I'd just take the second one first, procedural volume. We've seen it basically flat. We're not seeing big spikes up or down. I know different companies had been reporting and some of them seeing a little bit up a little bit down. It seems like it's in maybe in certain segments. For us, basically seeing a flat trend on that part of the business. And so, our growth is really coming from expansion and from market share gains, particularly in our clinically differentiated areas. On the capital side, you continue to see that hospitals whether it's the United States, whether it's Europe or elsewhere, they've got a big challenge in front of them that they need to significantly reduce their costs as they move forward and the natural place that they're going to head to do that is through labor, either deskilling or eliminating labor in the process of care and trying to do so in a way that holds patient safety, patient care are neutral or better improved. So from that environment perspective, it's still clearly a challenged market from a capital spending, but we're finding that our approach and where we're focusing, which is basically on operational simplicity while improving patient safety, is reaching the right ears. People are recognizing the importance of it. I would say that Europe continues to be a bit more challenged than the United States. It's a difficult capital environment there. But underpinning it all is the same drive towards that cost efficiency. Did that answer your question, Mike?

Operator

Your next question comes from the line of Jonathan Palmer, CLSA.

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

Jim, I was just hoping to get a little more detail on the timeline for getting all the recent financial restatements wrapped up. Is the holdup here in your discussions with the SEC? Or is the process of reevaluating all the leases the unknown any way you could, like, characterize how far along you are would be great.

James F. Hinrichs

Sure. So great question. First of all, you used the word which is not yet perfect to use which is financial restatements. We have a clear path forward. We are evaluating our new application of the accounting principles on our lease portfolio and we're looking backward in time to determine if a restatement would be necessary. Obviously if we had already determined that, you would've heard that we would have filed a 402, we would've filed an 8-K indicating that. So that's the first point of clarification there. In terms of the time line, it's really impossible to know we're looking backward through tens of thousands of transactions. It's a lot of work and like I said, we do have a clear path forward, but we just need to now grind through the work and there are tens of thousands of transactions each year that we are grinding through. You'll hear the results or you'll hear from us, really, about this in 1 of 3 ways. The first is if our analysis indicates that our historical financials are materially correct, we'll just file our 10-K and that's how you'll hear about it. To the extent the analysis would indicate a restatement is necessary, we would issue a press release and issue a 402 on Form 8-K notifying you of that conclusion. If we -- as time is passing, regardless of either of those outcomes, if we're not through the analysis, we'll get it updated in a month or so, if that were still working on it, where we stand. We just, like I said, there's a lot of work to be done to get through all of these transactions. We have a clear path forward, it's just now getting the work done. Would that answer your question?

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

That was great. Thanks for the clarification. Maybe if I could just shift gears here on the Respiratory line. I just want to make sure I'm clear on the numbers. Per the press release, it's $93 million last year, $97 million the first quarter this year. By my math, the fourth quarter was $120 million. So what was the large sequential decline there?

James F. Hinrichs

That business tends to have some ups and downs in the quarters. I don't have the math in front of me right now for the combination of Respiratory diagnostics and Ventilation. But that business does tend to fluctuate the second and fourth quarters tend to be the significant quarters in that business. There's nothing -- there's no change in demand what we're seeing from -- at least from the ventilation side of the business is stable demand, demand in line with our expectations, growth on the Ventilation side the demand on the Ventilation side, that's consistent with what we saw in the second half of last year. The Respiratory diagnostics business is lighter. I'll also take a look at that Jonathan and we can follow-up afterwards.

Operator

Your next question comes from the line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

So I guess one thing I wanted to ask about was in Procedural Solutions, you had pretty good growth this quarter and also the segment profit was up quite a bit more than the revenue was. So just curious what's driving that there? And if you could give any color on ChloraPrep, that would be great.

James F. Hinrichs

Yes, I mean, I'll take the margin part if you want to give color on corporate, Kieran. From the Procedural Solutions standpoint, the -- obviously, the entire company is the beneficiary of probably primary driver the entire company is the beneficiary of reduced overhead and support expenses and that gets allocated to the segments. And the impact on Procedural Solutions tends to be much larger because Procedural Solutions is the smaller of the 2 segments with lower OE numbers. So there is a huge benefit to that segment from all of the things that we are answering Mike's questions about. That's one. Second, in mix, there is a nice mix factor going on there. The higher-margin businesses are growing much more rapidly than the lower margin businesses. In fact, the lowest margin business in our portfolios is Respiratory or Specialty Disposables. And that's actually declining. So those 2 things are the primary drivers of that positive margin variance.

Kieran T. Gallahue

And then specifically with ChloraPrep, we continue to do quite well with ChloraPrep sales and the end user demand. The trend lines continue to be positive. We continue to take share in both the vascular and surgical applications and we continue to invest in Western Europe there of course we're running off a slower base, or a smaller, but we'll continue to invest there for future growth. So we're feeling pretty good about where the ChloraPrep's at.

Matthew Taylor - Barclays Capital, Research Division

And just out of Infusion, you did a little bit better than your guidance. Is this the low for the year? I mean, should we expect your Infusion numbers to come up as you ramp set revenue? And could you help us characterize in terms of -- now how much of that revenue is pumps versus sets, given the gap?

James F. Hinrichs

So great question. The answer is no. Actually, the comps get tougher through the year. So this we do expect the rate of decline in Infusion, which was down 1% this quarter. I'd expect that to decline more in the remaining quarters of the year, simply because we're comparing 2 massive pump installs. Now margins, as you've said, as we talked about will continue to increase in that business as we flip over to the set revenue, which we don't break out sets, disposable sets versus pump revenue, but needless to say, the sets are coming in exactly as we -- not exactly, but very close to exactly as we forecasted that business actually is doing really, really well. The one break, slight break from what we expected in that business, is in fact the pricing on the pumps, which has been slightly better than we expected. They're doing a great job out there as a sales team, bringing price back to market. We anticipated that they would be able to do some of that and they're delivering on that and a little extra beyond that. So otherwise that business kind of came in right where we thought it would.

Operator

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I can appreciate that you guys obviously can't give specific guidance updates because of the outstanding accounting filings. But just wanted to kind of check in. It sounds like from what you're saying, everything is on track and there hasn't been any material change relative to the business and the performance. And so if not for the accounting change would it be, I guess, correct to assume that your guidance would probably remain intact for the full year?

Kieran T. Gallahue

So you're absolutely right that we cannot comment on guidance. And so we won't comment on guidance. But what we will say is that all the operating elements that were underlying our previous guidance have been coming in as we'd anticipated and in some cases, a little bit better. So we are right on target for our strategic objectives for the year.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And where, specifically, are the areas that you feel are coming in perhaps a little bit better? Is it just infusions? I guess, that was a little bit better this quarter with the pricing? Or...

James F. Hinrichs

Yes, I just mentioned 1 infusion pricing. I think the other thing that kind of stuck out was we did a little better on the spend line. We budgeted relatively conservatively, and then we kind of exceeded what our goals were on the spend line. So spending reductions came in a little better than we thought. I think those would be the 2 things that stuck out for me operationally, where I felt really good about it.

Kieran T. Gallahue

Yes, but things are going along well. Sometimes things are this quarter, that quarter, that sort of thing. So I wouldn't also get too far ahead of ourselves, say that we're pretty much right in line with our objectives for the year and feel good about that.

James F. Hinrichs

Yes.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And then I think last quarter when you gave guidance from the interest expense line item, you had assumed that you would then go out and I think reissue that and that has not occurred so does that also give a little bit more, I guess, potential room for upside relative to the guidance that you gave last...

James F. Hinrichs

It does, right. So we left it on there conservatively that we might refinance that debt. Obviously, we are not able to get into the debt markets. We're not current on our filings, so we're not going to be issuing any public debt. And so, we've just gone ahead and said let's assume that $2.5 million per quarter comes out of the interest line for the rest of the year.

Operator

Your next question comes from the line of David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Jim, I just want to follow up on the interest commentary. I mean, you were going to go out and do a financing. You've elected not to do a financing. How should we sort of interpret kind of those comments in light of some of the public comments you've made about supplementing growth in terms of M&A?

James F. Hinrichs

I don't think you should interpret them as anything other than we've -- we thought -- at the beginning of the year, we were budgeting conservatively that we might go out and refinance that debt. As of right now, we haven't done that. We don't -- we haven't committed to doing that. So we're just simply saying let's take that off the table. I'm not at all concerned if we need access to capital, that we would be able to get it. I will tell you that I've had a number of discussions with a number of different banks. There will be no problem for us accessing capital if we needed it. This is not a credit event. What's happening here with our filings, it's an accounting impact. So I don't think you should interpret it as anything. We're still very actively looking at M&A deals. We've still got a good pipeline and there is no change whatsoever from our previous statements about what we're going to do and what our strategy is.

David R. Lewis - Morgan Stanley, Research Division

Just 2 quick follow ups. Just to be clear, you believe you could go out to the capital markets even without a K file?

James F. Hinrichs

We can't go to the public markets, but certainly we can borrow money from -- privately.

David R. Lewis - Morgan Stanley, Research Division

Great, very clear. And then, Kieran, the Respiratory business, it looks like the Ventilating business came in roughly in line, the government contract came right in line. But obviously VIASYS looks like it was relatively weak. And you talked about market driven factors, but the decline in the quarter looked a little more extreme than what would be implied by the market. So is this sort of perhaps a slowdown prior to product launch, or you still believe it is market-driven factors?

Kieran T. Gallahue

No. Remember -- the first thing to remember, we have the 2 different pieces, right? We have the respiratory diagnostics. The respiratory diagnostics definitely -- as we expected was down from last year, right? So I think that's where you feel most of that pain. On the vent side, there was -- it's been actually trending the way we expected. There was some little things, a little bit of push out from 1 quarter to the next, nothing that really in any way affects the trend line. I will say by the way, in RDX, that is the case where we do have products that will be launching later in the fiscal year, which is part of why we had anticipated the downside on that. But no, I'd say overall vent is looking good.

Operator

Your next question comes from the line of Larry Keusch with Raymond James.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Jim, I'm just wondering if you can help us think a little bit about the cash flow in the first quarter. Obviously, it looked quite solid relative to last year, but you had some system conversion issues there, so it's a little tough to compare. I think if I do the math correctly and look at the midpoint of what you're looking for, for the year, it's about 14% that was generated in the first quarter. But just help us think how to put that cash flow in context if you could.

James F. Hinrichs

Yes, absolutely. Q1 is always going to be a light cash flow quarter for us. We have bond coupon payments, we have management incentive payments. So Q1 is always going to be our lowest cash flow quarter. Last year if I remember, I think it was 1. This year it was 78. So we're well ahead of last year. I will tell you that, that number was ahead of our internal expectations. Last year, we had some extensions of system conversions that hurt us on the working capital side. This year I would describe as a much more normal year. So I would tell you that the cash flows were modestly better than what we had anticipated; still feel like we're right on track what we said we'd do, which was 5 25 to 5 75 of operating cash flow.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

For Kieran, I was just hoping you could just spend a moment in amplify the o U.S. strategy. Where do you sort of stand with the investments? I understand you're making them, but just trying to get a feel for kind of where we are within that process and how do you continue to increase and drive growth overseas?

Kieran T. Gallahue

Yes. So it really depends on which markets you're in and what period of our life stage we're at. So last year, a lot of it was around getting a business model that we feel comfortable with over the next 5 years. In other words, setting up the structure that allows us to have the right management in place to recognize that certain markets that we want to be direct, certain markets are better to be a distributor or supported distributor models, et cetera. So as making those decisions getting them in place and then getting the personnel on board and quite friendly, hiring above the job that they'd be in when they walked in the door in order to set a foundation on a base for us, and then to be able to make both organic investment, as well as the growth through M&A. In certain markets, Brazil was a great example, we felt that trying to do that organically was probably not the best way to do it. And when we identified Intermed, it was a great example of where we felt we can get technology. We could get distribution, knowledge and a distribution base in place. And we can get manufacturing capabilities all at once. So it allowed us to sort of jump-start the program, and then it allows a base after we settled that down for us to look for further growth throughout Latin America. So really in each of these markets, depending on the product line, we're taking very selective activities. A little bit more on that, U.K. Medical was a good example of where in the U.K. we had a great distributor. We felt that we had more growth opportunities ahead of us. We forward integrated that, team is on board. They set us up for more opportunities to add products into their bag as we get into the next couple of years, so it's progressing. I'm actually really pleased with the progress that we've made last year and I'm pleased that the team has been able to set the foundation and then both accept organic and inorganic means of adding to that team.

Operator

Your next question comes from the line of Matt Miksic.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

So I wasn't sure if you covered this in one of the earlier questions. I've been hopping back-and-forth here. But on pumps, Infusion in the quarter, you said a couple of things. One was on the pricing improvements maybe slightly better and your expected faster. And should -- I think you also mentioned that it was sort of -- it had come back. I mean, come back if we should think about that as being around sort of as close to list as you were a couple of years ago? Or are you not quite there yet? Give us a sense of what you mean by sort of the normal target for pricing. Then I have one follow-up.

James F. Hinrichs

Okay, so, I mean -- what we always -- what we said was over the course of the last couple of years we discounted down pretty heavily, as much as 30% per channel in the last year. That actually -- we did not expect to get back to prior year selling prices. We expected to regain a little bit of that, get part of the way back, and I would say we've gotten that part of the way back and then maybe a little bit more. So like I said early days, much smaller numbers because we're just -- we're selling fewer of these things, as you would expect. But the trend is very, very good. It's a real kudos to our sales team, done a nice job of making sure they explain very carefully the value of our products to our customers and it's obviously working in the marketplace.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay, and then on the mix on the fusion side. Can you give us a sense of -- I understand where you were last year you were placing a lot more pumps. This year we're looking for utilization of consumable to start to track up. Can you give us a sense of the mix of the business in Q1?

James F. Hinrichs

We don't break that statistic out separately. What I will just tell you is that we forecasted the disposable sets based on the channels that we placed last year, and that forecast has come in very, very, very close to what we expected it to be. So again, we don't break that out separately, but it's right on track with what we thought.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Maybe, if you mean -- could we just say something like it's a little -- you've taken a step towards a more traditional balance in that mix of revenues? Obviously...

James F. Hinrichs

Yes, it's certainly a step towards a more traditional balance than where we were last year, for sure.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay. And then one final one, if I could, on new products or mixed elements of the Pyxis rollouts. Could you give us a sense of what else is coming in that pipeline on the Dispensing side and when? That would be helpful.

Kieran T. Gallahue

Well you know, in the Dispensing line overall, we have been in the midst of rolling out the next generation system, which is the ES. And that's kind of rollout that as we've publicly discussed before, it happens to -- you do those things over like an 18-month or so period. So we're in the early days of that rollout. It's going very, very well. Great customer response, and it's particularly timely in the sense that it works well not only within single hospitals, but within hospital systems. And it helps at a time when many of these customers are trying very hard to lower their costs of managing their medications. So it fits very well within that strategy for the hospital and the timing of our ability to release these products. We did also acquire some technology that we're going to be showing here soon in a packager technology. And that will be shown at a trade show coming up here. So we are -- in fact, I think we've already showed it in public already recently. So that's an example of a technology, not a full product, but a technology that we acquired in that we are already able to advance to the product enrolling stage. And we'd expect to continue to do that.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And anesthesia?

Kieran T. Gallahue

We're not -- beyond that, we're not giving time -- clearly for competitive and commercial reasons, we are very hesitant to give a lot of details around future product generations in many of our products. So what I discussed is what we've been publicly chatting about.

Operator

[Operator Instructions] Your next question comes from the line of Amit Bhalla with Citi.

Unknown Analyst

This is Nick [indiscernible] in for Amit today. You guys have given great color on the better than expectations and spending reductions in Infusion or the Infusion pricing better with spending reductions also becoming better. How about on the other side of things? Where have you seen incremental weakness in the quarter that you didn't expect coming in?

Kieran T. Gallahue

It's a good question. I'd have to say that the quarter -- we're pretty pleased with it, I guess. That would be the only thing I'd say. I think we've made good strategic progress in all the critical areas. Here or there, we mentioned RDX was down, but we've kind of expected that. And some of the non-differentiated products, they have a tough time. But again, I couldn't characterize those as not expected. It's pretty much what we -- we would always hope for better, but those are pretty much in line with what we had anticipated.

James F. Hinrichs

Yes, I think this was the best way to characterize the quarter -- notwithstanding the fact that we can't file our financial results, it was a clean quarter. It came in kind of where we expected it. There were some minor things that looked a little better to us, but the trends are all really where we thought they would be.

Operator

Your next question comes from line of Rajeev Jashnani with UBS.

Rajeev Jashnani - UBS Investment Bank, Research Division

Just regarding the, I think, comments on M&A and share repurchase, I guess I was just wondering given where we are now in the year, are you still -- and M&A is tough to predict, I understand that. But do you still expect the same sort of pace you might have expected 3 months ago in this fiscal year? Or maybe a little bit more perspective as what you described as what's going on below the water line?

Kieran T. Gallahue

Yes. We are absolutely on track for what we had anticipated. But you -- you're absolutely right, M&A is very difficult to predict. You never want to back yourself into a corner on timing of any given deal just because it's not constructive and it leads to bad decisions. Our team is very disciplined. We look at -- kiss a lot of frogs, you look at a lot of deals, but you have to make sure that the target lines up from a strategic perspective and maintaining financial discipline. And that's the way we have always been and that's the way that we intend to continue. But I'd have to say that what we have looked at in the market, what we see ahead of us has been good. It's what we've expected and I wouldn't say there's any -- been any change in the last x number of months, 6 months.

James F. Hinrichs

None whatsoever. I mean, the one change, obviously, is on share buyback, we would have anticipated buying shares in the first quarter. We weren't able to do that and we're not going to be to until we get current. But we believe there is plenty of runway in the year to fulfill our planned buyback. So that has changed, but only just temporarily.

Rajeev Jashnani - UBS Investment Bank, Research Division

Okay. And just on Infusion, I think it sounds like it was better than expectations. I guess it's related to pricing. One is that really what's different versus your expectations? And then would that not have a positive implication for your expectations for the balance of the year as well?

Kieran T. Gallahue

Look, I don't want to overstate this, right? We had a very good quarter in Infusion. We feel very good with the progress. This is one quarter into the year, so I don't want to get ahead of ourselves here. We're still fundamentally executing. We're on for what we expected to be on for the year, and that's the way I would think about it.

Jim Mazzola

Thanks, Rajeev. Operator, any other questions? Do we have other questions?

Kieran T. Gallahue

All right, well we're almost up for the hour in any case. All right, so with that, why don't I say thank you very much. As always, I'd like to thank the CareFusion team members around the globe. They've done an extraordinary job. I want to particularly thank the finance organization, as they've dealt with these challenges. But also the rest of organization because everybody has stayed focused exactly what they need to be stayed focused on, which is our customers, the hospitals and their patients.

So look forward to updating you when we get other news. But thank you, and it was a good start to the year. I look forward to updating you. Cheers.

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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