Hill-Rom Holdings, Inc.
Q4 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Good morning, and welcome to the Hill-Rom Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for telephonic replay through October 30, 2013. See Hill-Rom's website for access information. The webcast will also be archived in the Investor Relations section of Hill-Rom's website, www.hill-rom.com. If you choose to ask a question today, it will be included in any further use of this recording. Also note that any recording, transcript or other transmissions of the text or audio is not permitted without the written consent of Hill-Rom. [Operator Instructions] Now I would like to turn the call over to Mr. Andy Rieth, Vice President, Investor Relations.

[Blair A. Rieth:]

Thank you, Ashley. Good morning, and thanks for joining us for our Fourth Quarter Fiscal Year 2013 Earnings Call. Before we begin, I'd like to provide our usual caution that this morning's call contains forward-looking statements, such as forecasts of business performance and company results, as well as expectations about the company's plans and future initiatives. Actual results may differ materially from those projected. For an in-depth discussion of risk factors that could cause actual results to differ from those contained in forward-looking statements made on today's call, please see the risk factors in our Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. Also, we will discuss certain non-GAAP or adjusted financial measures on today's call. Reconciliations to comparable GAAP financial measures can be found in our earnings press release, the associated Form 8-K, and are also available as part of the presentation materials posted earlier on our website. Joining me on the call today will be John Greisch, President and CEO of Hill-Rom; and Mike Macek, Vice President, Treasurer and Interim CFO. The usual ground rules will apply to make the call more efficient. We've scheduled an hour in order to accommodate our prepared remarks and leave plenty of time for Q&A. [Operator Instructions] As you listen to our remarks, we are also displaying slides that amplify our disclosure. I would encourage you to follow along with us. The slides were posted last night on our website and will also be part of the archive. With that, I'll turn the call over to John.

[John J. Greisch:]

Thanks, Andy. Good morning, everybody, and thank you for joining us today. We are pleased to finish the year with strong fourth quarter results. Revenue was near the top end of our guidance range and adjusted earnings of $0.65 per share exceeded our guidance of $0.59 to $0.61. In addition, we finished the full year with slightly stronger operating cash flow compared to 2012, despite lower adjusted earnings. For the full year, we delivered adjusted earnings per share in line with our original expectations. In addition, the improved operating cash flow performance in 2013 enabled us to return over $125 million, nearly half of our operating cash flow, to shareholders. This exceeded our target of 15% to 20%, but was consistent with our commitment to increase the amount of cash returned to shareholders in the absence of meaningful M&A transactions. Looking back on the full year, we made great progress in many areas despite the inherent volatility in our core North America capital business. On the R&D front, we launched several exciting new products in the second half of the year. Chief among those was our new ICU bed frame, Progressa, which has now been launched globally. Other product launches this year included our revolutionary Allen Advance Spine Surgical Table, a new respiratory airway clearance product; MetaNeb 4.0, which received 510(k) clearance earlier in 2013; and new Hand Hygiene Compliance product launched in North America and several new and improved frame products for our international portfolio. During the first quarter of 2014, we expect to launch our newest international bed frame product, Centaurus [ph], targeted at emerging and developing markets around the world. All of this reflects our improved R&D productivity. In the talent area, we further strengthened our global leadership team with key appointments in our North America commercial organization, as well as new leadership in 3 of our key international regions, including Europe, our largest region. I have great confidence in the leadership we have in place in our commercial organizations around the world. In the regulatory area, we have made significant progress upgrading our regulatory personnel and capabilities. We believe we are well prepared for the FDA's reinspection of our Batesville facility, which we expect to occur in the next several months. And finally, despite revenue falling short of our original full year guidance, we delivered adjusted earnings per share at the high end of our guidance, and we had another solid cash flow performance with operating cash flow higher than 2012 despite lower adjusted earnings. Before I comment on our 2014 outlook, let me take a moment to speak to fourth quarter performance in each of our businesses. Starting with North America. Capital revenue was up slightly year-over-year, and increased 7% sequentially, consistent with our expectations. Sales of our U.S. Patient Support System products increased 6% sequentially, which is another strong competitive performance following 16% sequential growth in the third quarter. For the full year, North America capital orders were relatively flat compared to 2012 but quarter-to-quarter performance was uneven, with strong results in Q1 and Q3, and weaker results in Q2 and Q4. Orders in the fourth quarter declined slightly from the prior year and were also down sequentially resulting in a North America backlog that is about 10% down from the end of 2012. This performance is consistent with our comments throughout the year that the CapEx environment for our products in North America was relatively stable on a year-over-year basis. However, we expect quarterly fluctuations to remain the norm as we move into 2014. You see this in our first quarter guidance. Internationally, our fourth quarter revenue was consistent with the prior year and up sequentially from the third quarter. Q4 revenue in Europe was the strongest performance of the year and showed solid growth over the prior year. International orders in the fourth quarter were the strongest of the year, but below the prior year due to several one-time tender wins during 2012 in our Middle East region. We will have challenging comparables in the first half of 2014 for our International business due to the strength in the Middle East and Latin America in early 2013. Overall, we had a very solid year in Europe and Asia and we move into 2014 with good momentum in those regions. Turning to our Surgical and Respiratory Care segment. We saw growth in Q4 in our Surgical business with Allen growing in the mid-teens driven by new product introductions. Aspen had a solid quarter as well in line with our expectations, and developed good momentum throughout the year with second half revenue up about 2.5% compared to the first half. Following several quarters of decline in our Respiratory business, revenue in the fourth quarter was up slightly due to improved execution in that business throughout the second half of 2013. Companywide, we had the strongest adjusted operating margin of the year in the fourth quarter, on sequentially improved gross margin and tight cost controls. Adjusted SG&A, as a percentage of sales and in absolute dollar terms, was the lowest of the year despite the fourth quarter being the strongest revenue quarter of 2013. So overall, we had a solid quarter in each of our businesses and we are proud to have delivered on our financial commitments. We expect to continue to see quarterly fluctuations in certain parts of our business, but we remain committed to executing our long-term goals. Looking ahead to 2014, we expect the environment to be relatively consistent with 2013 with no major changes in the U.S. CapEx environment for our products. The uncertainty facing our customers will continue to impact the timing of CapEx decisions and, as stated earlier, we expect to see uneven quarter-to-quarter order and revenue volumes but relative stability year-over-year. Internationally, we are pleased with our progress in Europe this year and expect to see continued momentum there in 2014. As we discussed at our Investor Conference in May, improving European profitability is a key priority for us over the next several years. Later this year, we will be finalizing plans to address our cost structure and footprint in Europe in order to drive long-term profitability improvements in the region. Mike will cover our 2014 financial outlook shortly, but as you saw in our release, we expect revenue to grow approximately 1% in 2014 with improving margins due to continued aggressive and disciplined cost management. We expect modest improvements in our adjusted operating margin in 2014 with more significant improvement coming in subsequent years from our European restructuring actions and other supply chain and portfolio improvements. We expect 2014 to be another strong year for cash flow and we will maintain our disciplined approach to capital deployment in line with our stated capital allocation policies. With that, let me turn the call over to Mike. Mike?

[Michael S. Macek:]

Thank you, John, and good morning to everyone on the call. Before we get started, I want to reiterate Andy's comments at the outset that many of the figures we will discuss are adjusted or non-GAAP measures. Reconciliations to our reported U.S. GAAP numbers are included in the appendix to our slide deck. To start, fourth quarter revenue increased 1.5% to $438 million on a consolidated basis. This increase was driven primarily by revenue from our acquisition of Aspen in the fourth quarter of last year and to a lesser extent, increases the North America capital revenue, less favorable impact from foreign currency movements. Partially offsetting this favorability were declines in our North America Rental revenue. Excluding Aspen, revenue was essentially flat compared to last year. Capital sales increased 3.8% to $343 million, again, driven by Aspen and to a lesser degree, North America. Consolidated Rental revenue decreased 6% to $95 million, driven by declines in North America. Domestic revenue increased 1.1% to $289 million, again, led by the incremental revenue related to the Aspen acquisition. Revenue outside the United States was up 2.3% to $149 million, primarily the result of favorable foreign currency movements. Looking at revenue by segment. North America revenue decreased 1.9% to $245 million with the increase in capital sales more than offset by declines in Rental revenue. Capital sales increased by 0.8% to $178 million with the U.S. Patient Support System sales flat with the prior year, but up 6% sequentially. After strong North America orders in Q3, our orders in Q4 were down both sequentially and year-over-year. This resulted in a fourth quarter backlog that was down about 10% from the prior year. Full year orders for 2013 were roughly flat with 2012. This underscores the quarter-to-quarter volatility of capital orders despite environment that was relatively stable on a full year basis. We expect this pattern to continue into 2014. North America rental revenue declined 8.3%. Rental revenue was down due to lower pricing and the effects of the prior year exit from unprofitable portions of our Home care business. Moving to our Surgical and Respiratory Care segment. Revenue increased 14.6% to $64 million, driven by the addition of Aspen. Segment revenue increased 3% sequentially. On an organic basis, revenue increased approximately 7% year-over-year. Specifically, Allen Medical revenue increased 15% year-over-year, its highest quarterly growth rate of the year driven by the launch of the Allen Advance Spine Surgical Table. Respiratory care revenue increased 1% year-over-year after declines in each of the 3 previous quarters. International revenue increased 2.3% to $129 million. On a constant-currency basis, quarterly revenue was essentially flat. Revenue in Europe, the Middle East and Asia was up, offsetting declines in Australia and Latin America. Adjusted gross margin of 46.3% for the quarter was up 40 basis points sequentially, but down 70 basis points compared to the prior year. Year-over-year adjusted capital margin was down 30 basis points, driven by lower surgical margins, partially offset by favorable product mix. Rental margin experienced a decline of 150 basis points due primarily to lower volume and pricing pressures. Regarding operating expenses, our R&D investment for the quarter decreased nearly 4% year-over-year. As you know, this quarter, we launched Progressa, our new intensive care unit bed system, which has been a key driver in our higher R&D investment in previous quarters. As a percentage of sales, our R&D investment was comparable to last year. Adjusted selling and administrative expenses were down more than $2 million sequentially, primarily the result of previously announced cost-reduction initiatives. Year-over-year, adjusted SG&A expenses for the quarter increased 3% to $131 million, the largest drivers of this increase relate to the incremental SG&A from the Aspen acquisition, higher QARA expenditures and medical device tax. These increases were partially offset by the aforementioned cost reduction initiatives. Despite the higher level of dollar spending, adjusted SG&A, as a percent of sales was 29.8%, the lowest level this year. Adjusted operating profit for the quarter was $54 million, representing a 12.3 operating margin. This is the highest level of the year and down 90 basis points versus last year, mainly due to lower gross margin and the medical device tax. The adjusted tax rate for the quarter was 24.3% compared to 35.7% in the prior year. The lower rate in 2013 reflects the inclusion of the research and development tax credit and favorable period tax adjustments. Also favorably impacting the rate were higher earnings in low tax jurisdictions, coupled with the benefits of prior restructuring activities and tax strategy. So, to summarize the income statement, adjusted earnings per diluted share was $0.65 in the fourth quarter, representing a 16% increase compared to $0.56 in the prior year. Relative to our fourth quarter guidance of $0.59 to $0.61 per share, the favorable tax rate contributed approximately $0.03. Adjusted EBITDA for the full year was $305 million, down 6% from the prior year driven by year-over-year decline in earnings. Our fourth quarter operating cash flow was $96 million, by far our strongest quarter of the year. Full year operating cash flow increased slightly to $263 million from $262 million last year due to improved working capital metrics, which more than offset lower earnings. During the quarter, we repurchased 700,000 shares of common stock for approximately $24 million, bringing our total for the year to $94 million. Also in September, our Board of Directors increased our share repurchase authorization by $150 million, bringing the total available to $190 million. This share repurchase activity is consistent with our capital allocation strategy of returning a significant portion of our operating cash flow to shareholders as one of our key levers for creating value. Now, let's turn to our fiscal 2014 guidance. Beginning in fiscal 2014, we will revise our definition of adjusted earnings per diluted share to exclude intangible amortization expense associated with prior business acquisitions. This change is being made to allow better visibility in understanding of our operating trends by excluding the noncash impact of acquired intangible amortization, and providing increased transparency to the information used by management for its financial and operational decision-making. For fiscal 2014, we are projecting full year revenue growth of approximately 1% on a constant-currency basis. At recent exchange rates, we expect the FX impact to be minimal. We expect adjusted earnings of between $2.43 to $2.51 per diluted share, excluding acquisition-related intangible amortization of $0.31 per share. This compares to $2.38 in fiscal 2013 on a comparable basis, excluding $0.29 of acquisition-related intangible amortization. Excluding the additional catch up benefit received in 2013, the R&D tax credit that won't repeat in fiscal 2014, and the negative impact of 4 quarters of the medical device tax in fiscal 2014 versus only 3 quarters in fiscal '13, earnings per share growth would approximate 4% to 8%. This full year 2014 financial outlook reflects the following

[John J. Greisch:]

Thanks, Mike. In closing, I'm proud of the efforts of our employees around the world during 2013. A year in which we delivered adjusted earnings in line with our original guidance, launched several new and exciting products, achieved another strong cash flow year and returned nearly 50% of our operating cash flow to shareholders. All of this was achieved in what remains a difficult top line environment for our business, particularly in North America and Europe. As I mentioned earlier, we expect 2014 to be another choppy year in our end markets and with respect to our quarterly financial results. We are committed to continuing to drive long-term improvements in operating margin and to delivering consistent and sustainable cash flows regardless of the challenges in our end markets. This team has demonstrated the ability to effectively manage our portfolio through the ups and downs of economic and capital spending cycles, and I'm confident that we will continue to drive successful results as we have over the past 4 years. While we focus on optimizing our core business, we will also continue to pursue strategic additions to our portfolio, in line with the strategy we laid out at our 2013 Investor Conference. We will remain disciplined with respect to our M&A strategy and we will continue to effectively deploy our strong cash flows in value-creating ways in the years ahead. I'm confident we have the leadership team and a strategy in place to continue to deliver value to shareholders as we did in 2013. With that, operator, please open the call to questions.

[Operator:]

[Operator Instructions] Our first question is from Larry Keusch of Raymond James.

[Lawrence S. Keusch:]

I guess the first question, John, from my end is look, if you look at your operating margin for the last 3 years, it's obviously declined from 13.5% 3 years ago to 11% this year. I know you made mention in your prepared comments about some plans for restructuring activities in the latter portion of the year, but I guess the fundamental question is, what activities are you looking at to further restructure here? And can you get the operating margin to go higher in an environment where, again, it looks like top line growth is going to continue to be challenged?

[John J. Greisch:]

Yes. I think we can, Larry. I think if you look at our operating margin, the biggest drag the last couple of years has been the amortization expense from the acquisitions, the device tax and bringing on Volker, which we knew at that time was a lower-margin business when we acquired it. I think the improvements we made in our SG&A leverage and in some of our gross margin opportunities still provide us with opportunity to expand our margins going forward. And I don't feel any differently today about our opportunities to drive the 300 to 400 basis point improvement in margins over the next 4 to 5 years than we did in May. I think we stated at that time, it was not going to be linear. And the 2 biggest opportunities ahead of us are the European restructuring, which we'll talk about a little bit later this year, and the introduction of our next-generation med-surg bed towards the end of the LRP period. But I think the opportunity to, what I'll call grind out margin improvements through procurement savings, through SG&A leverage, through some consolidation of back office activities, which are still in front of us, give us the opportunity to achieve what we laid out in May. It's not going to be straight lined, quarter-to-quarter, year-to-year. We've seen that across our business the last several years. Our revenue is not going to be any more linear than our margin improvement, but I'm confident that we've got the team and the opportunities to continue to execute margin improvements going forward, despite some of the headwinds in front of us.

[Lawrence S. Keusch:]

Okay, that's helpful. And then I guess the other question is, the guidance that you've provided for '14. I'm just trying to get a sense of sort of, again, you sort of indicated that you expect North America to be flat. But where are there potentially opportunities, if you look at that guidance to be towards a higher end of the range? What do you -- what needs to happen between the higher and lower end of the range?

[John J. Greisch:]

Yes. I'd say the opportunities for improvements, one, the biggest one would be any tailwinds behind the U.S. capital spending environment. I mean, if you look at the last 2 years, as I said in my prepared comments, the choppiness in both our revenue and orders has been remarkably consistent, as crazy as that sounds. We've had ups and downs quarter-to-quarter, really over the past 8 quarters. But 2012, 2013 on a year-over-year basis, orders were almost flat on the number year-over-year. But the volatility quarter-to-quarter is up and down 5% to 8% each quarter. If that trend changes and we see some confidence back in our customer base, some improvement in our capital spending for our products in our customer base in North America, that's going to be the biggest tailwind that we could hope for as we move through 2014. We haven't planned on that. I think we prudently assumed the same picture we've seen the last 2 years, which is steady but choppy trends on a quarter-to-quarter basis, is what we have planned for, for 2014. If that improves, I think that's the biggest opportunity for us to see some improvement going forward. Internationally, as I stated in my comments, we've seen good stability in Europe. We saw a good performance in Asia during the year. The Middle East had a relatively flat year on the back of a very strong 2012. If we land a few larger tenders over there, those can have a meaningful impact on the full year for us, as well, as they did in 2012. And then on the cost side, I think what we've laid out as a very, very disciplined, tight management of SG&A, it's up less than a couple of percentage points, which is appropriate given our revenue environment. I think it's up about a point. And there may be more opportunities there. And as we go through the year, as we execute any additional actions, including the European one that I mentioned in my comments, those will give us some more tailwinds also. At this point in time we haven't baked in any restructuring benefits for 2014.

[Operator:]

Our next question is from David Roman of Goldman Sachs.

[David H. Roman:]

John, I can certainly appreciate your commentary on quarter-to-quarter volatility in the capital market. And I think if I look back over the course of fiscal 2013 quarters, you had a good fiscal first quarter, weaker second, strong third, it sounds like a tougher fourth. So it sounds like sort of a bouncing-around stability is a fair characterization. But as you think about managing that business going forward, and the resources you're going to dedicate to that type of franchise versus other growth initiatives, maybe you just help frame for us your priorities from an internal investment perspective? And I know you've been very explicit about the external component, but maybe within the business franchise you have today, how are you thinking about resource allocation both on a category and geographic basis?

[John J. Greisch:]

Yes, it's a very good question. We recently announced internally some changes in our North American commercial organization, and the biggest change is redeploying some of our sales resources towards a what we call our strategic partnership team, which is more of a higher-end selling organization going into the larger IDNs, establishing partnerships at the IDN level rather than having hundreds of reps around the country calling on individual hospitals. So we do see the investment in that sales organization and redeploying some of the investment, more in line with how customer purchasing decisions are being made today than they were over the past several years. At the same time, we've been adding resources into some of our international markets. Asia, where we've seen some of the benefits here over the past year, Middle East has certainly gotten some significant investments over the same time period, and we've seen some good results out of those areas. And then on our Surgical and Respiratory Care business, obviously, we've deployed a lot of money into those businesses on the back of the Aspen acquisition, as well as some sales and marketing investments and new product introductions. So I think you'll see continued redeployment of investment dollars into some of our better growth opportunities. Mike laid out the growth expectations we have here for 2014 for Surgical and Respiratory Care, mid-single digit type growth. International, slightly higher than North America. We're redeploying our investments accordingly.

[David H. Roman:]

And then maybe as a follow-up to that, even though it's sort of a separate question on financial strategic side. I know that you laid out in May in your long-range plan, some of the plans for cost reduction initiatives. And then you did reference on this call what we might hear later in the year about Europe. But it sort of, I look at your cost structure relative to the growth rate that you're producing, it still seems to be very high. So I'm just wondering what the opportunities are to go above and beyond, what's in the LRP, and to what extent you consider sort of other strategic alternatives for the company in that you've talked about getting bigger, but does it make sense as a public company right now?

[John J. Greisch:]

A lot of questions in that statement.

[David H. Roman:]

Well, you gave us 2, so I'm trying the ABC route.

[John J. Greisch:]

That's all right. I think, let me paraphrase your question, if I miss the mark here, you can correct me. I think I hear in part of your question with some of the heavy lifting you have to do, does it make sense doing it in the spotlight of a public company versus another environment? I don't think being a public company puts any handcuffs on us relative to what we need to do. And we are executing against the plan and obviously, taking the charges and the pain of some of the execution that we have to do and more ahead of us, as you heard in my comments. And I think we can do that very effectively as a public company. Our cost structure, I don't disagree with you and I think we've been chopping away at it as quickly as we think is prudent over the past several years. And I think there'll be more of that ahead. I think I've stated soon after I got here that having our SG&A where it was, relative to our gross margins and our growth profile, was at too high of a level, and we brought that down and we'll continue to bring that down as we go forward. So as I stated in response to Larry's question, I'm confident we still have opportunities in front of us to take cost out and improve our margins. And I wish I could do it at the wave of a magic wand and make it happen immediately, but I think we're going through it in a thoughtful, planful way and getting at it as quickly as we can.

[Operator:]

Our next question is from David Lewis of Morgan Stanley.

[Jonathan Demchick:]

This is actually Jon Demchick in for David. So Aspen appeared to have better performance in the second half of the year versus the first. And I was just wondering if you could discuss the drivers of this. If it was more related to maybe addressing any integration issues? Or was it more just improved surgical environment? Any additional color would be helpful.

[John J. Greisch:]

I'd say it's more internal than it is external. I don't think there's been any dramatic improvement in the surgical environment. It's been a tough environment as you all know, for the full year. I think coming out of the acquisition, I am sure there was some disruption to the business on the back of the acquisition, which occurred right at the end of 2012. And I think the stability and settling down of the organization, together with a few minor new product introductions, I think led to the improvement that you saw in the second half of the year, which was modest but certainly positive with respect to about a 2.5% first half over second half improvement. So as Mike said in his comments, the guidance for the entire business unit is 4% to 5% growth, so we are continuing to see -- we're expecting to continue to see more momentum as we go into 2014.

[Jonathan Demchick:]

And I just wanted to follow up on gross profit guidance being, I guess, up year-over-year this year. It's been a pretty even blend, I guess, for margin declines over the past couple of years when you look both capital and rental. But this year looked like capital margins appear to stabilize a bit. So when we think about the gross profit being stable to up next year, do you expect the improved performance to continue to come from capital? Or do you think we can maybe get rental margin stable year-over-year?

[Michael S. Macek:]

This is Mike. We do expect capital margins to improve. Some of our new product launches like Progressa we did in 2013, as well as some -- as we continue to take some cost out of the organization. We are facing pricing pressures, especially in North America in our rental business. But we are looking at cost reduction initiatives there to try to offset that. But we do see a little -- larger increase on the capital side with a slight decline, probably more in the rental area.

[John J. Greisch:]

Your prospectives is right, John. If you look at the last couple of years, we've been able to maintain our capital margins with the exception of the Volker addition that I mentioned earlier, relatively stable. And the pressure that we've had is in the rental area. As Mike said, I think that expectation for 2014 should be the same. Stable to improving capital margins and stable to maybe slightly declining rental margins.

[Operator:]

Our next question is from Matt Miksic of Piper Jaffray.

[Michael Klein:]

It's Mike Klein on for Matt. Can you talk about any share shift or differences in capital allocation across the group in the quarter, with respect to larger equipment, robots, beds, et cetera? We've seen some variance across the group, with just some of the largest capital players reporting thus far.

[John J. Greisch:]

So if I understand your question, Mike, it's a 2-fold question. Any share shift in our product, competitive environment in any redeployment of capital among our customers? Do I have that right?

[Michael Klein:]

Correct.

[John J. Greisch:]

On the first point, as I mentioned in my comments, even though I don't focus on quarterly share movements quite as much as I do on longer-term trends, I think if you look at 2013, the sequential growth we've seen, particularly over the last 2 or 3 quarters in our Patient Support Systems business has been pretty strong relative to what we've seen our major competitor report. And it's a bit tough on an apples-to-apples basis only because, we lay out our bed business pretty clearly, and we all have to triage some information to get at it on a competitive basis. But if I look at the sequential growth quarter-to-quarter throughout 2013, I feel very good about our competitive improvement relative to what the market appears to be growing at sequentially. Second question, on deployment of capital dollars within and among our customers. I think it's fair to say that in a continuing tight capital environment, virtually every hospital system is looking at deploying capital in the most productive and profitable way. And that has probably led capital -- if you go back 2 or 3 years ago into the IT arena as you all know, and I think you mentioned robotics, revenue-generating capital is going to be more attractive to a hospital in today's environment than nonrevenue-generating capital. So whether it's revenue-generating capital, or capital that truly drives margin improvement for the hospitals, that's going to capture a bigger percentage of hospital capital spending. I happen to believe a lot of our products are very effective in reducing hospital-acquired infections such as pressure ulcers, helping reduce patient falls, helping get patients in and out of hospitals faster and helping hospitals prevent patients from returning back to the hospital, which obviously, is going to be a more punitive occurrence for them as time goes on. So our products have very strong benefits to our customers, but relative to some of the more obvious revenue-generating capital, I'm sure there has been some crowding out in our space over the past couple of years in that direction.

[Michael Klein:]

And just as a follow-up. Surgical was up nicely, but a little short of our expectations. Can you help us understand how seasonality might play into that business and what we can expect heading into calendar fourth quarter? To what degree does surgical utilization play into that business?

[John J. Greisch:]

Utilization would impact our Aspen business probably more than the Allen business, just given that it's a disposable kind of product portfolio. That said, it hasn't been a business that's historically had a lot of seasonality, so I wouldn't expect a lot of seasonality in that business, certainly not to the point where it's going to impact the company's overall revenue profile.

[Operator:]

[Operator Instructions] Our next question comes from Gary Lieberman of Wells Fargo.

[Gary Lieberman:]

I guess coming back to the comments you made earlier about sort of hoping for a tailwind or that, that might be the -- have the biggest impact on the business. If you were to maybe handicap where that tailwind might come from, is it from a diminishing of the crowding out that you mentioned? Or do you think it'd be more from an overall increase in capital budgets by hospitals?

[John J. Greisch:]

Yes. Gary, let me just restate what I said. We are not planning on any rebound in spending in 2014. So, and I'm not picking on the word hoping, but we're certainly not banking on an improvement in the capital spending environment. So call it a conservative assumption, if you might, but based on what we've seen in the last couple of years, we're expecting relatively flat spending year-over-year. And maybe hoping that, that continues to be the case, so we see the year-over-year stability. Where is improvement going to come from? Which is really the core of your question. I personally think it's going to be driven at some point in time by more confidence among our customers that they can see more clearly towards what their reimbursement future looks like, what their margin and cash flow profile is going to look like. And right now, I think with the uncertainty overhanging the entire provider universe, that clearly has had an impact on both the absolute level of capital spending, and as I mentioned earlier, the allocation of capital spending within our customers. So as that uncertainty gets raised and clarity around reimbursement levels, timing of reimbursement changes, et cetera, on the back of health care reform, I think capital spending will get freed up a bit. But I wish I knew when that was going to happen, but for the time being we are planning on continued choppy, tough top line environment, certainly, for our products as we look into 2014.

[Gary Lieberman:]

Okay. And then maybe one follow-up. Just in terms of looking at the quarterly progression and the guidance. It certainly looks like first quarter is maybe a little bit lower than where the Street was expecting. Is that -- was there a shift in sales that you saw into the first quarter? Or is that more a shift of sales that you're expecting to come later in 2014?

[John J. Greisch:]

Yes. It had nothing to do with shifting any revenue. I think what you meant was into the fourth quarter of 2013. Yes, we deliver, particularly if you look at our core capital products, specifically our bed frame products, we don't have a lot of control over when those products get delivered. So the timing of those deliveries is really up to customers discretion based on their construction needs and replacement of existing products. So there was not any movement from one quarter to the next, here. The weaker first quarter is really a function of the orders that came in to the backlog during the fourth quarter. As I mentioned in my comments, they were down slightly year-over-year. I think Q4 orders were off about 3% compared to last year's fourth quarter, and about 5% down sequentially. And then in one of the earlier comments somebody noted what I said in my comments, Q1 and Q3 were strong, Q2 and Q4 were weaker and the Q4 orders really are going to dictate what the Q1 deliveries and therefore, revenues are. So it's really just a function of the timing of the orders throughout the year. If you look at 2013, not a lot of difference in the picture in terms of quarterly sequences, certainly relative to orders. So 2013 certainly on an earnings perspective and revenue perspective, was somewhat back-end loaded. That tends to be the picture for us. But it's probably even more so this year, given the slightly lower order rate that we had in Q4 this year versus last year.

[Operator:]

Thank you. I'm not showing any other questions in the queue. I like to turn the call back over to management for any further remarks.

[Blair A. Rieth:]

Thank you, Ashley, and thank you everybody for being on the call today. We look forward to speaking with you. That's it for today. Thank you.

[Operator:]

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.