Hill-Rom Holdings, Inc.
Q2 2014 Earnings Call Transcript

Published: 2 May 2014

[Operator:]

Good morning, and welcome to the Hill-Rom Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded and will be available for telephonic replay through May 8, 2014, 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 future use of this recording. Also note that any recording, transcript or 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. Please go ahead.

[Andy Rieth:]

Well, thank you, Stephanie. Good morning, and thanks for joining us on our second quarter fiscal year 2014 earnings call. Before we begin, I’d like to provide our usual caution that this morning's call contains forward-looking statements such as forecast 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. Reconciliation 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 on our website. Joining me on the call today will be John Greisch, President and CEO of Hill-Rom; and Jay Saccaro, Senior Vice President and CFO. The usual ground rules will apply to make the call more efficient. We 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 on our website and will also be part of the archive. With that, I'll turn the call over to John.

[John Greisch:]

Thanks, Andy. Good morning everyone and thanks for joining us this morning. We are pleased with our performance this quarter despite a weak environment for the majority of our portfolio. We delivered adjusted earnings per share above the top-end of our guidance and ahead of the second quarter last year. We also saw over a 50% increased in adjusted earnings compared to the first quarter this year on a sequential revenue increased of only 6%. Improved product mix and our discipline cost management drove the earnings increase. As you all know, we started the year with a weak performance in the first quarter in our key North America capital business. In the second quarter, we saw a strong recovery in this business with a 16% increased in orders compared to the first quarter and up 2% compared to the second quarter last year. We also saw an improved order mix during the quarter, compared to the first quarter with a 64% increased in our mid-surg orders. We continue to see strong performance in our ICU product category led by the introduction of our new products Progressa last year. Our North America capital order backlog is up 14% compared to the first quarter, but down about 6% compared to last year, in line with our revenue expectations for the full year for this business. The performance of this business in the last two quarters and really over the last several years reflects the volatility in customer capital spending and environment we do not expect to change anytime soon. Similar to the first quarter this year our surgical and respiratory care business achieved very strong growth, 7% up compared to last year, driven by strong growth in our Allen Medical and Aspen Surgical business units. The growth we have seen in this segment over the past several quarters which partially offset the impact of the continued challenges in our core patient handling segments, underscores the importance of our diversification efforts. International revenue was essentially flat with the first quarter and last year as weaker revenues in Europe and the Middle East were offset by improves performance in Asia Pacific and Latin America. Europe was down this quarter due primarily to declines in Germany partially offset by improved performance in other Western European markets. We also saw an improved operating margins both sequentially and compared to last year. In the phase of the revenue challenges we continue to experience in our major markets in North America and Europe. We are pleased with our margin performance and costs discipline. As Jay will cover later. We completed the majority of our U.S. restructuring program announce in the first quarter. We also discontinued our remaining Home care bedframe rental business in North America. We stayed in this business following the exit of our home care surface rental business in 2012, hoping to improve profitability. However with an increasingly challenging reimbursement environment, we decided to exit the remainder of this business. Annually, this is about a $20 million business for us, with marginal profitability. This latest together action with the restructuring announced last quarter is consistent with our commitment to adjust our cost structure and portfolio to drive improved margin and return on invested capital. In addition, as you may have seen in a previous announcement, we acquired a company that has been supplying us a portion of our surface products. This acquisition allows us to vertically integrate product sourcing for a critical portion of our surface portfolio and lower our product cost structure. While we aggressively manage our cost structure and portfolio, I'm also pleased with the results of our new product introductions over the past year. Our Allen Medical and Aspen Surgical businesses have seen strong growth on the breadth of recent new product introductions, while Progressa has driven solid performance in our ICU product category. We will continue to drive improvements to our product portfolio, through our R&D investments. In addition to our commitment to R&D, we remain highly focused on deploying capital to diversify our portfolio through M&A activities. We are aggressively pursuing meaningful additions to our portfolio, which will leverage our strong patient handling franchise and global footprint, while at the same time strengthen our position in the areas of surgical safety and efficiency, wound care, infection control, and respiratory care. So while we feel very good about delivering a solid quarter, we expect our quarterly results will remain volatile for the foreseeable future consistent with what we have experienced for past few years. Looking ahead to the rest of the year, while we have lowered our revenue guidance for the full year in part due to the exit from our home theatre, bed frame rental business, we maintained our adjusted earnings guidance. We are focused on meeting our commitments and driving margin improvement regardless of our revenue challenges. With that let me turn the call back over to Jay.

[Jay Saccaro:]

Thank you John. And good morning to everyone on the call. To start second quarter revenue declined 2.4% to $415 million on a consolidated basis or 2.9% on a constant currency basis. This decrease was driven by lower revenues in North America partially offset by increases from our surgical and respiratory care segment. Capital sale decreased 1.5% to $313 million and rental revenue decreased 5.3% to $102 million both of these declines were driven by lower revenue in our North America segment. Domestic revenue declined 4% to $263 million while revenue outside the United States was flat at $152 million. Looking at revenue by segment, North America revenue declined 6.3% to $224 million, sequentially revenue increased 9.2%, rebounding after our disappointing Q1. Capital sales decreased 5.9% to $151 million. During the quarter, the order patterns improved in comparison to the abnormally low first quarter and were 2% above Q2 orders in the prior year. Our backlog position at the end of the quarter was down approximately 6% in comparison to the prior year but improved sequentially by 14%. North America rental revenue declined 7.3%. Related to this area, we announced plans to discontinue our home care rental bed frame due to an increasingly challenging reimbursement environment, which I will discuss in further detail shortly. Moving to our Surgical and Respiratory Care segment, revenue increased 7.2% to $66 million, driven by growth in both of our surgical businesses. Specifically, Allen Medical revenue increased 17.4% year-over-year, and Aspen revenue increased 7.7%. We continued to be pleased with the strong performance and growth from these businesses although we will face tougher comparables in the second half of 2014. Respiratory Care revenue was essentially flat for the quarter. International revenue of $125 million was approximately flat with the prior year. On a constant currency basis, quarterly revenue declined approximately 2%. Increases in revenue in our Asia Pacific and Latin America regions were offset by declines in Europe and the Middle East. Adjusted gross margin of 47.1% for the quarter was down 20 basis points compared to the prior year but increased 180 basis points sequentially, driven by improved product mix and cost controls. Year-over-year adjusted capital margin was flat at 44.5%. Adjusted rental margin experienced a decline of 30 basis points to 55.1%, primarily due to lower volumes and pricing pressures. Regarding operating expenses, our adjusted R&D investment decreased 4.4% year-over-year following the launch of several key products in the second half of last year. As a percentage of sales, our adjusted R&D investment was comparable to last year at just over 4%. Adjusted selling and administrative expenses were down 3.4% year-over-year, as we continued to see the benefits of prior period cost reduction initiatives. Adjusted operating profit for the quarter was $52 million, representing a 12.4% operating margin. In comparison to the prior year, adjusted operating margin increased 20 basis points, despite the lower revenue for the period. As you will see with our guidance, we expect operating margin for the remainder of the year to continue to improve as we will see the benefits from our restructuring actions. The adjusted tax rate for the quarter was 32.2% compared to 30% in the prior year. The prior year benefited from a catch-up of the R&D tax credit. So to summarize the income statement, adjusted earnings per share of $0.57 in the second quarter increased 2% over the prior year. Adjusted year-to-date EBITDA was $125 million, down roughly 16% from the prior year, the year-to-date decrease was driven by primarily by lower earning in the first quarter. Year-to-date operating cash flow of $78 million compares to $113 million last year, down primarily due to lower earnings and the lower contribution from working capital. While down on a year-to-date basis, we do expect operating cash flow to be in line with our prior guidance. During the quarter we repurchased approximately 700,000 shares of common stock for approximately $29 million. Our year-to-date share repurchase activity is consistent with our capital allocation strategy of returning a significant portion of our operating cash flow to shareholders in the absence of meaningful M&A activity. Before turning to guidance, I would like to comment on our restructuring actions during the quarter. As we previously announced in our Q1 earnings call, during the quarter, we launched a comprehensive restructuring program with the objective of improving our operating margins and our overall cost structure. The majority of the U.S. portion of this action was completed during the quarter, while we still anticipate the activities in Europe will be completed over the next two years. At this point, we are on track to deliver the benefits and savings previously outlined of $30 million on an annual basis or approximately $0.35 per diluted share. Expected savings for the current year are reflected in our guidance. The second quarter restructuring charge for these actions was approximately $17 million. As I mentioned earlier, we also announced the plan to discontinue our marginally profitable North America home care rental bed frame business. As we have in the past, we continue to evaluate our portfolio on the basis of strategic and financial contribution. We look for opportunities to rationalize and improve our portfolio where appropriate. As a result of this action, during the quarter, we recorded an $11.5 million charge of which $7.7 million was non-cash. The exit from this business will impact revenue by approximately $11 million in the second half of the year. Before I move on to guidance, there are two additional non-cash items affecting GAAP earnings, but excluded from adjusted earnings that I want to mention. The first is a $12 million pretax gain that results from a change in our vacation policy. The second item relates to deferred tax assets. Given the restructuring charges to be incurred in Europe, we expect to experience statutory losses in France over the near term. As a result, we have recorded a non-cash charge of just under $20 million to establish a valuation allowance on the net French deferred tax assets as required by accounting rules. These are both discussed in detail in our 10-Q which will be filed shortly. Now, let’s move on to our full year 2014 guidance. We now expect full year revenue to decline in the range of 4% to 5% on a constant currency basis in comparison to the prior range of a 2% to 4% decline. Our updated range reflects our exit from home care bed frame rental business and slightly lower expectations for international revenue. At current exchange rates, we expect the favorable impact from currency of approximately 1%. Our full year adjusted EPS guidance is unchanged at $2.18 to $2.28 per share. Our full year 2014 financial outlook reflects the following

[John Greisch:]

Thanks, Jay. As we demonstrated this quarter we will continue to manage the business as effectively as we can. Given the challenging top-line environment for our highly capital intensive portfolio. We don’t see the capital spending environment for our product portfolio changing anytime soon, and we will continue to optimize margins and cash flows in our core businesses. At the same time, we clearly need to add profitable revenue growth to the portfolio. We will continue to do so through our R&D investment as we’ve seen with some of our recent products introductions. That however, won’t be enough to offset the volume and pricing pressures we are experiencing with our core business. We have great brand equity and channel presence with our customers as a result of the strong patient handling franchise and growing surgical product platform we enjoy. Plan to build upon this strength by aggressively adding products and services to our portfolio that will enable us to leverage our brand equity and customer relationships in the areas of surgical safety and efficiency, wound care, infection control and respiratory care, areas where we have strong positions today. As we’ve demonstrated in the past we will do so in a disciplined manner, with the focus on shareholder value creation and on businesses that strategically will strengthen our relationships with customers and enable us to bring increase value to them around the world. With that operator, please open the call to questions.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Matt Miksic with Piper Jaffray. Your line is open.

[Matt Miksic:]

Hey, good morning. Thanks for taking the question.

[John Greisch:]

Hi, Matt. How you are doing? Thanks. So a lot of things to cover, but I'll try to focus on just two as you keep things moving. And the first I guess just broadly speaking given what happen in Q1 and the strength here in Q2 similar comments you made about backlog and order rates in the quarter is (inaudible) helpful predictors of the next quarter and the tone in the business, if you like to sort of cough up for Q1 and now we are sort of -- you're back on track or is there something stronger this (inaudible) from that or something we can meet from the order patterns and backlog that you mentioned? I have one follow-up.

[John Greisch:]

Yes, the way I look at it Matt. If you look across the portfolio, I think your question is largely centered on North America given that that's for the main weakness in Q1 was. If you look across the North America portfolio, the real normally in Q1 was in our Med-Surg portfolio. ICU, our service business, our maternal and stretcher business even though smaller. Those that remain pretty steady, and the Med-Surg portfolio is where we took a hit in Q1. That's return to in more normal level. I wouldn't say it made up for the shortfall in Q1 by any means, but it certainly has returned to expected levels of orders for a normalized quarter if you will. So as I mention in my comments I feel good about where we are now backlog is obviously up from last quarter 14% down still slightly from last year, but I would say the business is more in line with there we expected it to be certainly in Q2, I am not looking at it as a strong rebound quarter to put us on a significant upward trajectory and I think as we all know this business has seen its ups and downs over the past several years and unfortunately last quarter Med-Surg was a big downer for us, but were certainly back to where I expect the business to be overall based on second quarter performance and obviously our outlook for the rest of the year.

[Matt Miksic:]

That’s great. And then follow-up on some of the comments and guidance you give out, turning to top line for couple of reasons the international tenders and (inaudible) divestments are the business that you are working out of but you have healthy EBITDA line and I am wondering if you could give us some color maybe as to how some of the mix of the various businesses that maybe the puts and takes that are here help us to understand how that happens?

[John Greisch:]

Yes I will take a cut at that and then if Jay had anything appropriate. So the revenue guidance change as you said is really two fold we discontinued roughly a $20 million home care frame medical business, so half of that for the second half of the year roughly 10 million bucks came out of our revenue guidance. The other piece as Jay mentioned, a couple of delays one in Europe, one in the Middle East, some significant tenders that we would have expected for the second half of this year, particularly in France, where a lot of our business is under a couple of government tenders that are being renewed later this year and the renewals have been deferred by at least a quarter by the government, which mean unfortunately during that intervening period French hospitals have nowhere to go to buy product. So, it maybe a deliberate action on the part of government to deferred capital spending, because there is open contract under which hospitals can buys product from us. So, that's going to have a slight impact in the second half of the year, as are a couple of tender delays in the Middle East. Deferrals into ‘15 not losses, I'm not too worried about the business changing at all, as I look beyond the next quarter or two. You are right we maintained our earnings and cash flow guidance and we're managing the hack out of our cost structure in light of a challenging revenue environment across the board and we're going to continue to do that with as I mentioned in my closing comments, commitment to deliver on our commitments and we're going to do that again through tight controls over all of our cost actions. The small supply chain vertical integration acquisition we made, will have a modest impact this year, but that's another piece of the puzzle to continue to manage our cost structure where we can to continue to drive earnings growth.

[Jay Saccaro:]

Yes, and the only thing to add is to reiterate the comment regarding the home care bed frame rental business, that is a very low margin business for us. So that exit in and of itself doesn’t really impact earnings.

[Matt Miksic:]

Great that’s helpful thanks.

[John Greisch:]

Thanks Matt.

[Operator:]

Our next question comes from David Roman with Goldman Sachs. Your line is open.

[Matt McDonald- Goldman Sachs:]

Good morning this is Matt McDonald on for David. Thanks for taking the question. First we’ve heard hospitals talk about some favorable, early favorable impact from ACA regarding bad debt, I was wondering could you talk about the health of your customers and how you see that evolving with the roll out of ACA. I’m just trying to get at what you think it will take to drive an improvement in the environment?

[John Greisch:]

Yes, I don’t know if I can speak specifically to bad debt impacts from HCA an individual hospitals, that’s just obviously a function of their patient mix hospital to hospital. I think that’s certainly one of the positives of ACA that many hospitals are looking towards. There is certainly counter bailing pressures on hospitals from reimbursement levels and payer mix expectations going forward. I think as I’ve said several times on these calls and elsewhere I think the most recent term impact on our customers relative to ACA has been the existence of a cloud of uncertainty over their future economics and I think that has impacted certainly capital spending for our products there over the past several quarters. As that uncertainty gets clarified, do I think customers will open up their capital spending a bit, yes, I do. I don’t want to sit here and predict when that may happen however. So there is certainly some positives come out of potential bad debt improvements but I think you have to look at the entire economic picture on the provider universe on the back of ACA. And certainly at this point in time I would say from my experience both sitting on a hospital board and talking to many of our customers over the past couple of years there is probably more concern than there is optimism within the payer universe but again that varies system-to-system and hospital-to-hospital, but clearly it’s had a negative impact on the capital spending levels overall. I think that’s pretty well known to everybody on this call that you guys have to be affirm, do a lot of research in that area and put upgraded analysis on that in the firm and I think your analysis is pretty consistent to what we’ve seen relative to the pressure at least for our product category on capital spending.

[Matt McDonald- Goldman Sachs:]

Okay, thank you. And secondly you’ve talked a lot about operational cost savings. Could you maybe discuss some of the financial leverage opportunities on tax or share repurchases?

[Jay Saccaro:]

Yes, I mean as we’ve done consistently over the last several years. We definitely look at share buyback as a mechanism of returning cash to shareholders. And so I think in the first half of the year I have seen significant and meaningful business development opportunity. We really took advantage of that and repurchased a significant amount and number of shares, which is featuring in the return profile of the company. From a tax perspective we are very careful about managing the tax rate, we do what we can to optimize the tax rate on an overall basis. So I would say that’s another area of focus. Having said that the R&D -- the tax rate is up versus prior year in large part due to the expiration of the R&D tax credit which has not been reinstituted for this year. So that really as we look at those two pieces in the current year, there is a big offset of the share buyback benefit with the tax rate increase.

[Matt McDonald- Goldman Sachs:]

Okay, great. Thank you.

[Operator:]

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

[Larry Keusch:]

Hello everyone.

[John Greisch:]

Good morning, Larry.

[Jay Saccaro:]

Hi Larry.

[Larry Keusch:]

John you sort of answered this, but I'm wondering if you could take another step. I'm just trying to understand in the specific med-search portion of the capital business in North America. What do you, what change between the first quarter and the second quarter? I'm just trying to lock my arms around that.

[John Greisch:]

That's a good question Larry. I think just to put it in some context, we have to remember that in a given year roughly 7% of the bed population in North America is being replaced. And that's as I say every hospitals replacing 7% of its beds, but hospital-by-hospital I think as you all know most of the sales are when us resize the flip a ward or flip a floor or flip an entire hospital. And it's not like a consumable product where you can tie directly to surgical procedure as remissions or some other easy [grass] metric. So with a small percentage of hospitals replacing a large percentage of their beds, the timing of any one hospital making that capital decision or several hospitals is going to impact what goes on in any specific month or any specific quarter. And in our case the timing of our customers and our share of the market debt purchased in Q1 was obviously very low. As I said last quarter I wasn’t aware then and I am not aware now of any major (inaudible) accounts that actually went to a competitor in that period of time. So as odd as it sounds I think it was a confluence of timing considerations that impact us in Q1 and here in Q2 we saw a more normalize level. So I can’t point to anyone specific of that to even couple of events that explain it, we can lose any big account. I think we said in the last several quarters delays or more common than not in capital spending this is in today. Hospital systems are certainly trying some more success with another is figure out how to centralize their capital spending decision making. And as that process works its way through some of the larger systems and we have had this discussion with the executive team of the largest full profit system in the country getting control over the spending is a clear priority for all of our systems and as that happens certainly accounts are taking longer to make decisions than others. So longer than answer to your question, we are not maybe answering it specifically only because I don’t think there is a specific event or occurrence in the quarter that explains it but the timing of spending decisions obviously in the first quarter negatively impacted us through enough of our customers to make a difference.

[Larry Keusch:]

That's very helpful. And then just the follow up on the cash flow from operations, if I did the math correctly, you are looking to generate about 70% of the year goals in the second half of the year. So, again how do we think about what drives that acceleration outside of just earnings?

[John Greisch:]

Yes, it's a good question. As we've looked at it, there is two really factors that are going to contribute to that. The first factor relates to the normal seasonality that we see, if you look at 2013, we generated approximately 60% of the cash flow in the second half of the year. The second factor relates to continued focus on working capital management. As we went through our forecast and plans early in the year, we started to see there is definitely is opportunity in a number of factors including inventory, accounts payable and AR. And so we as a management team have started to install a serious focus on optimizing working capital. And so, if I were to say the second, what's the second contributor, it's really about liquidating some of the working capital that we have in the portfolio.

[Larry Keusch:]

Okay, terrific. Thank you.

[Operator:]

Our next question comes from Bob Hopkins with Bank of America Merrill Lynch. Your line is open.

[John Greisch:]

Good morning Bob. You there?

[Operator:]

Bob, your line is on -- can you please unmute it?

[Travis Steed:]

Can you hear me?

[John Greisch:]

Yes.

[Travis Steed:]

Hi, this is actually Travis Steed on for Bob Hopkins today.

[John Greisch:]

Hi Travis.

[Travis Steed:]

So we executed well this quarter, but the business is still shrinking. What will it take to return to growth on an organic basis? Is it simply waiting for the environment to change or is it something you can do to drive organic growth?

[John Greisch:]

That’s a great question. As you heard in my commentary, that’s clearly a priority for us to get profitable revenue growth back in the portfolio. We’re seeing that obviously in our surgical and respiratory portfolio. For the first half of the year, that business is up 7% to 8%, all of which is organic since the acquisitions in that portfolio occurred a couple of years ago. It’s been driven by both management focus and some new product introductions, and as I mentioned the Aspen and Allan businesses. We saw a good growth in Latin America and Asia, where we continue to see positive growth over the past several years from a geographic perspective. Our big challenge is clearly in our core bed frame business here in North America and Europe. And growth for that business for those products in that portfolio is a function of what I discussed earlier, capital spending within our customers. And that’s going to be challenged for the foreseeable future. Hence, the need for us to be more aggressive as we look forward on portfolio additions through M&A activity as well as to smaller degree through our R&D investments to drive growth in the portfolio. And so our core business going to continue to be challenged; capital spending, I think on this call, as I mentioned earlier, we do same [portions] out to the customers that I talked to and capital spending is going to continue to be sweet, particularly for products that are in our portfolio relative to others that have a higher priority within hospital capital spending priorities today. So M&A is going to be a big driver of our growth that’s clear. And growth opportunities we have, both geographically and in some of our smaller today portfolio categories, we’re going to continue to drive the [neck] out as we have successfully here in 2014.

[Travis Steed:]

So just as a follow-up, are the challenges in the bed business more cyclical or secular? In other words, is issue the current environment or is there is simply excess capacity?

[John Greisch:]

I think it’s a little bit of both. We’ve been pretty clear over the past several years that the North American and Western European bed populations are not growing. So in that sense for us to be able to look at unit growth driving revenue growth going forward is just not realistic. Hospital bed capacity here in the states has been declining 1% to 2% a year for quite some time. You layer on top of that the economic pressures that hospital systems are under; the uncertainty I mentioned earlier. And the cyclical effect of that, in response to your question, obviously has made for a tough environment for the past couple of years, after a strong recovery cyclically in mid 2010 through 2011. So, I won’t say we’re at the trough of a cycle from a cyclical perspective as we were back in 2009. But clearly, the economic pressures that particularly in North America and Western Europe that hospital systems are under, has put a squeeze on capital spending for our products more than we saw in ‘10 and ‘11. But secularly, this is the a product category that is not going to be growing unit wise other than as we're seeing with our ICU platform as an example, the growth we can drive to new product introductions, which we've done with the launch of Progressa that business is been performing great for us in 2014 on back new technology and the innovative launch of a new product and I think that has triggered some accelerated replacements in the ICU space and we obviously hope to do so with our Med-Surg product and to launch new products in that space over the next several years as well.

[Travis Steed:]

Got it. And just quickly one to check and see how you view M&A environment the kind of things you're looking at still same?

[John Greisch:]

Yes, I mentioned the categories that we're focused on consistent with what we talked about that our last investor conference. Our surgical franchise which again has shown very strong growth for us this year, is an area that we’re very aggressively looking to expand. Wound care, infection control areas that we're in today as well and areas that are high in the priority list of our customers to reduce their costs and improve the efficiency of care and their cost structure within hospital and respiratory care today it’s a small business for us roughly $75 million, $80 million we focused on expanding that area as well. So we're very happy with the deal flow we're seeing across all four of those areas, it's a competitive environment everybody knows price has certainly improved from where they were two, three years ago and improve if you're seller not so much if you are a buyer. The M&A activity is active and we’re aggressively pursuing within the compliance of the discipline that we talk about for the last three years to add to that portfolio really again travels to get growth in the portfolio because the position we’re in today is either on attractive one nor a sustainable one in terms of the other top-line pressures that we are under.

[Travis Steed:]

Okay, thanks a lot.

[Operator:]

Our next question comes from Matthew Mishan with Key Banc. Your line is open.

[Matthew Mishan:]

Great, thank you for taking my questions.

[John Greisch:]

Sure, good morning Matt.

[Matthew Mishan:]

Well, could you give some color on the declining of medical capital maybe broken down by volume in pricing?

[John Greisch:]

Yes, in North American capital it’s largely a volume issue and pricing is not a significant issue for us in that segment of the business, and so I’d say it’s predominantly volume driven.

[Matthew Mishan:]

All right, and then how should I think about orders being up 2% in the quarter but the backlog being down 6% is that you are getting a lot of orders, and you filling them quickly or versus maybe some larger new construction type orders that maybe take little bit longer to fill.

[John Greisch:]

I guess you think of it largely in terms of rounding areas to honest with you the difference being 2% and 6% on our backlog is only $2 million to $3 million, but there is no dramatic change in cycle time of orders or delivery certainly not on delivery times, but again the time between when we get an order and when we actually deliver is very customer specific, but I haven’t seen any major change in that timeline to explain any difference there.

[Jay Saccaro:]

The only comment I would add to that is, some of the softness in Q1 orders not only impacted Q2, but impacted future backlog as we do have certain orders that have longer timeframes associated with them. So, the softness that we saw in Q1 is something that sort of carry forward a little bit as well. Matthew S. Miksic - Piper Jaffray Companies, Research Division And last question from me, I believe in your guidance you had shares outstanding gone up to 58 million, 59 million, I think you its closed to 57 million. Do you expect to do share buyback in the second half? Or how should I think about that?

[John Greisch:]

Just two comments, one is as it relates to the number of shares outstanding on the P&L that's included in the press release, because that is a GAAP P&L and we have a GAAP loss, that excludes the impact of diluted shares in the denominator. And so, it's really a basic shares outstanding that’s use to calculate, when one looks at a GAAP loss. And so, it ignores approximately 800,000 in dilution in the quarter. I would say that from an overall share buyback perspective. We have guidelines where we talk about, our ideal mix of returning operating cash flow to shareholders in the 20% to 25% range in the form of buyback. As we sit here today, we have done far more than that in the first half of the year. While we don't comment on future share repurchase activity, I think it's safe to say that we would sort of start to migrate back more to our normal framework particularly as we evaluate many of the BD activity, the opportunities that we are currently evaluating.

[Matthew Mishan:]

Okay, thank you very much.

[Andy Rieth:]

Thank you Matt.

[Operator:]

(Operator Instructions). Our next question comes from David Lewis with Morgan Stanley. Your line is open.

[John Demchak:]

Hello, this is actually John Demchak in for David.

[John Greisch:]

Hey John.

[John Demchak:]

So John one of the follow-up on the M&A discussion from earlier, over the last year or so there has been, talk about reshaping and diversifying the business, I think the talk today, may have been a bit more pronounced with discontinuing home care and discussions about M&A. Am I reading too far into this or is there something in the environment where targets that you are seeing that is making M&A more attractive or time sensitive to you?

[John Greisch:]

Well, it’s been a year and half obviously since we’ve done anything of any meaning with respect to ask them. Now I think you are reading into my comments appropriately and as I said in response to an earlier question and in my closing comments. Continuing to manage the business as effectively as we can, as we show this quarter is generating some improvement but it’s not generating topline revenue growth and the majority of our portfolio has been a challenged topline revenue environment. So growth through M&A has been important to us, is it even more important today than maybe a year ago, I guess on balance I would say, yes. But marginally more important, because it’s been a high focus for us, really for the past couple of years, we are not going to jump into something that is neither strategically obvious that that is not strategically obvious, nor that’s not financially in line with our return expectations. So if that means it’s going to take a bit longer, so be it, I’d rather be patient and disciplined than panic over the revenue pressures we’ve got. We don’t like reporting revenue growth that is the negative number, but it is not going to force us to do something stupid either. So more aggressive on the M&A front, I mean it’s hard for me to sit here and say we have not been aggressive over the past couple of years because we have been. We’ve taken a few shots on goal that we’ve got to out bid on or we didn’t like at the end of the day but we have certainly been aggressive again in the years that I’ve talked about, some small things and some bigger things that have been interesting to us and we’re going to continue that focus but certainly with as pronounced of an effort and aggressive approach that we could possibly have.

[John Demchak:]

Thank you, very helpful. And just a quick follow-up in regards to cost cutting clearly benefits received in this quarter and you’ve proven your ability to rationalize costs when needed. But how confident are you that these cost cuts don’t translate into further pressure on the top-line going forward?

[John Greisch:]

I am very confident of that, we’ve been very conscience all along to not impact our revenue generating cost base to any large degree. We have made changes I think I talked a quarter or two ago about redeploying some of our sales resources which means we’ve taken some out some areas and invested in other areas either geographically and the international front or here in the States by building up our strategic partnership or major account sales efforts. But I am very confident we haven’t negatively impacted our ability to generate revenue across the portfolio. Just one other point John on your first question and again Jay mentioned this in his comments and in response to your question. But I think if you look at our share buybacks in the first half of the year, we spent nearly 100% of our operating cash flow and share repurchases. Hopefully investors see that as a sign of the discipline that we are taking on M&A and consistent with our comments for the past couple of years if we don't have any meaningful activities in front of us, we're going to be aggressive on that allocation of our capital in line with our policy as well. So as I said, we are aggressively and very interested in adding to the portfolio through M&A, but we are also going to use our balance sheet as aggressively as we can to manage our share buybacks as aggressively as we can at the same time.

[John Demchak:]

Thank you. Very clear.

[Operator:]

Thank you. I'm showing no further questions. I will now turn the call back over to Mr. Andy Rieth for closing remarks.

[Andy Rieth:]

Thanks Stephanie and thanks everyone for being on the call today. Have a great Friday and talk to you soon.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone. Have a great day.