Aug 7, 2013
Executives
Julie Winter - Director, Investor Relations Walt Rosebrough - President and Chief Executive Officer Mike Tokich - Senior Vice President and Chief Financial Officer
Analysts
Konstantin Tcherepachenets - Raymond James Erin Wilson - Bank of America/Merrill Lynch Robert Goldman - C.L. King Jason Rodgers – Great Lakes Review Chris Cooley – Stephens Incorporated Mitra Ramgopal - Sidoti
Operator
Good morning. Welcome to the STERIS’ Fiscal 2014 First Quarter Conference Call.
All lines will remain in listen-only until the question-and-answer session. (Operator Instructions) I’d now like to introduce today’s host, Julie Winter, Director of Investor Relations.
Ma’am, you may begin.
Julie Winter - Director, Investor Relations
Thank you, Joel, and good morning, everyone. It’s my pleasure to welcome you to our fiscal 2014 first quarter conference call.
Thank you for taking the time to join us. As usual, participating in the call this morning are Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO.
Just a few words of caution before we begin, this webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebroadcast of this call without the expressed written consent of STERIS is strictly prohibited.
I would also like to remind you that this discussion may contain forward-looking statements relating to the company, its performance or its industry, that are intended to qualify for protection under the Private Securities Litigation Reform Act of 1995. No assurance can be given as to any future financial results.
Actual results could differ materially from those in the forward-looking statements. The company does not undertake to update or revise these forward-looking statements, even if events make it clear that any projected results, expressed or implied, in this or other company statements will not be realized.
Investors are further cautioned not to place undue reliance on any forward-looking statements. These statements involve risks and uncertainties, many of which are beyond the company’s control.
Additional information concerning factors that could cause actual results to differ materially is contained in today’s earnings release. As a reminder, during the call we may refer to non-GAAP measures including adjusted earnings, free cash flow, backlog, debt-to-capital and days sales outstanding, all of which are defined and reconciled as appropriate in today’s press release or our most recent 10-K filings, both of which can be found on our website at steris-ir.com.
With those cautions, I will hand the call over to Mike.
Mike Tokich - Senior Vice President and Chief Financial Officer
Thank you, Julie, and good morning, everyone. It is again my pleasure to be here with you this morning to review our first quarter financial results.
Following my remarks as usual, Walt will provide further perspective on the quarter. My comments this morning will focus on our adjusted first quarter results.
However, before I start reviewing our first quarter results, I would like to remind you that our adjusted net income this quarter excludes a $9 million tax benefit associated with the deduction for U.S. tax purposes related to our European restructuring effort.
This deduction is based upon the IRS completing its fiscal 2012 tax year audit. Our adjusted net income also excludes just over $3 million in amortization of purchased intangible assets and acquisition related transaction and integration costs.
Please see the reconciliation table included within our press release for additional details. Let me now begin with a review of our first quarter income statement.
Total company revenue grew 9% during the first quarter driven by 13% increase from acquisitions and a 1% improvement in pricing offset by flat organic volume and a 4% decline from our SYSTEM 1 and 1E franchise. Foreign currency was neutral to revenue during the quarter.
Gross margin in the quarter declined 80 basis points to 39.9%. The positive gross margin impact from our acquisitions of approximately 110 basis points was more than offset by an approximate 90 basis point decline from our investments in in-sourcing and the negative impact on gross margins from the decline in SYSTEM 1E revenue.
In addition, we incurred approximately $2 million from the Medical Device Excise Tax and had unfavorable mix in our organic business during the quarter. EBIT for the quarter declined $3.1 million to $46.1 million.
EBIT as a percent of revenue for the quarter was 12.5%, a decline of 210 basis points from last year due to the gross margin impact I have just described as well as increased spending on research and development and a $2.2 million negative impact from foreign currency exchange rates as the dollar weakened compared to both the euro and peso. The effective tax rate in the quarter was 36.7% compared with 33.5% last year due to the timing of discrete item adjustments in both quarters.
We expect to return to a more normalized tax rate included in our guidance over the course of the year. As a result, net income was $26.2 million or $0.44 per diluted share compared with $30.9 million or $0.53 per diluted share last year.
The $0.09 per diluted share variance is driven by a $0.04 impact from lower operating income, a $0.02 impact from higher interest expense, a $0.02 impact from a higher tax rate and a $0.01 impact from an increase in diluted shares. Moving on to our segment results, Healthcare revenue in the quarter grew 13%, contributing to the quarter our acquisitions drove both consumables and service revenue up 40% and 34% respectively.
Capital equipment revenue excluding the negative impact of our year-over-year SYSTEM 1E unit shipments declined 1%. Including the SYSTEM 1 unit shipments last year, capital equipment revenues declined 11%.
We believe the decline in capital equipment revenue is a matter of timing, not changes to market conditions as out Healthcare backlog in the quarter increased by 21% to $120.2 million. Healthcare adjusted operating profit was $19.7 million in the quarter.
Several factors which I already discussed are impacting Healthcare’s operating margin including the Medical Device Excise Tax, increased spending and research and development, the negative impact of foreign currency exchange rates, the timing of insourcing investments and unfavorable organic mix. Life Sciences revenue declined 1% in the quarter, consumable revenue had another good quarter of growth up 8% but was more than offset by declines in both capital equipment and service revenue of 7% and 2% respectively.
Backlog in Life Sciences ended the quarter at $44.6 million, a decline of 6% compared with prior year but remains at a level consistent with our historic backlog rates. Life Sciences operating margin increased 130 basis points to 20.9% driven by improved gross margins mainly due to favorable mix and continued operating leverage.
Revenue for Isomedix increased 5% in the quarter to $48.2 million. Isomedix operating margin was 30.5% of revenue, a decline from their very strong first quarter last year, but a nice improvement sequentially as we continue to fill our recently expanded capacity.
In terms of the balance sheet, we ended the quarter with $165.8 million of cash and $513.7 million in long-term debt. We remain comfortable with our current leverage profile of total debt to capital of 34.6% and total debt to EBITDA of 1.8 times.
Our free cash flow for the quarter was $11 million compared with $45.7 million in the prior year. The decline in free cash flow which we anticipated is due impart to the payments of our annual incentive compensation program which did not occur last year as well as the impact of strong working capital improvements in the prior year.
Our full year free cash flow outlook remains unchanged at approximately $145 million. Capital spending was $21.7 million in the quarter, while the depreciation and amortization was $18.3 million.
With that I will now turn the call over to Walt for his remarks. Walt.
Walt Rosebrough - President and Chief Executive Officer
Thank you, Mike and good morning everyone. We appreciate you taking the time to join us this morning.
Now that you have heard an overview of our results from Mike, I will spend my time focused on our profitability for the quarter and our thoughts on the rest of the year. First of all, we believe that our first quarter results are largely a matter of timing versus the change in underlying demand or sustainability or profitability.
In particular we continue to see generally stable market trends, good performance from the businesses we’ve recently acquired and solid Healthcare orders and backlog. These trends give us confidence in our ability to deliver revenue and earnings in line with our annual guidance.
With that said, let me quickly cover few highlights. Our overall revenue growth of 9% was driven primarily by strength in Isomedix and the businesses we acquired last year.
While Life Science revenue declined slightly, they delivered another quarter of impressive margin expansion and we believe Life Science will finish the year in line with our expectations. As we approach the anniversaries of the acquisitions we made last year, we are pleased with both the performance of the businesses and the progress we have made from an integration prospective.
Of particular note, U.S. Endoscopy has continued its strong track record of growth with new products.
Specifically products like the less progressing device Infinity biliary sampling device, AquaShield CO2, and the Oracle EUS latex-free balloon, and we are leveraging our existing customer relationships to expand our specialty services businesses as well. As we told you at the beginning of the year, we anticipated that our earnings for fiscal ’14 would be more heavily weighted toward the back half of the year than usual.
This was primarily due to timing of R&D spending as well as the timing and startup costs for our insourcing investments versus the savings that will be generated later. In addition to those expectations, we have experienced the timing issue with shipments in the Healthcare segment in our first quarter.
The combination of those events led to a lighter than anticipated quarter, but we anticipate these trends to reverse. Let me expand a bit on that.
First, this is the last quarter, we have a comparison issue with SYSTEM 1E, which continue to reduce our reported growth in Healthcare capital equipment during the quarter. As you heard from Mike, excluding SYSTEM 1E, our Healthcare capital equipment revenue was nearly flat.
But we expected to see growth in capital equipment shipments excluding S1E, our order rate remains strong and our backlog grew by 21%, which gives us confidence that it was a matter of shipment timing. The other challenge with Healthcare gross margin percentage this quarter was the product mix of our revenue, which offset the margin percentage gains from our recent acquisitions.
We had two issues from a mixed perspective. First, our organic consumables business was lower as a percentage of our overall revenue.
In addition, we had a mix issue with our – within our capital equipment shipment as happens from time-to-time in capital business. We ship more of lower margin capital equipment in the quarter than our higher margin equipment.
However, when we look at our backlog in Healthcare, we see a better mix of higher margin capital equipment going forward. When we look at the rest of our decline in profit, we had three additional headwinds that all hit in the quarter, most of which we believe will be eliminated by the end of the year.
Both headwinds include first our insourcing investments, which we believe we’ll reverse and actually generate savings towards the end of the year with negligible total full year impact. We had negative foreign exchange as Mike mentioned which had foreign exchange rates at the end of June are anticipated to reverse in the second half and becomes slightly positive for the year.
In the Medical Device Excise Tax, which anniversaries in the fourth quarter, in addition, we plan higher levels of R&D spending this year, which we saw in the quarter. While we anticipate some easing of that spending on a percentage basis, we will maintain closer to 3% of revenue throughout this fiscal year as we planned.
We are excited about the price of overall projects currently underway and we look forward to sharing more information with you once we are ready to launch those products. While each of the items creating year-over-year variances that I just mentioned is fairly small in and of itself combined together they had a meaningful impact on our profit in the quarter.
To assist in your modeling, however, I will mention that over half of the difference between consensus and our EPS results was planned and the balance is more than explained by the unexpected uptake in tax rate, FX exchange rates, lower than expected shipments and mix. As I’ve already noted, we believe we will make much of that up in the second half and are nationally working to achieve our original plan.
As you all know, we manage business for the long-term and are willing to invest to produce long-term earnings growth. We did not want to overreact to short-term blips in our performance as long as we believe that the investments will pay-off and that we will overcome any headwinds in a relatively short time and we believe we will.
Looking out at the rest of our fiscal year then, we continue to believe that we will deliver top-line growth in the range of 8% to 10% and earnings per diluted share in the range of $2.47 to $2.60. We continue to be encouraged by the reception of our new products like V-PRO maX, the iQ 3600 Integration System, the award-winning European XLED light, new lines of Sterilizers and Washers, and new Orthopedic Surgical Table.
We have a good pipeline of product development projects behind these. While we anticipate sequential improvements in margin in each quarter, we expect a most significant improvement in Q4.
As for the longer term, we believe the investments we are making now will contribute to our goal of double-digit profit growth going forward. Reflecting that, our Board has approved a 10% increase in our dividend from $0.19 to $0.21 per quarter.
With that, I will turn the call back over to Julie to begin Q&A.
Julie Winter - Director, Investor Relations
Thank you, Walt and Mike for your comments. We are now ready to begin the Q&A.
So, Joel, would you please give the instructions and we’ll get started.
Operator
Thank you. (Operator Instructions) Our first question is from Lawrence Keusch with Raymond James.
Your line is open.
Konstantin Tcherepachenets - Raymond James
Hi, guys. This is actually Konstantin for Larry.
So, I guess I just want, Walt I just wanted to understand, so clearly it sounds like about half of the difference in the EPS miss relative to the speed, is just the speed getting the gating wrong? But can you talk about the other, essentially the other $0.06 difference, how much of it was really just kind of I guess really kind of a surprise essentially in the quarter and can you just explain really in maybe more detail what drove it?
Walt Rosebrough
Sure. Yes, you are correct in your original assumption that actually it’s a little over half that was a difference between where we were thinking we would be in the quarter and where the street was.
And as you know, we don’t give quarterly guidance. So, that’s not completely unexpected.
We are usually closer than that together, but at this time, we are little further apart. But on the differences, I would say almost by definition all the differences versus our plan, which is little less than half of the $0.12.
Almost all the differences are unexpected that is FX does what it does, we didn’t expect it, the tax rate, the IRS, and we determine things at a time. And when they come, we never know exactly when they are going to come.
And so it was unexpected vis-à-vis the quarter for the year we think it levels out. And then the balance is really the shipments and mix and that was unexpected when we set our plan, but the flipside of that is our backlog grew $20 million and that was unexpected too.
So, that’s why we have confidence that, that reverses.
Konstantin Tcherepachenets - Raymond James
Yes, okay. That makes sense.
And then just on your commentary regarding that the consumables, I guess, the growth of the consumables was lower this quarter than you expected, can you just maybe just provide more color on that, is that just driven by lower healthcare utilization?
Walt Rosebrough
Yes. In any short-term period, that’s always a difficult question to answer, because the hospitals use things and then they choose to stock up and not stock up and all that.
So, we see some variation due to the way they choose to order. And that sometimes lags or leads their usage.
So, it’s a little difficult to answer, but we clearly as most people said the rates in hospitals slowdown a bit, actually particularly in the fourth quarter last year as I recall. We see it a little stronger than it.
And so it could just be a temporal thing. Right now, we are not concerned about the overall direction of that business.
Konstantin Tcherepachenets - Raymond James
Okay, terrific. Thanks so much.
Walt Rosebrough
Got it.
Operator
Thank you. Our next question is from Erin Wilson with Bank of America/Merrill Lynch.
Your line is open.
Erin Wilson - Bank of America/Merrill Lynch
Hi, thanks for taking my questions. Did you quantify the consumables organic growth, I mean, I guess ex-U.S.
Endoscopy and can you explain a little bit about I guess was it a less probable mix there and then can you also explain the capital equipment trends fundamentally speaking in the industry and why there was that, I guess, shipment mismatch?
Mike Tokich
Erin, this is Mike. We had minus 4% in our organic consumables business reflected within Healthcare.
I don’t know, Walt you want….
Walt Rosebrough
There were three other questions. I guess the first one and the last one.
There are two other questions I think. The last one Erin in terms of capital we are seeing nothing different than we have been seeing now for probably close to a year, six or nine months anyway close to a year that is we are not seeing extraordinary increases in capital spending in North America nor we are seeing decreases.
They are running at what I would call solid rates, steady state to slightly up. And that’s reflected in our order patterns over this last 6, 8, 12 months and so it’s strictly a matter of when the timing of shipments.
And what we have seen again and this fluctuates a little bit. We have seen a little bit more increase in large projects as opposed to replacement work in that and so those large projects are defined shipment dates usually out for – almost always out further than replacement works.
So, we just have some projects, some larger projects that are sitting out a quarter or two as compared to where we were a quarter ago and that’s how the backlog tends to grow because the order patterns, the order patterns were up and they are up sequentially, but they are not up nearly as much as the backlog reflects. And Erin I am sorry I missed the middle question I think.
Erin Wilson - Bank of America/Merrill Lynch
I was talking about sort of the mixes, the consumables business?
Walt Rosebrough
Inside the consumables, there is not significant mix, it’s really the mix of consumables versus and really if you look at it, we traded a little bit the mix of consumables versus the mix of service. Our service business grew nicely, and it has a little lower profitabilities in our consumables business.
And again we don’t think either one of those is some change of trend, it’s just in a quarter those things happen.
Erin Wilson - Bank of America/Merrill Lynch
Okay, got it. And on the U.S.
Endoscopy deal where do you stand as far as the cross selling or potential synergies there, are they starting to materialize?
Walt Rosebrough
The primary reason of course we bought U.S. Endoscopy because it was an area that we wanted to get into and we wanted to have a channel into that business.
And they give us channel end product. We clearly have that, and so we are seeing that.
We are seeing modest synergies, but those are the kind of synergies we expected to see. The more important thing is we are continuing to see solid growth and solid product development cycles.
And so they are doing very well vis-à-vis what our expectations were and what our plan is for them.
Erin Wilson - Bank of America/Merrill Lynch
Okay, great thanks so much.
Operator
Thank you. Our next question comes from Robert Goldman (C.L.
King). Sir, your line is open.
Robert Goldman - C.L. King
Thank you. Good morning.
Walt Rosebrough
Welcome Bob.
Robert Goldman - C.L. King
Hi. First I just wanted to follow-up on an answer you just gave, Mike you mentioned the organic consumable sales were down 4%, does organic…
Mike Tokich
Healthcare and specifically organic.
Robert Goldman - C.L. King
In Healthcare.
Mike Tokich
Yeah.
Robert Goldman - C.L. King
Does organic mean you stripped out U.S. Endoscopy from that calculation?
Mike Tokich
That is correct. Yeah, so it’s just – it’s the rest of our Healthcare business less the acquisitions and less SYSTEM 1E impact.
Robert Goldman - C.L. King
Okay, I could understand timing issues on CapEx. I have got a more difficult time understanding why a 4% decline in the organic consumable business doesn’t represent some change in the marketplace or in your sales, could you take us through that?
Mike Tokich
You know Bob we do see variation. And for example last year if you look through the year we had three quarters, it looked kind of similar, and one quarter that had an off-tick.
And it went back up, and if you go back year-over-year, we see that. We don’t see the reason I suggest is we don’t see any fundamental cause for that.
And sometime there is timing we go both through distributors and we go – and hospitals make decisions about when they buy so sometimes we see blips in timing. At this point in time, that’s our view.
Robert Goldman - C.L. King
Okay. On cash flow, there is the obvious ramp up in capital expenditures.
Two questions on that. One could you just remind us again what the ramp up is for, and how you see that helping Steris.
In other words, the cost savings from whatever you are doing on the CapEx side, and then also as we look past fiscal ’14 where does CapEx start to fall down to?
Mike Tokich
Yes, let’s talk two things. The first is the most significant variation or difference quarter – year-over-year in cash flow was the management incentive program, not capital spending and that’s because we didn’t pay on the year before because as you know two years ago our performance wasn’t as we expected so, that’s the biggest variation when you look at differentials.
In terms of capital spending, we have picked up our capital spending yet to remember there is a multiple reason for capital spending. The first is Isomedix and as we said we have continue to grow our capacity in Isomedix and capacity, the twofold equation it is the physical facilities as well as the cobalt that we purchased.
And we expect to see that continuing to grow modestly as we continue to grow the business and so that we will continue to see in line with growth of the business so, that’s one section. The other significant area as you mentioned is that we are investing in our plans to do more insourcing of products that we are making that is – there is twofold, one is some of those are literally insourcing of a product itself that is someone else was manufacturing for us historically and now we are going to manufacture itself and the other is components of products and we are doing both and as we mentioned we were spending about $20 million of the course of the couple of years and we are giving significant annual savings for doing that.
This year, the front end of that – is not just capital cost, Bob, because you see that in increased depreciation of course, but you also see the project expense that we are going through and the change over from when you switch from vendor from Part A to Part B the change over cost is a number of things that we are incurring those expenses. We’re incurring the bulk of those expenses in the first half of this year and we experience good returns in the back half of the year from doing that and then but more importantly out in the future years we expect to see $8 million to $10 million of profit improvement as a result of that or cost reduction as a result of that.
I think we said about $8 million you should expect next year and then we have a couple of million dribble out following year.
Robert Goldman – C.L. King
Great. And then just two other number of things if I can, first again on CapEx, should we assume this $90 million rate for 2014 that you project is that sort of where CapEx will be for the next several years?
Mike Tokich
You know, Bob, that’s a tough call, plus or minus, $10 million or $15 million I would say, yes, plus or minus $2 million, I don’t know.
Robert Goldman – C.L. King
Okay. And then the final question is obviously one way to avoid gaps between the analysts and your own internal projections on earnings, is to give us a bit more to the sense you can guidance on the gating.
Would you be comfortable to give us some sense of what the second half earnings might be as a percent of the total here or something like that to get a little in line with what you guys are thinking.
Walt Rosebrough
Bob, at this point doing half and half is equivalent of doing quarterly guidance for the next quarter, but I understand your view and as I said we clearly – historically, we’ve done I think a pretty good job of matching up this quarter we did not match up very well and that’s our responsibility. I should have been clearer in my communication with you all, but on that we said in our statements that bulk of what we missed in the first quarter we expect to make up in the second half, that’s not something we would expect generally speaking we are not going to pick it up in the second quarter.
So, that’s one guide post I can give you and the other is we gave a 42-58 split at the end of the year, last year – at the beginning of this year, excuse me, at the beginning of this year, we gave a 42-58 split because we knew we were going to be investing more into the first half and getting the benefit of that in the second half. We would be slightly under that today if we were re-guiding.
I don’t think we will give a number there because again it give too many coordinates and I am giving quarterly guidance, but we are not going to make that $5 million up this year so, plus or minus and so excuse me, we are not going to make the differential, which is slightly under $6 up in this coming half. As a result, this coming half is going to be lighter than the 42-58 that we gave you earlier.
Robert Goldman – C.L. King
Okay, thank you very much, Walt.
Walt Rosebrough
Sorry for the long-winded response.
Robert Goldman - C.L. King
Well done, thank you.
Operator
Thank you. Our next question is from Jason Rodgers at Great Lakes Review.
Your line is open.
Jason Rodgers – Great Lakes Review
Good morning.
Walt Rosebrough
Good morning, Jason.
Mike Tokich
Good morning.
Jason Rodgers – Great Lakes Review
I was wondering if you could provide some detail on the insourcing spending with the amount was this quarter and what do you expected to be for the next few quarters.
Mike Tokich
Yeah, right now, Jason what we’ve just outlined before is that the combination of insourcing and 1E decline was about 90 basis points impact on gross margin. Obviously we anticipate as Walt said earlier that will continue through the first half.
So, we’ll probably spend some of that again in Q2 and then obviously start generating savings throughout the remainder of the year most likely the bulk of that in the fourth quarter also. So, you can anticipate some additional spending next quarter and then some savings in third quarter, but most of the savings generated to become neutral for the year in the fourth quarter.
Jason Rodgers – Great Lakes Review
And then looking at the tax rate, what do you expected to be for the remainder of this fiscal year?
Mike Tokich
Yeah, we still think even now we had some discrete item adjustments this quarter, which we are unfavorable. We still think and anticipate the range in 34% to 35% as in our guidance.
Jason Rodgers – Great Lakes Review
And finally did you mention you expect that FX to be neutral on your results in the second quarter.
Mike Tokich
On that the way we handle the FX in our forecast as we are not foreign exchange forecasters so, we literally take the forward rates at the end of the quarter and apply them to our forecast and if you do that taking the forward rates as of the end of the June, it actually does reverse income slightly positive, so it turns from the negative that you saw in this quarter to slightly positive.
Jason Rodgers – Great Lakes Review
That’s slightly positive for the second quarter?
Mike Tokich
For the year.
Jason Rodgers – Great Lakes Review
For the year, thank you.
Mike Tokich
So, it’s positive – it overcomes what we lost again if those rates stay the same. Your forecast of U.S.
dollar versus all these currencies, it was any better in the forward rates used that one. We don’t try to do that.
Operator
Thank you. Our next question is from Chris Cooley with Stephens Incorporated.
Your line is open.
Chris Cooley – Stephens Incorporated
Thank you, good morning. Appreciate you taking the questions.
Walt Rosebrough
Good morning, Chris.
Chris Cooley – Stephens Incorporated
Hey, could we start off I just want to go back to Healthcare and specifically the operating margin there. Could you talk a little bit more about the product mix, I understand the Med Device Excise Tax, but that kind of increase in R&D spend you talked about FX and insourcing all weighting on that, but I really want to drill down on mix kind of what you saw in terms of the quarter versus may be what we’ve seen historically and are there any changes off of that mix that you sold in during the quarter as we think about consumable sales going forward in a better couple of follow-ups.
Thanks.
Walt Rosebrough
Chris, we saw mix as we mentioned seems little often we think that’s a temporary issue and that – so, there wasn’t mix within consumables so it’s not that issue it just the fact there was less consumables.
Chris Cooley – Stephens Incorporated
I’m sorry, the mix of working capital.
Walt Rosebrough
Where there was a mix within products was in the capital side and on the capital side, again it just so happened that we shift we are relatively lower margin products and then less of our higher margin, more of a lower margin. When we look at our backlog going forward that goes to normal trend so, we don’t believe that this is a trend that just as a one-off issue.
Chris Cooley – Stephens Incorporated
And I guess just as a follow-up to that then when we think about historical operating margin in the – for the Healthcare segment, last several years has been kind of the 14ish, low 14s starting off out of the gate that low here. How do we think about profitability for the full year within Healthcare from an operating margin perspective?
Mike Tokich
Yeah, Chris, we are still targeting in total company adjusted EBIT of about 15.5% and that obviously means in Healthcare has to come back over the last couple of quarters and we believe that will again as more timing, but most of that impact from where we are today has to come from Healthcare in order to get us there.
Walt Rosebrough
And I would add Chris, all of these items that we talked about being the investments in the insourcing, the investments that we are making in R&D, these are virtually all Healthcare related, or certainly the preponderance of the money there is Healthcare related. And as a result the savings from those will be Healthcare related.
So, that’s why we believe that we will see the Healthcare profitability move back.
Chris Cooley – Stephens Incorporated
Makes sense, just two quick follow-ups if I may and then I will get back in queue, when you provided guidance at the fiscal year end coming into this year, you talked about organic growth contributing 4% to 5% from the volume standpoint on the year for the full year. In the first quarter clearly we had flat was it – I am just trying to gauge your expectations versus where we are on the street for the quarter, were you anticipating more of an organic contribution to growth in the most recent quarter?
Walt Rosebrough
Two I will answer it. I think you separate almost separated two questions I think Chris.
Chris Cooley – Stephens Incorporated
Rigth.
Walt Rosebrough
The first is for the year we don’t feel any differently today than we felt 90 days ago in terms of organic growth. And for the quarter it was indeed unexpected that the quarter in Healthcare came in a bit lighter than our expectations which we – actually we talked about that when we are talking about versus expectation.
So, we were a little light versus our expectations.
Chris Cooley – Stephens Incorporated
I understood and then just last question and I’ll get back in queue.
Walt Rosebrough
And then almost all of that is contained in the backlog that’s where – that’s one of the reasons the backlog grew. Our orders didn’t change versus our expectations…
Chris Cooley – Stephens Incorporated
Just the backlog?
Walt Rosebrough
Our shipments did.
Chris Cooley – Stephens Incorporated
Makes perfect sense, and then just lastly on leverage I believe you’ve talked about last year’s, this year kind of coming back around and focusing on growth. You weren’t really anticipating a lot of leverage to the operating line this year as we started the year.
Any change in that view after you looked at the 1Q and kind of what you are seeing going forward or still kind of a relatively neutral operating leverage kind of view point as we think about this year before?
Mike Tokich
Yeah, Chris, I would say that we – our anticipation is the same was it 50 or 60 basis points.
Chris Cooley – Stephens Incorporated
Right.
Mike Tokich
We would have no change in that. Again Q1 is one quarter we still have the bulk of the year ahead of us.
So, I think we would still maintain that 50 to 60 basis point improvement from an EBIT margin standpoint.
Chris Cooley – Stephens Incorporated
Thanks so much.
Operator
(Operator Instructions) Our next question is from Mitra Ramgopal (Sidoti). Your line is opened.
Mitra Ramgopal - Sidoti
Yes, hi, good morning. Just a couple of questions, first on the acquisition front you’re clearly seeing some nice growth there.
I was wondering as you look at margins however if there is room in terms of any cost savings or synergies that have not yet been realized that might be apparent later in the year?
Walt Rosebrough
The bulk of those there is – there will be reduction expense in those because of the money we’re spending to do the integration, but we adjust that out. So, as you look at adjusted earnings we don’t see tremendous changes in operating margins for that reason, we’re pretty much done what we’re going to do now.
Over time like all of our businesses we look for ways to improve. So, they will be looking for ways to improve just as they have in the past and we will in the future, but I don’t see a step function for that reason.
Mitra Ramgopal - Sidoti
Okay, thanks. And again I believe as you mentioned the three acquisitions have pretty much have been largely integrated and if you could comment on the potential pipeline for future acquisitions and if related 8% to 10% guidance revenue growth if that’s assuming any transactions?
Walt Rosebrough
The first answer to your question is we do have robust pipeline. Going forward, we’re looking at a number of things as we’ve talked about before, first of all we’re not going comment on what obviously prior to time we would make an announcement.
But secondly, the timing of those is often far more dependent on the seller than the buyer, so we don’t have a lot of control of timing. So, that’s the answer to your first question.
And actually we are excited about the things we’re looking at. In the end it comes down the pricing and how we feel, how they feel.
But we like what we are seeing in the marketplace. The second question is – answer to your second question is we did not include anything for acquisitions other than those we’ve already announced in our forecast or plans?
Mitra Ramgopal - Sidoti
And then as a quick follow-up as it relates to the capital spending environment, I believe you said things have been pretty stable in the U.S. any comments in terms of what you’re seeing outside of the U.S.?
Walt Rosebrough
Sure. Outside the U.S., I’ll break it into roughly two camps, Latin America and Europe we are seeing may be a little bit of sunshine, those have been – particularly Europe has been very difficult.
I would say that it certainly not robust, but it seems like there is a little bit of thawing in Europe. In Latin America, we had good solid performance there for longtime and we think we’ll continue to see that good solid performance although, it’s not the, I call, may be the market itself is not the robust growth that it has been and in Asia-Pacific, we are clearly see a more pressure as you see those economy slowdown.
Mitra Ramgopal - Sidoti
Thanks again.
Operator
I show no other questions at this time. I’ll turn the call back to any closing remarks.
Julie Winter - Director, Investor Relations
Thanks everybody for joining us this morning. This concludes our conference call and we’ll chat with you again next quarter.
Operator
Thank you for participating. You may now disconnect.