CareFusion Earnings Call Insights: Respiratory Business and Compensation Increases

CareFusion Corp (NYSE:CFN) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Respiratory Business

Frederick Rick Wise – Stifel Nicolaus: Gosh, one question. Can you hear me clearly Kieran?

Kieran Gallahue – Chairman and CEO: Yes, we can.

Frederick Rick Wise – Stifel Nicolaus: I guess I’m going to start off on Respiratory just because that was a little unexpected to me. Can you give us little more detail, you should be anniversarying the lower government orders. You talked about certain geographic weakness. Just help us understand are there any new competitive issues? What’s going to change the Respiratory trajectory in the next two three, four quarters; is it going to be deals, internal products? Just help us think through that?

Kieran Gallahue – Chairman and CEO: Yeah, good question. Look, the Respiratory business has sort of a baseline, let’s call it sort of a baseline business that you perform to, and then there is also a whole another category which – it’s sort of the nature of this business is that there are a lot of tenders. There’s tenders within the U.S. There’s tenders in different parts of the world, and that tends to be somewhat lumpy. That’s why, in out of all our businesses, Respiratory tends to be one of the more lumpy businesses that we’ve got. So as you point out, we were anniversary a large government order that was falling off. So we knew that there was going to be a bit of negativity on the performance line because of that. We’re not really seeing anything different from our competitors. I think the – certainly no changes in the last six months from what we’ve been able to see, and our team, I think, is well positioned. There was just a lot of little things, a tender in Brazil that got delayed; there is some things that happened in Japan et cetera. So it’s just a lot of little things that unfortunately when they come together on top of what we have seen, they tended to drive performance lower for a period of time. I fully expect this business is still going to have its ups and down. Competitively though, I think we’re feeling very good. I think we’ve got a good product pipeline in that. Some of it will be some incremental designs over the next year. Some of it is going to be some category replacements that will seem a little bit longer-term, but it’s well into the product pipeline. We’ve got a great team. There was a lot of turnover in that team as we upgraded their ability to be able to sell not only ventilation, but the informatics around it, and I expect to see some benefit from that. So it’s not one thing, it’s a bunch of bumpy things. But I’m actually feeling like the team is in a good position as we move forward.

Frederick Rick Wise – Stifel Nicolaus: It should be a less of a drag going forward, you’d hope.

Kieran Gallahue – Chairman and CEO: Yeah, I mean, look, any given quarter, I can’t speak to, but I think as you look at that business over several quarter period, yeah, I think that you’ll start seeing performance improving.

Compensation Increases

Michael Weinstein – JPMorgan: Let me ask one strategic and one financial. I’ll start with strategic. So, Kieran, you talked about the Company being in a position where you felt comfortable that the Company could take on a larger transaction should an opportunity present that made both strategic and financial sense. I think probably the question people have today is, you said but you see a lot of opportunities of the smaller size. Do you still see opportunities that may potentially be of interest that are larger in scale?

Kieran Gallahue – Chairman and CEO: Yes, we do.

Michael Weinstein – JPMorgan: Then the second question, financial question, I just want to make sure that I understood the first quarter there Jim, and if I’m thinking about it right and doing the math right, the anticipated 1% decline in – or, sorry, low single-digit decline in revenues is in line with our model, but the $0.05 decline in EPS, would imply that, if I’m doing the math right, about a 200 basis point contraction in operating margins. Is there something that I’m missing there? Is it a timing of payments, bonuses, what – why is that?

Jim Hinrichs – CFO: Yeah, it’s pretty simple actually. It’s a great question. It’s one I’m sure a number of people have, so thank you for asking it. It’s really exactly what you describe which is an increase in expenses in the first quarter versus the fourth quarter, and that is driven almost exclusively by increases in compensation. So if you think about last year’s number, a lower revenue than expected. Obviously, so our incentive comp plans, both our sales incentive comp plans as well as our management incentive comp plans paid out generally lower than planned. So you saw a reduction through the year, and in the fourth quarter there, we reload at a 100% of target obviously for FY ’14. Every fiscal year, we start the year reloading incentive comp at the full year rate. So that’s driving a lot of the expense increases and the margin degradation in the first quarter. That will sort of solve itself over the rest of the year. In addition the usual increase is around merit increases that happen in the first quarter for us as well as health and welfare increases will drive a little bit of that expense growth. Then we’ve got some investments we’re making in the business that are largely offset frankly, in fact, completely offset by reductions in corporate support spending. So, the two things that I described to you first are probably the two biggest negatives sequentially going into the quarter.

Michael Weinstein – JPMorgan: Then one other clarification, and then I’ll let others jump in, the share count and repurchase authorization guidance implies that you’ll be buying back stock at a consistent rate over the course of the year rather than front-end loading it. Is that the reality of how you’re going to go about it?

Jim Hinrichs – CFO: Yes, that is – it’s actually based on our current plans, slightly backend loaded, but generally pretty consistent. That’s correct.

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