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Steris Corp  (NYSE:STE)
Q3 2019 Earnings Conference Call
Feb. 12, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the STERIS plc Third Quarter 2019 Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note today's event is being recorded.

And at this time, I'd like to turn the conference call over to Ms. Julie Winter. Ms. Winter, please go ahead.

Julie Winter -- Senior Director, Investor Relations and Corporate Communications

Thank you, Jamie and good morning everyone. As usual, on today's call we have Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO.

I do have a few words of caution before we open for comments from management. 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.

Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the company and on our website.

In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, constant currency organic revenue growth, segment operating income, and free cash flow will be used. Additional information regarding these measures, including definitions, is available in today's release, including reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making.

With those cautions, I will hand the call over to Mike.

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Thank you, Julie, and good morning everyone. It's once again, my pleasure to be with you this morning to review the highlights of our third quarter performance. For the quarter, constant currency organic revenue growth was 6.9%, driven by volume and 50 basis points of price. Gross margin for the quarter increased 20 basis points to 42.7% and was impacted favorably by currency, price and the impact of divestitures, somewhat offset by higher labor costs and the impact of tariffs.

EBIT margin for the quarter was 20.8% of revenue, a substantial increase from second quarter levels and 20 basis points better than the third quarter last year. EBIT margin was negatively impacted in the quarter by 40 basis points, due to higher than anticipated calendar year-end employee healthcare benefits claims activity, causing an increase in SG&A for the quarter. The adjusted effective tax rate in the quarter was 18.9%, somewhat lower than we had anticipated, due to favorable discrete items.

Net income in the quarter grew 11% to $107.2 million and earnings increased 13% to $1.26 per diluted share, benefiting from both revenue growth and a lower effective tax rate. In terms of the balance sheet, we ended December with $225 million of cash and $1.25 billion in total debt.

During the third quarter capital expenditures totaled $50.7 million. Given our spending to-date and plans for the fourth quarter, we are reducing our expectations for capital expenditures by $10 million to approximately $180 million for the full fiscal year 2019. As a reminder, during the third quarter, we announced the restructuring plan that will generate profit improvement of approximately $12 million over the next two years.

In addition, we adopted a branding strategy that included phasing out the usage of a trade name associated with certain products in the Healthcare Products segment. These two items have resulted in a significant increase in depreciation and amortization for the quarter. Unlike the P&L, we do not adjust the balance sheet nor free cash flow for these items, hence depreciation and amortization for the quarter was significantly higher at $82.7 million, primarily due to $36 million of accelerated depreciation, amortization associated with both the restructuring plan and the branding strategy.

Free cash flow for the first nine months increased to $252.9 million, mainly due to improvements in cash from operations. We are updating the full fiscal year 2019 free cash flow expectation to include higher working capital requirements, cost associated with our plan to redomicile to Ireland and restructuring plan costs. Free cash flow is now expected to be approximately $330 million for the year.

With that, I will turn the call over to Walt for his remarks.

Walter M. Rosebrough -- President and Chief Executive Officer

Thanks, Michael, and good morning everyone. Fiscal 2019 is shaping up to be a strong year for STERIS fueled by solid demand from our customers in all four segments. For the first three quarters, we are ahead of our expectations for revenue growth and as a result are increasing our full year constant currency organic revenue growth expectations to be approximately 6%.

Each of our business segments have contributed nicely to our revenue growth so far this year. AST and Healthcare Specialty Services are leading the way with 8% constant currency organic revenue growth year-to-date. In AST, we continue to see solid underlying demand from our core medical device customers. Our Healthcare Specialty Services Segment continues to exceed our revenue expectations, driven primarily by strength in the United States. Their profitability has improved as planned, as we have successfully leveraged the investments made over the past year or so.

Healthcare Products constant currency organic revenue has grown 7% so far this year with strength in both recurring revenues and capital equipment. Even with the growth in capital equipment shipments, our healthcare backlog has also grown nicely and is anticipated to ship over the next few quarters. We expect a solid fourth quarter in healthcare capital shipments.

And finally Life Science constant currency organic revenue has grown 5% year-to-date with growth across the business. Our fourth quarter last year was a strong record quarter for life science capital equipment shipments, which we do not expect to replicate this year. Backlog has stayed relatively steady versus last year and certainly above our historic levels, which gives us comfort that the underlying trends we have experienced over the last year or so will continue.

As I mentioned earlier, we now expect our overall constant currency organic revenue growth to be approximately 6% for fiscal 2019. As a result, we are confident in our ability to deliver another record year with adjusted earnings per share in the range of $4.74 to $4.84.

I will note that when we raised our outlook this range last quarter, our thinking was that the effective tax rate would come in around 20%. With continued favorability on the tax rate in the third quarter, due to favorable discrete items, we will likely have a modest upside on the effective tax rate for the fiscal year. But not certain enough or substantial enough to reguide that rate. We appreciate you're taking the time to join us this morning and your continued support of STERIS.

I will turn the call over to Julie to open for Q&A.

Julie Winter -- Senior Director, Investor Relations and Corporate Communications

Thank you, Walt and Mike, for your comments. Jamie, we're ready to start Q&A, if you give the instructions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions) Our first question today comes from John Hsu from Raymond James. Please go ahead with your question.

John Hsu -- Raymond James -- Analyst

Good morning.

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Good morning, John.

John Hsu -- Raymond James -- Analyst

Good morning. Good morning, Walt. Maybe you could start with the guidance -- the organic revenue guidance, I think it applies a pretty decent deceleration in the fourth quarter, so what's driving that? The comp looks to be pretty consistent with the third quarter, but is it just conservatism or is there any other -- anything else that you can point to maybe from a segment standpoint?

Walter M. Rosebrough -- President and Chief Executive Officer

Sure, John. Couple of points that I would make. First of all, we've been talking about for a long time that we are trying to move our revenue pattern to be a little bit away from the fourth quarter, we traditionally have a very strong fourth quarter that we'd like to run our factories more level loaded to the extent possible. And as a result, we've been trying to pull that forward; we've had some success with that this year. And so, I do expect relatively speaking, as you know, we've been strong in the first three quarters, we may not be quite as strong relative to historic growth period last year. So that's one item. I will mention there is one less shipping day this year than last year and that doesn't have a big effect on capital equipment, but it does have some effect on the recurring revenue. And I would say you're probably correct, we may -- being a bit conservative because we do have a situation where the end of March happens this fall in Saturday or Sunday, we don't like to run our plants of shipping on Saturdays and Sundays.

And secondly, we have Brexit coming March 29th, which is two days before our fiscal year and there is some uncertainty about how the patterns of shipments will relate us to that. So, we probably are being a bit conservative in our forecast, we're quite comfortable at the 6%, but we'll see how this -- end of the month of March turns out.

John Hsu -- Raymond James -- Analyst

Okay, great, that's helpful. And then I guess taking a step back your organic growth probably call it over the last five years or so has probably been in the 4% to 6% range. This year, you're now guiding 6%, you mentioned it's actually one less shipping day. I believe there's actually another 50 basis points of sterile med contract that you're also hurdling. So I guess, just taking all those pieces, are you at a point where you believe you can drive consistent organic growth at the 6% range or better?

Walter M. Rosebrough -- President and Chief Executive Officer

You know, I think, it's early for us to be saying we're going to move above, kind of 4% to 6% long-term target. Clearly, we're at the top end of that right now. We could possibly tip over a little bit, but I think it's early to say that we're looking at our next year's plan as we speak now, we'll talk more about next year and beyond at that time.

John Hsu -- Raymond James -- Analyst

Okay, great. And then last one from me on cash flows. I think you're very clear that -- on some of the changes in cash flow from operations, higher working capital, plans to redomicile and then restructuring. But specifically on the CapEx piece of it, can you talk about what's driving the reduction in CapEx by $10 million versus prior guidance?

Walter M. Rosebrough -- President and Chief Executive Officer

Yeah, John it's mostly due to timing of projects we set out a goal at the beginning of the year and we're just behind our original plans from a timing perspective, it's nothing more than that.

John Hsu -- Raymond James -- Analyst

Okay, great. And sorry, just a quick follow-up to that. Just obviously you've baked in some investment for outsourcing projects and I believe there is an upfront CapEx cost associated with that. So, just kind of relative to your comments, Mike is everything tracking in line as far as the $10 million in revenue that you were expecting from outsourcing for the year?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Yeah, actually, as you can see from the -- that business the speciality service business in healthcare in the United States, they're just having an outstanding year in growth and they're having it on both sides of the equation; the instrument management business is growing nicely and the outsourcing business is growing actually slightly ahead of our expectations. So this year we'd forecast about $10 million of growth; as we sit here today, we've already exceeded that number, and so, we fully expect to -- well, obviously we're going to meet or beat that objective. So it's going quite nicely for us.

John Hsu -- Raymond James -- Analyst

Okay, great. Thank you so much.

Operator

Our next question comes from David Turkaly from JMP Securities. Please go ahead with your question.

David Turkaly -- JMP Securities -- Analyst

Good morning. I was looking primarily, you got to ask the question on the guidance that the $12 million, the profit improvement from the restructuring over two years. I was wondering, if you could comment on how that should flow through the P&L, and specifically, as we're looking at that gross margin line, what can we expect, any color you might give, looking-forward in terms of sort of directionally, it sounds like we should be moving higher. But any specific comment you might want to make about how that flows through would be great?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Yeah, Dave. This is Mike. So we anticipate that $12 million will happen over the next few years. About majority of that will actually happen in the second year, next year in our fiscal year. We anticipate that will be more back-end loaded as we are just starting our plans and implementing our plans to close and consolidate our manufacturing facilities and do some product rationalization that would take some time. So, I would say there would be more back half loaded next year and then the bulk of it will happen in FY 2021, the bulk of the savings.

David Turkaly -- JMP Securities -- Analyst

Got it. I mean, I guess, we haven't seen -- I've haven't been able to ask a question sort of on the M&A side, and I know you get asked this a lot, but given the environment that we're seeing out there and sort of your plans looking ahead, I guess any color, any update on how we might roll into next fiscal year, anything you're seeing that might get you back on the board on the M&A side?

Walter M. Rosebrough -- President and Chief Executive Officer

Sure. We have an active funnel again most of what is active is what I would call tuck-ins, things that are, you know, relatively small compared to the businesses they are tucking into, and that's actually our favorite type of acquisitions. So we've had a few of those this year and we have a good pipeline going forward. In terms of a more significant acquisition, there are things we're looking at, we have been for sometime, there are two issues in concert; one is, again there are possibilities, but none of those possibilities, can we take unilateral action, many times there are private companies that have the decision -- have that decision to make themselves.

And secondly, as we've discussed before, right now, the market is fairly high in price across the board. And so we want to be careful not to overpay for something that we may purchase. So it's a combination of those two things, I think that has caused us not to have purchasing of asset. But you should not be surprised if we do something significant tomorrow morning, and you should not be surprised, if we don't do one next year, it's just a matter of the timing.

David Turkaly -- JMP Securities -- Analyst

Thank you.

Operator

Our next question comes from Isaac Ro from Goldman Sachs. Please go ahead with your question.

Isaac Ro -- Goldman Sachs -- Analyst

Good morning guys. Thank you. Walt, just maybe want to clarify your comments on the implied outlook for fiscal fourth quarter, it sounds like a lot of the items you talked about had to do with timing and maybe just a little bit of conservatism. But I just want to clarify that you are seeing no change in spending pattern in your end markets. Just want to maybe look at it from the demand side?

Walter M. Rosebrough -- President and Chief Executive Officer

Yeah, I think you've read that absolutely correctly from the demand side, in fact I would say, this is all more than the supply side, if you will than the demand side, all of our units are experiencing solid growth from the demand side, we anticipate continuation, day and a half or day less, which is a 0.5 on the consumable side, if everything runs to the number of days that's just a calendar timing issue.

The balance if anything given again the uncertainty of Brexit there's some people pulling things ahead and pushing things behind to accommodate that, and our plants are running pretty hot. And so, if a couple of orders particularly capital orders slip -- the wrong two days out of the year or end of the year, that can have a fairly significant effect on those growth rates in a given quarter. But in terms of pipeline, we see no difference in the healthcare capital pipeline then we've talked about now for probably 18 months or so. And on the consumable side, we have seen no difference in the ordering patterns. So I would not suggest, I said -- I guess, I'd say it differently, I think our full year numbers are more reflective of what we have seen and are still sitting in the pipeline than what might be implied by the fourth quarter.

Isaac Ro -- Goldman Sachs -- Analyst

Okay, that's helpful context. And then just a follow-up on the expense side, and really kind of in two parts; one, on the P&L and then one on the free cash guide. I'm kind of curious on the redomiciling effort you have there. Could you talk about whether or not those incremental costs on the free cash guidance kind of run rate into fiscal 2020, or is it sort of one-time thing that sunsets once you're done with the move, and if so, when does that happen? And then on the OpEx side, I think you mentioned that margins were hit a little bit by benefits-related items. Can you talk a little bit more about what that was and the extent to which that carries through into next year as well?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Yes, certainly, Isaac. In regards to the Ireland redomicile most of the expenses will be incurred this fiscal year, both from a P&L standpoint, which are adjusted out and a cash standpoint, which we do not adjust out. We anticipated early on that it would cost us about $5 million impact; right now that estimate has been revised to about $10 million, which is one of the reasons, we are taking down free cash flow.

In addition to that, the healthcare claims activity that we've talked about is, we were little bit surprised by the level of claims activity in the fourth or in the calendar fourth quarter, as we seem to be moving a lot of our employees to high deductible claims and once they hit their deductible as anybody would, they would take advantage of hitting that deductible and going through additional procedures if required or if needed. So we were a little bit surprised by their claims activity, and as I mentioned, that was about an impact of 40 basis points to our EBIT margin, so was pretty significant for us in our third quarter.

Walter M. Rosebrough -- President and Chief Executive Officer

But I think I would not characterize that as a significant change when you look at it over the course of the year. I do think it's a timing adjusted, we've been seeing that and we do this on an actuarial basis, so the actuaries are always a bit behind, but I would not expect that to be a significant effect for the full-year, if you look at just over the nine months is not particularly significant and I think as you go through the 12 months, we'll find that the same.

Isaac Ro -- Goldman Sachs -- Analyst

Thanks for all the detail.

Operator

Our next question comes from Jason Rodgers from Great Lakes Review. Please go ahead with your question.

Jason Rodgers -- Great Lakes Review -- Analyst

Yes, good morning.

Walter M. Rosebrough -- President and Chief Executive Officer

Good morning.

Jason Rodgers -- Great Lakes Review -- Analyst

Regarding your HSS segment, nice operating leverage in the quarter. And wonder if you could talk about that going forward. And how we should think about further investments in that segment compared to what you saw this quarter?

Walter M. Rosebrough -- President and Chief Executive Officer

Yeah, you know, we've talked about that in the past, and I don't feel a difference in view at this point in time. Again, on the outsource reprocessing business in general, it's still relatively small. So as we make investments, there will be more fluctuation on a quarter-to-quarter basis, maybe even a year-to-year basis. But over the long-term, we see that being kind of mid-double -- another way to say is mid-teens is probably the best way to say it, mid-teens kind of return on sales type business. So we don't feel differently about that. Obviously, we invested early as we said, we're -- late in the -- late last year and early this year, as we said we were to that impacted the margins early, and they are now flowing through almost exactly as expected except they're a bit ahead on revenue, so it's a little better on a dollar basis.

So, and again, I think you will see some fluctuations as we move forward, if you talk specifically about the ORC business. But having said that, when you combine it with the instrument repair business, it moderates those fluctuations a bit, because that business is larger. So in total, we don't feel any differently about that than we've been saying now for a couple of years.

Jason Rodgers -- Great Lakes Review -- Analyst

And then, Walt, I wonder if you could just provide some thoughts on hospital spending globally, if you're seeing any material change from what you said last quarter?

Walter M. Rosebrough -- President and Chief Executive Officer

Really the short answer is no. No, no significant change in -- the pipeline that we see, well, first of all, our backlog as you can see is at record levels and record by pretty significant differential. And so in terms of shipments that portends well for the next little bit, but our pipeline also continues to stay solid, so we're feeling pretty good about. In healthcare, we don't have quite the visibility we do in life science; life science has a longer pipeline, but still on large projects we see things out 18 to 24 months, they may not materialize in the timeframe that we like, but what we see out there in pipeline looks quite healthy to us.

Jason Rodgers -- Great Lakes Review -- Analyst

And then Mike, as far as the tax rate, do you have an estimate for the fourth quarter and maybe any early thoughts for fiscal 2020?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Yeah, as we have continued to say approximately 20% for the full year is going to be our effective tax rate. We did get some favorability this quarter in particular, due to some stock comp deductions that we typically plan zero, and we did have some compensation related to stock some equity options that were exercised during the quarter, which obviously helped us. But we still think in the low '20s or 20% approximately is the range that we would look at for the fourth quarter and we will guide in May timeframe, as we look out to next year.

Jason Rodgers -- Great Lakes Review -- Analyst

And then do you have what the current debt-to-EBITDA is, and what is the target for that?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Yeah, we are currently just under 2 times levered. Remember, we took up leverage to about 2.9 times with the acquisition of Synergy just over three years ago, and we've been talking about working to bring that down somewhere in the low 2 ranges. We really don't have a specific target per se, but we feel comfortable operating at the levels that we are.

Walter M. Rosebrough -- President and Chief Executive Officer

You know, you may recall that STERIS historically was well under 2 for a long time, we have taken those debt levels up. I think, if you look at the capital structure, the optimal capital structure most of our bankers would say sit someplace between 1.5 and 2.5 and it's fairly flat. So we don't feel pressure at this point on the capital structure issue in terms of what our debt rates are and our cost of capital is. So it's pretty flat between 1.5 and 2.5 and very flat between 1.6, 1.7 and 2.3. 2.4. So we don't feel pressure there.

Jason Rodgers -- Great Lakes Review -- Analyst

Okay. Thank you.

Operator

Our next question comes from Chris Cooley from Stephens. Please go ahead with your question.

Chris Cooley -- Stephens -- Analyst

Hey, thank you, Walt, Mike and Julie congrats on a great quarter. Just a couple from me at this point. Walt, would you help us a little bit with AST in the quarter, that's the first time we've seen 40% plus op margins. And you did it growing 6% off of a very tough high-teens comp in the prior year. Could you just talk to us a little bit about what's driving that upside to the op margin at AST? Is that utilization of the capacity that you brought on here over the last 12 months? Is that a change in mix that we're starting to see? Just wanted to kind of level set expectations there for the contribution margin from AST going forward, and I've got a couple quick follow-ups.

Walter M. Rosebrough -- President and Chief Executive Officer

Yeah, Chris. A couple of comments. The underlying driver is the growth in the business and as you guys, who follow medical devices know that most of the device makers are having a pretty solid quarters. And so when they do, we tend to do, because I mean that's the ultimate demand of that business. We have expanded geographically and we've expanded our capabilities and we've talked about that and those expansions are paying off. As we bring things online, they tend to have a negative effect on our margins, because we have -- grade (ph) depreciation and early start-up cost. But now that we have 60-some-odd plants, any individual plant tends to have less of that impact. And we have seen our utilization rates outrun our expectations for this year and so we're getting to where a lot of our plants are running fairly hot.

I wouldn't suggest that the -- I mean, numbers between those high-30s and low-40s, I wouldn't suggest that those are not kind of a normal run rate for that business, you know, we do spend a lot of capital to make that money, so it's the ROICs are attractive, but not stupendous, but so I wouldn't suggest that those are not, but you will see fluctuations around that range. I wouldn't say we'll always be over 40, but I wouldn't bet my life against it either.

Chris Cooley -- Stephens -- Analyst

Understood. Appreciate it. So, great performance there. And I guess the only real net, when you look at the quarter, the life science backlog and I realized, last year we had phenomenal growth there, I think it was up 43% in the prior year quarter before being down 7% on a year-over-year basis this time and up 1% sequentially. But are we starting to -- I'm trying to kind of get out here is, you know, what's kind of the normalized capital growth rate, are we going to essentially go back to that mid-single digit life science capital growth kind of having worked through a lot of these projects from a retooling enhancement that had been put off and we've seen that kind of driving growth here over the course for the last two years. Does that -- is it starting to normalize a bit there or if not, why should I think that this would start to turn up on a year-over-year basis as we go into fiscal 2020?

Walter M. Rosebrough -- President and Chief Executive Officer

Yeah, Chris, I think your comment or -- and question is excellent, and we've been saying for some time, we don't really expect 30%, 40% growth rates in this business, when it jumped very strong about, I guess not two years ago, it started headed up and it -- those 20%, 30% kind of percent growth rates, we don't anticipate staying that way. Our bigger, I'd call concern or thought was geez, it's going to stand up at this level or we are going to -- this was a one-time blip and we're going to drop down from that, and we don't think so even though, again just like shipments are kind of lumpy in life science, backlog is kind of lumpy in life science, because the orders come in the same way the shipments go out kind of in big chunks. As it turns out as we speak today, our backlog is roughly the same as it was last year, it was down a bit at the end of December, but in the January we're right back at -- within $1 million, I don't remember of where we were last year. So to us it looks steady state, so I don't expect a big downturn nor do I expect a big upturn. But all things being equal, it looks kind of a steady state.

Chris Cooley -- Stephens -- Analyst

Super. And then just lastly from me, so I'd make sure I picked up on this correctly. When I look at the cash flow, original guide was $340 million, now $330 million, but kind of when you reconciling the two, you did have an additional $5 million there in expense to redomicile to Ireland, do have additional $5 million in headwinds you kind of called out there. So, in essence, I'm looking at -- if that's the $10 million with the offset of course of the reduction in the timing on CapEx. So, just trying to go back to that $340 million to kind of just work my way back that's -- those are the two central driving factors, am I correct in thinking about that way?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Yeah. There's actually three driving factors, Chris, there is the -- the increase in the redomicile expenses by about $5 million, there's also some restructuring costs from a cash perspective, again, about $5 million and then on top of that we have additional working capital requirements mostly inventory as our backlog is high and as everybody knows not all that backlog is going to ship in Q4. So some of that will carry over in Q1, but we have to start building that product as we've got about $10 million in increased inventory there. So that helps you reconcile and then take the $10 million, a reduction in CapEx and that gets you to roughly the $340 million to the $330 million.

Chris Cooley -- Stephens -- Analyst

Got it, got it. So underlying leverage there, you know, clearly not tapering it, just those different factors offsetting each other partially (multiple speakers).

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Exactly, and as you know, we do not adjust like we do on the P&L. So, the restructuring and the Ireland get adjusted on the P&L, but we do continue to account for those in the free cash flow and on the balance sheet. So --

Walter M. Rosebrough -- President and Chief Executive Officer

And Chris, I would add, just as we said, we have demand to ship more than we are now forecasting we would ship. It's matter of ability to make -- to match the orders. It's not can we make it, it's just if a customer calls up a week before the end of the year and says, hey, I need to delay this two weeks, because my construction is not going as anticipated, they usually don't do it a week before, but a month before, we've already built the product and as a result if it's -- particularly, there are certain products that are specific to the job. And so we forecasted or we put in our forecast that -- some of that does slide into next year, which is why the revenue, the same conversation we had on the revenue to start with, that ends up being inventory, so that's the logic.

Chris Cooley -- Stephens -- Analyst

Got it. Great quarter, congratulations. Thanks so much.

Operator

Our next question comes from Matthew Mishan from KeyBanc. Please go ahead with your question.

Matthew Mishan -- KeyBanc -- Analyst

Hey, Walt, Mike, Julie. How you guys doing?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Good, Matt.

Walter M. Rosebrough -- President and Chief Executive Officer

Good, Matt.

Matthew Mishan -- KeyBanc -- Analyst

Hey on ORC centers, congratulations on getting that revenue in the US up and running. You mentioned that there were three centers that you had contracted. Are one, two or three of those open right now? And then can you say whether or not that you -- whether or not you have more than three contracted to open at some point now?

Walter M. Rosebrough -- President and Chief Executive Officer

Matt, one, two or three of those are open right now?

Matthew Mishan -- KeyBanc -- Analyst

And -- thanks for the detail, Walt.

Walter M. Rosebrough -- President and Chief Executive Officer

You know, as I mentioned last time, Matt. We're not going to talk about specific customers, we never have like doing that early on this process when people were -- when there was absolutely a start-up. We talked about orders of magnitude, the kind of numbers. And so we're going to get away from the individual contracts. The answer to your question is, yes, we have multiple contracts up and running. Some of those are full ORC, what you would think of as a full ORC, some of those are places where we are doing the work.

We are outsourcing the workflow, we're outsourcing it inside their facility, some of which we may own the capital, some of which they may own the capital and we have a number of places where we are beginning that walk by taking a piece of their business and over time we would anticipate taking more and more. So there is a full spectrum of outsourcing in this ORC business, some of which is what you would think of as a traditional stand-alone ORC, but just as we do in the UK -- in the UK we have certain customers where we do all the work in a center that's off their site and we are trucking it back and forth, but we have a number of centers where we're doing the work inside their site and outsourcing the work.

So it's very much like the UK model and it is progressing nicely across the various fronts. So that we can grow it. We're not going to continue to break that down into details, all I can -- what I will say is we've already achieved our yearly target. So we're obviously going to go over it and we're quite comfortable with this business.

Matthew Mishan -- KeyBanc -- Analyst

Okay. And then this is a new model for US, can you give us a sense of how the transition has gone with those customers as you moved it from their facilities or their operations to yours?

Walter M. Rosebrough -- President and Chief Executive Officer

Yes. Well, like all transition, some of them were a little testy, and some of them were easy. And it is work, but and that's why in a number of these cases, we're not trying to transition the whole thing at once. Both we and our customers think the idea of moving pieces is not a bad plan. And then, you do more and more in the next thing, you know, you're fully across. There are other places where their capacity is such, and they would have to rebuild, if you will, and so building the center offsite as opposed to sticking it in the middle of their hospital is -- it's better for them to have it offsite for any number of possible reasons. And so then it's more of a transition as you would think of it, but even then, it's not like you turn a switch off in the facility and a switch on in the other facility and 100% moves that would be a bridge too far. So, it typically is over the course of time.

Matthew Mishan -- KeyBanc -- Analyst

Okay. And then, Walt. You know, I know, not to take every word literally, and I know you mentioned you wouldn't be surprised if you were to close a significant deal tomorrow or not within the next year. But just what you consider it -- what would you consider to be a significant deal, and does that mean you're actually looking at several like significant deals in the pipeline?

Walter M. Rosebrough -- President and Chief Executive Officer

Yeah, Matt, I guess, I think of orders of magnitude, I think of tuck-ins, things that are 10% or less, the size of the business that we are putting them in, if you will, I think of those as kind of tuck-ins. And then if it's bigger than that, either for a specific business or for STERIS as a whole, those are more significant deals that we are looking at some in that order of magnitude, but we've been looking at those -- some of those, we've been looking at for long time, some of those we -- are newer to us. I don't see a big differential in that pipeline even over the course of last 5 to 10 years. The only difference is we're getting bigger, and so in some sense that shrinks the -- it doesn't shrink the number of deals, in fact it opens wider then number of possible deals, but it shrinks those that are greater than 10% vis-a-vis the individual businesses or ours. So it's a category switch, not an overall pipeline question.

Matthew Mishan -- KeyBanc -- Analyst

Okay, and this is the last one. Mike, how confident are you that you've captured all the changes in tax reform in that low-20s guidance. And is the way to think about it is, you have the low-20s, but then on any given year depending upon where stock comp comes in, you probably have an extra 100 basis points of cushion in that?

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

We could, depending on the volume of the exercises from a stock comp standpoint that definitely as we have seen this year has been more favorable than we originally anticipated. And as far as capturing what has been published at least at this point in time and that is finalized under the Tax Cut Jobs Act, I would say that we are very confident that we have captured all of the pieces. Now there's proposals out there, obviously, we can't speak to those because those are final, but whatever is final, we are very comfortable.

Matthew Mishan -- KeyBanc -- Analyst

All right. Thank you, Mike.

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

You're welcome.

Walter M. Rosebrough -- President and Chief Executive Officer

If we could get tax laws around the world to stop changing, we would be very confident with our forecasts.

Operator

(Operator Instructions) And at this point, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Julie Winter -- Senior Director, Investor Relations and Corporate Communications

Thanks again, everybody, for joining us today and all of your continued support of STERIS. We'll talk to you again next quarter.

Operator

Ladies and gentlemen, the conference call has concluded. We do thank you joining today's presentation. You may now disconnect your lines.

Duration: 41 minutes

Call participants:

Julie Winter -- Senior Director, Investor Relations and Corporate Communications

Michael J. Tokich -- Senior Vice President and Chief Financial Officer

Walter M. Rosebrough -- President and Chief Executive Officer

John Hsu -- Raymond James -- Analyst

David Turkaly -- JMP Securities -- Analyst

Isaac Ro -- Goldman Sachs -- Analyst

Jason Rodgers -- Great Lakes Review -- Analyst

Chris Cooley -- Stephens -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

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