Roper Technologies Inc (ROP) 2013 Q1 法說會逐字稿

The Roper Industries first-quarter 2013 financial results conference call will now begin.

I will now turn the conference over to John Humphrey, Chief Financial Officer.

Thank you, Kayla, and thank you all for joining us this morning, as we discuss the results of our first quarter.

Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer, Paul Soni, Vice President and Controller, Jason Conley, who heads up Planning and Investor Relations.

Earlier this morning, we issued a press release announcing our financial results.

The press release also includes replay information for today's call.

In addition, we've prepared slides to accompany today's call, which are available through the Webcast, and also available on our website at www.RoperInd.com.

As we turn to slide 2, we begin with our Safe Harbor Statement.

During the course of today's call we will be making forward-looking statements, which are subject to risks and uncertainties as described on this page and detailed in our SEC filings.

You should listen to today's call in the context of that information.

Now, if you'll please turn to slide 3. Today, we will be discussing our income statement results for the quarter, primarily on a non-GAAP basis.

A full reconciliation between GAAP and non-GAAP measures is in our press release this morning, and also included as a part of this presentation, and on our website.

For the first quarter, the difference between GAAP and non-cash GAAP is a fair value adjustment to acquired deferred revenue at Sunquest.

For the quarter, this impact was $3.6 million to revenue and operating profit.

This adjustment represents revenue that, absent our acquisition, Sunquest would have recognized.

We believe showing our results on this basis provides additional insight into the ongoing and recurring results of the business.

Now if you'll please turn to slide 4, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer.

After his prepared remarks, we will take questions from our telephone participants.

Brian?

Thank you, John, and good morning, everybody.

We look at the Q1 enterprise financial results, that was an all-time record for the first quarter.

Most level of orders, highest level of sales, biggest net earnings, the most EBITDA, and the highest operating and free cash flow.

One of the incredible things about the first quarter is that all of our margins again increased, gross margins, the operating margin, the EBITDA margin, and the net earning margins all established records for Roper.

Our orders at $794 million are particularly strong in that, last year, we had about $15 million out of the Neptune cancellation, which of course didn't recur, making that 794 look even stronger on a comparative basis.

Revenue was $741 million, and our book-to-bill was 1.07, which is well above our norm.

We have a little over $1 billion dollars of backlog now, which is up 18% over last year at this time.

Our gross margin went up 240 basis points to 57.4%, and all four segments actually increased their gross margin, so it's not just the benefit of higher margin at Sunquest but execution in all four segments.

Operating margins were up 150 basis points to 25.5%, and our EBITDA reached $230 million in the quarter, which was up 210 basis points to 31%, which is quite excellent performance for our first quarter.

Our GAAP operating cash flow was $171 million, representing 23% of revenue, and compare that $171 million to $125 million of net earnings.

The free cash flow was $160 million in the first quarter, and our diluted earnings per share increased 17% to $1.27.

We felt we had really compelling margins and cash flow, and then the Q1 orders will really drive our full-year organic growth.

Next slide.

Here we look at the Q1 income statement.

A couple of things here, in the orders you can see overall orders for the Company were up 9%, organic was up 1%, but if you adjust for the $15 million Neptune cancellation, that contract cancellation, organic would have been up 3%, which may explain our tone about feeling better about orders and organic growth for the balance of the year.

Revenue, which was at $741 million, was up 4%, organic posted down 3%, but most all of that is this Neptune cancellation.

Again, it's over 2%, and the residual was just the continuing softness in the imaging businesses that we expected, so the core really was flat to modest growth on revenue, without those two particular items.

Gross margin, as we said before, up 240 basis points to 57.4% from 55% last year, with each segment increasing their margins.

Operating profit was up by $19 million on the $30 million revenue variance.

Our leverage was above 60% and that included greater than $1 million charge in deal costs we incurred in the quarter, but aren't calling out as a separate item for a one-timer.

Operating margin, you can see was up 150 basis points from 24% to 25.5%.

Interest was up 6%, as we're paying for the interest related to the new bond offering last year, and the interest cost for Sunquest.

Other expenses, we had a negative experience at $2.5 million, mostly FX-driven item here, so that $2.5 million plus $1 million on the deal cost was about a $3.5 million drag.

Fortunately, we had a benefit from our tax rate, with about half of that coming from the R&D and other extenders from 2012, and that gave us the net earnings of $1.27.

Next slide.

If you look at the EBITDA growth, two years ago, our trailing EBITDA at the end of the first quarter was $685 million.

Last year was $830 million, and this year we're already up to $950 million on a trailing basis.

No performing in that, that's just the number, so we're up $265 million in just two years.

Then if you look at our margin performance on EBITDA, two years ago it was 27.4% on a trailing 12-month basis.

Last year it was 29% and this year, it closes out at 31.3% and we'll continue to expand, up 390 basis points in just two years, so it's really extraordinary performance on an EBITDA margin basis by any measure.

Next slide.

Our Q1 cash flow is, again, remarkable, and it continues to grow as a function of revenue.

We had $171 million of operating cash flow.

If you divide that by the net earnings, you can see that conversion was 137%.

We had $160 million in free cash flow, which is 22% of revenue, and the cash conversion is at 128%.

It's really across-the-board improvement in every segment.

Certainly a record.

You can see our cash flow, free cash flow in the quarter at $160 million is twice what it was two years ago, $78 million, and below, you can see the percent of revenue, as I said, the cash flow as a function of revenue continues to escalate.

Two years ago it was 12.1%, a year ago 18.5%, and this year 21.7%.

Next slide.

We'll get into the individual details.

A lot of moving parts here, so let's turn to the first one, which is energy systems and controls.

I think these are kind of in order of revenue or orders.

So, energy system being our smallest segment, now 20%.

Here you had orders up modestly, about $4 million, revenue down a little bit, and gross margin increased from 54.1% to 55.6%, up 150 basis points.

On the items in the quarter, our Compressor Controls business continues to capture growth.

They're benefiting from global project rollouts, a lot of visibility, too, for the balance of the year, and continue to increase their field engineering billable time for people.

Next point is that the lower gas rig count reduced revenue for our engine safety systems businesses and some other people that are in that category.

That was about a $3 million drag in the quarter, and the industrial end markets were soft as it related to any instruments, and pretty good on consumables.

That was another $2 million drag.

Margin expansion from the growth in the higher margin areas and benefits from second-half 2012 cost actions helped us out, and you can see the book-to-bill for this segment was 1.08, which is quite strong.

In the second quarter, we would expect relatively flat revenue in the energy systems business, but higher margins, and then in the second half of the year we see higher revenue growth, with compressor controls really driving a big part of that, and then more favorable comps for some of the other energy categories, and we're starting to see what will be a ramping early adoption of some new products around sensor technology, that we're introducing in control systems.

Next slide.

Here, we'll look at industrial technology.

While revenue was down, virtually the whole variance is simply the Neptune contract cancellation.

That was $15 million, and revenue was down about $13 million, so we had flattish revenue exclusive of that.

We had very strong growth in our US water meter sales, which was better than expected.

We had double-digit growth in water meter sales, and that really offset the drag we had in our material analysis business, where we had instrument sales decline somewhat, with consumables being steady.

But net-net, the contract cancellation wasn't able, we weren't able to overcome that with other organic growth.

The fluid handling, we had growth in certain niche markets that mitigated the gas drilling activity.

The gas drilling activity did hurt our Cornell Pump business a little bit, but the other businesses were strong.

Book-to-bill was virtually flat at 0.99.

Gross margins expanded in the industrial segment, even without the revenue growth.

They went from 50.6% up to 51.2%, so a 60 basis point increase, and those very few businesses that delevered did so at a very modest leverage rate.

For the second quarter, we would expect similar market conditions, although we will get sequential growth from the first quarter.

We still have the Neptune headwind for another quarter.

It was $15 million in Q1 and it's going to be about $12 million in Q2.

As we get into the second half, that dissipates, so we're back on a normal basis, and you'll see better looking ratio numbers on the growth pattern.

Fluid handling growth and directional drilling is assured, we've got strong incoming orders and demand for products in that arena, and the energy markets are improving very modestly.

Our material analysis comps are going to be relatively easy for us to lap, so we expect to do better there, and the Neptune headwind in the second half, it eases to a single digit number in Q3 and then zero in Q4, so that will help us and our distributor network around water meter sales is continuing to grow as housing continues stronger than it was in the past.

Next slide, if we look at the RF technology segment, very strong performance here.

Orders are up $36 million.

We had great segment orders, led by toll and traffic, where segment orders were up 18% over the prior year, two really important projects that we'll have delivery throughout the year, but tailored to the end of the year, with the Florida Department of Transportation tag upgrade project, and then Virginia's I-66 highway system.

We had revenue growth in toll and traffic projects in the first quarter, which offset lower tag shipments, which were lower than a year ago.

And the project execution, as we've made some considerable upgrades in the people side at TransCore are certainly paying dividends as we see better operational performance.

In fact, the segment overall gross margins went up from 51.8% last year to 53.9% this year so they are up 210 basis points.

We had some growth again in our freight match and iTrade US businesses on subscriber subscriptions, and our book-to-bill, you can see, is exceptionally strong at 1.15.

For the remainder of the year, we see this backlog really positioning us for an assured amount of organic growth in toll and traffic, and then our seaboard cash flow systems and integrated security wins, which we're confident about will also drive growth.

We just won, in April, a Technolog contract award for gas AMR.

This is going to be in the UK.

It will drive improved second-half performance for us.

It's a five-year contract and the terms aren't ready to be disclosed, but it certainly will add to our growth profile in the second half of the year.

And then our Innovonics brand businesses, who make wireless sensors for security and senior care, and submetering, are doing dramatically better this year.

They were better in the first quarter, and we expect them to be substantially better in the latter part of the year, particularly in our senior care applications, and submetering as multi-family housing continues to strengthen, and we'll get some continued modest growth in our subscriber basis in our SaaS businesses, at both freight matching and iTrade.

Next slide.

If we look at medical and scientific imaging, huge increase in orders, up $59 million, and of course some of that's Sunquest.

Nonethelss, revenue was up 25% over the prior year, and operating profit is up 46% over the prior year, and operating margins in what used to be our most difficult segment, from an OP viewpoint, are up 450 basis points to 31.1%, and our gross margins in the quarter increased by 270 basis points over last year.

So we look at the specific items.

Sunquest is on plan.

They have favorable order rates, so they are ahead on orders.

We do need to increase our ability to get faster implementation processes in place, which we've been talking to them about, because we have an opportunity to increase our growth beyond their original expectations, if we can get the implementation processes to happen faster.

We continued to have very weak research markets, and those continue to negatively impact us.

In fact in the quarter, that was a $12 million headwind, and it's hard to make that up.

We had a very difficult comp at Gatan, because they had a blow-out first quarter last year, but the core problem remains very modest activity in the camera [borses] with the research funding around the world.

Medical devices were a little bit soft as it related to direct sales to US hospitals, but the consumable sales were quite good, so on balance that came out fine.

Our book-to-bill for the segment was 1.06.

In the second half of the year, medical is going to be led by the faster uptick on the Sunquest implementation execution.

It's the only thing that wouldn't be driving greater growth, and so we're very focused on seeing that improve.

It's not bad.

It's just that it could be better, because we're getting a lot of new business on the adoption of software upgrades for Sunquest, and the speed at which we can recognize that revenue is directly related to our execution capability and the implementation.

We had strength in the second half.

We're going to have strength in Civco's applications.

Remember that's a multi-modality business in radiation oncology.

We have new products that are coming to play, so they will add some growth in the second half, and while the research markets remain challenging, they have easier comps for scientific imaging in the second half than they did in the first half.

And then the MHA acquisition will add substantially to our growth, and I've asked John Humphrey to talk through the nature of MHA, and then I'll talk a bit about why we thought it was a great acquisition.

So John?

Thank you, Brian.

Next slide.

Going to the MHA overview slide.

So talking a little bit about this acquisition, which we do expect to close later in the week, so all the regulatory approval has already been obtained on that.

MHA is the largest provider of services and technology and a network for the alternate site healthcare market.

So alternate site, for those of you on the phone, just means non-hospital settings, so all the places where care is being delivered in a non-acute care, non-hospital type setting.

What they really provide is a whole suite of tools and technologies which include GPO services, includes reimbursement tools, software specific to pharmacy solutions, and the largest network for processing and adjudicating Medicare Part D claims.

They provide that for all of their customers across multiple classes of trade, and those are delivered with the largest and most comprehensive customer service team, which enables their customers to both increase revenue through getting better reimbursements, and faster reimbursements, and also to lower costs by being able to purchase more effectively and efficiently across the network that MHA is able to provide for them.

They do have the number-one position in all of their served niche markets, which include long term care pharmacists, home infusion, specialty pharmacy, assisted living locations, all of the places where care is being delivered in a non-hospital setting.

Next slide.

Going into a few more of the facts and figures for MHA.

When we talked about it being the largest alternate site healthcare network, this really gives a glimpse at the scale that MHA has, with the customer base of about 12,000 different customers, 47,000 different locations, and they enable the purchasing volume for all of those different locations which exceeds $5 billion annually, and MHA is able to have a share in that and that's how they are able to generate revenue.

As I said they do process almost 35% of all Medicare Part D claims in the country, with the network that they are providing for their customers.

Over 120 million annual pharmacy and drug interactions that are being analyzed and delivered, and the large customer service workforce, and that workforce is more than just salespeople.

They really act as consultants that enables their customer success, so they are able to run their business more effectively and that high degree of customer intimacy is one of the sustainable real advantages that MHA has in the marketplace.

On the right side, you can see the break down of the customers and the end markets that they are serving.

About half of their customers are in long term care pharmacy.

The long term care facility that also includes assisted living centers and that's generally around food that's being purchased, but also other things in those long term care facilities.

The alternate site care includes such things as specialty pharmacy, home invasion, respiratory therapy, et cetera, and then that other smaller slice that says technology is really the network and the other software and enabling tools that MHA is providing to its customers that allows them to run their business more effectively.

Now the end market that we see here has a number of very durable and diverse growth drivers, including favorable demographic trends.

Except for the people on the phone, everyone else in the country is getting a little older, and these alternate site care markets are a low-cost care setting.

So as more care is being delivered outside of the hospital setting, that's a favorable trend that's impacting this end market.

And we continue to expect to see market share gains based upon the value, the scale that MHA has, and the classes of trade that they serve, and the strong customer service, high intimacy consulting type of sales process that they have.

And this niche market still provides what we think are very complementary acquisition opportunities.

MHA has done a few of those in their history, and we would expect to continue that process as we go forward.

So, there's just a couple of slides about MHA, who they are, who they serve, and what they provide, and then I'll turn it back over to Brian to talk a little bit about the acquisition and how it fits.

Thanks, John.

People always ask us about what our criteria for acquisitions are, and we -- virtually every presentation, we will tell you that these are the things that we're looking at, and just as a reminder, these are the things we look at.

So if you look at the first item, we want our businesses to be asset-light.

Many people report EBITDA and they don't even take the time to tell you what the EBITDA minus CapEx is.

They will talk about depreciation and CapEx, as though it's unimportant.

We think asset velocity is extremely important, so in the case of MHA, they have no inventory.

That would be zero, nada, and they have negative working capital.

So the cash on cash growth out of MHA is really quite substantial, because it's going to throw off additional cash that we're going to be able to use to acquire companies to augment its own growth.

We're going to, we always want to focus on market structure and driving forces.

We invested more money and diligence on MHA than any deal we've ever had, with three different outside people approaching this from very different directions, and we've been looking at this Company for quite a long time, waiting to pull the trigger, based on a variety of factors, and this research was critically important to us to just see how secure their strategy is, and that there aren't externalities that could come out of the woodwork that would be difficult for us.

On customer intimacy and technology, we want those to drive the purchase decision, and we were very impressed.

When John talks about the consulting nature, these people virtually prepare for their clients a three ring binder that they go through to tell them how they're performing, and where they can make decisions that will add to their margins.

These guys that they are serving work on such slim margins that a basis point change could be the difference between whether they are cash positive or cash negative.

Management continuity we always value, and in this case, the entire team is coming along.

Mike Sicilian is going to run this business.

His team are on Board.

In fact, as we say, we like to have incentives linked to commitments from the team, and in this case we have a three-year forward execution goals in place already with Mike's team.

We like to still focus on the Covey idea of preserving core values and stimulating progress, and in this case, the core values at MHA are really outstanding.

They have great people, and they provide great service, but we're going to be able to get them access to customers and complementary people that we currently do business with in our software activity, both in RF and in medical, that should be quite helpful to Mike as he continues to grow his business.

And then grow what you buy.

Well one of the immediate benefits you got from our ownership is that MHA customers can have much better confidence now, because they have a strong Company behind it, instead of it being a private equity situation.

Customers don't have to worry about who might own it in the future, and whether that's in or not, in their best interest, and they can really focus now on executing longer-range strategies, knowing that they have a permanent home, and they really are, both from a cultural viewpoint and market viewpoint a great addition to our medical family.

Next slide.

So here we take a look at the 2013 guidance.

The full-year non-GAAP DEPS guidance we're increasing from $5.60 on the low range to $5.76, and from $5.82 on the top to $5.94.

That really comes about, we have $0.05 of negative currency using our 3/31 currency versus what we said at 12/31, so that's a negative $0.05, and then we have a positive $0.14 on the low end for MHA, and a positive $0.17 on the high end.

We raised the low end higher, because really the quality of our orders and delivery gives us very little doubt about the low end, compared to where we were at the beginning of the year, when we had the $5.60.

Tax rate for the rest of the year, unfortunately it's going to be in this 31% category.

MHA is a high tax base business, as is Sunquest.

Both those continue to grow, and they add several basis points to our tax rate.

Sales guidance, we said at the beginning of the year that we thought we could do somewhere between 8% and 10% of revenue, with about 5% of that coming from Sunquest, meaning about 3% to 5% inorganic, and we don't see any reason we can't still do the 3% to 5% organic.

So we're raising our sales guidance to 11% to 13% for the year, with some of that coming from MHA, and I think that should really, we're just quite comfortable with those numbers, despite a little softness in the first quarter.

I think if you look at the numbers, without remembering that you had a $15 million divot from the contract cancellation in the first quarter and $12 million divot in the second, you might think it's softer than it is.

Q2 non-GAAP DEPS is going to be $1.26 to $1.30.

The only way that would improve is if some of these projects for the second half moved into the second quarter, but we don't have any reason to believe they will, but they could.

We're going to have a much stronger Q3 and Q4.

A little bit more EPS coming in the second half of the year from a linearity viewpoint than normal, but that's due to the nature of the things that have happened in the first half of the year, in our acquisitions.

For a full year, the GAAP operating cash flow, we've raised the guidance to exceed $800 million, and that's fairly prestigious cash flow, we would say.

Then, we are reminding people in our press release in here that all of the MHA items will be non-GAAP.

Next slide.

Here if we look at the Q1 summary then, we really have had compelling results on all the margins, the cash flow, the niche markets continue to separate Roper from any of these traditional overseas peers that people used to talk about for Roper.

For us, it's always frustrating.

Some guys say, oh, a machinery company.

My goodness, it's certainly not a machinery company.

It's an Electrical Products company.

We don't have a single business that's in the KIX code electrical products.

This is a Diversified Growth company getting more diversified with each acquisition, with the biggest piece of our activity now centered around medical, and radio frequency, and software technologies.

We've achieved record first-quarter results in all of these different categories.

Our book-to-bill was 1.07 with a backlog up 18% to $1 billion.

Our gross margin, as we said, was up 240 basis points to 57.4% and all four segments were up.

Operating margin up 150 basis points, EBITDA up 210 basis points to $230 million, and operating cash flow coming in at 23% of revenue, and free cash flow at 22% of revenue with 128% cash conversion.

MHA will close this week.

With any luck, it will close on May 1. We're really now positioned to capture organic growth for the rest of the year.

And with that, we would like to open it up to questions.

(Operator Instructions)

We'll take our first question from Deane Dray with Citigroup.

For MHA, maybe some additional color on their mix, some sense of how or what percent of their contracts are exclusive, and maybe talk a bit about how much of the revenue comes from performance contracts, and how they have done against those historically.

So none of their contracts are performance-based, and most of the things you are talking about, this idea of exclusivity is more of acute care hospital type of GPO.

I mean very little, as far as MHA's contracts with their customers, are exclusive, and none of them are performance-based.

Okay, and then, Brian, I was hoping you can expand on, and maybe this is just the terminology, but on Sunquest, where you talked about you're looking for faster implementation.

Is this, are you talking about integration, new software rollout?

Or just if you could expand on that point.

The integration is fine.

It's just a world-class organization and we've had nothing but a marvelous time working with the Sunquest people, but the adoption of the software upgrades that they are getting is occurring at a faster pace, I think, than they expected and as a result, their ability to execute against those and get the implementation, needs to improve.

And they're making some structural changes around people and who is driving what, so that they can get better focus on that, because we could actually escalate their growth if we can get out there to get those new customers on Board.

It's a customer integration, not a Roper to Sunquest integration question.

And just to clarify on that, what is the growth rate that you're expecting from Sunquest, if you factor in these new software upgrades?

I think we're expecting it ought to grow at sort of high single digits.

And what type of margins that you've been -- you're getting out of the blocks?

Well, I'd say they are maybe twice ours.

Great, thank you.

We'll take our next question from Matt Summerville with KeyBanc.

Good morning.

One follow-up on MHA and then I have another question.

John, or Brian, can you talk about the addressable market size for MHA, the competitive environment, whether you see any disruptive technologies out there to what MHA has?

We see a lot of disruptive technologies, and saw them all during our diligence process.

I mean they have a very high share in, particularly in the long-term care pharmacy space, well north of 50% there, but it's still they have the largest share also in the long term care facilities around food purchasing, but that's still a relatively small share.

So there's still quite a bit of head room to grow in the long term care facility and assisted living areas.

And then we just see the positive drivers associated with demographic trends and more care being delivered in non-hospital settings as the population ages, so those are positive benefits, and then those share gains, particularly on the LTCF side of their business are things that we think will drive their growth going forward.

And I think, Matt, that John means the disruptors that he sees are at MHA.

Yes, that is what I meant.

We're seeing a pretty clear pathway for growth there, and we're enabling a lot of people to be successful in a marketplace that probably wouldn't be able to survive without the productivity that MHA allows them to deliver.

That's right.

That's helpful and then for my follow-up, just Brian, can you help fill in the blanks a little bit on the organic growth forecast?

You start out minus three.

It sounds to me like you weren't specific, but the second quarter is maybe relatively flattish.

That really does imply a pretty big finish to the year.

Can you just help bridge how Roper gets there?

Sure.

I mean you're right.

As far as the math and the way that it rolls out, so what's kind of down three in the first quarter, we're expecting second quarter to be up kind of in the low single-digit range on an organic basis 1%, 2%, 3% and then the back half is in the high single-digit range, driven by the orders that we received in the first quarter, so that provides nice backlog and contracts and projects to execute against in the RF segment.

And then just some modestly improving areas, some new product introductions, and frankly a little bit of easier comps as we get toward Q3 and Q4 in some of the imaging and industrial segments.

Thanks, appreciate the color.

We'll take our next question from Jeff Sprague with Vertical Research.

Just a couple questions, just again on MHA, is that $95 million EBITDA number inclusive of the D&A that gets created by your acquisition of the company, or is that its own underlying EBITDA?

It's actually both, so we will have incremental amortization, obviously, of the intangibles upon acquisition, but the earnings before that amortization in interest and other things is consistent between our ownership, and theirs, and just to clarify that $95 million is under the first 12 months of our ownership, not for the calendar year of 2013.

But you're saying the additional DA created by your acquisition isn't significant, relative to that $95 million number?

Yes, so we've got the $95 million of the EBITDA and then we're right now estimating that the amortization on an annual basis will be something around $25 million.

And that's included in the $95 million?

Right.

Well it's actually excluded from the $95 million, so the $95 million is before the amortization, so if you add in the amortization it comes down to $75 million or $70 million.

Got it, got it.

Thank you and just trying to ballpark the revenue for the business.

I guess at the midpoint of your revenue ranges, you've raised revenues by 3 percentage points which is $90 million or so for a partial year.

You've got FX headwinds and other things going on, but we're talking about a business that's $130 million to $150 million in revenues.

Is that the right ballpark?

Yes, it's a fair assessment.

And then finally I was just wondering if you could give us a little more detail on how the deal pipeline looks now.

This is obviously a very significant deal.

Is the pipeline still active, should we expect anything else this year of this size?

Any general color will be appreciated.

Well I think a couple of years ago, we said we already knew where the next $5 billion of investment would be.

It's just that you never know whether you're going to close the gap or things will work out.

And in this case having done Sunquest at $1.4 billion in August and MHA at $1 billion this month at $2.5 billion, we're sort of half way there.

We're hoping that things we would like to do are still going to be available to us over the next two or three years, so I don't think there's any question.

We've still got another $2.5 billion or $3 billion to go, but I don't think much of that would be this year.

Thank you very much.

We'll take our next question from Joe Ritchie from Goldman Sachs.

Just to follow-up on that organic growth question from earlier, clearly the book-to-bill is strong this quarter at 1.07.

What kind of confidence and visibility do you have into the back half of the year growth forecast?

Are there any specific areas where we have concerns in the back half of the year, given what you have seen in what has been a relatively slower growth environment this quarter?

That's a really good question.

So the area where we have the best visibility into are the ones where we also had some of the best order growth this quarter, so in the RF segment, which has a little bit longer lead time between order receipt, and revenue, and project execution, so that's the area that I would say that I would say we had the highest degree of confidence in, because most of what we're going to be shipping out and delivering in the back half is largely in backlog already today.

As we kind of step away from that and see what are the areas where we have a little bit less visibility, because we're faster between order to delivery, those areas are more in our industrial and energy markets, and so we have a number of things that were going on there.

Our compressor controls is very similar in terms of RF in terms of its backlog and visibility, but some of the other areas there, it's not unusual to have a order to revenue cycle that would be measured in weeks, not months.

We do have visibility in terms of the new products that we're introducing and what we expect the uptake rate to be there.

But I wouldn't say that our view on the second half, as we stand here today, is any different than our view would have been on the second half as we stood here at this time last year.

So we have similar visibility today as we would at any other time as we look six to nine months out, and that tries to give some sense of where we have better visibility and things that still have to happen in order to achieve our earnings guidance for the year.

Let me just add to that, Joe, that our book and ship businesses actually did quite fine, and our book and ship businesses are motoring along.

What we wanted to see and we were fortunate to have it occur is that these longer lead time businesses, which really are compressor control and our toll and traffic businesses, in some cases, seaboard projects, all are coming in favorably now.

There was more risk in those things for the year than there are some of these book and ship businesses, and our bellwethers that would worry us, that would say there's some weakness, are seeing some of that on the instrument side that's CapEx-related but not anything on the service and parts and consumables side.

That's the reason we were willing to stick with the organic guidance we had here when we raised our overall sales to 11% to 13% for the year.

Got it.

That's helpful color.

I guess one follow-up is, given that we have had a little bit of a slower growth environment, have there been any adjustments that you have made to your portfolio, either adjusting the cost structure in any way to try to navigate through these relatively uncertain paths, or has the portfolio essentially remained intact over the past quarter or two?

Well, in terms of the portfolio, meaning the businesses, they've remained intact.

We haven't really done anything about exiting a category.

We get a very modest amount of restructuring in the third quarter last year, and even a little less in the fourth quarter.

Most of that was in the energy business which is why energy's first quarter had higher margins, and why we're saying they will have still higher margins again sequentially in the second quarter.

Those businesses that were down, and there were only a few, the big down is just this contract cancellation, this [tig] going through the pipe on here, and so the others aren't down all that much.

Where they are down, they are deleveraging at about 30%, with gross margins at 50%, so that would tell you that their costs are quite fine in terms of being in line.

And since we don't have a lot of heavy assets, if we had to make an adjustment we can be very nimble, compared to most other people, because most of our assets go home at night.

Makes sense.

Thanks, Brian.

We'll take our next question from Christopher Glynn with Oppenheimer.

So if we're talking about high single digits in the second half, would it be fair to be thinking about RF as double digits, or presumably, somewhere, there's low double digits in there and just wondering if we could go a little deeper into any such component?

Yes, it would be safe to say that RF will lead the organic growth profile by a wide margin, so you'll struggle to get past mid-digits in industrial, and you'll get high single digits in energy and medical, and double digits in RF.

Okay, and on the medical, high single organic, what's at the forefront of that?

Is there any research improvement or budget flush that you're putting into that?

It's all relative.

Yes, it's true.

It is relative.

The situation there is, you do have easier comps for the research market businesses, but we're not expecting anything great out of those.

It's just a little better, and they did have a weaker Q1, and what really happens in the medical segment is in the fourth quarter, Sunquest becomes organic, so we acquired it in August, so it's finally going to lap itself and it will drive some additional growth in that segment.

Okay, that makes sense.

And then just overall in the quarter versus where you came into it, what was the one or two biggest surprises?

Yes, I think even though we're down 3% organically, it's really all just this contract situation, getting rid of that, and the imaging, which we expected to be soft.

I they we were generally encouraged that the consumption stuff with consumables in those businesses that were weaker with instruments, was as strong as it was, so it's not suggesting that people are slowing down their activity, but maybe postponing their purchases.

Our stuff tends to be above MRO and below capital spending, but it's easy to defer the instrument purchases for a period of time.

Great, thank you.

We'll take our next question from Mark Douglass with Longbow Research.

Looking at, Brian, can you just say, or John, after MHA, what does the balance sheet look like, and what's your capacity after it closes?

You mean our balance sheet, not MHA's balance sheet?

Yes, correct.

So on a post close basis, obviously we'll be borrowing a substantial portion of our $1 billion will be borrowed under the revolver, and then that will put us kind of at a debt to EBITDA level of somewhere in the 2.5, 2.6 range, very consistent with our existing ratings, and with our long-term commitment to continue to be an investment grade-rated Company, so I don't really see a lot of pressure there.

And then also you see, we did raise our operating cash flow guidance for the year up to $800 million, so with the vast majority of that being in the US, we'll use that to pay down debt through the year, and continue to build capacity with growing EBITDA to continue to do what we've been doing for the past 5, 10 years as well.

Yes, I don't doubt that.

I guess it's more what will be left on the revolver, and how much cash will you have left?

So it is $1.5 billion revolver, and if all of this is drawn, so it will be $1 billion dollars, we would still have $500 million available under the revolver, plus the cash we'll generate through the year.

So you aren't drawing down your cash balance much at all, it's all in the revolver?

That's a fair assessment, yes.

Okay.

And then looking at the medical and scientific, it looks like, did research decline double digits?

Is that what we're looking at here?

If you put $12 million on its base, the answer is yes.

Now double digits last year, and they're continuing their trend.

They were down double digits last year as well?

They were, yes.

Okay, so then with the rest of medical outside of Sunquest was it roughly flat?

It sounds like that was certainly below--

All medical is a duck on the water, right?

So everything looks fine, but the feet are moving fast.

So there are different product lines that are doing better than others.

Anything that has consumables with it is still doing really well.

Some of the product businesses are more mixed, so you've got from negative single digits to modest growth.

We've got some new products coming on board, so we feel, on balance, pretty decent about the medical device side of the business.

Okay, and finally, can you give an idea of the size of the orders in the toll and traffic in Florida and Virginia?

I don't know if we can do that.

Let me check and if we have approval to give any color on the size of those contract wins, then I'll be able to get back in touch with you.

Okay, thank you.

We'll take our next question from Richard Eastman with Robert W Baird.

Just a couple questions on MHA follow-up here.

Can you just give us a feel for what the purchased volume that MHA has handled, what the growth rate has been there in the last say, three years?

Also what percentage of MHA's revenue comes from an administrative fee on that?

So the vast majority of their revenue is an administrative fee on that purchase volume, and that purchase volume has -- there are a couple different parts to that.

You've got the long-term care pharmacy side, where the overall purchase volume has probably been flat over the past couple of years, primarily because of some branded drugs that have gone to generic, that big change, particularly around one drug called Seroquel happened last year, so that change over the last couple of years has impacted the pharmacy side.

On the long-term care facility side, where most of the purchases are around food that's been growing at a single-digit or a mid single-digit rate on the overall purchase, but MHA has been growing faster than that due to share gains.

Okay, is there a deferred revenue component with MHA?

Will there be?

There will not be a deferred revenue component, no.

And then just the last question.

On the RF tech side of the business, given the growth in the second half will come off of some project work, primarily in tolling, would you expect that the EBIT margin for RF, or excuse me, for industrial tech, or excuse me, for RF, will work higher on that project-driven revenue?

Than it is in the first quarter?

You mean the project driven revenue at RF?

Yes, so RF will be driven the second half by these projects in Virginia, I know you have one in California, also the projects at Seaboard, but will the EBIT margin in RF Tech work higher in the second half?

Is there leverage there, or is the project revenue going to come in at the same general EBIT level?

Well there's two kinds of leverage here, right?

So one, as we said, one of the reasons that we did better in the first quarter in RF is the quality of the project execution that they have, which is service-related.

The second is the margin on product sold, so when you look at a particular situation, like Florida has a lot of tag sales, so the margins associated with the Florida order will be higher than the Virginia order, where the Virginia order has more labor content, which is really almost design and build, if you will, so you're not going to have huge margins there.

But you do have spread variances on your execution, and I would say, not long ago we put a new President in TranScore that's a career expert, Tracy Marks is doing an incredible job, and he's really built a very fine team.

We've done some structural things to get more attention on contract execution and that's starting to pay benefits, so I think we'll see in the second half better leverage on contracts than we enjoyed in the last couple of years But they still will be the lowest margin businesses we have, just because there's so much labor content in them, and they are not high margin businesses.

Okay, so again, off the first quarter EBIT of 27% for RF tech, we'll still get some volume leverage off of that project work, and our EBIT margin should work harder for the balance of the year?

The time will tell.

We'll be able to talk more clearly about that after we have the third and fourth quarter.

But I do want to follow-up on one earlier question, Rick, I'm sorry.

So from just your question around deferred revenue, the answer is no, there's not really a deferred revenue component for MHA.

There will be some noise with respect to how purchase accounting treats some of the revenue that MHA has.

That's why our guidance is on a non-GAAP basis.

We'll be adding some of that revenue back that will not be recognized, due to purchase accounting rules, and after we close on the business, we'll be able to know exactly how much that is, and talk more clearly and have some additional schedules available at the second-quarter close, that we'll describe that adjustment in detail.

Okay, we'll wait and see.

Thank you.

And Kayla, I believe we have time for one more call.

One more question, I mean.

We'll take our next question from John Quealy with Canaccord Genuity.

Just two quick ones.

First, on the book-to-bill, obviously very strong in RF.

I'm assuming as revenue goes up, maybe book-to-bill qualitatively goes down this year.

Can you talk to that, and then the second one, within industrial tech?

You talked about double digit metering gains.

Is that competitive, or do you think that's part of with [Elstra] going away or is that part of the market coming back in housing, et cetera?

Thanks.

From what we've heard from competitors, they didn't do very well the first quarter and we did quite well, so people will have to sort out whatever they think the forces at work are.

I don't know.

I just know that we continued to grow, with the exception of the contract cancellation, and had double-digit growth in the United States in water meters.

And then with respect to your other question, John, so the book-to-bill ratio at 1.15 for the segment, I mean, that is above our norm.

We would expect that over time to trend closer to one and it will be based upon the timing of project orders in the RF segment, as we go into the second half.

Obviously, as some of these orders that we just received ship out in the third and fourth quarter, those will start to bring that ratio back down.

That will end our question and answer session for this call.

We will now return the call back to John Humphrey for any closing remarks.

Okay, thank you all for joining us, and we do look forward to talking to you at the end of the second quarter, as well.