Roper Industries Inc ROP
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/29/2013

Operator: 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.

John Humphrey - EVP and CFO: Thank you, Halle, 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 our 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.

Now if you 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 as detailed in our SEC filings. You should listen to today's call in the context of that information.

Now, if you will 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-GAAP is a fair value adjustment to acquire 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 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?

Brian D. Jellison - Chairman, President and CEO: Thank you, John, and good morning, everybody. We look at the Q1 enterprise financial results. It 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; the gross margins, the operating margin, the EBITDA margin, and the net earnings margins all established records for Roper.

Our orders at $794 million are particularly strong and that last year we had about $15 million out of the Neptune cancellation, which of course didn't recur, making that $794 million 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 in 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 our 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 the first quarter.

Our GAAP operating cash flow was $171 million representing 23% of revenue and compare that $171 million to $125 million or 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 have 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. 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 opposed to down 3%, but most all of that is this Neptune cancellation. Again, it's over 2% and the residual was just continuing softness and the imaging businesses that we expected, so the core really was flat to modest growth on revenue without those two particular items.

Gross margins we said before up 240 basis points to 57.4% to 55% last year, with each segment increasing their margins. Operating profit was up by $19 million on the $3 million revenue variance or leverage was above 60% and that included greater than $1 million charge deal cost 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, $2.5 million, mostly FX-driven item here. So that $2.5 million plus the $1 million on the deal cost was about $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 we look at the EBITDA growth, two years ago our trailing at the end of first quarter was $685 million; last year was $830 million, and this year were already up to $950 million on a trailing basis; no pro forma in that; just the number. So, we're up $265 million in just two years. And 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 will continue to expand; up 390 basis points in just two years. So it's really extraordinary performance on an EBITDA and margin basis by any measure.

Next slide. Our Q1 cash flow; it's 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 the conversion was 137%. We had $160 million in free cash flow, which is 22% of revenue, and the cash conversion is at a 128%. It's really across-the-board improvement in every segment. It's 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 of $78 million. And below you can see, the percent of revenue, as I said that our 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 will 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 small segment now, of 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 are benefiting from global project rollouts; they have 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 $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 our 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 in the second half of the year, we see a higher revenue growth with compressor controls really driving a big part of that, and more favorable comps for some of the other energy categories, and we're getting – starting to see while we're 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%, so we had flattish revenue exclusive of that. We had very strong growth in our U.S. water meter sales which was better than expected at 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 in a very modest leverage range.

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. 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 in 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 single-digit number in Q3 and then zero in Q4, so that'll 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 were 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 will have delivery throughout the year, but kind of 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 is 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 U.S. 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 CBORD cashless systems and integrated security wins which we're confident about, will also drive growth. We've just won in April a Technolog contract award for Gas AMR. This is going to be in the U.K. It will drive improved second-half performance for us. It's a five-year contract and the terms are ready to be disclosed but it certainly will add to our growth profile in the second-half of the year.

Our Inovonics 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 multifamily housing continues to strengthen. And we'll get some continued modest growth in our subscriber bases 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. Nonetheless 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 the last year. So, we look at the specific items. Sunquest is on plan. They have favorable order rates, so they're at on orders. We do need to increase our ability to get faster implementation processes in place which we've been talking to them about, as we have an opportunity to increase our growth beyond their original expectations, if we can get the implementation processes to happen faster.

We continue 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 kind of a blowout first quarter last year, but the core problem remains very modest activity and the (indiscernible) with the research funding around the world. Medical devices were a little bit soft as it related to direct sales to U.S. hospitals, but the consumable sales order were quite good. So, on balance, that came out fine. Our book-to-bill for this segment was 1.06.

In the second half of the year, Medical is going to be led by a 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 (SIDCO's) application. Remember that's a multi-modality business on radiation oncology. We have some new products that are coming to play, so that will (have) 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 have 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?

John Humphrey - EVP and CFO: 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 is already been obtained on that.

So, MHA is the largest provider of services and technology and a network for the alternate site healthcare markets. And alternate site, for those of you on the phone, just means non-hospital settings; 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 to them.

They do have the number position in all of their served and 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 nonhospital setting.

Next Slide. Going into a few more of the, kind of, facts and figures for MHA. When we talk about it being the largest alternate site healthcare network, this really a glimpse of the scale that MHA has, with a customer base of about 12,000 different customers, 47,000 different locations and they enabled the purchasing volume for all of those different locations which exceeds $5 billion annually, and MHA is able to have average share in that. 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 been analyzed and delivered, and the large customer service workforce and that workforce is more into sales people. They really act as consultants that enable 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 breakdown 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 infusion, respiratory therapy et cetera, and in 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 in low cost care setting. So, as more care is being delivered outside of a hospital setting, that's a favorable trend that's impacting this end market. We continue to expect to see market share gains based upon the value, the scale that MHA has in the classes of trade that they serve, and this strong customer service, high intimacy consulting type of sales process that they have.

In this niche market, it 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 another couple of slides about MHA, who they are, who they serve and what they provide.

I'll now turn it back over to Brian, to talk a little bit about the acquisition and how it fits.

Brian D. Jellison - Chairman, President and CEO: Thanks John. People always ask us about what our criteria for acquisitions are, and we, at virtually every presentation, we'll tell you 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-like), 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, (knot), 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 always want to focus on market structure driving forces. We invested more money in 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 kind of tell them how they're performing and where they can make decisions that will add to their margins. And these guys that they're serving work on such slim margins that basis points change could be the difference between whether they're 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. I and 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, and 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 get 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 long-range strategies knowing that they have a permanent home, and they really are both from a cultural viewpoint and end market viewpoint, a great addition to our Medical family.

Next Slide. So here we take a look at the 2013 guidance; next slide. 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 high tax-based business as is Sunquest. Both of those continue to grow and they add several basis points to our tax rate. Sales guidance, we said at the beginning of the year, 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% in organic 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, and I think if you look at the numbers without remembering, you had a $15 million dividend from the contract cancellation in the first quarter and $12 million dividend in second. We 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 that 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, little bit more EPS coming in the second half of the year from a linearity viewpoint is normal, but due to the nature of the things that have happened in the first half of the year in our acquisitions.

For the 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. And then we are reminding people in our press release and here that all of the MHA items will be non-GAAP.

Next Slide. Here we look at the Q1 summary then, we really have had compelling results on all the margins, the cash flow. The niche markets continued to separate Roper from any of these traditional or perceived peers that people used to talk about for Roper. For us, it's always (indiscernible). Some guy (called) it's 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 (geeks) code electrical products. I mean 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. And we're really now positioned to capture organic growth for the rest of the year.

With that, we'd like to open it up to questions.

Transcript Call Date 04/29/2013

Operator: Deane Dray, Citi.

Deane Dray - Citi: 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've done against those historically?

John Humphrey - EVP and CFO: So, none of their contract are performance based. Most of the things you're 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.

Deane Dray - Citi: Then Brian, I was hoping you can expand on and maybe this is just the terminology, but on Sunquest when you talked about – you're looking for a faster implementation. Is this – are you talking about integration, new software rollout or just – if you could expand on that point?

Brian D. Jellison - Chairman, President and CEO: 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're 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 can 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.

Deane Dray - Citi: Just to clarify on that, what is the growth rate that you're expecting from Sunquest if you factor in these new software upgrades?

Brian D. Jellison - Chairman, President and CEO: I think we're expecting it ought to grow at sort of high single digits.

Deane Dray - Citi: And what type of margins that you've been – you're getting out of the blocks?

Brian D. Jellison - Chairman, President and CEO: I'd say they are may be twice ours.

Operator: Matt Summerville, KeyBanc Capital Markets.

Matt Summerville - KeyBanc Capital Markets: One follow-up on MHA and then I have another question. John or Brian, can you talk about the addressable markets size for MHA, the competitive environment, whether you see any disruptive technologies out there to what MHA has?

John Humphrey - EVP and CFO: We see a lot of disruptive technologies, so they are molded in our diligence process. I mean they have a very high share, 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 is still quite a bit of headroom 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 setting as 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.

Brian D. Jellison - Chairman, President and CEO: I think that, Matt, John means the disruptors that he sees are at MHA were fully owned.

John Humphrey - EVP and CFO: Yes, that is what I meant.

Brian D. Jellison - Chairman, President and CEO: We're seeing a pretty clear pathway of growth there and we're enabling a lot of people to be successful in a market place that probably wouldn't be able to survive without the productivity that MHA allows them to deliver.

Matt Summerville - KeyBanc Capital Markets: 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 3, 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 sort of help bridge how Roper gets there?

John Humphrey - EVP and CFO: Sure. I mean, yeah, you're right, as far as the math and the way that it rolls out. So with kind of down 3% 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 in 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 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.

Operator: Jeff Sprague, Vertical Research.

Jeffrey Sprague - Vertical Research Partners: Just a couple of questions, gents. 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?

John Humphrey - EVP and CFO: It's actually both. So, we will have incremental amortization, obviously, of the intangibles upon acquisition. But the earnings before that amortization and 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 '13.

Jeffrey Sprague - Vertical Research Partners: But you're saying the additional (DA) created by your acquisition isn't significant relative to that $95 million number?

John Humphrey - EVP and CFO: Alright, yeah, 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.

Jeffrey Sprague - Vertical Research Partners: And that's included in the $95 million?

Brian D. Jellison - Chairman, President and CEO: Right.

John Humphrey - EVP and CFO: Right. Well, it's actually excluded from the $95 million. So the $95 million is before the amortization. So if you add any amortization, it comes down to $75 million or $70 million.

Jeffrey Sprague - Vertical Research Partners: And just trying to ballpark the revenues of the business, I guess, at the midpoint of your revenue range as you've raised revenues by three percentage points which is $90 million or so for a partial year, you've got some FX headwinds and other things going on, but we're talking about a business that's $130 million, $150 million in revenues, is that the right ballpark?

John Humphrey - EVP and CFO: Yeah, that's a fair assessment.

Jeffrey Sprague - Vertical Research Partners: 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 as the pipeline is still active, should we expect anything else this year of this size, any general color would be appreciated?

Brian D. Jellison - Chairman, President and CEO: 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. In this case, having done Sunquest at $1.4 billion in August and MHA at a $1 billion this month, $2.5 billion, we're sort of halfway there. We're hoping that things that 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.

Operator: Joe Ritchie, Goldman Sachs.

Joseph Ritchie - Goldman Sachs: Just to follow up on that organic growth question from earlier, clearly the book-to-bill was strong this quarter, 1.07. What kind of confidence and visibility do you have into that back half of the year growth forecast? And then, are there any specific areas where you have concerns in the back half of the year given what you've seen and what has been a relatively slower growth environment this quarter?

John Humphrey - EVP and CFO: Yes. That's a really good question. So, the areas that 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 we probably have 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. Then as we kind of step away from that and see that one of 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 are going on there. Our compressor controls is very similar to RF in terms of its backlog and visibility, but some of the other areas there, it's not unusual to have an order to revenue cycle that would be measured in weeks, not months. But 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 kind of 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.

Brian D. Jellison - Chairman, President and CEO: 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 CBORD projects, all are coming in favorably. Now, that's – 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 consumable side. That's the reason we were willing to stick with the organic items we had here when we raised our overall sales to 11% to 13% for the year.

Joseph Ritchie - Goldman Sachs: I guess, one follow-up is given that we have had a little bit of a slower growth environment, has there been any adjustments that you've had to make 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 been remained intact over the past quarter or two?

Brian D. Jellison - Chairman, President and CEO: Well, in terms of the portfolio meaning of the businesses, they have remained intact; we haven't really done anything about exiting the category. We did a very modest amount of restructuring in the third quarter of 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 seeing 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 pig going through the python here. So the others aren't down all that much. Where they are down, they are deleveraging at about 30% with gross margins 50%. So that would tell you that their costs are quite fine in terms of being in line. 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.

Operator: Christopher Glynn, Oppenheimer.

Christopher Glynn - 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 wondered if we could go a little deeper into any such component?

Brian D. Jellison - Chairman, President and CEO: Yeah, it would be safe to say that RF will lead the organic growth profile by a wide margin. And you'll struggle to get past mid-digits in Industrial, and you'll be at high single-digits in Energy and Medical and double-digits in RF.

Christopher Glynn - Oppenheimer: And on the Medical type single organic, and what's at the forefront of that, is there any research improvement or budget flush that you're kind of putting into that?

John Humphrey - EVP and CFO: It's all relative.

Brian D. Jellison - Chairman, President and CEO: That's true. It is just 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 become organic. So, we acquired in August, so it's finally going to lap itself and it will drive some additional growth in that segment.

Christopher Glynn - Oppenheimer: Then just overall in the quarter versus where you came into it, what was the one or two biggest surprises?

Brian D. Jellison - Chairman, President and CEO: 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 think 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.

Operator: Mark Douglass, Longbow Research.

Mark Douglass - Longbow Research: Looking at – Brian can you say or John, if MHA – what does the balance sheet look like and what's your capacity after it closes?

Brian D. Jellison - Chairman, President and CEO: Our balance sheet not MHA's balance sheet?

Mark Douglass - Longbow Research: Yeah, correct.

John Humphrey - EVP and CFO: So, it's on a post-close basis. I mean, 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 an awful 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 U.S., 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 five, 10 years as well.

Mark Douglass - Longbow Research: Yeah, I don't doubt that. I guess, it's more what will be left in the revolver and how much cash we have left?

John Humphrey - EVP and CFO: So it is $1.5 billion revolver, and if all of this is drawn, so it'd be $1 billion. So we'd still have $500 million available under the revolver plus the cash that we'll generate through the year.

Mark Douglass - Longbow Research: Okay, so you're not drawing down your cash balance much at all, it's all is in the revolver?

John Humphrey - EVP and CFO: That's a fair assessment, yes.

Mark Douglass - Longbow Research: Okay. And then looking at the Medical and Scientific, it looks like – did research decline double-digits? Is that what we're kind of looking at here?

Brian D. Jellison - Chairman, President and CEO: That's (correct). I feel all $12 million on its base; the answer is yes. Down double-digits last year and they're continuing their trend.

Mark Douglass - Longbow Research: They were down double-digits last year as well?

Brian D. Jellison - Chairman, President and CEO: Oh, yeah.

Mark Douglass - Longbow Research: So then with the rest of Medical outside of Sunquest, was it roughly flat? It sounds like that was certainly below...?

Brian D. Jellison - Chairman, President and CEO: All of Medical, it's the 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 that are coming on board, so we feel on balance pretty decent about the Medical device side of the business.

Mark Douglass - Longbow Research: And finally, can you give us an idea of the size of the orders in the toll and traffic in Florida and Virginia, if you can?

John Humphrey - EVP and CFO: 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.

Operator: Richard Eastman, Robert W. Baird.

Richard Eastman - Robert W. Baird: Just a couple of questions on MHA; a follow-up here. Can you just give us a feel for what the purchased volume that MHA has handled with the growth rates been there in the last, say, three years? And then also what percentage of MHA's revenue comes from an administrative fee on that?

John Humphrey - EVP and CFO: So, the majority – in fact, the vast majority of their revenue is an administrative fee on that purchase volume. And that purchase volume has – there are a couple of 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. Kind of 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 – a mid-single digit rate on the overall purchase, but MHA has been growing faster than that due to share gains.

Richard Eastman - Robert W. Baird: Is there a deferred revenue component with MHA? Will there be?

John Humphrey - EVP and CFO: There will not be a deferred revenue component. No.

Richard Eastman - Robert W. Baird: 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?

John Humphrey - EVP and CFO: You mean the project-driven revenue at RF?

Richard Eastman - Robert W. Baird: Yeah, so RF will be driven in the second half by these projects in Virginia; I know you have one in California, also the projects at CBORD. 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?

Brian D. Jellison - Chairman, President and CEO: There is two kinds of leverage here, right. So, one is we said, one of the reasons that we did better in the first quarter in RF is just 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 those 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 are 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 at TransCore that's a career expert. Tracy Marks is doing an incredible job and he's really built a very fine team. We've kind of done some structural things to get more attention on contract execution, and that's starting to pay benefits. So, I think we'll see at 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 that they're not high-margin businesses.

Richard Eastman - Robert W. Baird: So again, of the first quarter EBIT of say 27% for RF Tech, we'll still get some volume leverage off of that project work and that should – our EBIT margin should work higher for the balance of the year?

John Humphrey - EVP and CFO: 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, just to 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're going to be adding some of that revenue back. It 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. We'll describe that adjustment in detail.

Operator: John Quealy, Canaccord Genuity.

John Quealy - Canaccord Genuity: 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 the – with Elster going away, or do you think that's part of the market coming back in housing, et cetera?

Brian D. Jellison - Chairman, President and CEO: From what we've heard from competitors, they didn't do very well 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 continue to grow with the exception of the contract cancellation and have double-digit growth in the United States in water meters.

John Humphrey - EVP and CFO: 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 to closer to 1. 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.

Operator: 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.

John Humphrey - EVP and CFO: 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.