Apr 26, 2009
Executives
John Humphrey – VP and CFO Brian Jellison – Chairman, President and CEO
Analysts
Christopher Glynn – Oppenheimer Mike Schneider – Robert W. Baird & Co.
Matt Summerville – Keybanc Alex Blanton – Ingalls & Snyder
Operator
Roper First Quarter 2009 Financial Results Conference Call will now begin. I will now turn the call over to John Humphrey, Chief Financial Officer.
John Humphrey
Thank you, Anthony, and thank you all for joining us this morning as we discuss the results of our 2009 first quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer for the company, and Paul Soni, Vice President and Controller.
Yesterday afternoon, we issued a press release announcing our financial results. The press release also includes replay information for today's call.
We have 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 will turn to slide two, we start with our Safe Harbor statement.
We will be making forward-looking statements during today’s call, 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.
And, now if you please turn to slide three, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our participants.
Brian?
Brian Jellison
.
Just a word here, we will try to move a little bit quickly this morning. I know that a number of our analysts have a competing call here at 10:30, and I'm sure you would like to hear as much of ours as possible.
So we will move quickly. We're going to cover here on slide one a quick overview of the enterprise and a little bit of detail around the segments in terms of how Q1 was and how we think sequentially Q2 will look at then an update of guidance in a summary with a Q&A period.
Next slide. So from an overview, the sales were down 6.9% in the quarter.
We were up 6.8% with the acquisitions that we have done last year as they favorably impacted the first quarter. Organic growth was down 10.5%, which was couple of points worse than we expected, we will tell you why.
And currency hurt us 3.2% in the quarter, which was kind of a $0.03, $0.04 headwind for us. On gross margins, we did very well, almost 50% there, 49.9%, excluding restructuring.
Our EBITDA margins were only down 160 basis points, closing out at 23% excluding the restructuring. The area where we outperformed the most internally was on decremental margins.
We had feared our decremental margins would be in the 40s because our gross margins of course are so high. When you look at those three segments, that struggled in the quarter, there are collective gross margins of 51%, and yet that decremental margins were only 36%, which we think is really quite outstanding performance from our field people.
Our adjusted earnings per share were $0.59 versus last year's $0.67. Just a comment on that $0.67 in your model and you want to look at the information there around the new convertible accounting FASB thing that took effect in January 1 which is in both of these numbers.
And then operating cash flow for the quarter was $51 million which is really better than it looks. We will explain in a minute because of unusually heavy Q1 cash usage that will be – we have a table on.
Next slide. One of the things I think we felt good about in this quarter was the governance process that we had used in the fourth quarter to effect the contingency planning and extend that into the fourth quarter.
In fact we are continuing to do it now. We had all of our operating people together last week, for most of the week, in the industry and energy segments and the product oriented portion of our RF segments.
It was an incredibly positive event in the sense of how close all of these presidents are to their end markets and the customer culture, and what they're learning about the kind of solutions that are going to be required as the market returns to some closer normalcy, at some point in time, and the channel conflict changes that are going to occur, and the nature of products and expectations was really very interesting. Secondly, we were encouraged that no one had cut any development investments.
We're still making the same level of market channel investments and product development new launches as always, and in fact with declining sales the R&D spending is actually up as a function of revenue. It was refreshing to see again limited staff as we have.
I know you know that is true at our corporate enterprise, but it is pretty well true in the field as well. We were able to get in one room all of the division presidents and all of the controllers, no multiple layers of people at Roper, and you can really get to the core truth quickly and challenge everybody on any variance issues.
The low fixed assets meant we didn't have to really close down any kind of large facility because we were having absorption issues. We were able to flex Neptune on very low volumes in a lot of creative ways and none of the other factories had difficult absorption issues.
Our breakeven analysis gave everybody the awareness quite early in the fourth quarter about the challenges they would face and certainly if we had thought we could come out with decremental margins of only 36% with 51% gross margins, that would have been remarkable, and that is what they did. There were no targeted broad-based situations where we said take 7% of SG&A out or anything like that.
Everything was done on an individual market basis because of such wide variances and aggregate demand. Our SG&A cost model because we are not holding to any particular channel or way we go to market was able to be flexed very quickly and in the first quarter our SG&A expenses actually declined by 14% when we exclude the acquisitions, and we think that is quite an achievement.
Next slide. On the decremental margins, here you can look at industrial technology.
We were down $43 million in revenue and our change in operating profit was $14.9 million. That is a decremental margin ratio of 35% against a gross margin of 49%.
And we think that is quite good in an industrial market. Our energy systems and control segment had a reduction in revenue of $21.8 million.
Change in OP is nine, the decremental margin was 43% against a higher gross margin of 54%. If you look at the variants, we were 14 points under the gross margin in industrial technology, and we were 11 points under the gross margin in energy systems and controls.
Energy systems and controls will be better, but we have a lot more European-based people, and so the effect of that in our margins will show up better throughout the year and would be worse here in Q1. The scientific and industrial imaging story, while looks the best, actually has a kind of different scenario.
Change in revenue was $12 million, change in OP was 34, so it delevered at 27, that is because it was a mix change in the Rugged Mobile, which really pulled down our organic growth. And that is a very low margin business, so it doesn't mean we performed better decrementally.
It just was an easier target. And then in total, you can see $77 million down in the three segments that had lower sales, 27 in OP, 36% decremental margin, frankly almost all this OP variance comes out Neptune Struers, PAC and a little bit out of Dynisco and the rest of the company was equal to do better than the prior year.
Next slide. On asset velocity, the discipline continues here.
You can see that our inventory plus receivables minus payables and accruals, hit a new all-time low point in the first quarter at 10% of revenue. That is down 240 basis points from two years ago.
And 2007, increasingly looks a lot like 2009, it is remarkable, the similarities in the ratios in the numbers. Next slide.
On operating cash flow, you can see net earnings of $52 million and operating cash flow was $51 million , and so it is kind of a virtual 100%. We're going to do over 130 routinely on a year basis.
So what happened you can see is receivables were favorable by $30 million, inventory unfavorable by three, payables unfavorable by five, because of course you are making less purchases. Depreciation was nine and amortization was 17.
Then you have 36 million of timing, John can talk more about that. We had a cash tax payment required in the first quarter of $12 million, which will be very atypical and won't repeat.
We had interest payments which are accrued but had to be paid, they are only paid twice a year, that happened to hit us in the first quarter. That won't be the case in the second quarter.
That was $12 million, and then of course we had the annual field bonuses that were required to be paid. So those things quickly add back to a much, much higher cash conversion.
And then we had an improvement in deferred revenue which shows up as a negative here of $16 million, but is a wonderful thing to have. I can assure you that are a very good thing, not a negative.
And so those things are understating the quality of our cash earnings in the first quarter. Next slide.
Our balance sheet remains very strong; undrawn revolver was $473 million at the end of the quarter. The cash was $178 million.
Our net debt was actually $8 million less than it was last year, and of course we invested $705 million last year. Shareholders equity $2 billion, so net debt to net cap at 34%, and we're sitting on over $650 million in cash and immediate liquidity for transactions.
Next slide. Now, we're going to look at the segment level.
As we go through the segment, the first is the industrial technology here. Next slide, you can see in industrial technology that we did in the quarter with these difficult organic fees down 22%, operating margins still closed out at 23.3, and EBITDA margins were 28% with gross margins at 48.
We would stand those numbers up against any industrial company in the world. We had exceptional margins in our opinion on this level of sales, just incredibly great.
Restructuring activity staying ahead of the curve which is little correction movements producing very good results. Now in the first quarter, if we look at the water automated meter reading and meters being timely Neptune, we had very difficult comp in Q1 on orders.
People may have forgotten that in the first quarter last year we had the big African ordered which was effective, also another international order. The collapse in the housing market has of course been beyond anybody's expectations and with us having the leading market shares in the country, that's actually had some depressing effect.
And distribution channels are only buying the absolute minimum of activity. As we look forward to the second quarter, Neptune will have sequentially stronger orders in the second quarter, and we're quite assured much stronger sales in the second half of the year as we look at commitments.
In the area, material test, which is primarily Struers and Logitech, they had a very difficult Q1. The materials lab testing market was down very dramatically, more than 25% for equipment and that brought with it then a little lighter consumer sales of consumables than normal.
In the second quarter, the consumables situation will come back decently because they're not just tied to new equipment spikes. And we think we will have a modest uptick in Struers in Q2 but still be difficult.
The perk [ph] businesses, some people thought that they perhaps didn't perform well. They actually had very, very strong Q1 performance, they were very similar to any normalized Q1 activity, certainly performing at no difficulty at all, although orders in the quarter were a little soft.
In the second quarter, orders are going to be up sequentially. We have already booked some things to give us confidence there, and we have a very interesting new product out of Roper pumps, that is kind of a proprietary thing, we can't – we are not going to disclose a lot yet but orders for that are very strong.
Last in general activity, the short cycle book and ship businesses, which represent over half of this kind of activity, all looked fine on a book to bill basis with overall close to one. But the problem was the amount of orders weren't really great.
And we don't see any material change in that for the second quarter. Next slide.
If we look at energy systems and controls, that was the most difficult comp here. We had very widespread end market weakness here, hard pressed to find anything that looked good, really compressor controls was about the only thing that looked good.
We continue to take more cost actions. The problem on the margin here with 17.7% and 22% EBITDA is really driven by the actions we are taking effect, people with longer lead times severance obligations for us.
So we know we're going to have a better – we are confident we are going to have a better second quarter margin in this area, and then it should just continue to improve. We had very sharp in refinery and petrochem which is petroleum analyzer and then process control which is some additional elements of PAC and certainly Dynisco.
Those businesses were awful. They had very, very sharp order falloff, significant customer capacity situations where people just closed for extended periods, and that didn't get us the normal consumables that would go along with the Dynisco portion of that business.
In the second quarter, we don't think that the end markets are going to improve but we're confident that the margins are going to improve as these cost improvements that have a longer lag, will start to take effect. In the oil and gas arena, CCC I said was already very solid, no deterioration.
It looks forwards to an extremely favorable booking environment here in the second quarter. The AMOT Roda Deaco [ph] businesses are shut off valves and Canadian activity with the oil sands was okay on a revenue basis, not okay on an orders basis.
We have taken quite a bit of action there. We think that is going to struggle for the next several months.
And then in the all other areas, the nuclear testing orders were light in the first quarter but we have solid commitments for the second half. We actually have a plan work schedule now, so they are going to have sort of a blowout second half of the year from recognizing sales and profitability basis.
The smaller niche business is Metrix, Dynamic/Hardy, and those all did very well, no deterioration, we expect that to continue. Next slide.
In the scientific and industrial imaging business, here it is really better than it looks. The quotation activity has gained quite a bit of momentum here with renewed funding for the National Institute of Health and other scientific funding in general.
But we had extremely weak bookings in our rugged mobile businesses. Those businesses are very low margin but they actually cost about half of that, that organic V you see in here.
So the underlying businesses are better than this looks and of course still pulling in here at 24% EBITDA margins. The medical niche businesses continue to do well.
The consumables were strong. International was up dramatically in the quarter, and we have some very important new products, all of those milestones in terms of field testing were achieved, and those are going to be launched here in the second and third quarter, which are going to bolster in the second half of the year.
And notably in our acquisition pipeline, we have quite a few things in this area that are pretty interesting as those types of businesses which normally would carry extremely high enterprise multiples are still high, but within the balance of rationality now. So the acquisition opportunities there are better than they have been.
And secondly in the microscopy area which is primarily Gatan and micro imaging analysis piece, orders were up in the first quarter from the fourth quarter, but the hardware shipments associated with that longer lead times were weaker than they were a year ago. We have got quite a bit of increased activity as we have got our PhD and lead engineering people out in the field trying to catch up to the solution demands of people who want to get their products and solutions in and funded before the end of year because of the stimulus program.
So we feel very good about sequential growth in microscopy throughout the year. On the camera side, the life sciences portion performed very well, had close to a record second quarter in some aspects of those products.
Quote activity was good, but the industrial markets were mixed, generally flat. The OEM sales were a little bit better and we expect the camera activity to be sort of similar throughout the rest of the certainly the second quarter if not the year.
And then generally this idea of having to get your engineers out of their respective locations out into the field has had the kind of positive effect that we expected it would, and it is good to see people reconnected with the markets and solutions. We think we will have a better second quarter in imaging but an even stronger second half of the year.
Next slide. RF technology, here the core business is doing really well.
The acquisitions are all accretive, they are ahead of plan. In the toll and traffic solution side, we had solid backlogs coming into the year, still have very strong backlogs, that's has helped sustain organic growth.
Project activity is pretty robust, there are a lot of things on which we are quoting. As you can imagine, there could be a lot of different infrastructure plays that could be interesting over time for us.
As so second quarter, kind of more of the same, it is going to be more difficult Q2 comp because we had very high level of hardware and tag shipment in the second quarter of last year. So that could put a bit of stress on the margins and absolute revenue quarter over quarter.
In the education health care systems and security, we have got terrific bids out and likely success stories that we can't really talk about because they have political sensitivity, one in a large very large school system in the Northwest, one in a very big city in the Midwest, and an important program with military. CBORD in their second quarter will have its very high seasonal quarter, so it should have its best revenue, and certainly its best cash recognition in Q2.
The wireless security OEM sales were down in the quarter. Sequentially they will be better in the second quarter but they are still going to struggle on a year over year V basis.
Freight matching is better than some people reported. Our get loaded integration problem program is ahead of schedule carries with very, very solid margins.
We expect that our freight matching business will continue to perform well. Canada is holding up really quite well with link operations and US core performed well although it is a little more difficult market and we're very fortunate to have a wider range of products to defend the price points and we probably have some modest productivity initiatives going on in the US.
But on balance, these businesses are very strong. We were able to do an important thing that we don't have time to fully talk about today.
It is not overly material but we negotiated a deal with Inmarsat Satellite. That is important to ground asset tracking where we are going to contribute some assets and we're going to get multiple satellite coverage for ourselves.
And a lot of acquisitions in the RF space, we're having discussions which we are addressing. Technolog is sort of well underway but ability to share the technology and synergies with people will have more of an effect on us in the second half as it has this quarter.
Next slide. Here we look at the guidance update.
On to 2009 guidance, Q2 DEPS we established At $0.61 to $0.65 and the reason for that is that we see orders increasing meaningfully in the second quarter over the first quarter levels, just not sure how much, that it'll come in fast enough to get the shipments caught up to that. Sales will certainly improve over the first quarter.
We're looking modeling 4% negative currency headwind Q2 over the prior year and of course those numbers of $0.61 to $0.65 exclude any restructuring or future acquisitions. For the full year we took the DEPS down a dime on the entry-level of 2.60 to 2.80.
I think we are pretty comfortable at the midpoint of that, could it be above that way if there was just any modest improvement in the global economy, we are certainly very well positioned to take advantage of that. Operating cash flow, we didn't provide any guidance previously, so we it in here as an initial place over that will exceed at least $325 million in operating cash flow and CapEx this year is likely to be between $25 million plus or minus.
Summary points on Q1, we achieved the high end of our EPS guidance at $0.59, excluding the restructuring against the $0.55 to $0.60. We had very, very nominal cash, we've only had to spend $5.4 million of recognized costs thus far to execute the contingency plans in the fourth quarter of last year and the first quarter of this year.
We have outperformed on the decremental margin expectations versus what we had planned substantially which is why we were able to produce this kind of income with lighter sales than we thought. The business mix of our RF and scientific medical softened what was a pretty draconian decline in industrial and energy.
And cash conversion performed well when you look at the normal usage. Next slide.
Our Q1 business reviews that we had the field, we got everybody in the same room, no layers, we don't exactly what the field controllers should do, we do a creative thing where we have anonymous voting all of which is RF collected by the way and it was quite interesting to see how the presidents felt versus how their controllers felt versus how corporates felt at the beginning of our multi-day conference. And then voting at the end how we came a little closer together.
I think corporate got much more comfortable and the field got a bit more conservative. On balance I think we have a good view of where we're going.
The asset light model we have certainly enabled the leadership teams to act and they did a great job. And I think what we close on is just while you look at Q1, while we wouldn't call a bottom necessarily of the global economy over here in the US portion, we are really quite comfortable that Q1 for us will be our lowest level of nominal sales and operating profit.
And even at that low level, we had 49.9% gross margins adjusted to restructuring, 23% EBITDA, 17.9% operating margins and EBITA at 21.4. And we just want to remind everybody, not all EBITDA is created equal.
Or EBITDA of 23% only has 1.6% of d depreciation in it and that 21.4 tends to turn out to be real cash. So with that we will open it up to questions.
Operator
Thank you. We will now go to our question-and-answer session portion of the call.
(Operator instructions). We will take our first question from Christopher Glynn at Oppenheimer.
Christopher Glynn – Oppenheimer
Thanks, good morning.
Brian Jellison
Good morning Chris.
Christopher Glynn – Oppenheimer
So in the press release you mentioned that the orders and quote activity picked up in March nearly, I was just wondering if that is largely on normal seasonality or little muted seasonality relative to a normal year?
Brian Jellison
Well, one of the things that has been odd in the last three quarters is that every quarter has started of sort of okay not spectacularly in the first month. In the second month, it has been exceptionally weak, and then in the third month, it has been pretty good, and on balanced should come out okay.
We're seeing a little more sustained rhythm here since the end of February so we feel a little bit, a little bit better. March was up high single digits from the January February average across the board.
Christopher Glynn – Oppenheimer
Okay. And just related to normal seasonality, could you relate it to that at all?
Brian Jellison
No. Especially not on orders.
I mean orders are not a wonderful indicator in terms of activity here because we only book orders that are going to be shipped within 12 months and frequently the lead times on things that confuse the issues. So I don't know, John, if you want to add anything to that.
John Humphrey
Yes, that's true. Actually our order rate really doesn't vary dramatically in most normal circumstances.
The big surprise was a little bit with February being as weak as it was and that is why as we looked at much, we didn't just say, okay, it was up dramatically from February, so we feel great. We also kind of looked at the January February run rate and also against the last five months run rates.
So we've looked at this a number of different ways and deconstructed it, and as a result do feel good that the second quarter is going to see some sequential improvement.
Christopher Glynn – Oppenheimer
Sounds good. Thanks.
John Humphrey
All right.
Operator
We will take our next question from Mike Schneider at Robert W. Baird.
Mike Schneider – Robert W. Baird & Co.
Good morning guys.
Brian Jellison
Good morning Mike.
Mike Schneider – Robert W. Baird & Co.
Maybe first we can just approach Neptune, can you give us a sense of what the quoting activity is, and you mentioned it is sequentially. Are there awards still occurring at this point, or do you see municipalities still sitting on at least a bid and say collect, and things being pushed out in terms of deployment.
And then also just a follow up on Chris' question about orders specifically for AMR projects. You said they are sequentially stronger, did you book something since quarter and?
Brian Jellison
John, do you want to comment on that or?
John Humphrey
Sure. In terms of the deployment, the deployments that have already been won, and so orders already received, are kind of rolling out as expected.
I want to get to that point of course all the activity is lined up and the municipality generally has their work schedules and they are continuing to roll that out without very much change at all. Clearly the decision-making process has been slower than it was one or two years ago as many of the municipalities are going through their own sets of confusion regarding what their funding and tax basis are but also whether anything is going to be flowing from maybe a federal government level.
But all of that noise in the system has made the decision-making a little bit slower. I mean we are actually not in a position to be able to talk about anything that we may have won recently.
As you know, Mike, with your close contacts, those folks don't like it when theirs suppliers talk about any orders before they roll out those.
Brian Jellison
I think what is important though just, Mike, I want to add, the investors then are saying, what is happening. When we say stronger sequentially, what is going to happen here is, we've had kind of the big trough negative is now behind us with Neptune and without revealing very strong statistics we would expect any negative Vs we have now to be contained in the high single digits to maybe 10% level of the balance of the year, because to the degree there is de-stocking in Roper it would come really from Neptune.
That has clearly occurred in the distribution channel and so guys who would buy X tend to buy half of X because they can get immediate turnaround from Neptune in a matter of days. And so our ability to flex in the short run has made things a bit more sweet.
We had an in-depth review of that with them and let's say that they are down substantially more than 10% in the first quarter and aren't going to be substantially down more than that for the rest of the year.
Mike Schneider – Robert W. Baird & Co.
So there is sequentially stronger comment for Neptune specifically is related more so towards the distribution side rather than the project deployments?
Brian Jellison
Well, normalized activity, I think what – the thing – and we certainly didn't miss it, I just think normally new housing starts don't have squat [ph] to do with this business because it is all the installed base. When you take away sort of a million new housing starts with the kind of share we have and you figure that somewhere between $50 and $100 per unit, that has been a problem.
But we think that that has now finished nesting its way through the system, and so that is why we – I mean we are more than confident about Q2's improvement in Neptune.
Mike Schneider – Robert W. Baird & Co.
Okay, thank you, and impressive performance on the margins guys. Thank you.
Brian Jellison
Thank you.
Operator
We will take our next question from Matt Summerville at Keybanc.
Matt Summerville – Keybanc
Just two quick ones here is I think, Brian, in your prepared remarks, you mentioned that you are feeling better about the Zetec's performance in energy in the back half of 2009. I guess in the latter half of 2008, you start to see those projects pushed out, I guess, how much from a regulatory standpoint, because that would give us the confidence that they won't get pushed further into 2010?
Brian Jellison
Yes, absolutely. And furthermore the naval activity that we have had right virtually nothing of is truly back and those commitments are usually very firm and they really give us a spike up in the second half.
Matt Summerville – Keybanc
And then just I may have missed it if you talked about it, with PAC, Antek and Dynisco also sticking with energy, what are your sequential expectations there? I guess have you seen customer utilization rates improve and shutdowns become less in magnitude as we sit here right now?
Brian Jellison
I would say that we haven't seen any improvement. We would be worried that you are going to – I don't think we think we're getting any order improvement although we think that we should.
We've got a pretty strong challenge to our leadership team. Actually at PAC, we have brought in a new president, and he has been on board now for three or four weeks.
He is a Dutch guy, speaks French, speaks German, he's just been around trying to kind of redress our focus on who we are and what we're doing. I think candidly PAC has seen some opportunities in industrial arena, try to go after them, those have produced nothing of real consequence.
So we feel quite good about his breadth of experience, comes out of a large company, was running a private company in Australia, very much a global guy, exceptionally strong person that we think will do a better job than what we have had in the recent past. And so we're kind of counting on him.
And we know the people there are looking forward to Jerome's [ph] expertise and activity and already have stepped up to the place somewhat. So part of it is just our own effectiveness that we think is going to be better and the fact we know our margins are going to be better.
And it is not even a challenge to know that our margins are going to be better.
Matt Summerville – Keybanc
And then just sticking with energy with CCC I guess, what have you seen in that business that is yielding the better performance relative to some of your other energy businesses, and I guess similar to your comments you made with the businesses I just asked about I guess how do you feel about the second half of the year in CCC and visibility there because that tends to be a little more project oriented?
Brian Jellison
Yes. In CCC, we expect a very strong Q2 order flow.
They have usually strong Q2 seasonality anyway. Lead times at CCC are much longer than most of our businesses, more like the tolling and traffic businesses, where you might be six months, nine months out.
They have a high degree of confidence at the start of a quarter as to what they're going to do. We pretty well know that bookings in Q2 would be better than Q1.
I think that everything they're doing related to the turbine control technology is attractive. On the other hand, as you get to the fourth quarter with them, we worry a bit about the power generation side of those businesses.
We have got a great leader there, who has certainly done a wonderful job in getting people focused on rightsizing here if they have any challenges down the road. They are going to have a solid year, I mean close to a record Q1.
So we feel okay about that.
Matt Summerville – Keybanc
Thanks Brian.
Brian Jellison
Yes.
Operator
And we will go next to Alex Blanton at Ingalls & Snyder.
Alex Blanton – Ingalls & Snyder
Hi, good morning.
Brian Jellison
Good morning Alex.
Alex Blanton – Ingalls & Snyder
I would like you to comment on the following observations that this recession ought to be quite good for Roper in two respects and actually the worse the section turned out to be, the better for you. One is that, it is very harmful to a lot of your competitors who aren't as well run or well financed as you are, so you should be getting a lot of share in some of your businesses.
And if you could give us some examples of that, it would be useful. Secondly, the prices of the companies you want to buy should be coming down quite a bit, and could you comment on that?
Brian Jellison
Yes, we could. We agree they should be coming down a bit.
We would like to get sellers to recognize how much more they should come down. First I have to say the first quarter didn't feel as good as you described, but we do believe everything went really well.
On the customer activity, you're absolutely right. We compete in a lot of small markets where usually we are the number one player.
People at the trench have great difficulty. You just saw last week the merger market and Debtwire communications perhaps on Sun Capital writing their investment in Mark IV off to zero, and the potential filing of bankruptcy for all of those assets, which would include of course the Easy Pass system in New England which is currently under bid and which we are a bidder along with them.
So there are several things like that that are already in the early stages and a whole lot of other things that we are aware of that are going to come to fruition. So we would agree with you that that is good.
The other thing that happened in our in-depth multi-day review with people is that because we don't have any layers here, when we talk about how our business is doing like compressor controls, it is because we are talking to Chris Krieps who runs it and his controller in the same meeting with everybody else. So there's nowhere to hide here and by the same token we are right out there with the rest of them.
And what we're seeing is a lot of customer inputs about how they want to look coming out of the recession and we're hearing a lot of things around channel shifts and a lot of things around integrated nature of – if they were buying some portion, they would like to buy more of that portion going into an OEM activity, or maybe they are going to be more willing to outsource a larger portion of what they do. And coming out of the recession, I think the purchasing decisions from end-users is going to be surprisingly different than what we hear a lot of our competitors saying.
So that is why we have actually increased our investment in R&D and product launches so that we don't miss the opportunities that we think we will see in 2010 and 2011.
Alex Blanton – Ingalls & Snyder
Okay, thanks. And follow question is that, there has been some comment on the Street that perhaps your guidance is somewhat unrealistic and that you will be – there has been a speculation that you will be reducing it later on in the year as a result of economy.
And related to that, you said that you're not going to say that the economy bottomed in the first quarter. When do you think the economy will start to recover in terms of when you're looking ahead at your guidance, what are you assuming about the economy, or is that even a factor?
And how confident do you feel in the guidance that you're giving us for the second half?
Brian Jellison
Well I think in terms of level of confidence at $2.70 to $2.80, looking at the sort of $2.70 midpoint, we feel quite confident about that frankly. I think the thing that is frustrating is that the stimulus program and government activity has gotten a number of people in our end markets who say, wait a minute, wait a minute, maybe we could call this something else, and it'll be treated as a shovel ready project, and I won't have to spend my budget money on that, and that has hurt our Q1 orders in ways that people wouldn't have foreseen.
We have one example. I don't want to say where it is, but it is a very important project for us.
It is already previously funded, but no orders are placed. And the orders will be important because the municipality and state involved is moving stuff around here, and that's been a nuisance; I'll tell you that, that has been a nuisance.
Orders wouldn't have looked as weak if some of things hadn't gotten in the way. I think we have a lot more visibility around how we think we will perform over the balance of the year than we do the general economy and I would say that we are probably more pessimistic about the general economy than a lot of people who we run into.
And I think part of the reason that we took the guidance down to $2.60 to $2.80 from $2.70 was looking frankly at what everybody else was saying and looking how other people have reported and the depth of how far down their organic Vs are. We are down 10.5% and looked like the tallest midget amongst most people.
So you have – we don't want to be ridiculous about that. I think people that are betting their ranch on we are going to have terrible 2009 are naïve, don't understand who we are, can't keep abreast of the fact that 36% of revenue is in RF when just two years ago was 27%.
So we are a very different company and we have transformed at a pace of change that some people understand and others don't.
Alex Blanton – Ingalls & Snyder
Okay, thank you.
Brian Jellison
You are welcome.
Operator
That will end our question-and-answer session for this call. We will now return back to John Humphrey for any closing remarks.
John Humphrey
Okay. Thank you, Anthony, and thank you all for joining us this morning.
And as always we look forward to talking to you in the next three months.
Operator
This does conclude today's presentation. Thank your everyone for their participation.