Trimble Inc. (TRMB) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble's Third Quarter 2014 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Jim Todd. Sir, you may begin.

Good afternoon. I'm here today with Steve Berglund, our CEO; and Francois Delepine, our CFO. Before we begin, I'd like to remind you that the forward-looking statements made in today's call and the subsequent Q&A period are subject to risks and uncertainties. Trimble's actual results may differ materially from those currently anticipated due to a number of factors detailed in the company's Form 10-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission. During this call, we will refer to a press release, which is available, along with additional financial information, on our website at www.trimble.com. The non-GAAP measures discussed in the call are reconciled to GAAP measures in the tables to our press release. Now let me turn the call over to Steve.

Good afternoon. The third quarter financials can be described as mediocre against Trimble's standards, with the fourth quarter outlook appearing to be even more disappointing. However, after adjusting for a number of onetime issues, the normalized third and fourth quarter year-to-year trends are more positive than the reported results would indicate. In particular, the baseline third quarter non-GAAP operating margin as a percentage of sales improved year-to-year but was depressed by the short-term effects of recent acquisitions. I'll leave it to Francois to explain. The 2 significant changes that caused us to fall out of our revenue guidance for the quarter were a deeper agriculture decline and a step-down in the global economy, particularly in Europe. For example, Russia was down almost 50% year-to-year and Germany also declined. Continuing the pattern of the last year, our business portfolio continues to break down into 2 parts: one comparatively healthy and one that is struggling. The 2 most significant drags in revenue growth are agriculture in the Field Solutions segment and the field services business in the Mobile Solutions segment. The rest of the company, excluding these 2 businesses, has demonstrated convincing year-to-date double-digit organic growth and was in the vicinity of 10% growth for the third quarter despite the heavier economic headwinds. The extent of the decline in agriculture grew in the third quarter and is expected to remain at a depressed level in the fourth quarter. The fourth quarter agricultural year-to-year comparison is particularly challenging because we had double-digit growth in the fourth quarter last year, which, in retrospect, was an outlier. We didn't see the latest deterioration coming because the largest cutbacks late in the third quarter and the anticipated cuts in the fourth quarter are coming from equipment manufacturers' distribution channels and from factory fit. This diminished outlook is more severe than the prevailing market and maybe inventory reductions and an amplified overreaction to the market. While the Trimble channel is down, it was down 6% to 7% in the third quarter and may represent clearer market mix signaling. Clearly, our agricultural market forecast model, which has been reliable historically, has broken down under the current extreme conditions. Our current outlook for 2015 for agriculture assumes our base market will retreat by another 15% year-to-year to reflect general industry expectations. However, we believe we have mitigation steps available to improve on the base number. One is better execution in irrigation. We announced our irrigation product line midyear of 2014, and it turns out we were overly optimistic about our ability to execute our distribution strategy before the season ended in the fall. The response to the introduction has been enthusiastic, just not yet monetized. Going into the 2015 early spring season, we now have a growing direct sales force dedicated to irrigation to supplement the dealer channel. With that capability in place, we believe we can add enough revenue in 2015 to mitigate some of the agriculture downside. Another point of mitigation is new product introductions. Historically, there's a tight correlation in our agricultural business between new product introductions and a meaningful lift in revenue. Even with current market conditions, we expect this to remain true. We anticipate a strong season of product introductions in early 2015, and although we're not expecting miracles, we do expect some lift. While we want to avoid overpromising in the short term, the early dynamics on the agricultural services business are encouraging, albeit from a low base. Our target in 2015 is to provide recurring services covering millions of acres during the year. If we execute against this expectation, this could provide some lift from a relatively new revenue source. If we execute on these actions, our tentative net conclusion is that our 2015 agricultural growth performance will be consistent with the first half of 2014, which was down single digits. We have levers to pull and we don't need to be passive victims to the market, but we do have to execute. Because of the high operating margins we have in agriculture, another point to emphasize is the marginal effect of changes in agricultural revenue on aggregate profitability. Agriculture gross margins are in line with the rest of the end-user businesses within Trimble, with the higher agriculture operating margins a function of leverage on the below-the-line expenses. Therefore, at the margin, exchanging $1 of growth in the E&C, our Mobile Solutions segments, for $1 drop in agriculture will leave us more or less indifferent at the total company operating margin line. As a result, with our current aggregated view of 2015, we believe we can continue to improve our total company financial model even if agriculture remains under pressure. Our posture's, therefore, currently one of cost constraint, not major cost restructuring. If the conditions change, we'll adjust accordingly. The other meaningful component of the Field Solutions segment, GIS, continues to grow and is recovering from the challenges in 2013. The picture in the E&C is much brighter. Although our concern about economies outside of the U.S. has grown over the last 3 months, our basic performance is comparatively robust. In the core product categories of our traditional address markets, we believe we are gaining share points worldwide. Strategically, we are also making substantial progress. The last few months have been highly significant in the development of our construction strategy both in acquisitions and product development. The recent acquisitions have reinforced our unique prevalence -- relevance across the entire design-build-operate spectrum, DBO for short. The acquisition of Manhattan Software, which develops facilities management software, provides us with an important bookend. For any given project, our constructible model can now capture the earliest equivalent of a doodle on a napkin, and SketchUp carry that concept into a full 3-dimensional model, which can drive the estimating and scheduling processes and ultimately drive the machines and tools on site. During the construction phase, our constructible model will augment the design data by capturing extensive as-built data. Upon the turnkey event, the constructible model will become accessible as part of the operating model, which is where Manhattan Software enters the picture. Another significant acquisition in the quarter was Gehry Technologies. Aside from the validation of having Frank Gehry select Trimble to be a key part of this long-term legacy, this transaction gives Trimble the ability to accelerate our market strategy. With GT, we've acquired collaboration software, which becomes part of our DBO software platform. As importantly, we acquired a significant high-grade professional services capability. Although we have been organically building professional services capabilities, this provides us a step-function effect and allows us to fill in a significant missing piece of our overall engagement with the DBO market. Owners and contractors are rapidly becoming convinced of the potential of reducing project cost by 25% to 30% with a comprehensive technology solution. A business as usual approach to implementation as a series of point solutions won't achieve the full intended effect. To holistically integrate the various elements requires both deep domain knowledge and technology literacy and will typically require access to professional services. Next week, we are holding Dimensions, our users' group meeting, with over 4,000 attendees. We expect to announce several significant steps that reinforce our position in the market. One of several breakout announcements will be that of Trimble Connect. Trimble Connect is a cloud-based collaboration platform that incorporates GT, which is the software acquired in the transaction with Frank Gehry. It allows all the constituencies in the project, including designers, contractors and owners to share information seamlessly. It will allow the combination of BIM models, conventional CAD models and operational data within one information context. Over the last few years, we have systematically acquired or developed the pieces of the puzzle. The acquisitions have included Tekla, Meridian, Accubid, WinEst, SketchUp, Manhattan and others. When we introduce Trimble Connect next week, we will unify these pieces into an integrated platform that will be continually upgraded going forward. After the first week, we expect to have well in excess of 10,000 signed-up industry users. To the DBO community, this will emphasize Trimble's unique position in 3 ways. First, we cover every information element of the DBO workflow from predesign through operation. Secondly, our product offering is unique because we enable the direct linkage between the data and the tools, machines and operations on the physical construction site through our combination of information, sensors and tools. Thirdly, because of the open architecture of Trimble Connect, we are the leader in democratizing collaboration in the construction process just as we have already democratized modeling and content. The Mobile Solutions segment grew year-to-year. However, the double-digit growth in the transportation and logistics business continues to be held back by year-to-year decline in the field services business. Field services has been challenged by the conversion from our starting horizontal focus on small- and medium-sized businesses to a vertical market focus. Although not yet a large business for us, field services is meaningful as a capability, not just a business, because it supports the entire range of Trimble businesses, including construction and agriculture. In an attempt to clarify our intentions in field services, let me provide a specific example to illustrate what we are undertaking as part of this intensified vertical focus. A major 2015 targeted field services vertical for us is made up of mechanical, electrical and plumbing contractors, a group we are already selling to in E&C. In the U.S., there are approximately 32,000 MEP contractors in the mid-tier category with approximately 360,000 technicians in the field. Assuming a $25 per technician monthly ARPU, this is a U.S. addressable market of over $100 million with the worldwide potential being significantly greater. Currently, there are over 20 competitors, generally small, partially occupying this market, almost all providing no more than dot on a map functionality. We have an opportunity to differentiate ourselves by providing a significantly higher level of functionality and to leverage our channel and brand into a familiar market. Our higher functionality will consist of discrete features such as asset management, work order management and a generally tighter integration into our existing MEP solutions. This is one example of several within our field services vertical market strategy where we believe we can create differentiated advantage. Our general outlook for the company for 2015 needs to be careful, given the forecasting challenges we have in 2014. The first element to consider is the acquisition effect, which provides more of a bump in 2015 than we had in 2014. Including the full year effect of the acquisitions we have already made during 2014 plus probable contributions from the acquisition pipeline we see today, the total acquisition list should be approximately 4 to 6 points of 2015 growth. Establishing the organic foundation for next year is more problematic given the volatility in agriculture and the uncertainty in the direction of the world economy. Looking at 2014 as the base, assuming the midpoint of our fourth quarter guidance, and making 2 discrete adjustments that Francois will identify later, expected normalize growth -- organic growth to total year 2014 works out to be roughly 5%. Taking 2014 as a template for 2015 and adding the acquisition effect leads to a path to total company growth approximately 9% to 10%. This is hardly a stake in the ground at this point, but it provides a pragmatic context for next year's revenue assuming economic conditions do not deteriorate. In addition, we anticipate delivering our historical underlying levels of operating leverage adjusted for any short-term effects from acquisition accounting. Let me turn the call over to Francois.

Thank you, Steve. Good afternoon, everyone. Steve mentioned the second half of 2014 is proving more challenging than expected. Before I get into the numbers, I'd like to remind you that unless otherwise noted, the operating results I will discuss will be on a non-GAAP basis. The reconciliation from GAAP to non-GAAP numbers is available in our earnings press release along with the financial data by segment. Unless otherwise indicated, growth rates are meant to be year-over-year growth rates. So let's now discuss the results for the third quarter. Full revenue was $585 million, up 5% year-over-year. We experienced growth in most of our major businesses with the notable exception of agriculture, where the market environment grew significantly more difficult in the quarter. The majority of the growth in the quarter was organic was only a minor impact from acquisitions closed in the past year. Engineering and Construction grew by 10%, with continued growth in Trimble Buildings, heavy civil and geospatial. Field Solutions revenue was down 11% with agriculture revenue down in the mid-teens, offset by growth in GIS revenue. Mobile Solutions grew 7% with continued double-digit growth from the transportation and logistics business and the Advanced Devices segment was essentially flat in the quarter compared to last year. The Q3 revenue by geography was approximately 56% coming from North America, 23% from Europe, 13% from Asia Pacific and 8% from the rest of the world. Total growth rates by region were fairly consistent around the world with 5% in North America, 6% in Europe, 5% in Asia Pacific and 5% in the rest of the world. Relative to the second quarter, however, growth was in line in North America, slowed in Europe and Asia and turned negative in South America. The growth in North America came primarily from Engineering and Construction and Mobile Solutions, offset by a high single-digit decline in Field Solutions linked to agriculture. Europe saw growth in Engineering and Construction, Mobile Solutions and Advanced Devices. However, Field Solutions growth in Europe turned negative in the quarter due to weakness in agriculture and E&C growth slowed. Most countries in Europe grew year-over-year with the exception of Germany and Russia. Germany softened in the quarter, and Russia, as expected, was down significantly for the third quarter in a row. Asia Pacific growth also slowed in the quarter, with mixed performance across the region. Within Asia Pacific, China and India were relatively strong, while Australia remained weak and was down year-over-year. In the rest of the world, the Middle East and South Africa were up significantly year-over-year, but growth in Brazil turned negative due to weakness in agriculture. The impact of foreign currency fluctuations in the quarter was immaterial. Our gross margin and operating income performance in the quarter was mixed. Q3 gross margin was 57.8%, up about 90 basis points over the third quarter of 2013, driven by continued mix shifts in our portfolio toward the bundled hardware, software, maintenance and subscription services. Third quarter operating income increased 0.2% to $118.4 million or 20.3% of revenue as compared to $118.2 million or 21.2% of revenue in the third quarter of 2013. Third quarter's operating income was negatively impacted by acquisition effects, including the impact of noncash write-downs on preacquisition deferred revenue. Excluding the impact of the short-term acquisition effects, non-GAAP operating income percent was up approximately 20 basis points year-over-year. The effective income tax rate for Q3 was 25%, higher than our expectations due to lower non-U.S. pretax income in the second half of 2014 and compares to 14% in Q3 2013. The increase to 25% for Q3 also includes a catch-up for Q1 and Q2 to bring the year-to-date rate to approximately 22%. Compared to the Q3 '14 tax rates, the Q3 '13 tax rate benefited from discrete tax benefits and the R&D tax credit. Q3 net income was $87 million, which was down 15% as compared to Q3 2013. Diluted earnings per share were $0.39 compared to $0.33 -- sorry, $0.33 compared to $0.39 in the third quarter of 2013. The drop in net income year-over-year is primarily due to the difference in tax rate, which added an approximately $0.05 negative impact to EPS, and the impact of acquisition effects in the quarter, which added approximately $0.03 negative impact to EPS. We finished the third quarter of 2014 with $139 million in cash. We reduced our debt by $9 million ending Q3 2014 with $647 million in debt versus $656 million at the end of Q2 2014. Cash flow from operations was $96 million for Q3 2014 and $310 million for the first 3 quarters of 2014. Cash flow from operations for the first 3 quarters of 2014 was up 12% versus comparable period in 2013. At the end of Q3, accounts receivable was $359 million and days sales outstanding was 56 days as compared to 59 days at the end of Q3 2013. We're pleased with the overall quality of our AR portfolio. Q3 ending inventory was $278 million compared to $274 million at the end of Q2 2014 and $242 million at the end of Q3 2013. Although it did not impact the non-GAAP results, I do want to add a few words about the $52 million reserve for legal matters that we mentioned in the press release and, more specifically, the $51.3 million jury verdict awarded in Alaska to a local entrepreneur claiming it was wronged by Trimble. We strongly disagree with the verdict and the damage award and intend to vigorously seek to have the verdict overturned or failing that, to pursue an appeal. I will now turn to our guidance for the fourth quarter of 2014. We expect revenue to be between $560 million and $590 million and non-GAAP earnings per share of $0.26 to $0.32. Our guidance reflects the challenging year-over-year comparisons and embeds caution in a number of areas. First, Q4 revenue last year benefited from the revenue recognition of a large discrete item and also include revenue for the VirtualSite joint venture, which is now deconsolidated. Second, we're anticipating the fourth quarter effects to our agriculture revenue that Steve discussed against the difficult double-digit growth comp for the fourth quarter of 2013. We are estimating these combined effects to be approximately $50 million. The fourth quarter guidance, while still disappointing, would show some year-over-year growth after normalizing for these effects. Q4 2014 non-GAAP earnings per share guidance assumes approximately 264 million shares outstanding and a 21% to 23% tax rate and also does not assume the renewal of the U.S. R&D tax credit. Q4 '14 anticipated tax rate compares to a 10% tax rate in Q4 '13, which, in addition to the U.S. R&D tax credit, also included several discrete tax benefit, including a substantial benefit from a reduction in the finished statutory tax rate. Other elements negatively impacting Q4 '14 EPS guidance compared to Q4 '13 EPS results include the short-term negative impact of recent acquisitions and the expense for our user conference Dimensions in Q4 '14 and the profit associated with the large discrete items, which we had in Q4 '13. Non-GAAP guidance exclude the amortization of intangibles of $39 million related to previous acquisitions, estimated acquisition cost of $4 million and the anticipated impact of stock-based compensation expense of $12 million. Now let me say a few words about our capital structure. During the third quarter, we repurchased approximately 2,080,000 shares of Trimble common stock for a total of $65 million. Repurchase activity has continued in the fourth quarter under a 10b5-1 plan, and quarter-to-date, the company has repurchased approximately 1,150,000 shares of Trimble common stock for a total of $33 million. Note that, as I communicated during our capital strategy update at the Investor Day in June, our first priority continues to be to invest in the business to grow organically and through M&A, and we will be opportunistic on share repurchases based on these priorities, market conditions and share price. Finally, concurrent with our earnings release, we filed a generic debt only shelf earlier today. This is to provide Trimble with flexibility on debt-funding options on a go-forward basis, and it is consistent with what we've already communicated in June at our Analyst Day with regards to our financial policy and our long-term capital structure strategy. This quarter, we're holding an investor briefing at our Trimble Dimensions user conference in Las Vegas from November 4, at 12 noon Pacific Standard Time. The briefing will be webcast with access from our Investor Relations website. We will also be participating in the Baird Industrial Conference in Chicago in November 11, and the Wells Fargo Technology Conference in New York on November 12. With that, we will now take your questions.

[Operator Instructions] And the first question will come from the line of Jonathan Ho of William Blair. Jonathan Ho - William Blair & Company L.L.C., Research Division: Just wanted to sort of understand this a little bit better. Trimble has historically been able to grow through challenging and cyclical environments. Can you maybe talk about what's caused this to change? And should we view this as being sort of more of a temporary effect? Or do you think there's maybe something more structural or persistent in nature relative to the challenges that you've talked about?

Well, all right. So this is -- I mean, Trimble has a singular problem at this point in time or a problem of magnitude in agriculture. So I think that taking your question as being a specific question about agriculture, I think it's the relatively extreme nature of the market is, okay, our premise that we've been speaking to kind of for the last 12 months is that we have intended to be cycle-resistant in agriculture. Basically, we're selling productivity, we're not selling capacity, so the farmer may defer the tractor, the farmer may defer the new combine, would certainly defer the new pickup truck. But if we could get to the -- access to the farmer and make the pitch about saving fertilizer or other input cost that we could make the sale kind of in the face of cyclical conditions. So I think what has happened recently, and it took us some time to really understand the full severity of the problem is the farm economy is in deep recession or great recession or whatever, and the farmers have simply gone to the benches and are waiting this one out and really have cut back on their spending. Now we've seen this historically over times where there has been a relatively complete shutdown of buying. Probably the one before this bout was in the latter part of 2008 and into 2009, the Lehman meltdown, which per se did not affect farmers directly, but the headline factor put them on the bench. So I think we're seeing this at this point. Now the third and fourth quarter effects, that the third quarter was worse than we expected. The fourth quarter's also not so good. I think this is simply a second or a third order effect is the Trimble channel, the channel that we ourselves control, that gives us the clearest insight into the market, was down 6% or 7% in the third quarter, roughly consistent with what's transpired year-to-date. It's the channel that we share with the equipment manufacturers and the factory fit market, the OEM market, if you will, in the fourth quarter that are down sharply. So some of that or maybe most of it, in fact, is inventory reduction in kind of the equipment manufacturers' ecosystem. And I think part of it is simply, they've hit the brakes hard, very hard, and I suspect they've overreacted. So I don't think the third or fourth quarter are indicative of what's going on in agriculture. I don't think it's a template for 2015 for sure. I think we return to a normal pattern in 2015. And I think what we're doing at this point in time is painting a conservative -- what we would regard as a conservative picture consistent with the overall industry picture, assuming the farmers do not come off the sidelines and become kind of economic animals, once again making rational decisions. So I would still maintain that over time, Trimble is a cyclical resistant not exposed to the cycle, but not necessarily reacting in the same way as other players are, but I think the circumstances currently in agriculture are severe enough that it's taken a bite out of us. So different circumstances more than any kind of existential theorem here. Jonathan Ho - William Blair & Company L.L.C., Research Division: Understood. And you guys referenced some levers that you could potentially pull in the agriculture business. Could you maybe walk through what those levers are and some of the main risk points you see to the ag business perhaps weakening even further?

Yes. So I think that we've been comparatively more transparent in our thinking than we have been historically, so I think we're going with the flow at this point in time. I think -- I don't know if there's a precise industry consensus in terms of how much ag might be down in 2015, but we've talked it through, and okay, it seems like we're simply going with the flow and saying okay, the industry seems to believe that it will be down, call it, 15% I think as early as this morning, although I did not study the CNH release, but it sounds like they're talking 10% to 15% next year. So we're saying okay, that becomes our baseline calculation. Now the things we can do off that baseline calculation, assuming the farmers do not come back off the sidelines and start to kind of prioritize their investments, which I think would put Trimble at the -- near the top of the list of investments they would make, but assuming that doesn't happen, the discrete things we can do, first of all, on the irrigation product line. We talked about that earlier in the year, in particular 2014. We simply couldn't get the distribution channel in place by the time the season closed in kind of the fall of this year. We're now ready for the early spring season on irrigation. That is a new product category. It represents a step function. If we execute against it, and its early signs are quite positive there, it adds a whole new revenue category that we haven't had before. So we've got a strong value proposition here. We're putting the distribution in place. That could be a step function increase in revenue, and it's just a question as to how big it would be. Now the other thing is that in a relative sense, 2014 was a comparatively light year in terms of, if you will, new products with new features being put out there. 2015 should end up being a more substantial year in terms of product -- our new product introductions. Now there's an argument in terms of -- in this market environment, how big of a lift will that give us, but pretty much historically, going back 10 to 15 years, you can map the data, map the revenue and new product releases, you can see kind of the month that they were released because it does lift revenues. So we're expecting some effect from that in 2015. The third effect, which is we're getting a reasonable traction on this recurring agricultural services element, it's a very small number at this point in time, but it could add some incremental lift with next year. Now the question, and so we expect starting with the 15% reduction in agriculture next year, which is we're simply taking the industry view and saying okay, that will become our baseline. So we can adjust off that 15%, and we're saying that, okay, that 2015 could look like the early part of 2014, which was a single digit drop in agriculture and offset by the rest of the company growing at a significantly -- or growing at a relatively significant rate and okay -- increased -- creating aggregate growth for the company. But -- so in addition to those 3 things I named for agriculture, the list is much longer with smaller elements. So I think that our -- the people in our agriculture business are -- let's just say they have a stronger belief in the market and what we can do in the market than I just gave you, but I think that what we're attempting to provide you is a comparatively sober judgment that doesn't challenge kind of the facts that are already in existence within agriculture.

And our next question will come from the line of Richard Eastman of Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Steve, could you provide a little bit of color on the E&C segment of the business? Maybe just dig down into the 3 primary verticals there a little bit. I would've thought that maybe we could've seen a bit more growth in E&C. Did that disappoint? And then also, I just had a follow-up on the op profit there.

Yes, so I think E&C -- okay, breaking it down into kind of the 3 most significant elements, kind of the traditional business, the geospatial, the survey instruments and such is -- okay, we saw growth there. We're actually seeing kind of improving health there and actually some segments of that grew relatively stronger -- strongly double digits. Heavy civil is growing. It's growing kind of in a double-digit context, but we're still facing pretty strong headwinds that have been around for a while in Australia. Australia's economy does not seem to be improving. Australia is actually -- for its population size, a disproportionately significant market for us because they're very active users of technology, so that hasn't improved. And what we are seeing is places like Germany looking less healthy from an economic standpoint, so we are facing some economic headwinds in heavy civil. But -- and then within the U.S., it's a major question still remains about the highway bill, which, against the current condition, would be, if anything happens, that extends the time frame workout on the highway bill -- okay, that would be incremental good news to us from the current baseline. The third category, which is the healthiest category at this point in time, is the build -- kind of the building construction, the vertical construction market, which is in the U.S. quite robust. We're seeing good results in the U.S. We're adding capability. We're penetrating the market, and so that's the healthiest part of the segment at this point in time. Now overall to the -- under kind of normal circumstances would we have expected a bit more growth out of E&C in the quarter? Yes, but what we -- what seems to have gotten tougher in the last 3 months is the world economic environment with a particular focus on Europe and within Europe, a particular focus on Germany. So I think E&C is going to be influenced by the macroeconomics out there, and so we're watching that quite carefully now. The other point that I made in the script that I think is meaningful, aside from discussions on what we're doing relative to product and solutions strategically, is the fact that I think in the core markets against the core traditional competitors, we think we are taking share. So if you go into the industry data and kind of dissect it, allowing for exchange effects and other elements that don't pertain, we believe we're taking share at this point in time. So in the market -- in the sense of the market at this point in time, we're doing relatively well, but I think we're a little dependent upon the macroeconomic environment. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And is the -- maybe for Francois, is the op profit there -- again, we still grew the business by $31 million-ish year-over-year. And so the question is what -- why is our op profit down? Was the impact of acquisitions that significant?

Yes, I mean relative to E&C, it was significant because all the 3 acquisitions that we had in the quarter were in E&C, and there's a lot of kind of write-down that take place on the kind of preacquisition deferred revenue and so you end up having 100% of the expenses, but a very small revenue number. So that was the main thing. They also had, on a year-over-year basis, they had some trade shows in Q3 that didn't have the prior, but the main thing, you're right, is on the acquisition front. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And that's all, again, that's for revenue comes out of the -- I guess out of the numerator. But at the same time, that's an adjusted op profit, right? So there's no amortization in there, no restructuring or anything like that?

That's correct.

But I think getting to the main point here, the structural, the financial structure of E&C in terms of a structural operating margin really -- that picture hasn't changed, so I think that this is a quarterly or at least a short-term effect on operating margins we would expect to kind of continue on the secular trend of improving operating margins there because the software content continues to increase in that segment.

And the next question will come from the line of Brett Wong of Piper Jaffray.

So I saw in the quarter that services subscription lifted, which seemed to help margins as you spoke about. What was the driver of the lift? And what are your expectations for service subscription going forward in the fourth quarter and in fiscal '15?

Well, I wouldn't necessarily want to comment per se on the fourth quarter, but there -- and Francois may have some additional color to add here -- because partly it's not the way we look at the business. We look at the business as a series of vertical markets and we're not necessarily focused on kind of the nature of how we develop -- delivering solutions. But again, service content, recurring revenue content is increasing within the company, so there's certainly a long-term trend towards increasing kind of recurring service content or recurring revenue streams in one form or another within the company. And I think what you're seeing is part of a long-term trend. I don't know -- anything to add, Francois?

Yes, I mean, just another factor in your thinking, when you look at subscription in particular, it's on a year-on-year basis. The last year, we were, including VirtualSite Solution, or VSS, revenue, which is primarily subscription. That was about $7 million in Q3 of '13, which we didn't have. So if we factor that in, we have double-digit growth in the mid-teens actually in Q3. So subscription's going to continue to take a bigger and bigger share, but it's an evolution not a revolution. It's going to be a gradual progression.

Okay, great. And then I'm just going back to E&C, you gave us some nice color, Steve, on the impacts of the third quarter. Wondering if you could provide some of your expectations looking forward for E&C growth in the fourth quarter in 2015?

Yes. Well, again probably we'll avoid talking about the fourth quarter by segment just to avoid kind of setting new precedence here in kind of giving guidance at that level. But I think looking into 2015, kind of the 2 competing factors here. One, I think that, again, strategically in terms of new products, new capabilities, ability to access parts of the market that we have not had kind of direct access to, I'm thinking large projects, key accounts and potentially going after them with relatively new business models, all that is on the upside and we're certainly pretty sure of the U.S. at this point in time. It's the counteracting thing which leads to some caution when we're talking about 2015 in E&C is just the state of the world economy. Again, by now, we would have expected Australia to begin to show some signs of recovery. It really doesn't seem to have done that. We're looking at Germany with some concern and, okay, that brings with it the rest of Europe. Russia is probably, not to be overly dramatic here, kind of turns out to be a write-off for next year. So it's those international issues that I think are the -- a little bit of a -- enough of a concern that I'm not being outlandishly bullish about E&C, but from a business dynamic standpoint, I think we're very, very aggressive, very ambitious and very positive about the prospects for E&C both, yes, for 2015, but then maybe more so beyond 2015. There are a number of things that are happening strategically here that should benefit us in the long term.

And then one last one for me. You spoke to some opportunities that you could see with new product launches next year in ag. And I just wondered you kind of commented about it a little bit in your remarks, but if -- we've seen a recent lift in grain prices, but in this kind of weaker grain price environment, could you talk to the confidence you have in that adoption of those new products in this current backdrop?

Yes. So I think kind of actively avoiding being overly specific and overly quantified here, just we've learned a fair amount of humility during the course of 2014 on kind of the ag market. We've had a couple of surprises. But I would say is we -- what we're certain about is that the fact that it will have a beneficial impact. How much of a beneficial impact under the current circumstances? I think we're being fairly careful of, but it should be in terms of environment, in terms of a channel having something new to sell, which is always motivating for a channel. All of that makes us at least relatively more confident about 2015 than we were in 2014. So I'm actively dodging your question in terms of specifics, but I think that directionally, it should be quite positive.

And the next question will come from the line of Ryan Connors of Janney Montgomery.

A few questions. First off, I want to kind of extend on Brett's question there a little bit about this environment and kind of the new products you got in rollouts. And specifically, what do you believe is sort of the competitive response to the down cycle and how is that impacting the competitive environment in terms of your pricing or in terms of, I know we've seen some new entry into the markets. Another example would be some of these certified preowned program that are including kind of tech upgrades. I mean, how are all of these competitive responses to the downturn impacting your business?

So as near as we can detect, and right now, I would describe the market as quite confused. And I think you're seeing some of that confusion come to us through the equipment manufacturers, channels and the factories in the third and fourth quarter. So I think it's a comparatively confused environment at this point in time where people are trying to find bottom and trying to get themselves properly aligned for a change. [indiscernible] I won't claim perfect insight, but I would say is in -- you mentioned new entrants. I think the new entrant issue is still some time away in terms of actually impacting our market in terms of what we're selling today. So I think that in terms of what's affecting us, I would not actually attribute much of our current set of issues to competitive issues per se. I don't think we're losing in the marketplace. I don't think we're losing share points in the marketplace. I think competitors, the -- I think maybe the most aggressive competitor at this point in time is probably Deere in terms of kind of active promotion within their own channel. At the same time, I could come up with countervailing anecdotes about Trimble equipment on Deere tractors, but I would say substantially the competitive environment has not changed in the last year or 2. Now there are fundamental structural changes taking place in the market though, not per se competitive, but we're actively attempting to realign our channel to be more capable of selling future information and data services so there is a structural realignment in the market that's causing at the minimum commentary and could be contributing some -- as we've talked about in prior quarters, contributing to some of our current set of issues in agriculture. But as of today, in terms of current environment, third and fourth quarter sort of environment, I would not be laying off our set of difficulties on kind of a change in competition. It's largely other issues.

Okay, and then my other question is more big picture in nature, Steve. I guess the aftermarket, some of these OEMs, you mentioned factory installed, channel and so forth, as that becomes more prevalent, what's the state and the direction of the aftermarket and the retrofit market? Big picture looking beyond the cycle as more of this legacy guidance equipment goes in at the factory level, what does it do to your aftermarket outlook and will you be able to make up any decline of that market with a shift into the OEM channel at a competitive margin?

Yes. So our assumption has always been, well, I mean actually, extending your question beyond probably what you intended here, but talking about construction and OEM for a second, when we entered into the first joint venture with Caterpillar back in 2002, our assumption in construction was that the market by now, in fact, the market a long time ago would've gone 100% OEM. It was going to be 100% factory installed. It hasn't gone that way. It's still dominated by aftermarket and may actually be permanently an aftermarket sort of market simply because the contractors have a mixed fleet problem and they don't necessarily want the factory install. That issue is smaller in agriculture, but it's still an issue. But I think that our strategic presumption in agriculture today would be that, okay, inevitably the strap-on elements of guidance are going to be factory install, and okay, that's always a part of our view of the marketplace. Now we have a growing OEM presence. So we are -- some of it visible, some of it not visible, but we are talking to a wide number or a large number of the equipment manufacturers with the idea of giving them the OEM content. But our basic view of the market, as it is in construction, is that the fundamental market is going to change. And that the substantial economics, the larger market potential is actually in terms of software and information, not on kind of the guidance-oriented hardware. So it would be our ambition over the next few years is to see the business, and again, both construction and agriculture, become more and more of a, forgive the expression, Big Data sort of solution. So our strategy basically calls for yes, that we'll continue to provide guidance solutions, which are becoming more and more robust and involve more than guidance. And if it goes factory fit, yes, that's fine, that's what we're assuming. But that the -- that what we're after is looking at the number of acres under cultivation world is extracting a revenue per acre in some fashion through providing services, through providing software and the like. And again, that's the element of the business. That's very -- it's still tiny but is actually growing at kind of very significant rates, and I think should become during 2015 be more and more of the story. So yes, so I think that we will continue to be active in guidance. It will still be a primary part of the business, but should be a diminishing part of the business as these other elements start to come into play, like irrigation, which is still kind of a hardware-centric business that has nothing to do with the equipment manufacturers, which is very much an aftermarket sale even though -- or in collaboration with the irrigation system manufacturers, but then again, I'd say that in 3 to 5 years, I would expect kind of the information elements to be a much larger part of the business than they are today.

Okay, finally, just a housekeeping clarification and confirmation for me. Did you say in your prepared remarks that your expectation for '15 is about a 15% decline in agriculture? Or was -- did I mishear that?

Yes. So I think that -- to provide you all with a construct is, I think, again, we're assuming the basic, what seems to be kind of the consensus out there, down 15%. Whether we actually see that or not is a subject to some debate, but we're conceding the 15% and we're basically talking about how we do better than the 15%. So we're trying to provide some transparency to help you figure it out.

And your next question will come from the line of Rich Valera of Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: The 4 to 6 percentage points of inorganic growth you expect in '15, can you say how much of that you have in hand from acquisitions already completed and how much of that is from acquisitions you expect to complete?

I think it would be a good assumption to assume that we're on the low end of the range, we're taking very little risks. So I think if you tell me 4%, I'd probably agree with it. Richard Valera - Needham & Company, LLC, Research Division: As in 4% you had sort of have in hand?

Yes, more or less. It's not exactly a science, but yes, so I think the bottom end of the range is pretty secure. Richard Valera - Needham & Company, LLC, Research Division: Perfect. And then, Steve, last year at this time, you were pretty confident about new products driving ag above whatever the market did. What happened there? Did the products not roll out? Or did the market just turn down steeper? What's different about going into this year than going into '14 when you also thought you had a strong new product lineup?

Yes. So a year ago, well, just talking about a year ago, kind of same time framework, we were in a little bit of a bubble as it turns out in the second half of the year. We saw double-digit growth in ag in the fourth quarter and something not too far from that in the third quarter. So we were actually thinking that, okay, we did have the formula dialed in terms of how to be countercyclical. But yes, in terms of kind of laying out the reasons we should be better than market, if you will, you would've heard irrigation, I think a year ago, or at least in kind of January, down when we simply couldn't get enough distribution in place fast enough to kind of meet the season so we did some learning there, but we did talk about new products. And there was, I'd call, less of a market issue than a, frankly, a bit of an execution issue on the new products is we were focusing our development efforts in one arena called the OEM arena when in reality we should've been devoting them to the kind of the aftermarket kind of more information-based universe. We have shifted that focus. So we didn't have our focus right in 2014, and so we were slow and a bit underfeatured in terms of new product sets. We believe we got that one -- we're pretty sure that we got that dialed in now and so that I think our 2015 response is simply going to be better than our 2014 response on new products. We'll see what the -- ultimately quantifiably how the market reacts to them, but I think we're much more secure this year than we were last year and we've got much more of a focus on kind of the aftermarket this year. Richard Valera - Needham & Company, LLC, Research Division: Fair enough, and one more if I could. Advanced Devices has been, I think, a bit of a pleasant surprise this year in terms of its strength. Can you give us a sense of where you see that business going? Do you see it continuing to grow, flattening? What do we think of that? Any color on how you think about '15.

Yes. If I were sitting where you would -- you're sitting, I would be basically, in the longer-term anyway, looking at Advanced Devices being comparatively flat. To some extent, some traditional OEM business, the embedded kind of board or chip level sort of business, it's a timing business that are tied into kind of large infrastructure place that they just don't have kind of the growth dynamics. There's a relatively small military business in Advanced Devices. So there isn't inherently, a whole lot of -- they're not typically end-user markets and therefore we have fewer knobs to turn to kind of dial up growth. There are some interesting elements in that segment for the longer term. The RFID business is in there. The inertial business is in there. I think at some point, we could start to talk more about the segment. So for example, the RFID business is actually -- their primary customer set is inside Trimble, so tracking items on construction sites, determining what's in my van for field service and those sorts of things. But I think the segment has maybe longer term, maybe some longer-term dynamics, but I'd say in the kind of the 1- to 3-year time framework, I would call them relatively flattish from a growth perspective.

And the next question will come from the line of Eli Lustgarten of Longbow Securities.

Can we -- I'll go back over, I guess during Francois' presentation, you talked about -- there was a normalization of about $50 million to get the comparison, and I understand the ag business pretty well, as you probably know. What was the other part besides the ag that you're referring to and the magnitude of $50 million of it?

Yes. So again, the total was $50 million, right, 5-0. I don't know if that's what you mentioned, or I wasn't sure if you said 15. So I would say, about 1/2 of that is ag roughly. And then in Q4 last year, there are 2 other elements, one is a kind of discrete revenue recognition item, which we mentioned in Q1, when we reported our Q4 results. And the other one is the VSS, which used to be consolidated in our results in 2013, but became deconsolidated, if you will, in '14. And so that's the other half of the $50 million, and about 75% of that, if you will, is the discrete item and 25% is the VSS impact roughly. Again, I'm just kind of trying to give you a rough indication of the mix there.

And that's all -- that's out of the equation at this point, so we have an apples-to-apples comparison coming, correct?

Well, what I was trying to do there is kind of explain the guidance and kind of compare it to the Q4 revenue that we had last year and we wanted to kind of explain the revenue guidance that way.

Moving on. The ag market revenue -- I decided to ask Steve [ph] -- I know everybody has a 15% decline, the ag market decline in the next 6 to 9 months is much more severe than that because of inventory liquidation and as you mentioned because of a pre-buy last year that occurred still going on. So as you point out, as you're looking at, are you compensating for the fact that it's going to be sort of a weird year in the way the spending patterns will take place next year, particularly in the OEM side of it? Or are you just thinking that, that will be minimal impact on Trimble in the first half of next year?

Yes, so -- I mean, I think first of all, we're talking about the full year, so we don't want to be particularly descriptive of how that year folds up, but I think, Eli, kind of the reason for going on at length in the script was the fact that I think that what we're seeing -- what we saw in the third quarter, what we're seeing in the fourth quarter, I think are those effects flowing straight through to us. So I think that our inventory effect will have taken place in the third and fourth quarter, but I think we're basically supplying within kind of very short time framework, so that weeks out, we saw kind of a step-function drop in the demand being placed on us. So I think that overall, my assumption is that we're going to see the, if you will, the inventory or effect or the kind of the radical reduction in the third and fourth quarter, that what we will be seeing by the time we get into next year will be actual end-user market demand and that we will have already experienced the inventory effects. So let's see how that plays out. But we are such a short-fused, quick-reaction part of the chain is that any inventory effects should flush through very quickly for us.

And we've put some of the sectors to debt, but can we talk a little bit about Mobile Solutions as you look out over the next fourth quarter, particularly in 2015 as how we should think about that business?

Yes, so again, I don't want to be overly specific here, but okay, here's the way I would -- I'm formulating it, which is -- okay, we've got, fundamentally, a double-digit growth part of that segment, transportation and logistics. So that's double-digit growth. Now the drag on that segment has been this field services piece, a business that we're really committed to as being fundamental to the Trimble strategy. But what's occurred over the last couple of years, we've swapped -- we're swapping out a majority of the revenue for a new majority as we kind of flesh out the horizontal small business -- small to medium business element of it, so we -- it's been kind of an awkward transition. For 2015, we expect, although field services probably won't be a rocket ship in 2015, we do expect that it will no longer be a drag at least for the full year of 2015. And so the drag on that segment will be diminished and what we'll start to see is kind of the more fundamental double-digit growth of transportation and logistics showing through. And then, okay, maybe later in 2015, we start to see the more and more positive contributions from field services. So I would at this point, for the full year 2015, without necessarily talking about when exactly it will occur, I would expect, let's call it, both a growth and a operating margin acceleration in 2015 in Mobile Solutions. That's what we're attempting to engineer at this point.

And Francois, can you give -- Francois, give us some idea what should we think about for tax rate next year. And also, particularly currency, which really had no effect this point, but we've seen some radical changes and we're starting to hear some impact as we look out a little bit.

Yes. So on the tax rate, I don't have kind of a strong view on next year at this point, and I think we're going to end this year in the neighborhood of 22%, it looks like. If I were in your shoes, I'd probably assume the next -- kind of a similar rate for next year, but I don't have the specific analysis to kind of tell you that, that's going to be the case, but that would seem like kind of a logical conclusion at this point. With regards to currency, so if we look at the kind of September euro rate in particular, some of -- so that would be kind of what is built into our kind of Q4 guidance and our -- and implied thinking for 2015 at this point. So obviously, if currency deteriorates in the sense that the dollar strengthens due to foreign currencies, then that would certainly potentially have an impact on the top line, although, on the bottom line, it's fairly well neutralized given how distributed our spending is and we have natural hedging taking place.

The decline of the euro, which really occurred in the last few months from 1.34 to 1.25. At 1.25, 1.26, you still have de minimis effect on currency next year?

Yes, I would say right now, they're kind of the rate that assumed is in kind of high 1.20s, 1.27, 1.28, 1.29, depending on -- because I think some of the businesses, but that's what they -- that's roughly where we are. And so the impact would probably be more in the first half than the second half because we're starting to see some of the rate impact here in Q3, particularly in Q4.

So you won't have some negative impact for the next couple of quarters. That's what I'm just trying to get...

Yes.

And the final question for today will come from the line of Chrishan of MKM Partners.

Maybe you can just talk about how the ag sales force is adjusting to the present environment.

Well, they're not happy, I'll tell you that. But I think we've been through bouts before, so we understand hard times, we understand adversity. The organization has been through bad times before. So I think the sales force are more properly since it's largely a third-party channel. The third party channel is adapting well and is doing what third party channels are supposed to do, they're adapting. And so I think that -- okay, it's an adverse situation, and okay, people are adapting to it. I think the element that I talked to just a little while ago that is new, which may be creating some stress in the channel, is the fact that we are attempting to redirect ourselves more and more to kind of the information around the data realm, which is involving a conversation with the dealer channel in terms of capabilities and investments and things like that. So I think that probably the channel is reacting as you would expect the channel to react during hard times, that they're working harder and they're scratching harder and they're -- but I think that this other element probably is adding a little stress to the channel as well. But overall, I think that kind of overall that they're adapting, they're reacting to it.

Sure. Maybe you can talk about -- going to a different subject, your framework for divesting and monetizing noncore businesses, I mean the older commodity hardware stuff that -- where China competition is taking share.

Well, I think that invokes a hypothesis that isn't actually in evidence yet, which is the Chinese. Thinking across the company, the Chinese are not a factor in any of our businesses, at least yet, in terms of low-end survey instruments where we don't have a -- which is not a market focus for us. On a statistical basis, the Chinese manufacturers provide a whole lot of low-end survey instruments, but it's not a market segment that we're focused on. So we're not competing with the Chinese, and right now, the Chinese are largely concentrated in China with some access to Latin America. So I would say that we don't have, let's call it, at this point in time, commodity products that are coming under that sort of challenge. So really not much to say about the subject.