Trimble Inc. (TRMB) Q4 2014 Earnings Report, Transcript and Summary

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

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. There were four unanticipated elements in the fourth quarter which affected our performance against the guidance we provided at the beginning of the quarter. Exchange rates, the oil price decline, and acquisition revenue recognition effects had negative impacts on pre-tax results, while a catch-up adjustment to our annual tax rate had a favorable effect on the quarterly tax rate. Without these effects our reported revenue would have been in the middle of our guidance range. The major themes of this afternoon will be the fourth quarter is not a reliable predictor of performance. I will let Francois for explain the moving parts in the quarter. I will focus on total year 2014 results which provide a more useful contacts for 2015. The exchange rate, oil price and revenue recognition factors we encountered in the fourth quarter will have a negative impact on performance in the first half of 2015. Agriculture remains a negative factor but we believe our ability to forecast the market is improving. We have yet to prove it conclusively. The business outlooks were progressively improved during 2015 with relatively strong second half with double-digit revenue growth postponed until then. The major risk to this improving outlook is the economies outside U.S. which in some cases are less than robust and potentially disappointing As far as core result, 2014 was a stronger year than the reported results may indicate. Although total revenue growth was 5% the company excluding Field Solutions was up 9% for the year but most of that being organic. The other dynamic, agriculture induced bad news, good news effect is the rapidly decreasing reliance in agriculture margins. Over the last two years since 2012, total company non-GAAP operating income has increased by 21% despite the significant negative effects of a 25% decline in operating income in the highly profitable Field Solutions segment. This growth results from the rest of the company excluding Field Solutions growing non-GAAP operating income from 2012 to 2014 by over 60%. As a result, the contribution of non-GAAP operating income by Field Solutions has dropped from 47% of total company in 2012 to 29% in 2014 in unattended consequence of the agriculture malaise has been a more balanced portfolio and a more balanced story that becomes easier to manage. Last quarter, we laid out a scenario whereby Trimble could grow double-digits in 2015 while the operational basis for that scenario is still intact, the combination of effects which surfaced late in the year will take away enough growth points to make that more difficult in the first part of 2015. Let me speak to these effects. The first is oil prices. Trimble has a relatively de minimis direct exposure to the decline in oil prices, approximately 1% of revenue or about $25 million a year, mostly on sales and exploration activities which has been drastically curtailed. We saw an immediate revenue impact of $5 million-$6 billion in the fourth quarter across E&C and Field Solutions. Our preliminary judgment is that we will see a continuing impact at this level and that our growth rate will be impacted by about one percentage point a quarter for the first two to three quarters of 2015. There may be secondary effects that could be both negative and positive. The most significant positive effect would be of lower gasoline prices provide cover to Congress to pass an infrastructure bill founded by an increase in gasoline taxes. One could also speculate that lower energy prices will provide some relief to struggling economies around the world and lead to improvements in those economies later in the year. On the other hand oil, producing countries could see a pullback in spending. The second effect is a stronger dollar which is a more significant consideration for us. Translation effects will negatively affect revenue growth for the first three quarters of 2015 by three to four points of growth assuming current exchange rates. The bottom line effects will be less impactful since our cost profile gives us close to a natural profit hedge under most scenarios. The third effect from fourth quarter is new acquisitions and the accounting for them. New acquisitions represented a short-term drag on revenue and earnings during 2014 partly because of the deferred revenue accounting effects. The most significant of these effects in the fourth quarter was Manhattan Software which from a business perspective is on track with pre-acquisition expectations although the revenue accounting has not yet reflecting the upside. Manhattan Software and the other acquisitions temporarily depressed non-GAAP operating margin by four points for 2014. We expect these revenue have recognition effects Manhattan Software to continue to be a drag on E&C operating margins through the first half of 2015 and then to provide lift in the second half as it starts to reverse. Let me update you on the latest picture by segment. Reported E&C revenue was up 10% for 2014. The growth was affected late in the year by the effects of the oil price decrease, exchange-rate effects and the larger order in the fourth quarter of 2013. Also, late in the year, we saw within E&C some of the anticipated cautiousness in Europe we identified in the last quarterly call. The combination of these effects will place pressure on revenue growth rates in the first half of 2015. We generally see strong double-digit growth in the construction product lines in the U.S. competitively inconsistent performance in Europe and a range of performance in other parts of the world. We currently anticipate the second half of the E&C in 2015 to be stronger than the first half. Part of this is the relief on comps as we lapped the exchange-rate and oil prices affects; part as the reversal of the adverse revenue accounting, part of it is the current view on order pipeline and part of it is the flow of new product launches during the course of the year. Field Solutions revenue was down for the year by 11%. Agriculture is the dominant part of the story and was obviously down more. The agricultural market is adapting to change circumstances and we are working to understand how the larger effects impact us. As an example, corn cash proceeds dropped by approximately 20% in 2014 as a result of price declines of 35% which were partially offset by higher yields. This trend is expected to continue in 2015 with the resulting drop in corn acres planted at least in the US. Soybean acres increased in 2014 with an expected drop in soybean cash crop proceeds in 2015. With major swings like this occurring, it is difficult to capture significant mindshare from farmers to discuss ROI. Our formulation for agriculture in 2015 is still roughly the same as the one we provided last quarter, which assumes our base agricultural market will retreat by another 15% year-to-year and will be partially offset by irrigation sales, new products and services. As the OEM anomalies which impacted us severely in the third and fourth quarters, worked themselves out, we also anticipated our forecasting ability to improve since we will be less reliant on another players. Although we can't allow ourselves to feel comfortable, our profile through the first five weeks of the current quarter is generally consistent with this scenario. Finally, although the second half of the year is a long way off, the OEM driven relative meltdown in the second half of 2014 we provide easier comps in the second half of 2015 which may improve relative growth performance. Reported Mobile Solutions 2014 revenue was up 5% and non-GAAP operating margins improved to 16%. The core elements of the segment built around transportation and logistics grew double digits and generated close to 20% non-GAAP operating margins. The two primary elements within the segment that resulted in the lower performance where Field Services which we discussed last quarter and construction supply. Construction supply is currently expected to benefit from new product introductions in the improved U.S. construction market and should demonstrate better performance as 2015 progresses. Field services is more reliant in enterprise accounts of longer sales cycles. We do however expect improvement on revenue growth and profitability during the year which is supported by both the potential orders pipeline and expected new products which will allow us to access new market segments. The decline in oil prices will probably be a net plus in the segment. On the one hand it could relax some of the pressure that reduce cost through our Solutions, on the other hand it will relieve some of the intense financial pressure felt by the participants and what is typically a low margin transportation and logistics market and give them increased discretion to invest in the business. Our 2014 performance across the regions was variable. In general, North America performed well outside the agriculture and is expected to continue and do well in 2015. Brazil was adversely affected by agriculture but has strong double-digit growth in E&C. the current direction of the Brazilian economy in 2015 is unclear and we are remaining flexible. China has strong double-digit growth overall and if the Chinese economy remains in its current state, it should continue to provide us with growth opportunities. India reflected double-digit growth in 2014 and is currently experiencing new momentum although it may take some time to play out for us. Russia was down precipitously in 2014 but most of the effect in E&C and we are assuming the market remains difficult in 2015. The Middle East and parts of the Africa showed extremely strong growth in 2014 with generally strong expectations for 2015. Europe is the most significant concern in 2015 aside from the exchange rate effects which will have a significant effect on translated dollar revenue. Although our European results for 2014 outside of Field Solutions reflected growth, we are seeing increased caution in Germany and making investments and cannot yet assess the full meaning for 2015. Our financial model has been squeezed by the relatively precipitous drop in agriculture which resulted in a slight drop in non-GAAP operating margin to 20% of revenue for 2014. Field Solutions operating margins have fallen six points in the two years from 2012 to 2014 while the rest of the company excluding Field Solutions has improved by about 3.5 points over that time, leading to a 20% increase in dollar operating income over the last two years. We continue to balance the cyclical short-term pressures with the longer-term secular view that agriculture has substantial future growth available in data and information solutions. Our approach thus far has been to mitigate cost as opposed to engaging in significant cost reduction to maintain the historical agricultural operating margins. Our stake in the ground is that we will maintain agricultural operating margins at greater than 30% against all foreseeable revenue scenarios which is down from traditional peak values. The overall Field Solutions segment operating margin may move around some depending on the revenue mix within the segment. We currently expect to expand operating margins for the total year largely on the back of the second half improvements. I have identified the most significant current portfolio issues within Trimble agriculture, our owners business which includes Manhattan Software, Construction Supply and Field Services Management. We believe all of these are grow up businesses and add to the Trimble franchise and expect to see all of them demonstrate a meaningful progress in 2015. Buried deeper within the portfolio are a number of smaller niche businesses that are not material. Some of them are profitable historical legacies and some are nascent growth platforms. We continue to evaluate all of our business elements and re-justify them on strategic fit and ability to conform to our financial expectations with an eye to tuning the portfolio. We expect 2015 to be a rich year for new products, some of which will be market extenders or penetrators. Trimble Leap and the R1 GNSS receiver will both fall in that category. They are both bring your own device solutions which have the potential to democratize and grow a number of Trimble’s existing 2 markets. They are combination of a low-cost, high accuracy, GNSS receiver, and Trimble software that pairs directly with smartphones and tablets. High accuracy is achieved with real-time corrections from Trimble's viewpoint RTX correction service. Potential users include an expanded universe of GIS users as well as existing the new users and construction land administration. Finally, let me comment on the ongoing process of renewing our Board of Directors to provide the experience and skills to address our opportunities. I am pleased to announce that Börje Ekholm, has agreed to join the Trimble board and will stand for election to the Board at our Annual Shareholders Meeting in May. Börje has served as President of CEO of Investor AB since 2005 and also currently serves as Chairman of the Board Of NASDAQ OMX. He is Chair of the KTH Royal Institute of Technology and the director of Ericsson. Following election, his term as a Trimble Director will commence upon stepping down from his officer and director positions at Investor AB effective May 12, 2015. He brings a rich international experience that with exposure to a wide range of industries. We anticipate a major contribution both in supporting and advising management and meeting the challenges of future growth as well as providing insight into the market possibilities across a number of vertical markets. Let me turn the call over to Francois.

Thank you, Steve. Good afternoon, everyone. Before getting to the numbers, please note that unless otherwise indicated, the operating results I will discuss will be on a non-GAAP basis. The reconciliation from GAAP to non-GAAP numbers is 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 now let's first, the fourth quarter results and then move on to the full-year 2014. Q4 total revenue was $564 million, down 6% year-over-year. Our fourth quarter revenue was challenging, which we expected. This was due to weakness in the agriculture business, the year-on-year comparison challenge due to the one-time effects in Q4 '13 in the engineering and construction segments and the impact of the 14th week in Q4 2013. Currency translation add an approximately 2% year-over-year unfavorable effect offset by acquisitions adding approximately 2% year-over-year. In the end, our results were towards the low end of our range due to the following: we were negatively impacted by the strengthening of the dollar during the quarter, recent acquisition at strong billings but less revenue recognized than the expected within the quarter, and lastly we saw short-term reaction in our oil and gas vertical to the decline in oil prices. Upside of agriculture, excluding the E&C one-time effects, and adjusting for currency impacts, organic revenue in Q4 was up approximately 5%. Now looking at revenue by segments: Engineering and construction segment revenue was down 1% this is essentially due to the one-time effects from Q4 ’13 excluding those the underlying organic growth for E&C is up in the high single digits driven by growth in heavy civil and building construction. Our Q4 guidance comments included that E&C revenue in Q4 ’13 benefited from the revenue recognition of the large discreet item and also included revenue from the virtual site joint venture which is now deconsolidated. These are known impacted fourth quarter growth negatively by approximately 8%. Currency headwinds were approximately 3% and favorable to year-over-year growth roughly offset by the acquisitions in E&C. Field Solution segment revenue was down 27% year-over-year due to weakness in the agricultural business which was down over 30% compared to Q4 ’13 during which agriculture had grown by double digits. The agriculture weakness was widespread and most pronounced in OEM factory installed. Currency translation add an approximate 2% unfavorable year-over-year impact on the Field Solution segment. Mobile Solutions segment revenue was down 1% year-over-year, as in the recent quarters, this was a mix picture with the growth in transportation and logistics, and a year-over-year decline in Field Services Management. The segment results were also modestly impacted by the divestiture of a nonstrategic consumer oriented business. Currency translation at the smaller 1% unfavorable effect on a year-over-year growth as this business is less geographically diversified. Advanced Devices was down 2% in the fourth quarter. By geography 53% of the Q4 revenue was from North America, 24% from Europe, 15% from Asia-Pacific, and 8% from rest of the world. North America was down 9% year-over-year but excluding the impact of one-time items we discussed, North America would have been roughly flat on a year-over-year basis. North America was where the agriculture decline was most pronounced. Europe was down 6% year-over-year, primarily impacted by currency and weakness in agriculture along with general softness in some key markets like Germany. Russia also continue to be down significantly. Adjusting for currency impacts, Europe would have been up by close to 2% on a year-over-year basis in Q4. Asia-Pacific was up 5% year-over-year. Within Asia-Pacific, there were multiple bright spots including China and India. Australia improved from prior quarters and was up slightly. Rest of the world was flat year-over-year as the Middle East and Africa posted strong results offset by weakness in South America primarily due to agriculture. Non-GAAP gross margins decreased to 56% in fourth quarter compared to 57% in the fourth quarter 2013, due mainly to reduce agriculture sales and associated lower gross margins in the Field Solutions segment. Q4 non-GAAP operating income was $84.2 million or 14.9% of revenue as compared to 20.9% of revenue in the prior year. Many of our businesses showed operating income improvements but the total company results were negatively impacted by a number of factors. Breaking these down and approximately speaking, we saw unfavorable operating margin effects from lower revenue in agriculture for two points, acquisition for another two points, the biennial dimensions users conference for one point, and profit from the discrete item recognized in Q4 ’13 for one point. The impact on currency translation on company margin was small. While our revenue was impacted, we have a significant cost base in Europe and other countries which mitigates the impact on the operating income. As Steve mentioned, our acquisitions of performing to business expectations but our financial results have been impacted by revenue accounting. This is occurring in two ways. First, GAAP accounting mandates or purchase accounting fair value balance sheet adjustment that often significantly reduces the pre-acquisition deferred revenue. Since most of that impacts short-term deferred revenue, the revenue shortfall diminishes over time and is mostly in the first two to three quarters. Secondly some businesses were acquired particularly those with software and professional services offerings, our business practices that need to be adjusted to meet the revenue recognition threshold in a public company such as Trimble. We are recognizing very little revenue in the short-term while carrying the full operating expenses, hence a negative impact from profitability. We are working to mitigate these short-term effects and while we still expect dilutive impact in the first half of the year, we expect that the acquisitions that we close in the second half of 2014 would be accretive in the second half of 2015. The non-GAAP tax rate for the fourth quarter 2014 was 5%. The full-year rate was 19% as compared to a prior year 22% estimate due to geographic mix of income and the R&D tax credit which was re-enacted in Q4. The Q4 rate reflected a catch-up for the full-year on these items. Q4 net income of $76 million was down 33% as compared to Q4 ’13. Diluted earnings per share were $0.29 compared to $0.43 in Q4 ’13. Let me now provide a summary of the 2014 full-year results which Steve have already commented on in more detail. Total revenue was $2.4 billion and up 5% over 2013 excluding the agricultural business, total company revenue was up approximately 9% for the full-year. Engineering and construction was up 10% year-over-year driven by growth in Trimble buildings, heavy civil and geospatial. Field Solutions was down 11% with agriculture down double-digits partially offset by growth in GIS revenue. Mobile Solutions grew 5% for the year with double-digit growth from the transportation and logistics business partially offset by declines in Field Services Management. The Advanced Devices segment was up 9%. By geography for the year, 54% revenue came from North America, 24% from Europe, 14% from Asia-Pacific and 8% from the rest of the world. The year-over-year North America was up 2%, Europe was up 9%, Asia Pacific was up 9%, and rest of the world was up 7%. Non-GAAP gross margin reached a full year record level of 57.5%, up one point year-over-year primarily reflecting the impact of a more favorable mix of revenue. Non-GAAP operating income increased 1% to $480 million or 20% revenue as compared to 20.7% revenue in 2013. Note that, without the negative impact of agriculture and the negative short-term effects of acquisitions, operating margin percentage would also have been up on a year-over-year basis. The non-GAAP tax rate for full-year 2014 was 19%. 2014 net income of 387 million was down 6% as compared to 2013. Diluted earnings per share were $1.46 compared with $1.58 in 2013. Turning to the balance sheet; we finished the fourth quarter of 2014 with $148 million in cash. Accounts receivable was $362 million with days sales outstanding of 58 days, and ending inventory was $278 million. Deferred revenue increased to a record level of 238 million, an increase of 32% year-over-year. The larger increase in deferred revenue primarily reflect changes in the mix of our revenue towards both software and subscription offerings and include the impact of acquisitions. We are pleased to complete refinancing of the company's debt in the fourth quarter primarily through our initial public debt offering during which we issued $400 million of investment grade senior notes due in 2024. This extends the term for a portion of our total debts that we believe to be long-term in nature. Debt increased by $92 million in the fourth quarter 2014 ending at $738 million versus $647 million at the end of third quarter 2014 primarily due to acquisition activity. Our debt-to-equity ratio and leverage ratio which is gross debt to trailing 12 months EBITDA remain at comfortable levels in the quarter at 0.31 and 1.4 X respectively. During the fourth quarter, we repurchased 1.2 million shares of Trimble common stock for a total of $32.8 million. For the full year 2014, we repurchased 3.2 million shares for a total of $97.8 million. We have $250 million remaining on our share buyback authorization. For the full-year, cash flow from operating activities was $407 million, down 2% against 2013. Lastly, I am pleased to report that the litigation reserve that impacting our GAAP results in Q3 related to $51 million jury verdict against the company has been reversed in the fourth quarter as the initial verdict was overturned. This impact was excluded from our non-GAAP results. I will now turn to our guidance for Q1 2015. We expect first quarter revenue to be between $590 million and $620 million, non-GAAP earnings per share of $0.26 to $0.33, and GAAP earnings per share of $0.09 to $0.16. Revenue guidance includes level of conditionality. We have a higher level of confidence in our forecast for the company outside of agriculture and within agriculture we expect another double-digit year-over-year decline in a higher level of variability. First quarter non-GAAP guidance excludes the amortization of intangibles of $41 million related to prior acquisitions, estimated acquisition cost of $4 million, and the anticipated impact of stock-based compensation of $13 million. First quarter non-GAAP earnings per share guidance assumes approximately 264 million shares outstanding and the 22% non-GAAP tax rates. This non-GAAP tax rate assumes that the R&D tax credit will be re-enacted for 2015.Note that we're abating our non-GAAP tax rate methodology moving forward to eliminate the big quarterly variations associated with up and down troughs during the year. With that we will now take your questions.

[Operator Instructions] Your first question comes from the line of Paul Koster with JP Morgan, your line is open.

This is Mark Strauss, thanks for taking our questions. So, I guess starting with Field Solutions, I understand it's still early in the season for Ag but can you just talk about the demand you're seeing for some of the new products and thinking more specifically for the irrigation products and I guess this -- I know you don't guide by segment, but does the total guidance of 590 to 620 include a material impact from that? Or do you think, more meaningful to 2Q.

Again, as I said in the scripted portion, so far through the quarter we are on a profile that we have laid out -- well with the profile that we actually laid out back in last quarterly call. So I think it's too early to be at all categorical but the relative impact of irrigation -- part of it is action on our part. This is going to be a combination of direct and indirect distribution. We, in the last few months have shown significant progress in terms of putting direct salespeople in place so a growing portion of the geography is covered by direct salespeople which should have a beneficial impact. I think again it is a seasonal market and I think that March for latter stages of February and March are going to be the significant periods. So I think it's premature to talk specifically about irrigation. But again through five weeks of the quarter we are on the profile that we laid out, so there is some reassurance that we are getting -- and there are understanding of current market conditions is improving and that we are less subject to -- let's call it drastic unforeseen movement. So I think still guarded, but I think our level of controlling insight is improving. But beyond that I think we need to wait until we are little deeper in the quarter to kind of characterize where we are on this quarter.

Okay, thanks Steve. And Francois, are there any general guidelines you can give for FX, maybe just walk through your top one or two currency exposures, and just say is there anything like 5% decline, and the euro would be a x% decline in your annual revenues, kind of guidelines.

Yes, so let me just kind of give you some general trends, I mean clearly we have about a third of our revenue in non-US dollar and out of that the largest number by far is in Euro, so that should kind of help you little bit and just kind of the rates that we assumed for the Euro is 116 which is -- it's a little bit worse today, right. It's been a little bit -- but I think we are in the range, that's what we have assumed for the guidance.

Okay, thank you. That's it for us. Thank you very much.

Your next question comes from the line of Jonathan Ho with William Blair, your line is open.

Just wanted to start out with the guidance for 2015 and some of the comments you had on the second half of the year. I just wanted to know and I know you have outlined a few items but what gives you sort of confidence that the organic growth is going to get back to sort of your prior targets and overall revenue growth back to double-digits in that second half. And can you maybe rank order for us some of the items that you listed previously in terms of that importance?

Yes, so part of this is, I guess the fundamental question, which is more indicative the fourth quarter or the three quarters through September 2014. If you exclude Field Solutions, by my calculations so you want to double check this but by my calculation that year-over-year growth through the first nine months of the year for the company excluding Field Solutions was between 12% and 13%. So I think that going into the fourth quarter, we had baseline for the company excluding Field Solutions admittedly of 12% to 13% which was overwhelmingly organic. Now, the math that we laid out in the last quarterly call was for comparatively modest organic growth, actually less than -- I think we had shown earlier in 2014, plus the effect of the acquisitions. So I think the calculation related to 2015 and the of the exchange rates -- the combined effects of the exchange rates, oil and gas and these revenue accounting effects has put definite pressure on the first half of the year. But I think our calculation of the last quarter which was, let's call organic growth at levels that we had demonstrated or more than demonstrated in the past, plus the inorganic giving rise to the view that a double-digit number was possible, I think that certainly applies to the second half when the comps start to get easier. Plus, I think there is a view from an organic perspective that in terms of looking at the pipeline of activity that some of our businesses are reflecting, it's actually there are some quite positive trends, now these tends to be larger blocks of businesses, some of them will happen some of them won't happen, but we are likely to see some relatively significant pieces of business in the second half for the year that are currently in a pipeline of prospective business. So I think that we still feel good about the fundamental platform businesses excluding agriculture and agriculture is the current assumptions the one we laid out which is down baseline down 15% with some mobility to mitigate of that. But I think we feel good about the base business, I think the only qualification or that would be new in the last three months maybe a little but more intensity around, what is going on in Europe and what's going to be the economic fallout in Europe, but parts of Europe are quite strong such as the UK but looking at Germany, I think there is a kind of undertone of consciousness and conservatism in Germany that would be work potentially impact us as we go through 2015 but generally we are in a solid position strategically. We have a strong and in some cases growing momentum in our businesses and from an operational standpoint and from a strategic standpoint, we actually feel good about it once we qualified for agriculture and the possibility that Europe could turn out late during the course of the year. Some of it is just the math of revenue recognition and kind of year-to-year comps but I think beyond that there is some relatively strong kind of organic movement within the company.

Got it. Thank you, that's very helpful and this is a follow-up, I mean given what we saw happen with your OEM relationship in the fourth quarter, I know this is difficult to predict but have we seen sort of last time that that's going to happen, has there been some sort of change or correction in terms of inventory levels or production type trend that give you more confidence that you may be OEM partners still run their business more like auto companies or sort of whole production in the fourth quarter of ’15 any commentary there in terms of what may be gives you some more confidence that won’t recur?

Well, attempting to be balance here, one the on hand, I think what we saw in the third and fourth quarter was just the OEM standing on the breaks and given the complexity of their supply chain, they really have to hit the brakes really hard to get an effect. We have been something fairly close to just-in-time supplier when it came to supplying the factories. I think in a general senses, there is a whole lot of inventory left there to create an inventory effect. At the same time, I think that it’s fair to look in the direction of the OEMs because it's impossible to kind of predict behavior of complex organizations and I think it’s the appropriate question to ask but I think that I don't want to give any guarantees but I think that the bulk of the OEM questions behind us and then what we are really looking at now is okay what is the honest-to-goodness demand, the sell through demand of the marketplace is going to be, is going to be the clear driver from this point on, but again I don't want to give in, given that other people are involved, I don’t want to give an absolute sort of guarantee that it's done, but I think it is.

Thank you.

Your next question comes from the line of Brett Wong with Piper Jaffray and your line is open.

Thanks guys, thanks for taking my questions. I was wondering if you can frame up a little bit more of the impact in E&C with the little lower energy prices and obviously you since talked about the direct impact but more on that indirect impact.

So the direct impact I think we have seen it and we have traditionally sold between $20 million and $30 million into oil exploration and that’s a very quick reaction sort of market. So I think we saw the effect in the fourth quarter and it has been drastic and it has probably purged kind of zero in terms of that as being a marketplace for us for some here. If both turns out very quickly and then starts up very quickly. So if we have to rebound, what we are good with, what we would see presumably is a cliff function going in the other direction as far as the indirect effects, I think those will play out over time but it would be things like and may not even be detectable in the background clutter, it would be things like if at some point somebody were going to build a road into an oil exploration area that road may not be built but I don't think we wouldn't actually, may be in couple of cases we could but it will be demand we never knew was going to be there in the first place. So, I think there will be indirect effects, so I think it would be silly not to say that there are indirect effect, I don't think that they will be particularly easy to categorize or all that necessarily notable. I think that if it the indirect effects would okay, how would it effect national economies? And okay is there an effect that rolls through from us in terms of investment levels and such like that but I think by and large the parts of the industry that are going to be affected will be comparatively small for us, okay obviously, but most obviously be a construction related to oil and that has never been a particular point of focus for us. It has been for others in the industry's other competitors I think will be affected more directly by kind of the fall off and construction related to oil but that has never been a particular point of focus for us historically. So, there will be effects, I just don’t expect them to be particularly notable and it will tend to be kind of background effects and probably not even identifiable by us.

Thanks, Steve. Can you talk a little bit more just on expectations for longer-term highway bill, obviously that's going to be impactful here as we move into the second half. So, just any color you can provide there what you see now and obviously it makes sense that it would go through at this point with lower energy prices.

So, I think that -- I don't have any particular insight in terms what's happening in Washington. I think that if you were to look at the single, most positive discrete event that could occur for Trimble. I think it would be a highway bill with multiyear financing but probably would be the most significant discrete and was positive event that could happen to Trimble because it could reignite, I think a level of confidence, it would provide increased confidence that there would be multiple years of funding and that has resolved contractors which would rev up to make the investments necessary to be competitive and securing that funding. So, I think it would be highly notable if the highway bill, with multiple years twenty funding were to pass. Now, I think that it is reasonably encouraging, although I am not one to be able to judge particularly well. I think it is somewhat encouraging that there seems to be bipartisan discussion going on and that there seems to be a somewhat of a bipartisan view that okay gasoline taxes would be the way to fund it, I don't think that conversation was being held on a bipartisan basis as of and maybe even a year ago but certainly not two years ago. So I think that's encouraging. What the timetable is? I don't know but it is one of the few things that Congress might be able to pass in a spirit of bipartisanship. So a vague hopes on my part, it would be a significant for Trimble if that happens but I don't know what probabilities are and I don't know what time framework is.

Great. Thanks a lot.

Your next question comes in one Rob mason with Robert W. Baird. Your line is open.

Good afternoon, Steve, Francois. Thanks for taking the question. I want to dig in a second on the E&C margins, I think I understand the impact of the differed revenue accounting but is that all it’s going on there because it was pretty significant drop-off and I am not sure I can account for all of that margin degradation via that.

Yes, so there is one more element which the discreet revenue item that was recognized in Q4 ’13. So on a year-on-year basis, that's definitely has an impact. We also have dimensions which is probably $2 million to $3 million for just that E&C business alone, for the total company about $5 million. So those would be the two other things that I would point to decides the acquisition and as a matter of fact may have a bit more impact on the E&C it does on the total company in terms of operating margin.

Just, may be adding on here a little bit is, I think that if just the discrete, -- in effect if you play portfolio here a little bit and what we call our owner 's business focus on the owners of the project, which is where Manhattan software is, where the bulk of the stuff is occurring. We just took that out, the rest of E&C without the owner 's business. The operating margins for the fourth quarter 2014 would look pretty similar to what they look like in the fourth quarter 2013 without any exchange rates. So plain portfolio, relatively comfortable that okay we have got hard handle on E&C margins and what we have here is a bit of a portfolio issue to work through.

Yes, it would've flat and without the outliers and the acquisitions.

Okay. And Steve you reference this, I call it 30% or better stake in the ground and fueled solutions, would you expect that you could see that, return to that in the second half of ’15 based on your revenue expectations and does that give you the latitude to invest that you need to you fully see that's connected form solution come to market with the right channel.

Yes, I think so, I mean we were currently running in the 30s and so what I did today to provide comfort to the financial community that we weren’t simply going to watch Ag margins or for that matter Field Solutions margins have laid a way is okay, there is what I would call hard floor under margins for Ag and we will simply not let them fall below that. Now with what we see in terms of revenue profile, we do believe that okay even maintaining Ag margins in the 30s as oppose to maybe thinking about a number in the 40s for the time being. I think that leaves us with the discretion to continue to do what we need to do in terms of the connected farm, in terms of the data and information products and I think what you're saying part of the back and early part of 2015 is a product flow that's consistent with this. So I think that we are attempting to find the right balance short-term, long-term but what we attempt to do the day was provide some comfort that we believe we can actually do both.

Okay and did you give an update or maybe I missed it just within Ag, the growth within the aftermarket channel how that compared to be the OEM channel, was it still similar to the third-quarter levels, or did that...

I don’t think we have provided much in the way of quantification but directionally Francois talk to, it was it was not pretty anywhere but the fourth quarter was particularly difficult in the OEM channels. So I think that the relative performance of the aftermarket is still better than relative performance in OEM and I think we are getting maybe a better handle on long term interest being able to predict the aftermarket element of it.

Okay. Thanks for taking my questions.

Your next question comes from the line of Ian Ing with MKM Partners. Your line is opened.

Thanks for taking my questions. As far as we could tell, there was elevated equipment purchases at the end of the year due to section 179 and bonus depreciation loss, so did you see any benefit from that? And do you think customers just bought more in December or did they pull in some of their March purchases into December?

Well, answering the second question first. So far given that we are on a profile, on the profile we expect going into the year -- so far there is much evidence from kind of first five weeks of the quarter that there was much in the way of pull in. And again selling largely through a third-party channel, it's hard for me to actually talk to discrete effects. We're not involved with the farmer on each individual transactions going through distribution. So the answer is, there may have been affect, but I don't think it was, from our standpoint it was not particularly discernible. So I think that in terms of a relatively small investment like ours, I'm not sure how much would an effect kind of the tax sort of environment affects us. So if it was there, it wasn't particularly notable to us.

And obviously a difficult environment in many ways due to several factors, I mean could you highlight the trends that give you the most immunity to some of this, I mean is it the mix to more software and services, more of an annuity, or is it is just tipping point where you talked about contractors just really needing to be more efficient any sort of forces that help offset what's happening right now?

Are we talking agriculture, or are we talking in general?

Just in general, just what should we focus on if that gives you immunity to environments?

I mean again I think that immunity might be something that I could only hope for, but I think that again maybe focusing on construction, agriculture gets a lot of attention and the agriculture is what it is and okay we are exposed to kind of a very severe turndown there. So I think that – let me focus a little bit on construction. And I think there both at current status, I think there is also kind of strategic secular play there. But I think that when it comes to construction, Trimble is not selling capacity so whatever is happening in the marketplace in terms of kind of demand or whatever Trimble is selling productivity, it's selling ROI to the contractors. So it's not immunity but let's call it resistance to the downside and maybe putting in the form of if a contractor -- and I don't think we are certainly not, in the U.S. the situation is very robust and in many parts of the world it's still relatively workable economic environment. So I don't want to kind of focus on kind of a negative environment but, in construction let's say a contractor does park half of the fleet out back, the half of the machine fleet out back; Trimble still has the ability to walk through the front door and say okay, we are very sorry that half of your fleet is parked out back because you don't have work for it. But let us help you make the other 50%, the 50% you are using, 20% or 25% or 30% more productive, and we can sell in adverse environment. And I think there is a fundamental, very strong secular trend in construction at this point in time which is -- there are more and more contractors who are willing to state out loud that they can save 25% or 30% of their project cost, their total project cost, through the holistic application of technology. Okay I think that's going to over the next five years, going to just to drive a major secular trend. Those contractors who are relatively early adapters are going to gain such a competitive advantage that it will either force the remaining contractors to step up their game or risk being pushed out of the game. So I think there are some very strong forces that working in construction, exchange rates and all that aside, that don't get the immunity but give us basically I think a strong secular story that let's call it kind of cycle resistant. And we have a very little exposure to mining, so kind of the cyclical downturn in mining really has not been a primary affect on us. So it affects us more through the geospatial thing. Transportation and logistics, I think is totally different paradigm and those tend to be large companies, they have significant balance sheets, I think they make their decisions on a long-term basis and again I don't think there are necessarily cyclical factors that are particularly strong or pervasive there. So I think I still see us as very much of a playing in secular trends even in agriculture. Right now cyclical is very strong but there is a move, there is a technology shift occurring in agriculture and I think that we will be a significant participant in that over the next few years. I'm not sure if I was exactly on point to the question you asked but I guess maybe I'm arguing a little bit with the premise.

No thanks, I mean that laid out the long-term thesis being intact. Thanks.

Your next question comes from the line of Andrea James with Dougherty, your line is open.

Hi. Most of my questions are already asked so I will just ask two quick ones. What are your thoughts on the construction software solutions you have pulled together? I feel like it's really only recently that you really pulled it all together. So I guess, is there any inflection point coming soon and when you really start to get excited about it throwing off, I guess real fruit?

We did roll out at dimensions in November, we did roll out Trimble Connect, which is the fruit of some number of years and a significant amount of investment coined together in one platform that starts to unite all of our construction offerings. So I don't know if there is a magic moment this will be progressive. That's just the opening salvo. There will be new releases coming continuously on that, in every some number of months. But I think that we are seeing the benefit of let's call disintegrated approach on software but it's really in terms of the total Trimble franchise. Again our view, and I will point Ekholm as an example, simply because that has been in press release but the ability for Trimble to come in with a significant portion, if not all of the portion of the technology solution that, yes we will generate the 25% to 30% project savings potentially gives us a, what I will call, significant competitive advantage gives us a significant claim on the share of wallet that's being used for technology acquisition. And so I think that we're already seeing the benefit, maybe not all of it is public at this point in time, a lot of the participants do not want to be press released, but it gives a significant market position. That does result in software revenue sales, but it also pulls the hardware along with it because what we're selling is a bundled solution to a large extent and the software is optimized to work with Trimble hardware even though it would work with anybody's hardware as well. So I think we're already seeing the benefits. I'm not sure that I would want to describe it in terms of some magic moment that creates a real inflection point. I think this is simply every day taking a few more steps ahead sort of market.

Fair enough, and then one more, you talked about the highway bill. I guess, maybe a more minor piece of legislation would be the Railway Safety Act. Can you fill us in there? It's my understanding that every rail operator in North America is going to have to work with you or buy a Trimble survey machine in some way. Can you just bring us up to date and tell us if that is a needle mover at all in the upcoming year?

Well, I think I am going to need some more education from you as to exactly what Bill we are talking about. We do have a rail business. It is growing at a very strong double-digit from a small base. And we are talking to our railroads, but I wasn't aware that there was a legislation that was driving some of that. I guess you're going to have to educate me.

Well, maybe it's a safety thing. And then as far as the highway bill obviously you don't have -- all of the commentary that you're giving about the upcoming year, you're not assuming, that hasn’t factored into anything that you said so far, it would be sort of upside to what your communicating right now? Is that the way it was thing about?

I'm not going to -- either my personal reputation or the reputation of the company on Washington doing anything. So now it is not considered to be part of it. But I suspect if there were highway bill passed, again particularly in terms of the -- that was relatively clear that had multiple year funding and it was clear that it was going to be used for highway or bridge or infrastructure development, I suspect we would detect the changes in the marketplace within days or weeks. Just for me it would be highly rewarding to those contractors that actually play in the infrastructure market.

I appreciate it. Thank you.

And our next question is from the line of Richard Valera from Needham, your line is open.

This is Kristin for Rich Valera. Thanks for let me ask the question. Recently the Department of Transportation announced they expect to publish the final Class A - ELD mandate for the end of 2015. Can you just talk about the opportunities this provides for the Trimble and portion of your Mobile Solutions business?

Again, I think I'm going to dodge the question. I'm not necessarily well enough versed to talk about the, let's call it subtle interactions other than to make a probably non-helpful statement that in this realm when it comes to over the road regulation, it is definitely different. Here is a case where regulation creates business for Trimble and much of the regulatory push coming out of DoT, when it comes to over the road and well other forms of transportation as well, requires compliance and that requires technology. So again I'm not well educated enough to be particularly helpful at the moment but I suspect it's probably good news for us.

Okay, great. Thank you.

[Operator Instructions]. Our next question is from the line of Eli Lustgarten from Longbow Securities, your line is open.

Good afternoon, everybody. Can I get a couple of clarification to make sure you assumed the R&D credit will be here this year, how much is that lower your tax rate to 22%, because that mean obviously it didn't exist before the end of ’14. Is that a 1% to 2% of [indiscernible] or something like that?

Yes, it is built in, and it is a little bit shy, a 1.5% in fact.

And secondly, we always ignore it, but you had a hell of a year in Advanced Devices with a 31% drop; is there anything happening that would prevent that from duplicating itself in the years that we're looking for every nickel and dime, so as to make sure that we don't have a blindside there?

Yes, I'm going to disappoint you once again, Eli, by not getting enthusiastic. Yes, again I think that every once in a while Advanced Devices will have a -- and this one was driven from a couple of sources. So we have a small military business that actually did very well in 2014, given the kind of budgetary pressures in Pentagon, that's not likely to occur. And then we have a timing business that sells GPS-based timing solutions into the telecom infrastructure players such as Samsung. And that is exceptionally lumpy business, very hard to predict. And I wouldn't necessarily want to predict 2015 as being an up year for that. It could turn out to be that way but there are no indications that is something that we could reliably put in a forecast...

If then actually we don’t fit in itself?

Yes, so I think that the best thing is to assume a very low sort of growth rate for Advanced Devices and not assume that it will repeat again. Basically our internal calculations are not expecting much from it.

Now as far as -- can you give us what the carryover acquisitions in revenues and how the impact will be in 2015 versus 2014, with the change in deferred revenue? I mean how much revenue -- notably we see in E&C but how much should we account for acquisition growth in the year, that have already been made?

I would say approximately a 3% to 4% would be the rough magnitude, and most of the benefit we will start seeing in the second half as the accounting effects start.

And most of that’s in the E&C.

And most of that is in the E&C, yes.

And if that if we should we get the change to bring the E&C margin back up to the 20% range that we have seen all the year on a reported basis, and we've got a disappointing quarter under 15 or 16, kind of at which way you look at it. But you know we are going to stay there that while and we got to it at the second half and the acquisition impact the drivers back over 20?

Yes, I think, additionally from a runway trend standpoint at the time where we get to second half of the year, total year average, I can't really answer that precisely but, again the E&C margins in Q4, without the acquisition impact and without the applier which has caused, would have been flattish year-on-year. So I think it's what...

And again, but there is -- I know we didn’t duplicate the fourth quarter of '13, but you're not going to duplicate it in '15 either. You know I have to built that in, I'm just trying to get the scenario with the feel of first half of how the quarters play out and the margins begin to play out and the improvement that we're expecting to take place and E&C is probably most critical area. I am assuming that with the funding running out and the highway bill in the spring also, I assume it will get renewed, but we have all these short-term factors that the second half looks like it should be a much easier and better comparison in E&C than the first half. And I just want to make sure that the right profile to look at.

Yes, I think that's a general sense of, that's our general sense.

And in Mobile Solutions, also I mean you have -- two-part business, one strong, one is not. We had a steady state level of business activity that the modest revenues will be able to sustain the current levels of profitability that we saw for the year in 2014 and 2015?

For Mobile?

In Mobile, yes.

Yes, so I think that the real engine within Mobile is the transportational logistics businesses. At this point they are looking at another strong revenue growth year. I am personally expecting that the construction supply which is not a major part of the business but which is enough to kind of at the margins to require a bit of a story here. I think that is now looking at a meaningful growth year. And then I think the Field Services, the other relatively significant part of the segment, the pipeline for the second half of the year is looking pretty strong there. So I think that the general answer to your question is, yes, and I'm hoping for continued improvement and progression there.

Thank you very much.

At this time I am not showing no further questions. I'll now turn it back to the company.

Okay, thank you for attending. We'll talk to you next quarter. Thanks.