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Trimble Navigation Limited (NASDAQ:TRMB)

Q4 2011 Earnings Call

February 2, 2012 4:30 p.m. ET

Executives

Willa McManmon – Director, Investor Relations

Steven Berglund – President and Chief Executive Officer

Rajat Bahri – Chief Financial Officer

Analysts

Michael Cox - Piper Jaffray

Andrea James - Dougherty & Company

Ajit Pai - Stifel Nicolaus

Jonathan Ho - William Blair & Company

Jonathan Goldberg - Deutsche Bank

Ryan Connors - Janney Montgomery

Tavis McCourt - Morgan Keegan

Jeff Rath - Canaccord Adams

Eli Lustgarten - Longbow Research

Alex Blanton - Clear Harbor Asset Management

Operator

Good afternoon. My name is Marvin and I will be your conference operator today. At this time I would like to welcome everyone to the Q4 and Year End 2011 Conference Call. (Operator instructions) I’ll now hand the call over to our host, Ms. Willa McManmon. Ma’am, you may begin.

Willa McManmon

Thank you. Good afternoon.

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. The press release and additional financial statements are posted 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 releases.

I will now turn the call over to Steve Berglund, our CEO and Rajat Bahri, our CFO.

Steve Berglund

Good afternoon. Fourth quarter results demonstrated the momentum which was evident throughout 2011. Its momentum is carrying us into 2012 and enables us to expect another strong year, subject to the strong positionality of the euro crisis and its effects on the world economy.

At the beginning of 2011 we anticipated revenue growth for the year in the neighborhood of 20% based on a combination of strong organic growth combined with incremental effects of acquisitions. We assumed we would not see a robust economic recovery during 2011 and, in particular, we assumed we would not see a recovery in the commercial and residential construction markets.

Overall, the environment provided us with no meaningful negative surprises aside from a slower than anticipated market in China. We exceeded our original expectations with annual revenue growth of 27%, largely because our acquisition activity during the year was higher than originally expected.

Entering 2012 our snapshot view is quite similar to a year ago. With our natural forecasting limitations which result from our characteristic of being a book and burn business, we believe our existing portfolio of businesses should once again generate total year revenue growth in the neighborhood of 20%.

This is a combination of strong organic growth topped by the full year of active acquisitions already made. The most significant difference between the two years is the higher level of economic uncertainty created by the euro crisis, which is not unique to Trimble. If the crisis is resolved early, it could remove uncertainty and enhance the outlook. If it lurches along, it creates significant uncertainty and could impair investment decisions in Europe. If it ends in a collapse in the euro it will have worldwide significance.

2011 reflected progression within all the Trimble strategic themes. We expanded our international reach, particularly in the emerging markets by adding development, manufacturing and sales capabilities. We actively pursued our longstanding strategy of moving away from sensors and products towards a focus on higher-value, industry-specific solutions.

The beneficial long-term impact of the higher-value content is seen in the aggregate gross margin of the Company, which has expanded by 3.4 percentage points from 2006 to 2011 reflecting the increased bundling of hardware, software and service. We also continue to both deepen and broaden our technology base in support of the solutions focus. This is reflected in the increasing software content in our products with more than 60% of our technical personnel currently engaged in software development.

The quarterly performance for the three most strategically and important segments, E&C, Field Solutions and Mobile Solutions was again strong. E&C reflected organic growth and heavy in highway and survey instruments, as well as the Tekla acquisition. These improvements in E&C were delivered in spite of a still dormant commercial and residential construction market in the U.S. and most parts of Europe.

Slower sales in China related to the recent problems specific to railway construction and generally more deliberate decision-making process across Europe. In a positive context and in contrast to the last four years, there's at least some discussion in the U.S. of the possibility of increased activity in the commercial and residential construction market later in the year.

The field solutions segment again demonstrated strong year-to-year growth with contributions from agriculture, GIS, and acquisitions. Agricultural performance reflects the attractiveness of our solutions within the backdrop of a relatively strong agricultural economy around the world. In the quarter, agriculture provided two pieces of evidence supporting the viability of the company trend towards greater value-added solutions.

The first was the growth in the relatively new product categories of flow controls and information management, which grew by approximately 85% in the quarter year-over-year. The second was the press release announcing Trimble's new relationship with US Sugar. This is significant because it demonstrates that there is additional [untapped] growth available to us by providing targeted solutions to specific large agricultural segments and also because U.S. Sugar's vision transcends any particular farm operation and is centered on the connected farm, which is central to Trimble's strategy.

GIS, although still negatively impacted by municipal and state budgetary constraints, had a strong double-digit revenue quarter and grew slightly faster than agriculture with similar margins. This demonstrates that despite the considerable and deserved attention agriculture has received in the last several years, other profitable but less visible Trimble product categories provides significant growth potential.

The mobile solutions segment quarterly results remained ahead of our original estimate and made major contribution to the year-to-year margin improvement, as a result of both acquisition and operating improvements.

While our results are still near our long-term model for the segment we expect the segment to provide meaningful contributions throughout 2012 to company-wide earnings improvement. Key to the improvement in mobile solutions is the redirection of the portfolio towards vertical markets through acquisitions, selective pruning of the existing subscriber portfolio, and new initiatives.

The core vertical markets reported in the segment are [Four Street], construction supply, transportation and logistics, communications, environmental, field services, and public safety. Our industry focuses to move beyond the commoditized dot on a map, horizontal functionality to add specific value-added capabilities that are relevant to these industries such as safety, compliance, carbon reduction, diagnostics, and RFID solutions. By providing this increased value we will be able to both create competitive differentiation and expand gross margin.

Advanced devices segment margins remained strong albeit without much current growth. We expect 2012 to be a relatively quite year for the segment although we have a number of longer term growth possibilities based on technologies under development.

We entered 20012 with a strong portfolio that is dynamic and capable of producing significant growth over the next few years. At the same time we understand the vulnerabilities of the economic environment and the potential for significant dislocations, which would affect the willingness of our customers to invest. However, with the environment as it exists today, we look forward to the year with some confidence. Let me turn the call over to Raj.

Rajat Bahri

Good afternoon. I'll cover only the non-GAAP numbers in my prepared remarks today.

Our GAAP numbers, as well as GAAP to non-GAAP reconciliation are available in today's earnings press release. For the fourth quarter of 2011, Trimble had revenue of $435.2 million, up approximately 35% as compared to the fourth quarter of 2010.

Fourth quarter 2011 non-GAAP operating income of $68.8 million was up 48% as compared to the fourth quarter of 2010. Non-GAAP operating margin was 15.8% as compared to 14.3% in the fourth quarter 2010. Non-GAAP net income of $67.8 million for the fourth quarter of 2011 was up 19% as compared to the fourth quarter of 2010. Diluted Non-GAAP earnings per share in the fourth quarter of 2011 was $0.54 as compared to diluted non-GAAP earnings of $0.46 in the fourth quarter of 2010.

The fourth quarter non-GAAP tax rate was 8% compared to a benefit of 14% in the fourth quarter 2010. The benefit in 2010 was primarily due to a catch up on the Search and Development Tax Credit due to legislation passed in the fourth quarter of 2010.

Turning now to full year results. Fiscal 2011 revenue was $1.64 billion, up approximately 27% compared to fiscal 2010. Fiscal 2011 non-GAAP operating income of $292.2 million was up 34% as compared to fiscal 2010. Non-GAAP net income of $271.2 million for fiscal 2011 was up 36% as compared to fiscal 2010. Diluted non-GAAP earnings per share in fiscal 2011 were $2.15 as compared to dilute non-GAAP earnings per share of $1.61 in fiscal 2010.

Turning now to segments. Fourth quarter 2011 E&C revenue was $238.7 million, up 30% as compared to the fourth quarter of 2010. The growth was driven by strong sales of heavy and highway solutions, double-digit growth rate in survey product sales and the Tekla acquisition.

Fourth quarter non-GAAP operating income was $39.4 million, or 16.5% of revenue, as compared to $24 million, or 13.1% of revenue, in the fourth quarter of 2010. The improvement in operating income was due to operating leverage as a result of increased revenue.

Fiscal 2011 E&C revenue was $906.5 million, up 26% as compared to fiscal 2010, driven primarily by strong sales across product lines and, to a lesser extent, the Tekla acquisition.

E&C non-GAAP operating income in fiscal 2011 was $159.2 million or 17.6 percent of revenue, as compared to $118.9 million, or 16.5% of revenue in fiscal 2010. Non-GAAP operating margin was higher due to operating leverage from increased revenue.

Fourth quarter 2011 Field Solutions revenue was $95.5 million, up 28% as compared to the fourth quarter of 2010 due to strong sales of agriculture and geographic information system products and the acquisition of Tekla, which has an infrastructure and energy business that falls under Field Solutions.

Fourth quarter 2011 non-GAAP operating income in Field Solutions are $34.7 million or 36.3% of revenue, as compared to $27.6 million or 36.9% of revenue in the fourth quarter of 2010. Without the impact of a technical acquisition in Field Solutions operating margins were up for the quarter.

Fiscal 2011 Field Solutions revenue was $413.7 million, up 30% as compared to fiscal 2010. Due primarily to strong sales across the product line and, to a lesser extent, the Tekla acquisition. Fiscal 2011 Field Solution non-GAAP operating income was $162.4 million or 39.3% of revenue, as compared to $118.4 million, or 37.2% of revenue in fiscal 2010. Non-GAAP operating margins were up due to operating leverage on increased revenue.

Fourth quarter 2011 Mobile Solutions revenue was $75.8 million, up 88% as compared to the fourth quarter of 2010 primarily due to the People Net acquisition. The base business also demonstrated double digit organic growth. Fourth quarter 2011 Mobile Solutions non-GAAP operating income was $6.4 million, or 8.5% of revenue, as compared to operating income of $931,000, or 2.3% of revenue in the fourth quarter of 2010. The improvement in non-GAAP operating margin was due to People Net acquisition and increased profitability from our base business.

The fiscal 2011 Mobile Solutions revenue was $218.5 million, up 42% as compared to fiscal 2010. Primarily due to People Net acquisition and growth within the base business, partially offset by the loss of a large customer in the second quarter of 2010. Fiscal 2011 Mobile Solutions non-GAAP operating income was $7.4 million, or 3.4% of revenue, as compared to operating income of $5.3 million, or 3.4% of revenue in fiscal 2010.

Fourth quarter 2011 Advanced Devices revenue was $25.2 million, up 2% as compared to the fourth quarter of 2010. Fourth quarter 2011 non-GAAP operating income in Advanced Devices was $4.1 million, or 16.1% of revenue, as compared to $4 million, or 16.3% of revenue in the fourth quarter of 2010.

Fiscal 2011 Advanced Devices revenue was $105.3 million, up 3% as compared to fiscal 2010. Fiscal 2011 Advanced Devices non-GAAP operating income was $16.5 million, or 15.6% of revenue, as compared to operating income of $20.3 million, or 19.8% of revenue in fiscal 2010. Non-GAAP operating margins were down versus the prior year due primarily to product mix.

In the fourth quarter of 2011 52% of revenue came from North America, 23% from Europe, 16% from the Asian Pacific, and 9% from the rest of the world. The year-over-year growth rate by region was 41% in North America, 18% in Asia-Pacific, 36% in Europe, and 31% in the rest of the world. Europe was up double digits, excluding Tekla.

For fiscal 2011 51% of revenue came from North America, 24% from Europe, 15% from Asia-Pacific, and 10% from the rest of the world. The EOE (inaudible) by region was 23% in North America, 10% in Asia Pacific, 40% in Europe and 56% in the rest of the world.

Moving now to non-GAAP operating expenses for the fourth quarter 2011 was $163.6 million or 37.6% of revenue, down as compared to 38.7% in the fourth quarter of 2010.

Fourth quarter 2011 non-GAAP non-operating income was $3.9 million versus $3 million in the fourth quarter of 2010, due primarily to a greater interest expense and the impact of foreign exchange transactions, partially offset by higher joint venture profitability.

Non-GAAP operating expenses for fiscal 2011 was $580.8 million or 35.3% of revenue as compared to 35.2% of revenue in the fourth quarter of 2010.

Fiscal 2011 non-GAAP non-operating income was $9.4 million versus $10.3 million in fiscal 2010, due primarily to greater interest expense partially offset by higher joint venture profitability.

We finished the fourth quarter 2011 with $154.6 million in cash compared to $138.3 million in the third quarter of 2011. Our debt level was $564.4 million on a 1.8 times trailing 12 month EBITDA.

Our cash flow from operations was $79.8 million for the quarter and $241.6 million for the year. We made $72.7 million of net repayments on the debt during the quarter.

Accounts receivable for the fourth quarter of 2011 was $275.2 million as compared to $287.7 million in the third quarter of 2011. Days is outstanding in the fourth quarter of 2011 was 58 days as compared to 63 days in the third quarter of 2011, and 63 days in the year ago quarter.

In entering the fourth quarter of 2011 was $232.1 million compared to $215.71 million in the third quarter of 2011. Returns at 3.7 times as compared to 3.5 times in the third quarter of 2011.

Our guidance for the first quarter of 2012 is for revenue between $477 million and $482 million with GAAP earnings per share of $0.32 to $0.34 and non-GAAP earnings per share of $0.61 to $0.63. Non-GAAP guidance excludes amortization of intangibles and acquisition expense of $35.5 million related to previous acquisitions, and the anticipated impact of stock based compensation expense of $7.6 million. Both GAAP and non-GAAP earnings per share (inaudible) 15% to 17% tax rate, 128 million shares outstanding, and interest cost of $3 million.

We will now take your questions at this time. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Michael Cox with Piper.

Michael Cox - Piper Jaffray

Congrats on a great quarter, guys. My first question is on the sci-tech program. I was just wondering if you could comment on how that performed relative to your expectations, either in the fourth quarter or through 2011 and how you see that shaping up in 2012. I know way back when you talked about this being a few percentage points to firm wide growth and revenue. Now that you've got several in the field, how is that shaping up relative to those expectations?

Steve Berglund

Yes, I think that sci-tech has been slower in developing than we originally expected at the end of 2008 simply because events of the end of 2008 carried through 2009 and 2010. We're probably operating a year to a year and a half behind original expectations of having it all in place. We're getting close to having what's called all major geographies covered by sci-tech at this point.

It's impossible to say with a high degree of science that it has added to the three growth points simply because determining the baseline is an art more than a science. I would say if 2% of a $1.6 billion is on the order of $30 million kind of posing the question are the sci-techs approaching the point where they're adding $30 million of incremental revenue to the company? Yeah, I think we're talking performance in that realm. I think we won't see the full effect until this year, 2012, but I think they are definitely both qualitatively and quantitatively meeting the set of expectations we set back in 2008.

Better capitalization, better access earlier to customers what's called a greater degree of self-confidence of projecting ourselves into the marketplace. Then in regions of, whether it be China or India or some other regions, where we were underwhelming in terms of our distribution as of a few years ago at least we have the potential. At this point in time in some of these areas it's more potential than reality. We have the potential for filling in white spaces on the map that we had not before. I think overall we believe we're on track, maybe a little delayed, but we're on track to where we expected to be. I think overall it will turn out to be a high quality channel for us.

Michael Cox - Piper Jaffray

OK, that's very helpful. In terms of the expectation of roughly 20% revenue growth in 2012, just so I'm clear on your baseline assumptions for construction activity, I assume you're basing that on really no change, but I'd be curious if you have some sort of basic assumption to construction activity on a global basis?

Steve Berglund

No, effectively we're basing it assuming the world is frozen at today's level. For example, there is really no recovery in commercial and residential construction built into that kind of expectations. So again, if we do see some activity back after the year that would be an upside to this baseline. So really it's taking the conditions, as we see them today, projecting them through the year, and saying this is what we think we can deliver.

Michael Cox - Piper Jaffray

OK. And one last question just from a model standpoint. Ex PeopleNet was Mobile Solutions profitable in the fourth quarter?

Rajat Bahri

Yes, it was.

Michael Cox - Piper Jaffray

OK. Thank you.

Operator

Our next question comes from Andrea James with Dougherty & Company.

Andrea James - Dougherty & Company

Hi there, Good Afternoon. Thanks for taking my question. Does it seem like PMS seemed to even surprise you guys on the upside? Could you just give us some details about what went right there? Did you sign new customers or what happened?

Steve Berglund

No, in actuality I think we're simply running maybe a quarter ahead of where we thought we were. So 2011, late 2010 and mostly the first part of 2011, the first half of 2011 was really kind of a re-orientation, a re-calibration, a re-structuring period where we reinforced the direction of verticalization. So there was a fair amount of change that occurred in the early and mid part of 2011. We were quite confident about the fourth quarter, but in reality, the fourth quarter happened in the third quarter, and maybe the first quarter happened in the fourth quarter.

So, as far as the fundamentals, we simply running a bit ahead of our original game plan. I think during the fourth quarter there were some surprises that walked through the door that we weren't expecting. But I would say that fundamentally this is not necessarily the kind of fourth quarter serendipity. I think it's more sort of a long-term trend line, more then anything else, in terms of the profitability.

Andrea James - Dougherty & Company

OK. Just moving over to field solutions. Can you just talk about pricing there and what you’re seeing out in the channel in terms of pricing pressure? Are prices holding steady?

Steve Berglund

Yeah, if we're talking agricultural. I think really the statement I could make, with a fair amount of intellectual honesty, there has been long-term price fidelity in agricultural. I think that if you took the premier products in agriculture and plotted them since back towards 2004, 2005 those prices have really remained quite steady. We have led on the low-end products because we believe that market is elastic. A couple times in our past we have actually dropped prices there, because we believe the market is elastic and it turned out it was elastic.

But in terms of the high-end products, I think that market is comparatively stable from a pricing standpoint. So no new competitive entrance, in fact there haven't been really any new competitive entrance for some period of time. So the market is not, at this point in time, experiencing any real pricing pressure.

Andrea James - Dougherty & Company

That's helpful. Thank you. Just one more and I will hop back in the queue. Did E&C margins come in to your expectation? I know they were up year-over-year but I remember last year there were some special things that had happened that had compressed the margins a bit. So I'm just wondering how E&C margins are tracking to what you guys are expecting internally?

Rajat Bahri

E&C margins were reported at around 16% but Tekla is dragging the margins significantly down right now. Because we are getting revenue from Tekla, but hardly any profit, because we had the deferred revenue haircut. That will reverse itself in Q1. We should see nice further expansions of E&C margins coming into Q1. But the reason they were a little bit lower than expected was the Tekla acquisition.

Andrea James - Dougherty & Company

Thank you. That's helpful. I'll hop back in the queue.

Operator

Our next question comes from the line Ajit Pai with Stifel Nicolaus

Ajit Pai - Stifel Nicolaus

Yes. Good afternoon and congratulations on a very solid quarter. A couple of quick questions. Just looking at your China business, you talked about that was a bit of a surprise in 2011. Going into 2012, what is your expectation for that business, especially on the railroad front? Are you expecting that to come back?

Steven Berglund

I think you characterize it properly. Because of both the scandals and the accidents, 2011 was a hard year for railway activity in China. There was financial pressure felt by the industry in the last half of the year. Our sense going forward, and one can never know for sure, but certainly the China market, in the last few months, has shown signs of stabilizing and solidifying some.

We're not looking for a monster year in China, but we believe we're back on a track we understand in China. The money flow seems to be turning back on for railways. Maybe there's a little less emphasis on high-speed and more towards conventional. It also seems as though funding for road construction is also headed back up. In general, with what we can see at this point in time, 2012 will be a better year than 2011 in China.

Ajit Pai - Stifel Nicolaus

Got it. And then the second question is, looking at your Mobile Solutions business, you mentioned that the PeopleNet business was very profitable, but Mobile Solutions even without PeopleNet, if you look at the old Atro [sp] business, was also profitable. Could you give us some color as to, given the profitability right now and the synergies yet to be fully captured from that business, as well as the ramp that you are expecting and the momentum to continue over the next couple of years, how will we see that operating margin progress over the next couple of years? Where could it get to? Could it get to your corporate average or above that over the next couple of years?

Steven Berglund

Certainly the expectation, and thank you for specifying a time framework of a few years, because I think that's the way to look at this business because the nature of the business there will probably be few step functions in terms of margin improvement, but basically we see, as we have all along is the ability for this business to meet or exceed the company average, let's call it.

Is it reasonable to get to a 20% operating margin in the mobile solutions space? I think, fundamentally, it is driven by the view that it is ultimately a software business, the mix between hardware and software in any quarter will skew that a bit, but over time the software part of the business, software delivered as a service in most cases, will increase. That will typically bring with it margins, in some cases, well above 50%.

The scale factors below the line in terms of infrastructure and R&D and all of those things should scale nicely. So, we should be able to march consistently towards, first, a consistent double-digit operating margin, but there is nothing to say that this is not a 20% operating margin business in a few years.

Ajit Pai - Stifel Nicolaus

Got it. The last question would be just looking at the tremendous cash flow generation and the pay down of debt, so if you had to (inaudible) use of cash right now and the cash flow generation, would you say that debt pay down is still probably the highest priority? Also, the current cash flow generation, do you think the current level is sustainable with a drop from there seasonally or could it continue to grow through this year?

Steve Berglund

Well, I'll let Raj answer the expectation question in terms of the numbers. But what I would say is, in terms of the current debt level and we currently have a debt-to-equity ratio of roughly 35%, with a cash generating characteristics of this company, in good times and bad times, we're not uncomfortable with this debt level.

So, I would say our number one priority is probably not deleveraging. I think it’s basically we'll scan the opportunities and make rational decisions. But I think that we're a technology company and technology companies typically don't carry much debt, but at the same time is the current level of debt is easily in our ability to handle. So, I would say is we'll make rational decisions, but I would not declare leveraging our number one priority of the company at this point.

Ajit Pai - Stifel Nicolaus

Got it. Thank you so much.

Operator

Our next question comes from the line of Jonathan Ho with William Blair.

Jonathan Ho - William Blair & Company

Great quarter, guys. Just wanted to start out on the E&C side. You've talked a little bit about the BIM space and some pickups in demand in the past and there's been some movement up and down. Can you talk about that and also the potential margin flow through of some of the maintenance revenue that comes back with Tekla in that segment?

Steve Berglund

OK, I'll let Raj track to the numbers again, but, basically, I think it was a busier 2011 and a little bit of that has come into 2012 with the acquisition of Tekla, the acquisition of (inaudible), the very small acquisition of StruCad but we have, in the last 12 months, combined with what he had done previously, built out a relatively full set of capabilities in BIM covering mechanical, electrical, plumbing, as well as the structural steel aspects. We have the meridian capability which kind of extends us into what's called BIM 5D which is the three dimensional model plus costs plus schedule. Then with the Hilti joint venture we have what's called the ability to project, kind of BIM to field physical tools in the marketplace.

As far as capability is concerned we've built out a relatively full set here. I think that the financial impact will truly come when we see any life at all in commercial and large scale residential. The market is still very quiet in Europe and in the US. What we will see, I think, when we see any kind of recovery, and it doesn't have to be a large recovery, but any kind of recovery we're going to see again a significant step up in performance of ENC.

Thus far with Tekla and the software pieces that have been previously acquired, QuickPen and Accubid and anticipate with [Plankel] we're going to have a group of margin rich software businesses here with gross margins well above 50% and the ability to generate very significant operating margins. I think we've got the strategic pieces in place. We're operating as a reasonably high level at this point in time. When we see any kind of recovery in commercial and residential I think we're going to see a significant increase in performance out of those areas.

Raj, anything else? Guess not.

Jonathan Ho - William Blair & Company

Just to, I guess, take a look at the Ag business. As you guys look at 2012, clearly you've had a very strong growth year in 2011, how do we break out the growth between sort of the new product areas that you're going to be launching? Contributions from flow control and some of the lower penetrated and then just your core business? Just the incremental growth, where do you see that coming from?

Steven Berglund

Well, there's a baseline business which relates to guidance. Now, there's a high end and a lower end element there. The autopilot, which is the high end, tends to operate to a bit of a different dynamic than the low end. That's the baseline business which is guidance. Then we have added the new connected farm elements which is information management, flow controls, but taking advantage of the fact that there is a GPS receiver on the roof of the cabin and that there's a computer in the cab and leveraging them to this prescription agriculture applications. The baseline business will continue for the foreseeable future to grow at meaningful double digits maybe not prodigious double digits that we saw a few years ago but let's call it strong very respectable double digits.

As I pointed out in the script is the new add-ons, although not terribly significant against the backdrop of the size of the business at this point in time, but the flow controls and the information management products combine in the forth quarter year-over-year grew at 85%. That may not be the long term average but I say those products probably have the ability to grow at greater than 40% for the foreseeable future. So what we're going to see here is a change in blend in that business, probably with no impact at all in operating margins.

The more information based, the add-ons, the prescriptions farming elements of the products start to become a larger and larger portion of it. But again, we still see the baseline business based around guidance and still be a good strong double-digit growth for 3 to 5 years before we have to consider the level of maturity of the market.

Operator

Our next question comes from the line of Jonathan Goldberg with Deutsche Bank.

Jonathan Goldberg - Deutsche Bank

Hi, thanks for taking my question. I just want to be super clear because we gotten a lot of questions on this. The operating margins you're enjoying in Ag right now seem high for relative to a lot of other businesses. Are they sustainable if they decline what would the shape of the curve of the decline? How are you able to earn operating margins at this level?

Steven Berglund

OK. First of all, there are a number of businesses within Trimble that don't get quite the same visibility that our earning operating margins at this level. I pointed out the GIS margins are very close to those. So the existence there is probably questionable in terms of the fact that this is unique. The question basically is this business going to be commoditized. As I pointed out there has been price stability since 2004 to now. So there's been 7 to 8 years of price stability in terms of the high end product.

OK. So what will cause prices to fall. If you go back over that same period, the competitors in the industry have remained largely unchanged. There have been no new competitive entries into the business over that period of time. The OEM content is still quite low in terms of factory installings, likely to remain low for the foreseeable future. It remains an aftermarket business.

It is still a technology business. There's a whole lot of innovation left to be done. It is becoming more and more of a software business. So it is not a sensors business. It is not just a piece of hardware that's been slapped on a tractor. It is a technology business. The margins are not inconsistent with it being a technology business.

At the same time, this question has been coming up for years. My answer has been fairly consistent. Which is, in the long-term, do I expect operating margins to stay at this level, in the long-term? No. I assume that the market in some way will arbitrage away those operating margins. Do I see a mechanism that will occur in the next one year, two years or three years? No, I don't.

The way the margin may come down, is if we add more and more products that say have operating margins between 20% and 30%. Arithmetically, this segment may very well start to slide down. Do I see any kind of precipitous fall in the next 12 to 24 months in the fundamental operating margin performance of this business? I don't see it. I don't see the mechanism to make that happen at this point in time.

Jonathan Goldberg - Deutsche Bank

Just to clarify, if you look at after market and OEM direct sales for Ag, is there a meaningful difference in margin profile between the products you sell into those two channels?

Steven Berglund

No.

Operator

Our next question comes from the line of Ryan Connors with Janney Montgomery.

Ryan Connors - Janney Montgomery

A couple questions on the Ag business. You mentioned that there have been no new entrants into the business of late. Have you seen any change in behavior on the part of any of your major competitors in terms of looking to do more or less partnering with other OEMs, and/or getting more aggressive in after market or things like that? Or is the competitive dynamic pretty stable in terms of how the various players are behaving?

Steven Berglund

There are only so many permutations that are possible in this market. If you look at the U.S. centric market, you've got Deere, you've got CNH, and you've got AGCO that are the big three in that [inaudible]. Now, until you get to India and start to talk about Mahindra & Mahindra and such, which are not yet a factor in this whole thing.

Deere has had a traditional top to bottom vertical orientation. They bought a GPS company and they're vertically integrated. At least for the moment, they are a case unto themselves.

AGCO a number of years ago announced an alliance with Topcon. As far as I know, that is still operative. Then we have the alliance with CNH. That gives us both access to their factories but access to their distribution channel as well.

There aren't a whole lot of dynamic elements that are possible in this marketplace. Those are the big three. There are a number of other agricultural equipment producers.

With the new agreement that we announced last year, or I guess more technically that CNH announced last year about the new arrangement with Trimble. As part of that, Trimble has increased ability to go talk to other equipment manufacturers. The first instance of that was when we announced a new arrangement with [Klaus] that covers a number of aspects of their equipment. So I would say the after market is lively particularly for what is called the low-end guidance products and manual guidance. It tends to be more of an aggressive dynamic at that level.

My belief and expectation is that Trimble has cost position on manufacturers on the low end. The high end which is automatic guidance system is steering and controlling throttle is a much more stable market. It is much more of a solution sale. The customer there is typically a large commercial scale farmer. They make decisions very much in the same way that any other large enterprise would make it. I point back to US Sugar as a prime example of that.

So in reality it's a technology market. It will undergo changes over time. The current bubble of dynamics in this marketplace is not all that different than they would have been five years ago.

Ryan Connors - Janney Montgomery

OK, again along that same vein, is there any indication of any change in the way the OEM's view this part of their product? In other words there has been some discussion in the investment community about OEM's look at precision Ag as a way to sell machines rather than a product in and of itself. Therefore that drives some over time less of a desire to invent more and more technology and therefore have some negative impact on pricing and margin. What are your thoughts on that?

Steven Berglund

I think there are courses of history there so. I go back to the time when I joined Trimble in 1999, if we had remained static, if we had simply continued to view the business as we did we would have ceased to exist by now. So at the base censor level, if you view yourself as a censor company and act out that part you do eventually become imbedded in someone else's system.

I think if you look to the press release that CNH put out on the updated relationship with Trimble. The primary focus is on technology and technology development using technology as a way to sell heavy metal but not as a give away but as a point of differentiation. For the time being this is a technology market.

The other thing is we have learned as a company over and over again whether it is in relationship to our joint ventures with Caterpillar, to arrangements with other equipment manufacturers other heavy metal types. Technology is not a simple factory fit option. For example for any equipment manufacturer to say we will standardize on this, that or the other thing, fails to realize, starting with construction. In construction, the mixed fleet question is a big deal for contractors. No contractor, or very few contractors have just one color of equipment in their fleet. What they are looking for is a solution that covers different types of machines. That’s not quite as blatant in agriculture but it's still very true.

A farmer will want a solution that covers all of their pieces of equipment, no matter who manufactured those pieces of equipment. So it is not axiomatic that the solution is defined by the equipment manufacturers because that doesn't necessarily fit what's best for the customer. I think, yes, this will play out over time. There will ultimately be some resolution, but we're a long ways from that being resolved at this time.

Ryan Connors - Janney Montgomery

That's great. Thank you. I just had one more quick one and I will jump out of queue. There's been a lot of talk about whether or not there was a pull forward into 2011 of agricultural equipment demand due to this bonus depreciation accelerating. I know the straight OEM sales are a smaller part of your business, but did you feel that at all in terms of your demand patterns or not?

Steven Berglund

No. If it was there, it was too small for us to detect.

Ryan Connors - Janney Montgomery

Great. Thanks for your time.

Operator

Our next question on the line comes from Tavis McCourt with Morgan Keegan.

Tavis McCourt - Morgan Keegan

Thanks for taking my question. First on the guidance for 2012, I was wondering if you could break out either what kind of a range of internal growth you would expect to get to that 20% or over number for the year? And then, should we expect a similar type of flow through on profitability as we've seen this year?

Steven Berglund

Well let me characterize first and then let Raj talk to the profitability aspect. So I think the formulation is very much the same as last year. When we talked about being in the neighborhood of 20% last year we were talking about, I think, at that time, we were talking, in very rough terms, 10% to 15% organic, and 5%+ in terms of acquisitions. I would say that the baseline expectation here is that, what we've said in terms of the long term, consistently, is that our long term growth was probably 15% to 17% with a couple of points of that being acquisition, but the bulk being organic. We would see that as being the baseline for 2012, but with a few extra points of growth being tied to the acquisitions that we've already made. So arithmetically it will just bump up the result. But we're saying that the year is going to be pretty consistent baselined to the 15%-17% that we've talked about historically and then we'll just get a little more of a bump from acquisitions than normal.

Tavis McCourt - Morgan Keegan

And then on the profitability flow through?

Rajat Bahri

We assumed 25% incremental leverage falling to the bottom line.

Tavis McCourt - Morgan Keegan

A follow-up on the Mobile Solutions; I'm wondering if that exceeded your expectations? I know it was well above what I had in my model. If so, was that because PeopleNet turned out to be more successful than you though earlier or was it the base business that was stronger?

Rajat Bahri

I think Steve pointed out that we started profitability in Q3 and it will be a progression every quarter and things will start getting incrementally better as more subscription revenue comes, which is more profitable. That's what's playing out, it's just that we are a quarter, maybe a quarter and a half ahead of where we thought we would be, in terms of the subscription revenue.

Operator

Our next question comes from the line of Jeff Rath with Canaccord.

Jeff Rath - Canaccord Adams

Great. Thanks guys. A just a couple of follow-ups. Raj can you talk about the margin impact of Tekla, given that you're not recognizing material profits now and that will reverse. Is there any way that you can speak to that a little bit more quantitatively? What would the E&C margins have been without Tekla? And then maybe as you think about where the Tekla reversal will take E&C margins on a go forward basis once that reverses? Can you just walk me through that?

Rajat Bahri

The easiest way to tell you is that in the first half and the later six months that we've had Tekla there's approximately at least $10 million in revenue and profit that has not gone to the bottom line. So you can equate it roughly to $5 million to $6 million a quarter. That will come back starting in Q1. We should start seeing normal margins from that, so roughly you would say a point to a point and a half of margin was depressed because of Tekla in Q4 for E&C

Jeff Rath - Canaccord Adams

A couple of quick ones here and then I'm done. Given that you've stepped up your acquisition strategy Raj, throughout 2012. How should we think about the amortization run rate here? I'm assuming $35.5 is probably a little low. How do we think about that throughout the year, given that's more accounting driven?

Rajat Bahri

I would, at this point, assume that for the rest of the year, and if we do more acquisitions we'll update that guidance. It doesn't impact non-GAAP numbers.

Jeff Rath - Canaccord Adams

I understand that.

Rajat Bahri

I can't tell you the number because I don't know what future acquisitions will close at what time. But that number just represents acquisitions closed so far.

Jeff Rath - Canaccord Adams

And then last one here is just for Steve. Steve you referenced it on your scripted remarks. I'm wondering if you could just expand on it a little bit. The US Sugar deal, it sounds like you were calling that out as a flagship deal on what you're pursuing within the Ag and Connective Farm. Can you expand on that comment?

Steven Berglund

Sure. Partly I was just being opportunistic because we don't often have the opportunity to press release a specific customer in Ag, but I think it is representative in a couple of ways. First of all, US Sugar is approaching this in what I would call a fairly visionary way. They're not looking to improve any single aspect of the business. They're looking to improve the enterprise.

One of the selling points that we had and one of the points that I think they're emphasizing is this connect to farm. Looking at all operations of the farm and applying technology right across. From kind of planning all the way through harvesting and, basically, potentially to the transport of sugar cane to the mill and, for all I know, beyond that. I think it represents a little bit of new age thinking in terms of it as opposed to talking about auto guidance and such, talking about all the farm operations in terms of how technology can lift the enterprise across the board.

I think the other aspect here that I touched on is if you look at sugar cane, for example, and let's just say I'm becoming more acquainted with sugar cane than I have historically. Whether that or another one we've used is vineyards. There are a lot of high value or significant value crops. Many of them, there's a high time sensitivity in terms of when things are done and there is little forgiveness to logistically not doing them at the right time.

But whether it be sugar cane or whether it be vineyards or any other number of, let's call it, relatively targeted farm segment. I think there's a realm here to, just as we're trying to do elsewhere in the company in terms of verticalization and trying to focus on specific customer segments and craft very specific solutions for those industries. I think there's the ability to do that same in agriculture. Which is pick out some of the specialty segments and define very sharply focused solutions for them. I think that adds, let's call it, a realm of growth that we have not historically had in the portfolio.

I think that yes, we have substantial growth potential still left in kind of the baseline businesses of running up and down corn fields and wheat fields and the like. I think U.S. sugar represents the ability to add an incremental growth area based on focused solutions for individual segments. I think it's not hugely significant in its own right from a dollar standpoint, although it's meaningful, but I think it represents the ability to continue to develop this agricultural business into something larger than it is today.

Operator

Our next question comes from the line of Eli Lustgarten with Longbow Research.

Eli Lustgarten - Longbow Research

Good afternoon everyone. I just have a follow up. I apologize if you answered it because I got bounced off the call about five minutes ago and had to come back on. The question is, the carry over acquisitions of what you've made so far, how much is carry over by segment? I have an estimate of that, it looks like it's about $114, $115 million of sales carryover in '12 versus '11 from the acquisitions you've made. Is that about right or how does it break down by group?

Rajat Bahri

Well, I think Steve mentioned the 20% growth rate roughly, the organic growth rate in the teens. This carry over acquisition impact gets us into the 20's.

Eli Lustgarten - Longbow Research

Can you give us what the carry over acquisitions are by segment?

Rajat Bahri

We haven't disclosed that, Eli.

Steven Berglund

Bulk of it would be in E&C and Mobile Solutions.

Rajat Bahri

Yeah.

Steven Berglund

PeopleNet and Tekla would be the most significant ones so it would be largely E&C and Mobile Solutions would be the two segments?

Eli Lustgarten - Longbow Research

Yeah, I know that. I'm just trying to get the magnitude, because I get that the two of those probably are roughly 60 million each in the carry over this year. I was just wondering with that sort of approximation.

Steven Berglund

Again, we're reluctant to start to break out individual segments in terms of the detail.

Eli Lustgarten - Longbow Research

OK. How far away are you from normalizing profitability in the E&C business back to the 20% plus level? I guess you consider that ore norm for that business.

Steven Berglund

Well, we're stepping back to the 20%. I think the difference between now and then, yes. We were at 20% in E&C. I think the most significant factor that will get us back there in a relative hurry will be any kind of revival in commercial and residential construction. Let's just say, in those business we a re a relative shadow of what we were in 2007 for example. I suppose 2007 was the peak period. But we still at levels that are way down from the levels of 2007 so they are profitable.

In a couple of cases they are quite profitable but at the same time, to get back to 20% quickly would require some type of--not back to the 2007 levels--but some kind of revival at all in commercial and residential construction simply because those markets are very dormant at this point in time outside Nordic countries and maybe a little bit of Germany. I thinks that's maybe the most significant determination of how quickly we get back to 20% at least quickly. But we are stepping in that direction.

Rajat Bahri

Yeah, this year we finished at 17.6% and next year there will be at least 100 basis points if not more improvement. So yeah, we'll be in the neighborhood of 19 now that there's a step up in commercial and residential in the back half and we get more revenue, there's a shot that we may have a run rate of that by year end next year. But we'll be close to around the neighborhood of 19% next year.

Eli Lustgarten - Longbow Research

I mean you had talked about getting to those double-digit margins in mobile solutions. That looks like a pretty reasonable target would those double digits in 2012?

Steven Berglund

Yeah, that's certainly our expectation.

Eli Lustgarten - Longbow Research

And one final question. You have a 15% to 17% tax rate that you're guiding us to for 2012. Would that continue to go up in '13? And I know you're worried about '12 but we have to think of more than one year?

Rajat Bahri

I think long term I expected it'll be some years maybe a couple of points lower than that. In some years, maybe a couple of points higher than that, it depends upon the mix of income, where it comes from, but I think 15 to 17 is a long-term average rate is the right way to think about it, unless something changes in legislation.

Operator

Our next question comes from the line of Alex Blanton with CHAM.

Alex Blanton - Clear Harbor Asset Management

Good morning, or good afternoon I should say. Most of my questions have been answered. Have you addressed where margins could go on the upside from here? Because most of the questions seem to have been when can they come down and when will they revert to the mean and so on. On the gross margins side how much higher can they go once your volume picks up from the recovering construction that is definitely coming?

Steven Berglund

OK, well thanks for asking the upbeat question of the day. I think in some ways we can play out the arithmetic together but I think you've already figured out what the leverage points are. For example, although we don't break out the commercial and residential related part of ENC it's a meaningful part of that. The gross margins overall, particularly with the BIM business, software oriented businesses in it, are at least consistent with the company average gross margin. We have the cost base in place for those in terms of R&D spending, sales force, all those sorts of things.

What we would get if we saw any sort of upturn in commercial and residential would be, let's call it, a high leverage coming from these businesses. I think the modeling aspects of that are relatively straight forward but I think would be enough to move the needle for the segment and for the company. I would say that is maybe, if we're going to talk about an upside scenario, that is maybe the first one on the list. Which is any kind of revival in residential and commercial.

I think the other, looking at the portfolio, the other upside scenario would be in Mobile Solutions. Yeah, we're seeing improvement there and the growth there has been relatively moderate, the baseline organic growth there has been relatively moderate because we're, in effect, kind of pruning the subscriber base. We're actually being selective in terms of what business we want and what business we don't want. I think there is the possibility there if we start to see any kind of movement on the top line in Mobile Solutions maybe more aggressively than we've been showing.

Again, there's a case where you've got very strong incremental gross margins that would have a tendency to drop to the operating line, maybe with some discomfort for sales costs but we have the R&D base already in place there. We have the physical structure and so that would leverage up fairly high.

So, I think those would be the two cases where you could create a scenario that would be consistent with your upbeat scenario here. But otherwise I'm basically called for being a dull and boring company of showing progression year-over-year, much as we have historically. But I would say those are the two cases where there might be some special dynamics available to us.

Alex Blanton - Clear Harbor Asset Management

Well, thank you for that. Now, speaking of incremental gross margins, you have an estimate for modeling purposes of what those would be. Let's say, not for those two divisions necessarily, but for the company as a whole incorporating those divisions. What can we look for in terms of an incremental gross margin?

Rajat Bahri

I'll point to a history. Our models, as Steve pointed out, has gone, since 2006, 300 basis points. But we really don't guide to specific gross margins. What we guide to is incremental operating leverage. What we said is for next year, for every incremental revenue that we sell, we expect to drop 25% off that for the bottom line.

Alex Blanton - Clear Harbor Asset Management

OK, but that's the operating line then, 25% incremental on the operating line.

Rajat Bahri

Yeah and it's a combination of sliding prior to expansion on gross margin and getting some leverage from operating expenses. So, a combination of those, too.

Alex Blanton - Clear Harbor Asset Management

Great. Thank you.

Operator

There are no further questions at this time. Thank you for joining us.

Steven Berglund

Thank you. Talk to you next quarter.

Operator

This concludes today's conference call. You may now disconnect.

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