Trimble Inc. — Q2 2020 Form 10-Q
Business context and period. Trimble provides technology, software, subscription, and services solutions across construction, geospatial, agriculture and utilities, and transportation. This filing covers the 13 weeks ended July 3, 2020, and reports first-half results for the two quarters then ended. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First two quarters 2020 | First two quarters 2019 |
|---|---|---|---|---|
| Revenue | $733.6 | $854.8 | $1,525.9 | $1,656.4 |
| Gross margin | $405.7; 55.3% | $460.6; 53.9% | $846.7; 55.5% | $898.9; 54.3% |
| Operating income | $97.6; 13.3% | $109.7; 12.8% | $195.9; 12.8% | $196.0; 11.8% |
| Net income attributable to Trimble | $63.0 | $94.6 | $124.9 | $156.9 |
| Diluted EPS | $0.25 | $0.37 | $0.50 | $0.62 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $303.2 | $325.5 |
- Q2 revenue fell 14% year over year. Product revenue declined 21% to $412.4 million and service revenue declined 10% to $156.6 million; subscription revenue grew 3% to $164.6 million.
- For the first half, revenue declined 8%; product revenue fell 13%, service revenue fell 4%, and subscription revenue increased 6%.
- Q2 GAAP gross margin percentage rose 1.4 percentage points and operating margin rose 0.5 points, despite lower revenue. Management attributed margin resilience to a higher mix of software maintenance and subscriptions, product mix, and expense reductions.
- Non-GAAP Q2 operating income was $169.9 million, down 3%; non-GAAP diluted EPS was $0.52 versus $0.53. These measures exclude specified items and are not substitutes for GAAP results.
- At July 3, cash and cash equivalents were $196.4 million; current assets were $1.120 billion and current liabilities were $1.171 billion. Total debt principal was $1.843 billion, including $268.2 million short-term and $1.5645 billion long-term debt. The company reported compliance with debt covenants.
- First-half cash flow: operating activities provided $303.2 million; investing activities used $227.4 million, including $198.0 million for acquisitions; financing activities used $60.9 million. Cash increased $7.2 million from fiscal year-end 2019.
Material changes and business drivers
- COVID-19-related disruption contributed to lower hardware, related software, and professional-services demand across segments. Q2 declines were particularly pronounced in Transportation, down 24% in revenue, and Buildings and Infrastructure, down 13%.
- Transportation segment operating income fell 56% in Q2, reflecting lower revenue, subscriber declines and hardware upgrades, and higher expense associated with Kuebix. Resources and Utilities first-half revenue increased 4%, supported by acquisition revenue and strength earlier in the year.
- Annualized recurring revenue (ARR) was $1.213 billion at quarter-end, up 6% year over year. Management attributed growth to organic conversion to term licenses and subscriptions, as well as acquisitions. Software, recurring revenue, and services represented 59% of first-half revenue.
- Trimble acquired Kuebix in the first quarter for total consideration of $201.1 million; it contributed less than 1% of first-half revenue. The acquisition added $147.6 million to goodwill. No Q2 stock repurchases were made; first-half repurchases totaled $50.0 million.
Outlook, risks, and unusual items
- Management said the pandemic’s duration and ultimate effects remained uncertain. It expected hardware, associated software, and professional-services revenue to remain affected for the rest of 2020, while recurring revenue was expected to remain stable. Management expected operating income to be down for the rest of the year because of revenue shortfalls, partly offset by cost reductions. The filing provides no specific numerical revenue or earnings guidance.
- Management believed cash, borrowing capacity, and operating cash flow would be sufficient for anticipated operating needs, debt service, and planned capital expenditures over at least the next 12 months.
- The Q2 effective tax rate was 30.5%, versus 18.0% a year earlier; first-half rates were 26.5% and 17.6%, respectively. The increase primarily reflected a one-time valuation allowance related to California tax legislation and a lower benefit from stock-based compensation deductions.
- First-half GAAP results included $8.0 million of restructuring charges and $3.6 million of COVID-19 expenses. Q2 non-operating results also compared against a prior-year gain on sale of an equity interest.
- Purchase obligations were approximately $249.1 million, primarily non-cancellable vendor orders. The company reported no material litigation beyond routine matters and no material changes to previously disclosed risk factors. COVID-19, macroeconomic conditions, foreign-exchange fluctuations, acquisitions and integration, and estimates including goodwill and credit-loss assumptions remain relevant risks.
Important facts for investors to verify
- Whether demand and revenue in hardware-sensitive markets, especially Transportation and construction-related businesses, recover or weaken further as pandemic effects evolve.
- Whether expense controls and improved recurring-revenue mix can sustain margins if revenue remains pressured.
- ARR growth, subscription trends, and the distinction between ARR and GAAP revenue or deferred revenue.
- Kuebix integration, acquisition-related costs, goodwill and intangible-asset assumptions, and the company’s ability to generate cash after acquisitions.
- Working-capital trends, including receivables, inventory, and deferred revenue, as well as debt maturities, borrowing availability, and covenant compliance.
- The effect of the California-related valuation allowance and other tax matters on future effective tax rates; also compare GAAP results with non-GAAP measures and their adjustments.