Trimble Inc. — Q3 2018 Form 10-Q
Business context and period. Trimble provides connected technology solutions combining hardware, software, services and subscriptions across construction, geospatial, agriculture/utilities and transportation. This unaudited report covers the quarter ended September 28, 2018, and the first three quarters of fiscal 2018; comparisons are with the corresponding 2017 periods, with prior figures adjusted for the retrospective adoption of the revenue recognition standard.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 3 quarters 2018 | First 3 quarters 2017 |
|---|---|---|---|---|
| Revenue | $795.2m | $676.2m | $2,322.9m | $1,946.7m |
| Gross margin | $426.9m; 53.7% | $351.2m; 51.9% | $1,245.8m; 53.6% | $1,018.1m; 52.3% |
| Operating income | $77.4m; 9.7% | $66.3m; 9.8% | $231.1m; 9.9% | $180.0m; 9.2% |
| Net income attributable to Trimble | $73.7m | $57.2m | $196.3m | $154.3m |
| Diluted EPS | $0.29 | $0.22 | $0.78 | $0.60 |
| Operating cash flow | — | $384.8m | $322.6m |
Revenue rose 18% in Q3 and 19% year to date. Product, service and subscription revenue were respectively $499.7m, $156.5m and $139.0m in Q3. Segment revenue increased year over year across all four segments; Buildings and Infrastructure grew 36% in Q3, Geospatial 9%, Resources and Utilities 13%, and Transportation 11%. Management cited organic growth across segments as well as acquisitions, particularly Viewpoint and e-Builder.
Gross-margin improvement reflected product mix, partly offset by acquired intangible amortization and purchase-accounting reductions to acquired deferred revenue. GAAP operating margin was slightly lower in Q3 but higher year to date. Management reported non-GAAP operating margin of 20.8% in Q3 and 20.2% year to date, versus 18.7% and 18.0%, respectively; these measures exclude specified acquisition, amortization, stock-compensation and other items.
Balance sheet, cash flow and capital
- At quarter end, cash and cash equivalents were $205.4m, down from $358.5m at fiscal 2017 year end; short-term investments were nil, versus $178.9m. Current assets were $1,061.2m and current liabilities $979.3m.
- Total debt carrying value was $2,012.7m (principal $2,026.9m), up from $913.9m carrying value at fiscal year end. Debt included $1.3bn of senior notes, a $500m term loan and $225.8m drawn under uncommitted facilities. The $1.25bn revolving facility was undrawn.
- Cash from operations increased to $384.8m. Investing used $1,612.8m, primarily reflecting acquisitions; financing provided $1,083.0m, primarily from debt issuance net of repayments. Cash declined by $153.1m over the first three quarters.
- Operating cash-flow growth was supported by higher net income, partly offset by working-capital needs, including inventory purchases. Inventory turns were 5.1 versus 5.4 at fiscal year end; receivable days were 54 versus 56.
Material changes, outlook and risks
- Trimble acquired e-Builder for $485.2m in February and Viewpoint for $1,211.2m in July, among five acquisitions totaling $1,753.9m in cash consideration. These acquisitions substantially increased goodwill and purchased intangibles. Acquired businesses contributed less than 3% of total revenue for the first three quarters, though Viewpoint and e-Builder together contributed $50.3m of Q3 revenue.
- Higher debt and acquisition-related costs increased Q3 interest expense to $22.7m from $6.3m; year-to-date interest expense was $50.8m versus $18.4m. Moody’s downgraded Trimble from Baa2 to Baa3 in connection with the Viewpoint acquisition; S&P maintained its rating but assigned a negative outlook. The company said it intended to limit further acquisitions to prioritize deleveraging and had temporarily suspended share repurchases.
- Q3 GAAP tax benefit was $9.6m, including a $14.8m one-time reserve release following statute-of-limitations expirations. The year-to-date effective tax rate was 6%, versus 23% in 2017. Tax Act accounting remained provisional, with analysis expected to be completed by fiscal year end.
- Management stated that available cash, investments and borrowing capacity were expected to cover anticipated operating needs, debt service and planned capital expenditures for at least 12 months. About $1.0bn of remaining performance obligations was expected to be recognized: approximately 73% within 12 months and 16% over months 13–24. No specific revenue or earnings guidance was provided.
- Risks include acquisition integration and realization of anticipated benefits, leverage and debt-service demands, floating-rate exposure, possible further ratings downgrades, and compliance with debt covenants. The uncommitted facilities may be called by lenders with little notice. A $51.2m IRS assessment for fiscal 2011 remains disputed in U.S. Tax Court; the company had settled $15.8m of the original $67.0m assessment. The filing also reports $226.4m of unconditional purchase obligations and $159.0m of future operating lease commitments.
- Other notable items: the company adopted the new revenue standard retrospectively; it materially changed some balance-sheet amounts but had no material impact on prior-year income statements. The company was in compliance with debt covenants at quarter end, reported effective disclosure controls, and disclosed no other material legal proceedings.
Important facts for investors to verify
- How much reported growth is organic versus acquired, and whether Viewpoint and e-Builder deliver expected integration, recurring-revenue and margin benefits.
- Debt reduction, interest costs, rating-agency actions and covenant headroom as acquisition-related leverage is absorbed.
- Cash conversion and working-capital trends, particularly inventory, receivables and deferred revenue.
- Final Tax Act accounting and resolution or reserve changes concerning the IRS tax dispute.
- Reconciliation of GAAP results with management’s non-GAAP measures and the effects of purchase-accounting adjustments on comparisons.