Trimble Inc. — Q3 2017 Form 10-Q
Reporting period: Third quarter ended September 29, 2017; comparisons are with the quarter ended September 30, 2016. Year-to-date figures cover the first three quarters of each fiscal year. Amounts are in millions except per-share data.
Business context
Trimble provides technology solutions combining positioning, software, connectivity and data analytics for construction, geospatial, agriculture, utilities and transportation markets. In 2017 it began reporting four recast segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation. The company acquired ten businesses in the first three quarters, including precision-farming business Müller-Elektronik, and sold ThingMagic.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 3 quarters 2017 | First 3 quarters 2016 |
|---|---|---|---|---|
| Revenue | $670.0 | $584.1 | $1,945.8 | $1,776.7 |
| Gross margin | $349.5; 52.2% | $309.0; 52.9% | $1,022.6; 52.6% | $925.2; 52.1% |
| Operating income | $64.0; 9.6% | $55.3; 9.5% | $183.2; 9.4% | $125.7; 7.1% |
| Net income attributable to Trimble | $55.7 | $39.2 | $156.1 | $94.7 |
| Diluted EPS | $0.22 | $0.15 | $0.61 | $0.37 |
| Operating cash flow | Not provided for quarter | $310.0 | $287.0 |
- Q3 revenue rose 15%: product revenue increased 16%, service 9% and subscription 16%. Year-to-date revenue increased 10%; subscription revenue grew 16%.
- Q3 gross margin percentage declined 0.7 percentage points, attributed to product mix and higher amortization and inventory step-up costs from recent acquisitions. Year-to-date gross margin percentage improved 0.5 points, partly because some prior-acquisition intangibles had become fully amortized.
- Year-to-date operating income increased 46%, with margin up 2.3 points. Management cited revenue growth, expense control and lower intangible amortization. Q3 operating margin improved slightly despite higher acquisition-related amortization.
- Q3 segment revenue grew across all four segments: Buildings and Infrastructure 13%, Geospatial 6%, Resources and Utilities 31%, and Transportation 16%. Resources and Utilities growth included acquisitions; Transportation benefited from logistics products and recurring SaaS subscriptions.
Liquidity, debt and capital allocation
- At quarter-end, cash and cash equivalents were $255.0 and short-term investments $154.2, totaling $409.2, versus $327.2 at fiscal 2016 year-end.
- Debt principal was $700.3, up from $624.8 at year-end; balance-sheet debt carrying value was $695.8. Debt included $400.0 principal of 4.75% senior notes due December 2024, $164.0 outstanding on the $1.0 billion revolving facility, and $135.0 on callable, uncommitted facilities. The company reported compliance with revolving-facility covenants.
- Year-to-date investing cash use was $322.9, mainly reflecting $286.7 net cash paid for acquisitions and investment purchases. Financing provided $34.2, including debt proceeds and repayments and $111.5 of share repurchases. Operating cash flow was $310.0; cash increased $38.9 during the period.
- Management said available cash, short-term investments and borrowing capacity were expected to cover operating needs, debt service, planned capital expenditures and stock repurchases for at least the next 12 months. It also noted potential borrowing needs if significant acquisitions or repurchases occur.
- Repurchased approximately 3.1 million shares for $111.5 year-to-date; $19.0 remained authorized under the program at quarter-end.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management expects continued investment in R&D and product development, and sees software, services and recurring revenue as important growth drivers that may improve business visibility.
- Management cited seasonality in construction, U.S. government purchasing and agricultural equipment; diversification and subscription growth may reduce seasonality. About 50% of Q3 sales were to customers outside the U.S.
- Key exposures include foreign exchange and interest rates. Currency translation increased Q3 revenue by $6.6 and operating income by $0.7; Trimble uses short-term forward contracts and does not use derivatives for speculation.
- The company is disputing IRS proposed adjustments for 2010–2011 related mainly to intercompany intellectual-property valuations. Assessments including tax, interest and penalties total $67.0; the company contests remaining items and says reserves are adequate. It said unrecognized tax benefits could decrease by up to $6.2 over the next 12 months.
- The Alaska litigation was remanded for an award of nominal damages after the state supreme court affirmed that the plaintiff had not proved damages or lost profits. The filing reports no other material legal proceedings.
- Acquisition valuations remain preliminary for certain transactions; adjustments to acquired assets, liabilities, intangibles and goodwill could be significant. Goodwill was $2,289.3 at quarter-end; the company reported no impairment from its 2017 reporting-unit reassessment.
- Other commitments included $149.9 of future operating lease payments and approximately $192.6 of unconditional purchase obligations. Fair-value contingent acquisition earn-out liabilities were $17.2, with undiscounted maximum payments of $60.1.
- Adoption of the new revenue-recognition standard was planned for fiscal 2018 using full retrospective adoption; Trimble was still evaluating its financial-statement impact, including possible changes in revenue timing and contract-cost deferrals.
Important facts for investors to verify
- How much of reported growth, particularly in Resources and Utilities, is organic versus acquisition-related, and whether recent acquisitions deliver expected profitability.
- Whether recurring subscription growth continues and whether gross-margin pressure from mix and acquisition amortization persists.
- Cash conversion and working-capital trends: accounts receivable rose to $407.2 and inventory to $254.7; the company cited higher working-capital needs. Days sales outstanding were 55 and inventory turns 5.2.
- Debt and liquidity exposure, especially the callable uncommitted facilities, future refinancing needs and possible use of additional borrowing for acquisitions or repurchases.
- Updates on the IRS dispute, related reserves and potential cash-tax consequences of repatriating foreign earnings.
- Future purchase-accounting adjustments, goodwill and intangible amortization, earn-out payments, and the eventual impact of the new revenue standard.