TRIMBLE INC. quarterly report, Q2 FY2016

Business context and reporting period

Trimble Navigation Limited’s unaudited Form 10-Q covers the quarter ended July 1, 2016, and the first two quarters of fiscal 2016; comparable periods ended July 3, 2015. Trimble sells technology, software, services and subscriptions across engineering and construction, agriculture, transportation and other markets. It reported four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices.

Financial results and position

• Q2 revenue grew 4%; product revenue increased 3%, service 4%, and subscription 9%. First-half revenue grew 2%, with subscription revenue up 8%.
• First-half operating cash flow was $192.5 million, versus $204.0 million. Investing used $12.6 million, compared with $67.7 million; financing used $65.2 million, compared with $148.2 million. Cash increased $115.9 million to $231.9 million.
• At quarter-end, total debt was $725.0 million on the balance sheet, with principal debt of $730.2 million; cash was $231.9 million. Current assets were $936.8 million and current liabilities $721.0 million. The $1.0 billion revolving credit facility had $199.0 million outstanding; Trimble said it was in compliance with its covenants.
• Cash and cash equivalents rose from $116.0 million at fiscal year-end 2015. Accounts receivable days sales outstanding improved from 59 to 56 days; inventory turns rose from 4.0 to 4.3.

Material changes versus prior periods

• Q2 net income and operating income rose year over year, but first-half net income and operating income declined despite modest revenue growth. First-half operating margin fell to 5.9% from 6.5%.
• Management attributed margin pressure to product mix in Engineering and Construction and Mobile Solutions, investment in growth opportunities, and lower high-margin Field Solutions sales in Q1. Gross margin percentage was slightly lower in both comparison periods.
• For the first half, Engineering and Construction revenue increased 4% and Mobile Solutions 7%; Field Solutions declined 5% and Advanced Devices 11%. Agriculture-market softness weighed on Field Solutions, while geospatial demand remained affected by the oil-and-gas exploration downturn.
• Q2 effective tax rate was 7%, versus 28%, and first-half rate was 18%, versus 25%. The lower 2016 rates primarily reflected a one-time discrete tax benefit from the APS divestiture.

Outlook, commentary, risks and unusual items

• Management provided no specific numerical revenue or earnings guidance in the supplied filing. It expected Mobile Solutions operating income to improve with higher revenue and better gross-margin mix, while warning that delays in large customer deployments could hurt results. It said agriculture product sales were expected to improve, but continued market weakness could further affect revenue and operating income.
• Management believed cash and available borrowing capacity would cover operating needs, debt service, planned capital expenditures, acquisitions and repurchases for at least the next 12 months. It noted that significant acquisitions or repurchases could require additional borrowing, and that repatriating some foreign cash could incur U.S. taxes. Approximately $211.7 million of cash was held by foreign subsidiaries.
• Trimble repurchased approximately 3.8 million shares for $92.2 million in the first half, at an average $24.21 per share; $157.7 million remained authorized under the program at quarter-end. It acquired three businesses for $13.6 million and divested the Omega Group assets and APS for total cash consideration of $12.0 million. The divestitures generated a $4.9 million gain; the APS sale also contributed the discrete tax benefit.
• A previously disclosed error in translating certain foreign deferred tax liabilities overstated goodwill and affected currency-translation amounts in other comprehensive income. Trimble revised prior-period comprehensive-income information, including 2015 comparatives in this filing; it said the error did not affect net income or cash flows and was not material to prior periods individually or in aggregate.
• The IRS has proposed $67.0 million of tax, interest and penalties relating primarily to valuations of intercompany transfers of acquired intellectual property for fiscal 2010–2011. Trimble disputes the position, is pursuing appeals, and has made no payment. The filing reports $57.5 million of unrecognized tax benefits at quarter-end.
• An Alaska lawsuit appeal remained pending; a prior $51.3 million jury award against Trimble had been set aside, and final judgment was entered in Trimble’s favor. A separate shareholder suit was settled with court approval and $250,000 in fees and costs. The company disclosed $127.9 million in future minimum operating lease commitments and approximately $149.2 million in unconditional purchase obligations.
• Other risks include seasonality, macroeconomic and market conditions, foreign currency and interest-rate fluctuations, and execution of acquisitions and customer deployments. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether recurring subscription and service growth can continue, and whether growth translates into improved GAAP operating margins.
• Progress in Mobile Solutions customer deployments and the expected improvement in segment profitability; continued weakness in agriculture and geospatial markets.
• The sustainability of earnings after the one-time APS-related tax benefit, and the status and potential outcome of the IRS tax dispute.
• Debt, cash availability and the location and potential tax cost of foreign cash; planned capital spending, acquisitions and share repurchases.
• Effects of the revised foreign-currency translation information and any final purchase-price adjustments for recent acquisitions.