Trimble Navigation Limited (Trimble) — Q3 2015 Form 10-Q
Reporting period: Quarter ended October 2, 2015; year-to-date figures cover the first three quarters of fiscal 2015. Comparisons are with the corresponding fiscal 2014 periods. Trimble provides technology, hardware, software, services and subscription solutions across construction, agriculture, transportation and other industries.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 3 quarters 2015 | First 3 quarters 2014 |
|---|---|---|---|---|
| Revenue | $562.3 million | $584.8 million | $1,730.7 million | $1,831.7 million |
| Gross margin | $298.0 million; 53.0% | $316.8 million; 54.2% | $909.1 million; 52.5% | $998.3 million; 54.5% |
| Operating income | $46.0 million; 8.2% | $11.1 million; 1.9% | $121.5 million; 7.0% | $184.0 million; 10.0% |
| Net income attributable to Trimble | $37.1 million | $11.8 million | $97.1 million | $158.3 million |
| Diluted EPS | $0.14 | $0.04 | $0.37 | $0.60 |
| Operating cash flow | — | $276.4 million | $310.5 million |
Q3 revenue declined 4% year over year, while revenue for the first three quarters declined 6%. Product revenue fell 10% in Q3 and 12% year to date; service revenue rose 6% and 6%, respectively, and subscription revenue rose 20% and 18%. Q3 operating income improved chiefly because the prior-year quarter included a $52.0 million litigation reserve; year-to-date operating income was lower amid revenue weakness, partly offset by that prior-year item. Non-GAAP diluted EPS was $0.30 in Q3 versus $0.33, and $0.86 year to date versus $1.17.
Cash and cash equivalents were $123.6 million at quarter end, down from $148.0 million at fiscal year-end 2014. Total debt was $759.4 million, up from $738.4 million. Current assets were $853.0 million and current liabilities $687.5 million. Year-to-date investing cash use was $113.4 million, including $101.7 million for acquisitions and $35.7 million for property and equipment; financing cash use was $177.0 million, including $234.4 million of share repurchases. Cash decreased $24.4 million over the period.
Material changes and segment trends
- Engineering and Construction revenue fell 5% in Q3 and year to date, with oil-price-related regional weakness, geospatial softness and unfavorable currency effects; building construction partly offset declines.
- Field Solutions revenue fell 17% in Q3 and 19% year to date, primarily due to continued agricultural-market softness, particularly in OEM channels.
- Mobile Solutions revenue rose 9% in Q3 and 7% year to date, driven mainly by transportation and logistics growth; Field Services was a partial offset.
- Advanced Devices revenue declined 6% in Q3 and 5% year to date, mainly from weaker timing-component sales.
- Software and services continued to increase as a share of revenue. Ten businesses were acquired during the first three quarters for total consideration of $111.0 million; together they contributed less than 2% of year-to-date revenue. Q3 acquisitions included Vianova Systems, Spatial Dimension and Solid Transportation.
For the first three quarters, segment operating income declined in Engineering and Construction and Field Solutions, while Mobile Solutions and Advanced Devices increased. These segment figures exclude certain corporate expenses and other items and should not be compared directly with consolidated operating income.
Liquidity, debt and capital allocation
- Trimble reported $400.0 million of 4.75% senior notes due December 2024 and $211.0 million drawn on its $1.0 billion unsecured revolving credit facility. It also had $150.0 million outstanding under uncommitted facilities, which lenders may call at any time.
- The company was in compliance with its credit-facility financial covenants at quarter end. It stated that cash and available borrowing capacity should be sufficient for operating needs, debt service, planned capital expenditures and stock repurchases for at least the next 12 months.
- In August, the company authorized a new $400.0 million repurchase program. During the first three quarters it repurchased approximately 7.5 million shares in open-market purchases for $159.4 million and made a $75.0 million upfront payment under an accelerated share repurchase agreement. Final ASR settlement was expected in Q4.
- Management cited improved receivables collection: days sales outstanding were 56, compared with 58 at fiscal year-end 2014. Inventory turns were 4.0 versus 3.9.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said it expects active investment in product development to continue and believes growing recurring software and services revenue can improve business visibility. It also noted that seasonality, market conditions and customer buying patterns may affect results.
- Management identified continued weakness in agriculture and oil-price-affected regional markets, foreign-exchange movements, and the possibility that current segment trends could further affect results. Q3 revenue and operating income were negatively affected by currency movements by $22.6 million and $0.5 million, respectively.
- Trimble corrected a foreign-currency translation error affecting goodwill and accumulated other comprehensive loss. The fiscal 2014 year-end adjustment reduced goodwill, assets and equity by $15.4 million; the company said there was no effect on net income or cash flows and that prior-period errors were not material to those periods.
- The IRS proposed $67.0 million of tax, interest and penalties relating mainly to valuations of intercompany transfers of acquired intellectual property for fiscal 2010 and 2011. Trimble disputes the assessment, has appealed it, and had made no payment. Unrecognized tax benefits were $45.8 million.
- LightSquared-related litigation includes claims that remain in discovery and an appeal of dismissed claims; the plaintiffs sought $1.9 billion in damages. The company warned an unfavorable outcome could materially affect results, liquidity or financial position and said it intends to contest the claims. A separate shareholder lawsuit concerning credit-agreement provisions had a proposed settlement submitted for court review.
- Acquisition purchase-price allocations remained provisional for certain deals and could change. The filing also disclosed $132.4 million of unconditional purchase obligations and $122.3 million of future minimum operating lease commitments.
Important facts for investors to verify
- Whether product-revenue declines in Engineering and Construction and Field Solutions persist, and whether recurring software, service and subscription growth continues to offset them.
- Whether cash generation, debt levels and the share-repurchase pace remain consistent with management’s stated liquidity expectations and credit covenants.
- Developments in the IRS dispute and LightSquared litigation, including potential financial exposure and timing.
- Final settlement of the accelerated share repurchase and remaining authorization under the $400.0 million program.
- Effects of currency movements, acquisition integration and the foreign-currency translation correction on future reported results and comparisons.