Trimble Navigation Limited — Q2 2015 Form 10-Q
Business context and period: The filing covers the quarter ended July 3, 2015 and the first two fiscal quarters of 2015; comparisons are with the corresponding 2014 periods. Trimble provides technology, software, services, and subscription solutions across construction, agriculture, transportation, and other industries. All amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First two quarters 2015 | First two quarters 2014 |
|---|---|---|---|---|
| Revenue | $585.8 million | $642.2 million | $1,168.4 million | $1,246.9 million |
| Gross margin | $303.9 million; 51.9% | $354.6 million; 55.2% | $611.1 million; 52.3% | $681.5 million; 54.7% |
| Operating income | $36.0 million; 6.1% margin | $97.2 million; 15.1% margin | $75.5 million; 6.5% margin | $172.9 million; 13.9% margin |
| Net income attributable to Trimble | $25.9 million | $77.9 million | $60.0 million | $146.5 million |
| Diluted EPS | $0.10 | $0.29 | $0.23 | $0.55 |
| Operating cash flow | Not reported separately for the quarter | $204.0 million | $214.6 million |
- Q2 revenue declined 9%; first-half revenue declined 6%. Product revenue fell 16% in Q2 and 13% in the first half, while service and subscription revenue grew 6% and 17% in Q2, respectively.
- For the first half, investing activities used $67.7 million, including $59.1 million for acquisitions; financing activities used $148.2 million, including $73.0 million for share repurchases. Cash fell $19.0 million to $129.0 million.
- At quarter-end, total debt was $639.6 million, versus $738.4 million at fiscal year-end 2014. Current debt was $124.2 million and long-term debt was $515.4 million. The $400 million senior notes bear 4.75% interest and mature in 2024.
- Current assets were $885.1 million and current liabilities $696.6 million. The company had a $1.0 billion revolving credit facility, with $118 million drawn under that facility, and said available cash and credit were expected to cover anticipated needs for at least 12 months. The company was in compliance with credit-facility covenants.
Material changes and segment performance
- Revenue and profitability weakened sharply, driven mainly by lower product sales, softer Field Solutions and Engineering and Construction demand, gross-margin compression, and unfavorable foreign exchange. Q2 operating income fell 63% year over year; first-half operating income fell 56%.
- Engineering and Construction revenue fell 8% in Q2 and 6% in the first half; segment operating income fell 37% and 38%, respectively. Management cited oil-price-related regional weakness, lower high-margin geospatial sales, and currency effects.
- Field Solutions revenue declined 24% in Q2 and 20% in the first half, primarily reflecting weak agricultural markets, particularly OEM channels, and some GIS weakness.
- Mobile Solutions revenue rose 4% in Q2 and 6% in the first half, supported by transportation and logistics growth; Q2 segment operating income declined 13%. Advanced Devices revenue fell 13% in Q2, mainly due to weaker timing-component sales.
- Subscription revenue increased to $85.5 million in Q2 from $73.2 million; management described a continued shift toward software, recurring revenue, and services. R&D was 15% of revenue, compared with 13% a year earlier.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management noted that Q2 is historically the strongest quarter due to construction seasonality, while software and subscription growth may reduce seasonality over time. Continued weakness in construction/geospatial and agriculture markets could further affect results.
- Foreign currency movements reduced Q2 revenue by $26.3 million and operating income by $1.7 million. The company uses forward contracts to manage short-term currency exposures and does not use derivatives for speculation.
- Seven businesses were acquired in the first half for total consideration of $64.1 million; their aggregate contribution was less than 1% of first-half revenue. Q2 acquisitions included HarvestMark and Cadec. Acquisition costs, purchased-intangible amortization, and restructuring charges were significant items affecting GAAP results.
- The IRS proposed $67.0 million of tax, interest, and penalties for fiscal 2010 and 2011, primarily concerning valuations of intercompany transfers of acquired intellectual property. Trimble disputes the position, filed a protest, and reported that no payment had been made. Unrecognized tax benefits were $44.9 million at quarter-end.
- In LightSquared-related litigation, most claims were dismissed, but negligent-misrepresentation and constructive-fraud claims by LightSquared plaintiffs proceeded to discovery; Harbinger plaintiffs appealed dismissal of their claims. The plaintiffs had sought $1.9 billion in damages. A separate shareholder suit challenges change-of-control provisions in the credit agreement and seeks non-monetary relief.
- Other commitments included $131.6 million of future operating lease payments and $132.6 million of unconditional purchase obligations. Management stated that these and planned capital expenditures were expected to be manageable with available liquidity.
Important facts for investors to verify
- Whether weakness in agriculture, geospatial, and construction-related markets persists, and whether revenue and operating margins stabilize.
- How much recurring subscription and service growth can offset declining product revenue.
- The cash and earnings impact of the IRS dispute and pending litigation, including developments in the remaining LightSquared claims.
- Debt maturities, reliance on short-term uncommitted facilities that lenders may call at any time, and ongoing compliance with credit-facility covenants.
- The sustainability of operating cash flow amid lower earnings, acquisitions, capital spending, and the remaining share-repurchase authorization.