Business context and reporting period
Trimble Navigation Limited designs and sells positioning, hardware, software, service and subscription solutions across Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices. This unaudited Form 10-Q covers the quarter ended June 28, 2013, and the first two quarters of fiscal 2013; the comparable 2012 quarter ended June 29. Fiscal 2013 is a 53-week year.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First two quarters 2013 | First two quarters 2012 |
|---|---|---|---|---|
| Revenue | $576.3 million | $517.6 million | $1,132.4 million | $1,019.8 million |
| Gross margin | $302.4 million; 52.5% | $267.7 million; 51.7% | $589.3 million; 52.0% | $526.8 million; 51.7% |
| Operating income | $64.9 million; 11.3% | $58.9 million; 11.4% | $121.4 million; 10.7% | $118.8 million; 11.6% |
| Net income attributable to Trimble | $54.6 million | $53.7 million | $104.4 million | $104.5 million |
| Diluted EPS | $0.21 | $0.21 | $0.40 | $0.41 |
| Operating cash flow | Not reported separately for the quarter | $172.0 million | $155.1 million |
Q2 revenue rose 11% year over year; product revenue increased 6%, service 33%, and subscription 27%. For the first two quarters, revenue rose 11%, with product up 5%, service 37%, and subscription 30%. Management attributed gross-margin expansion chiefly to higher-margin software and subscription sales, partly offset by increased acquired-intangible amortization. GAAP operating margin declined year over year for the half despite higher revenue. Management-reported non-GAAP diluted EPS was $0.38 for Q2 versus $0.36, and $0.75 for the half versus $0.70; these measures exclude specified acquisition-related, amortization, restructuring, stock-compensation and other items.
Cash and equivalents were $129.1 million at quarter end, down from $157.8 million at fiscal year end 2012. Total debt was $899.2 million, versus $911.2 million; current and non-current debt were $109.6 million and $789.6 million. Total current assets were $846.6 million and current liabilities $581.8 million. First-half investing cash outflow was $215.1 million, including $179.0 million for acquisitions and $39.4 million for property and equipment; financing provided $18.4 million. Cash declined $28.7 million over the half. Operating cash flow benefited from higher income before non-cash depreciation and amortization and increased deferred revenue, partly offset by lower accounts payable.
Material changes versus comparable periods
- Mobile Solutions revenue increased 42% in Q2 and 41% for the half, reflecting the TMW acquisition and organic transportation and logistics growth. Its segment operating margin improved to 13% in Q2 from 7%.
- Engineering and Construction revenue grew 10% in Q2 and 9% for the half, supported by building and heavy-highway products. Field Solutions revenue declined 6% in Q2 and 3% for the half, primarily due to weakness in GIS markets.
- Advanced Devices revenue grew 10% in Q2 and 12% for the half, supported by RFID and military products. Segment operating income rose in all segments except Field Solutions.
- Operating expenses and acquired-intangible amortization increased, reflecting acquisitions. First-half amortization of purchased intangible assets was $79.1 million, compared with $57.9 million a year earlier. Goodwill rose to $1.912 billion from $1.816 billion, including acquisition additions.
- First-half GAAP net income attributable to Trimble was essentially flat, while diluted EPS decreased from $0.41 to $0.40.
Outlook, management commentary, risks and unusual items
The filing gives no specific revenue or earnings guidance. Management stated that cash, cash equivalents and available borrowings were expected to meet operating needs, debt service, planned capital expenditures and stock-repurchase needs for at least the next 12 months. The company historically has its strongest quarter in Q2 due to construction seasonality, but acquisitions may reduce seasonality. Management expects continued active product development and identifies future growth as dependent in part on market development and its ability to enter new markets.
Key operating pressures included weaker GIS demand tied to reduced government funding, slower-than-anticipated U.S. agriculture sales associated with weather, Asia-Pacific weakness linked to an Australian slowdown, and survey-market constraints associated with government spending. The company cited exposure to foreign-exchange and interest-rate movements; it uses derivatives for hedging and did not anticipate a material adverse effect from its current hedging strategy. It was in compliance with credit-facility covenants at quarter end; covenant limits include minimum interest coverage and maximum leverage requirements. Other items to monitor include $99.4 million of unconditional purchase obligations, $93.6 million of future minimum operating lease commitments, and $41.8 million of unrecognized tax benefits. The filing reports no material legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of Mobile Solutions and overall growth is organic versus attributable to acquisitions, especially TMW.
- Whether Field Solutions GIS weakness and agriculture softness persist, and whether stronger service and subscription growth continues.
- The effect of acquisition-related amortization and other excluded items on GAAP earnings, margins and cash generation.
- Debt, leverage and covenant headroom, including the substantial debt maturity and repayment schedule under the credit facilities.
- Working-capital trends, deferred-revenue conversion, acquisition spending and the adequacy of liquidity against planned capital expenditures and commitments.