Trimble Inc. (Trimble Navigation Limited) — Q2 2012 Form 10-Q
Reporting period: Fiscal quarter ended June 29, 2012; comparisons are with the quarter ended July 1, 2011. First-half figures cover the first two fiscal quarters. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Trimble provides positioning, software, and related services to markets including engineering and construction, agriculture, mobile workforce and asset management, and advanced devices. It reports four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices. Results include substantial acquisition activity, notably Tekla and PeopleNet, acquired in 2011, and SketchUp, Gatewing, Plancal, StruCad, and GEOTrac, acquired during the period or the preceding twelve months.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $517.6 | $407.2 | $1,019.8 | $791.5 |
| Gross margin | $267.7; 51.7% | $208.7; 51.3% | $526.8; 51.7% | $400.3; 50.6% |
| Operating income | $58.9; 11.4% | $51.6; 12.7% | $118.8; 11.6% | $95.2; 12.0% |
| Net income attributable to Trimble | $53.7 | $53.7 | $104.5 | $93.4 |
| Diluted earnings per share | $0.42 | $0.43 | $0.82 | $0.74 |
| Cash provided by operations | Not presented separately | Not presented separately | $155.1 | $110.7 |
- Q2 revenue rose 27%; first-half revenue rose 29%. In Q2, product revenue grew 17%, services 86%, and subscriptions 80%. Management attributed growth to organic demand and acquisitions, with acquisitions contributing significantly to Mobile Solutions and Engineering and Construction.
- Q2 operating income increased 14%, but operating margin declined 1.3 percentage points. Management cited higher purchased-intangible amortization and acquisition costs as offsets to higher sales and gross margin. Q2 amortization of purchased intangibles was $29.1 million, versus $16.6 million a year earlier.
- Q2 net income attributable to Trimble was essentially unchanged year over year. Higher interest expense and a less favorable foreign-currency comparison—including a prior-year acquisition-hedge gain—offset operating improvement; the tax rate also rose to 16% from 10%. First-half net income increased about 12%.
- By segment, Q2 revenue increased 20% in Engineering and Construction, 19% in Field Solutions, 102% in Mobile Solutions, and 9% in Advanced Devices. Mobile Solutions returned to segment operating profit, at $5.6 million versus a $2.7 million loss; growth largely reflected PeopleNet.
Cash, debt, and liquidity
- At June 29, 2012, cash and equivalents were $121.9 million, down from $154.6 million at fiscal year-end 2011. Total debt was $697.4 million, up from $564.4 million; the filing reports $80.2 million as current debt and $617.2 million as non-current.
- First-half operating cash flow was $155.1 million. Investing used $359.5 million, including $337.7 million for acquisitions; financing provided $174.9 million, primarily reflecting credit-facility activity. Cash decreased $32.7 million during the half.
- The company had a $1.1 billion unsecured credit facility, including a $700 million revolving facility and a $400 million term loan, plus a separate uncommitted facility increased to $75 million. It reported compliance with financial covenants at quarter-end. Management said cash and available borrowing capacity should cover expected operating needs, debt service, planned capital expenditures, and planned stock purchases for at least twelve months.
- Other liquidity commitments included $86.1 million of unconditional purchase obligations, $78.5 million of future operating lease commitments, and acquisition holdbacks and earn-outs. Additional potential earn-out payments beyond amounts recorded were $8.8 million.
Outlook, commentary, and risks
- No specific revenue, earnings, or margin guidance is provided. Management expects continued new-product development and planned capital spending, including construction of a facility in Westminster, Colorado.
- Management described the second fiscal quarter as historically the strongest due to construction-season buying, but said recent acquisitions may reduce seasonality in the future. Engineering and Construction growth occurred despite weak commercial and residential construction markets and a generally negative European environment. Agriculture demand remained strong despite North American drought conditions.
- Foreign exchange reduced revenue by $10.6 million in Q2 and $14.5 million in the first half; management said the operating-income effect was immaterial. The company identified exposure to currency movements, particularly the euro, and uses short-term forward contracts.
- Acquisition accounting remains subject to adjustment: some acquired asset and liability valuations were preliminary and could change, potentially significantly. The company also faces tax examinations; unrecognized tax benefits were $31.4 million, and management did not expect a material change within twelve months.
- The credit facility imposes leverage and interest-coverage limits and restricts certain actions. Management noted that covenant noncompliance or tax costs associated with repatriating foreign earnings could affect liquidity. The filing reports no material change to previously disclosed risk factors, no material legal proceedings beyond routine matters, and effective disclosure controls.
Most important facts for investors to verify
- How much of reported growth and segment improvement is organic versus acquisition-related, and whether acquired businesses meet expected performance.
- Whether revenue growth translates into durable operating-margin improvement as acquisition amortization and integration costs continue.
- Debt repayment capacity, covenant headroom, interest expense, and reliance on revolving and callable uncommitted borrowing.
- Cash conversion and working-capital trends, especially receivables and deferred revenue, alongside substantial acquisition and purchase commitments.
- Exposure to construction-market seasonality, European weakness, agricultural conditions, foreign exchange, and unresolved tax matters.