Trimble Inc. — Q1 Fiscal 2020 10-Q
Business context and period: Trimble provides technology, software, subscription, and services solutions across construction, geospatial, agriculture and utilities, and transportation markets. The quarter ended April 3, 2020 and included 13 weeks; comparisons are with the 13 weeks ended March 29, 2019. The filing describes the growing importance of recurring software and subscription revenue, which together with services represented 58% of Q1 revenue.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $792.3 million | $801.6 million | Down 1% |
| Gross margin | $441.0 million; 55.7% | $438.3 million; 54.7% | Margin up 1.0 percentage point |
| Operating income | $98.3 million; 12.4% margin | $86.3 million; 10.8% margin | Up $12.0 million |
| Net income attributable to Trimble | $61.9 million | $62.3 million | Down $0.4 million |
| Diluted GAAP EPS | $0.25 | $0.25 | Unchanged |
| Operating cash flow | $155.7 million | $147.6 million | Up $8.1 million |
Product revenue fell 5% to $463.8 million; service revenue rose 2% to $162.4 million, and subscription revenue rose 8% to $166.1 million. Management attributed improved gross margin mainly to higher-margin software mix in Geospatial and Resources and Utilities. GAAP non-operating expense increased to $18.9 million from $11.1 million, primarily reflecting deferred-compensation plan fluctuations; the effective tax rate rose to 22% from 17%.
Non-GAAP measures: Non-GAAP revenue was $794.0 million, down 1%; non-GAAP operating income was $161.2 million, up 4%, with a 20.3% margin versus 19.4%; non-GAAP diluted EPS was $0.49 versus $0.45. These measures exclude items including acquired-intangible amortization, stock-based compensation, restructuring, COVID-19 expenses, and acquisition-related costs, so they are not directly comparable to GAAP results.
Segments
| Segment | Revenue | Year-over-year | Segment operating income |
|---|---|---|---|
| Buildings and Infrastructure | $296.9 million | Up 1% | $60.8 million, down 3% |
| Geospatial | $146.2 million | Down 9% | $30.5 million, up 4% |
| Resources and Utilities | $180.3 million | Up 13% | $66.9 million, up 31% |
| Transportation | $170.6 million | Down 10% | $16.9 million, down 46% |
Resources and Utilities benefited from agriculture strength, positioning services, and acquisitions. Geospatial was affected by weak survey demand, oil and gas market weakness, and COVID-19, while higher-margin software sales and cost control supported income. Transportation declines reflected fewer hardware upgrades, subscriber losses related in part to ELD transition challenges, COVID-19 impacts, and Kuebix-related expenses.
Cash, debt, and liquidity
Cash and cash equivalents were $216.8 million at quarter-end, versus $189.2 million at fiscal 2019 year-end. Operating cash flow was $155.7 million; investing cash outflow was $214.4 million, primarily reflecting the Kuebix acquisition; financing cash inflow was $99.6 million. Cash increased $27.6 million during the quarter.
Quarter-end debt principal was $1,985.7 million, compared with $1,854.0 million at fiscal 2019 year-end; reported carrying debt was $1,975.4 million. Management said cash, operating cash flow, and available borrowing were expected to cover operating needs, debt service, planned capital expenditures, and any repurchases for at least the next 12 months. The company was compliant with debt covenants at quarter-end. On May 4, 2020, after quarter-end, it modified its credit agreement to extend the $225.0 million remaining term loan maturity to July 2, 2022.
Outlook, risks, and notable items
- COVID-19 outlook: Management said the pandemic’s effects remained uncertain. It reported sales growth during the first two months of 2020, followed by a sales decline in the second half of March. It expected hardware and related software revenue, gross margins, and operating income to be pressured in Q2 and the remainder of the year; recurring revenue was expected to remain relatively stable. Cost reductions were intended to partially offset shortfalls. No numerical earnings or revenue guidance was provided.
- Key risks: Potentially prolonged pandemic disruption to customer demand, supply chains, distribution, manufacturing, employee operations, and financial markets; possible covenant pressure; foreign exchange and interest-rate movements; continued oil and gas weakness; and uncertainty integrating acquisitions. Management noted that actual results could differ materially from estimates, including credit-loss and impairment estimates.
- Acquisition: Trimble acquired transportation management provider Kuebix for $201.1 million cash consideration. The acquisition added $147.6 million of preliminary goodwill, contributed less than 1% of quarterly revenue, and was intended to create a freight planning and matching platform.
- Capital allocation: Trimble repurchased 1.2 million shares for $50.0 million in Q1, at an average $40.40 per share. It suspended further repurchases given the current environment; $122.4 million remained authorized at quarter-end.
- Other commitments: Unconditional purchase obligations were approximately $320.0 million, primarily non-cancelable material purchase orders. The filing reported no material legal proceedings beyond ordinary routine litigation.
Important facts for investors to verify
- How COVID-19 affected Q2 and subsequent hardware, software, segment demand, and gross margins relative to management’s expectations.
- Whether recurring subscription and maintenance revenue remained stable and continued to offset product revenue weakness.
- Kuebix integration progress, realized strategic benefits, and any changes to its preliminary purchase accounting valuations.
- Debt levels, borrowing availability, covenant headroom, and the effect of the extended term-loan maturity.
- Cash generation and working-capital trends, including collections, inventories, and deferred revenue.
- The size and recurrence of excluded non-GAAP items, and how they reconcile to GAAP results.