Trimble Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Trimble provides technology, software, subscription and services solutions across construction, geospatial, agriculture, utilities and transportation markets. This unaudited report covers the quarter ended June 30, 2017 and the first two quarters of fiscal 2017; comparisons are with the corresponding 2016 periods. The company reorganized its reporting into four segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation. Prior-period segment results were recast.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $661.9 million | $609.6 million | $1,275.8 million | $1,192.6 million |
| Gross margin | $346.5 million; 52.3% | $315.6 million; 51.8% | $673.1 million; 52.8% | $616.2 million; 51.7% |
| Operating income | $62.6 million; 9.5% of revenue | $40.5 million; 6.6% | $119.2 million; 9.3% | $70.4 million; 5.9% |
| Net income attributable to Trimble | $49.9 million | $35.7 million | $100.4 million | $55.5 million |
| Diluted EPS | $0.19 | $0.14 | $0.39 | $0.22 |
| Cash from operating activities | — | $248.7 million | $195.6 million |
Q2 revenue grew 9% year over year; first-half revenue rose 7%. Subscription revenue increased 14% in Q2 and 15% in the first half, while service revenue was nearly flat in Q2. Management attributed improved margins and operating income to revenue growth, cost control and lower amortization of acquired intangibles.
At quarter-end, cash and cash equivalents were $384.9 million and short-term investments were $101.2 million, for $486.1 million combined, compared with $327.2 million at fiscal year-end 2016. Principal debt was $616.9 million, versus $624.8 million at year-end; reported balance-sheet debt was $612.3 million. First-half investing cash outflow was $110.3 million, including $129.8 million of net cash used for acquisitions; financing cash inflow was $19.3 million. Accounts receivable days sales outstanding improved to 54 from 55, and inventory turns rose to 5.2 from 4.8.
Material changes and segment performance
- Q2 segment revenue increased 10% in Buildings and Infrastructure, 13% in Transportation and 12% in Resources and Utilities; Geospatial rose 1%. In the first half, the first three segments grew 9%, 11% and 9%, respectively, while Geospatial declined less than 1%.
- Subscription growth and organic gains in construction, agriculture and transportation contributed to results. Transportation and logistics benefited in part from the U.S. electronic logging device mandate. Geospatial results were affected by divestitures, including ThingMagic, sold in Q1.
- Trimble acquired seven businesses in the first half for total cash consideration of $158.0 million. Their combined contribution was less than 1% of first-half revenue. After quarter-end, it acquired Germany-based Müller-Elektronik, specializing in implement control and precision farming.
- First-half operating cash flow increased by $53.1 million year over year. Investing cash use rose substantially from the prior year, primarily because of acquisitions and purchases of short-term investments.
Outlook, risks and unusual items
The filing gives no specific revenue or earnings guidance. Management said cash, short-term investments and borrowing availability under its $1.0 billion revolving credit facility were expected to cover operating needs, debt service, capital expenditures, acquisitions and planned repurchases for at least 12 months. The company was in compliance with the facility’s covenants. Separately, $147.0 million was drawn under uncommitted facilities that lenders may call at any time.
Management cited seasonality in construction and agricultural markets, macroeconomic conditions, foreign exchange, interest rates and international trade barriers as factors that could affect results. Q2 revenue and operating income were negatively affected by currency movements by $5.2 million and $0.3 million, respectively. The company reported no material changes to the risk factors in its 2016 Form 10-K.
The Q2 effective tax rate was 26%, versus 7% a year earlier; the prior-year rate benefited from a one-time tax benefit related to the Advanced Public Safety divestiture. The first-half rates were 25% and 18%, respectively. The company continued to contest IRS proposed adjustments relating to 2010–2011 intercompany intellectual-property transfers; the stated assessments, including interest and penalties, totaled $67.0 million. Management believed existing reserves were adequate and said unrecognized tax benefits could decrease by up to $8.6 million in the next 12 months.
An Alaska lawsuit was remanded for an award of nominal damages after the state supreme court affirmed that the plaintiff had not proved damages or lost profits; rehearing was denied on August 3, 2017. The filing reported no other material legal proceedings. The company also disclosed $149.9 million in future minimum operating lease commitments and approximately $186.0 million in unconditional purchase obligations.
Management also presented non-GAAP diluted EPS of $0.38 for Q2 and $0.71 for the first half, compared with $0.29 and $0.55, respectively. These measures exclude specified items, including acquired-intangible amortization, stock compensation, restructuring and acquisition-related costs, and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether organic growth and subscription growth continue, particularly in the faster-growing segments, and how acquisitions contribute to reported growth.
- Cash conversion and working-capital trends, as well as the funding and integration costs of acquisitions and repurchases.
- Debt availability and refinancing exposure, especially the callable uncommitted facilities and the 2024 senior notes.
- Resolution and potential cash or tax effects of the IRS dispute; the filing does not establish a final outcome.
- How much reported operating improvement persists after acquired-intangible amortization and other excluded non-GAAP items.