Business context and reporting period
Trimble Inc. (then Trimble Navigation Limited) filed this unaudited Form 10-Q for the quarter ended September 30, 2016, and the first three quarters of fiscal 2016. The company provides technology, software, subscription and service solutions for industries including construction, agriculture and transportation. On October 1, 2016, it changed its name to Trimble Inc. and reincorporated in Delaware; the filing says this did not otherwise change the business or shareholders’ interests.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | First three quarters 2016 | First three quarters 2015 |
|---|---|---|---|---|
| Revenue | $584.1 million | $562.3 million | $1,776.7 million | $1,730.7 million |
| Gross margin | $309.0 million; 52.9% | $298.0 million; 53.0% | $925.2 million; 52.1% | $909.1 million; 52.5% |
| Operating income | $55.3 million; 9.5% | $46.0 million; 8.2% | $125.7 million; 7.1% | $121.5 million; 7.0% |
| Net income attributable to Trimble | $39.2 million | $37.1 million | $94.7 million | $97.1 million |
| Diluted EPS | $0.15 | $0.14 | $0.37 | $0.37 |
Q3 revenue increased 4%; subscription revenue rose 10% to $93.6 million, while product and service revenue increased 3% and 2%, respectively. For the first three quarters, revenue grew 3%, led by 9% subscription growth. Gross margin percentage edged down in both comparisons, mainly reflecting product mix. Q3 operating income improved with higher revenue, expense control and lower intangible amortization; year-to-date operating income rose modestly. Year-to-date net income declined despite revenue growth.
Segment revenue in Q3 was $332.4 million for Engineering and Construction, $77.9 million for Field Solutions, $138.5 million for Mobile Solutions and $35.3 million for Advanced Devices. Year-to-date growth was led by Engineering and Construction and Mobile Solutions; Field Solutions and Advanced Devices revenue declined versus the prior-year period. Segment operating income is a company-defined measure that excludes specified corporate costs and charges.
Operating cash flow for the first three quarters was $282.0 million, versus $276.4 million. Investing used $78.6 million and financing used $107.5 million; cash and cash equivalents increased $97.5 million to $213.5 million. Short-term investments were $62.1 million, bringing cash, equivalents and investments to $275.6 million. Capital expenditures were $19.7 million; operating cash flow less reported capital expenditures was $262.3 million.
At quarter-end, debt was $669.8 million on the balance sheet, including $145.3 million short term and $524.5 million long term; principal outstanding was $674.9 million, down from $735.2 million at fiscal 2015 year-end. The company had a $1.0 billion revolving facility, with $129.0 million drawn, and was compliant with its covenants. Separately, $145.0 million was outstanding under uncommitted facilities callable by lenders. Current assets were $957.9 million and current liabilities $694.0 million.
Outlook, commentary, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management said cash, investments and available revolving credit were expected to cover operating needs, debt service, planned capital expenditures, acquisitions and repurchases for at least the next 12 months.
- Management highlighted continued R&D and product development, increasing software and recurring revenue, and the potential for recurring revenue to improve business visibility. Transportation and logistics growth was expected to continue through the year.
- Results remain exposed to seasonal construction and agriculture purchasing, global economic and market conditions, and foreign-exchange movements. Q3 currency effects on revenue and operating income were described as immaterial. The filing says risk factors were unchanged from the 2015 Form 10-K.
- During the first three quarters, Trimble acquired three Engineering and Construction businesses for $13.6 million and sold the Omega Group assets and Advanced Public Safety business for $12.0 million. The divestitures generated a $4.9 million gain; the acquisitions contributed less than 1% of year-to-date revenue.
- An IRS proposed adjustment relating primarily to valuations of intercompany transfers of acquired intellectual property totaled $67.0 million for fiscal 2010–2011. Trimble disputed the position, was pursuing the appeals process, had made no payment and said it intended to defend its position. Unrecognized tax benefits were $60.3 million at quarter-end.
- A plaintiff’s $51.3 million jury award in an Alaska case had been overturned by the trial court, which entered judgment for Trimble and awarded it $0.6 million in fees and costs. The plaintiff appealed; the Alaska Supreme Court had not issued a decision as of the filing.
Important facts for investors to verify
- Whether subscription growth and segment revenue trends continue, particularly given weaker year-to-date results in Field Solutions and Advanced Devices.
- The durability of margins: gross margin percentage declined year over year, while Q3 operating margin improved.
- Cash generation and planned capital allocation, including repurchases, against total debt and the callable uncommitted borrowings.
- Developments in the IRS appeal and Alaska litigation, and any resulting financial exposure.
- Potential effects of seasonality, macroeconomic conditions, foreign exchange and the upcoming adoption of new accounting standards; the filing does not quantify their future financial effects.