Trimble Navigation Limited (now Trimble Inc.) — Q2 2011 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 1, 2011; comparisons are to the periods ended July 2, 2010. The unaudited filing describes a positioning-technology business serving construction, agriculture, surveying, mobile asset management, and related markets.
Financial performance
| Metric | Three months ended July 1, 2011 | Six months ended July 1, 2011 |
|---|---|---|
| Revenue | $407.2 million; up 22% | $791.5 million; up 21% |
| Gross margin | $208.7 million; 51.3% of revenue | $400.3 million; 50.6% of revenue |
| Operating income | $51.6 million; 12.7% margin | $95.2 million; 12.0% margin |
| Net income attributable to Trimble | $53.7 million; diluted EPS $0.43 | $93.4 million; diluted EPS $0.74 |
| Operating cash flow | Not reported separately for the quarter | $110.7 million |
- Revenue growth was led by Engineering and Construction and Field Solutions. Management cited improving demand and market penetration in construction and surveying, and strong agricultural demand amid high commodity prices, particularly in Europe.
- Gross margin improved year over year, which management attributed mainly to a higher mix of software and subscription revenue; higher amortization of acquired intangibles partly offset the improvement. GAAP operating expenses rose, including from acquisitions, and operating margin increased modestly.
- Net income comparisons were substantially affected by taxes: the effective tax rate was 10.0% in Q2 2011 versus 83.4% in Q2 2010. The 2011 period included a $2.3 million net benefit from closing IRS examinations for 2008–2009; the 2010 comparison included a $27.5 million net IRS settlement charge for 2005–2007.
- Non-operating income included a $6.5 million foreign-currency transaction gain, including a $5.6 million gain on a forward contract entered into for the Tekla acquisition. The gain was not designated as a hedge.
- Segment results were mixed: Q2 Engineering and Construction revenue was $236.7 million and operating income $47.0 million; Field Solutions revenue was $104.0 million and operating income $42.5 million. Mobile Solutions reported a $2.7 million operating loss on $40.2 million revenue; Advanced Devices operating income fell to $2.6 million on $26.2 million revenue.
Liquidity, debt, and capital allocation
- At July 1, 2011, cash and equivalents were $249.8 million, total debt was $127.3 million, and current assets and current liabilities were $812.7 million and $292.6 million, respectively. Cash increased $29.0 million from year-end 2010.
- Six-month investing cash use was $94.5 million, including $91.4 million for business acquisitions; financing cash provided was $8.0 million. Accounts-receivable days outstanding improved to 57 from 63 at year-end, while inventory turns declined to 3.5 from 3.8.
- A new five-year credit agreement signed May 6 provided a $700 million revolving facility and a $400 million term loan, with an aggregate facility increase option of up to $300 million. The company reported covenant compliance at quarter-end. Management said cash and available credit were expected to meet operating needs and planned acquisitions for at least 12 months.
- After quarter-end, Trimble borrowed $400 million under the term facility to fund most of the Tekla purchase price. It also borrowed $108 million under the revolver and $50 million under an uncommitted facility to fund the PeopleNet acquisition. These subsequent borrowings materially change the debt picture from the July 1 balance sheet.
Developments, outlook, and risks
- On July 8, 2011, Trimble completed its Tekla tender offer for approximately 99.46% of outstanding shares for about €319 million, equivalent to $454 million; it intended to pursue compulsory redemption of remaining shares. On August 5, it acquired PeopleNet. Both transactions occurred after the reporting date.
- During the first half, the company also acquired Yamei, Dynamic Survey Solutions, Ashtech, Beartooth Mapping, OmniSTAR assets, and other businesses. Acquisition activity contributed to higher operating expenses, amortization, goodwill, and acquisition-related cash use.
- The filing gives no quantified revenue or earnings guidance. Management expected continued product development and described the second fiscal quarter as typically the company’s strongest, reflecting construction-season buying patterns.
- Key risks include the effect of economic conditions and seasonal demand; acquisition integration and execution; foreign-exchange and interest-rate exposure; working-capital management; and debt service and covenant restrictions. Debt covenants include minimum interest coverage of 3.5 to 1 and maximum leverage limits that tighten over time. The filing reported no material change to previously disclosed risk factors other than adding a specific debt-risk discussion.
- Purchase commitments were approximately $66.6 million; operating lease commitments totaled $61.2 million. Recorded acquisition earn-outs and holdbacks were $15.3 million, with maximum remaining payments not to exceed $26.3 million. The company reported no material legal proceedings beyond routine litigation and stated disclosure controls were effective.
Most important facts for investors to verify
- Post-quarter borrowing and the resulting debt, interest expense, leverage, and covenant headroom following the Tekla and PeopleNet acquisitions.
- Whether strong Engineering and Construction and agricultural demand can persist, and whether Mobile Solutions can return to segment profitability.
- How much reported earnings growth reflects ongoing operations versus the unusual tax comparison and Tekla-related foreign-exchange gain; review management’s non-GAAP reconciliations alongside GAAP results.
- Acquisition integration, expected returns, purchase-price adjustments, contingent consideration, and the impact of acquired intangible amortization.
- Working-capital trends, particularly inventory turns and receivables, and the company’s ability to sustain operating cash flow while funding acquisitions and commitments.