Trimble Navigation Limited (Trimble Inc.) — Q3 2011 Form 10-Q
Business context and period. The filing covers the fiscal quarter ended September 30, 2011, and the nine months ended that date; comparisons are with the quarter and nine months ended October 1, 2010. Trimble provides positioning, software and related solutions across engineering and construction, field, mobile and advanced-device markets. Results are unaudited.
Financial performance
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $417.4 | $318.2 | $1,208.9 | $970.6 |
| Gross margin | $211.6; 50.7% | $159.7; 50.2% | $611.8; 50.6% | $482.2; 49.7% |
| Operating income | $32.4; 7.8% | $31.7; 10.0% | $127.7; 10.6% | $108.3; 11.2% |
| Net income attributable to Trimble | $28.0 | $32.8 | $121.4 | $67.1 |
| Diluted EPS | $0.22 | $0.27 | $0.96 | $0.54 |
- Quarterly revenue increased 31%; nine-month revenue increased 25%. Growth reflected acquisitions and organic expansion, particularly in Engineering and Construction and Field Solutions.
- Quarterly GAAP operating margin declined despite revenue growth, as acquisition-related expenses and purchased-intangible amortization rose. Gross margin improved, supported by higher-margin software and subscription sales.
- Nine-month net income rose substantially, while the effective tax rate fell to 12% from 43%. The comparison includes a $27.5 million IRS settlement charge in 2010; 2011 also benefited from a $2.3 million tax benefit following closure of IRS examinations for 2008 and 2009.
- Management’s non-GAAP diluted EPS was $0.52 versus $0.39 for Q3 and $1.61 versus $1.15 for the nine-month period. These measures exclude specified items, including purchased-intangible amortization, stock compensation and acquisition costs; they are not substitutes for GAAP results.
Segments
- Engineering and Construction: Q3 revenue $241.1 million, up 27%; segment operating income $42.6 million. Growth included Tekla and organic sales, with strength in U.S. and European heavy/highway and survey products.
- Field Solutions: Q3 revenue $91.1 million, up 35%; segment operating income $31.0 million. Agricultural demand benefited from relatively high commodity prices and expanded offerings.
- Mobile Solutions: Q3 revenue $58.1 million, up 54%, primarily reflecting PeopleNet. Nine-month segment operating loss was $1.5 million, compared with $2.1 million of income in 2010; the filing cites a large-customer loss in 2010 and acquisition effects.
- Advanced Devices: Q3 revenue $27.1 million, up 15%, while segment operating income was $4.0 million versus $4.1 million. Nine-month operating income fell to $10.4 million from $14.9 million, attributed mainly to mix and acquisitions.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $161.8 million, up from $87.0 million. Investing cash outflow was $771.8 million, including $758.2 million for business acquisitions, net of cash acquired. Financing cash inflow was $528.2 million, primarily reflecting new borrowings. Cash declined $82.5 million to $138.3 million from year-end 2010.
- At September 30, 2011, total debt was $637.3 million, up from $153.2 million at December 31, 2010. Current debt was $66.9 million. The company reported $740.7 million of current assets and $394.8 million of current liabilities.
- The new unsecured credit facilities provide up to $1.1 billion: a $700 million revolving facility and a $400 million term loan. A separate $50 million uncommitted revolver is callable by the bank. The company was in compliance with credit covenants at quarter-end; required minimum interest coverage is 3.5-to-1, with maximum leverage limits tightening over time.
- Accounts-receivable days sales outstanding remained 63 days; inventory turns were 3.6, down from 3.8 at year-end 2010. Goodwill increased to $1.312 billion and purchased intangible assets, net, to $516.2 million, largely reflecting acquisitions.
Material changes, outlook and risks
- Acquisitions: Trimble acquired 99.46% of Tekla for approximately $454.9 million in cash on July 8, 2011; the remaining shares were intended to be acquired through compulsory redemption. Tekla generated $15.2 million of revenue and a $1.1 million operating loss from acquisition through quarter-end. The purchase accounting, including $291.7 million of goodwill, remained preliminary. PeopleNet and several other businesses were also acquired during the period.
- Acquisition activity substantially increased debt, goodwill, intangible assets, amortization and reported acquisition costs. Tekla and PeopleNet integration and realization of expected synergies are important execution considerations.
- Management stated that cash, operating cash generation and credit facilities should be sufficient for anticipated operating needs, acquisitions and planned repurchases for at least the next 12 months. The filing provides no specific revenue or earnings forecast. It notes that the second fiscal quarter is typically strongest due to construction-season buying patterns.
- In October 2011, the board authorized a new $100 million share-repurchase program, superseding the prior program. No shares were repurchased during the first nine months of 2011.
- Risks include increased debt service and covenant constraints, interest-rate and foreign-exchange exposure, acquisition integration and provisional purchase-accounting estimates, working-capital collection and inventory management, and seasonal or economic changes in end markets. A hypothetical 10% increase in one-month LIBOR was estimated to raise annual interest expense by approximately $152,000 on existing balances.
- The company reported no material legal proceedings beyond ordinary routine litigation and no material changes to previously disclosed risk factors other than an updated debt-risk disclosure. Management concluded disclosure controls were effective and reported no materially affecting change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported revenue growth was organic versus acquired, and whether Tekla and PeopleNet meet integration and synergy expectations.
- Current leverage and covenant headroom, borrowing costs, repayment requirements and availability under committed facilities.
- Whether operating cash flow can support acquisition-related obligations, capital needs and the new repurchase authorization as receivables and inventory grow.
- Whether Mobile Solutions returns to sustained profitability and whether Advanced Devices’ weaker nine-month operating income stabilizes.
- Final Tekla purchase-price allocations, including acquired intangible values, deferred taxes and goodwill, and the resulting future amortization burden.
- The effects of tax-rate variation and acquisition-related/non-GAAP adjustments when comparing reported earnings across periods.