Trimble Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Quarter ended March 29, 2019; comparative quarter ended March 30, 2018. Amounts are in U.S. dollars. Trimble provides technology, software, and services for construction, geospatial, agriculture, transportation, and related markets.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $801.6 million | $742.2 million | +8% |
| Gross margin | $438.3 million; 54.7% | $396.2 million; 53.4% | Margin +1.3 percentage points |
| Operating income | $86.3 million; 10.8% | $64.2 million; 8.6% | Margin +2.2 percentage points |
| Net income attributable to Trimble | $62.3 million | $58.5 million | +6% |
| Diluted EPS | $0.25 | $0.23 | +9% |
| Operating cash flow | $147.6 million | $82.9 million | +$64.7 million |
| Cash and equivalents at period end | $216.7 million | $172.5 million at fiscal 2018 year-end | +$44.2 million |
Revenue mix shifted toward recurring offerings: product revenue declined 2% to $488.4 million, service revenue rose 24% to $159.2 million, and subscription revenue increased 33% to $154.0 million. Management attributed service and subscription growth mainly to Viewpoint and also to organic growth.
GAAP revenue growth included the Viewpoint acquisition and was partly offset by approximately 2% unfavorable foreign-exchange impact, Geospatial weakness, and lower product sales. Management’s non-GAAP measures reported revenue of $804.5 million, operating income of $152.9 million (19.0% margin, flat year over year), diluted EPS of $0.45 (flat), and adjusted EBITDA of $171.9 million versus $155.3 million. These measures exclude specified acquisition, amortization, restructuring, stock-compensation, and other items; they are not substitutes for GAAP results.
Segments and material changes
- Buildings and Infrastructure: Revenue increased 30% to $292.0 million; segment operating income rose 41% to $61.4 million. Growth reflected Viewpoint and organic software and subscription gains.
- Geospatial: Revenue fell 8% to $161.2 million and segment operating income declined 21% to $29.4 million, primarily from weaker OEM hardware sales in Asia Pacific.
- Resources and Utilities: Revenue was essentially flat at $159.3 million; segment operating income was $51.0 million, down slightly. Management cited agricultural market uncertainty, including China tariffs on U.S. goods.
- Transportation: Revenue increased 3% to $189.1 million and segment operating income rose 3% to $31.2 million. Subscription growth was partly offset by prior-year hardware demand associated with electronic-logging-device deadlines.
Higher GAAP operating income reflected revenue and gross-margin expansion, Viewpoint, expense control, and lower corporate expense than in the prior-year quarter. Higher interest expense—$21.9 million versus $9.5 million—partly offset operating improvement, reflecting increased debt. The effective tax rate was 17%, compared with 12%; the prior-year rate benefited from a one-time foreign deferred-tax adjustment.
Cash, debt, and liquidity
Operating cash flow was $147.6 million. Investing activities used $9.6 million, while financing activities used $94.3 million, including $72.8 million of net debt repayments and $40.0 million of share repurchases. Cash increased $44.2 million during the quarter.
Outstanding debt principal was $1.907 billion at quarter-end (carrying value $1.895 billion), compared with $1.982 billion principal at fiscal year-end 2018. Cash was $216.7 million. Current assets were $1.148 billion and current liabilities $1.090 billion. The company reported compliance with all debt covenants. It stated that cash and available borrowing capacity would be sufficient for operating needs, debt service, and planned capital expenditures for at least the next 12 months.
Deferred revenue was $464.4 million, up from $360.4 million a year earlier. Remaining performance obligations were approximately $1.1 billion; Trimble expected to recognize about 72% within 12 months and a further 17% over the following 12 months. These amounts are not equivalent to future-period revenue guidance.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expects continued investment in research and development and describes a strategic shift toward software, subscriptions, recurring revenue, and services.
- Management cited seasonality in construction and agricultural equipment, global macroeconomic conditions, foreign-exchange movements, and market uncertainty. Foreign currency adversely affected Q1 revenue, according to the filing.
- Viewpoint and e-Builder acquisition integration and anticipated benefits remain important execution considerations. Viewpoint was acquired in July 2018 for $1.211 billion; acquisition-related amortization and financing costs affect reported results.
- Trimble adopted the new lease standard in fiscal 2019. It recognized $123.5 million of operating-lease right-of-use assets and $126.1 million of lease liabilities at adoption; adoption materially affected the balance sheet but not the income statement or cash flow statement.
- The IRS asserted $51.2 million of tax and penalties for fiscal 2011. Trimble disputes the assessment; the matter is in U.S. Tax Court, with trial scheduled to begin on or after May 1, 2020. The company reported $62.8 million of unrecognized tax benefits and said reserves were more likely than not adequate.
- Unconditional purchase obligations were approximately $258.3 million, primarily non-cancelable vendor purchase orders. The filing reported no material litigation beyond routine matters and no material change to the risk factors in the 2018 Form 10-K.
Most important facts for investors to verify
- How much of revenue and earnings growth is recurring or organic versus attributable to Viewpoint and other acquisitions, and whether acquisition integration delivers expected benefits.
- Whether Geospatial’s OEM hardware weakness persists and how exposure to Asia Pacific demand and agricultural tariffs develops.
- Debt levels, interest expense, covenant headroom, and liquidity as debt is serviced and repaid.
- The distinction between GAAP results and management’s non-GAAP measures, including the substantial adjustments that raise reported non-GAAP operating income and EPS.
- Developments in the disputed IRS tax assessment and the adequacy of tax reserves.