Trimble Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Trimble provides technology, software, connectivity and services across construction, geospatial, agriculture/resources, utilities and transportation. This unaudited report covers the quarter ended June 29, 2018 and the first two fiscal quarters of 2018; comparisons are with the corresponding 2017 periods, with prior-year figures adjusted for the new revenue-recognition standard.
Financial results
| Metric | Q2 2018 | Q2 2017 | First two quarters 2018 | First two quarters 2017 |
|---|---|---|---|---|
| Revenue | $785.5 million | $659.9 million | $1,527.7 million | $1,270.5 million |
| Gross margin | $422.7 million; 53.8% | $342.6 million; 51.9% | $818.9 million; 53.6% | $666.9 million; 52.5% |
| Operating income | $89.5 million; 11.4% | $59.0 million; 8.9% | $153.7 million; 10.1% | $113.7 million; 8.9% |
| Net income attributable to Trimble | $64.1 million | $47.3 million | $122.6 million | $97.1 million |
| Diluted EPS | $0.25 | $0.18 | $0.49 | $0.38 |
| Operating cash flow | Not separately reported for the quarter | $267.8 million | $253.4 million |
Q2 revenue increased 19% year over year; first-half revenue increased 20%. Product revenue was $531.0 million, services $136.1 million and subscriptions $118.4 million in Q2. In the first half, revenue growth spanned all four segments: Buildings and Infrastructure +23%, Geospatial +14%, Resources and Utilities +31%, and Transportation +15%. Management attributed growth to organic demand across segments as well as acquisitions, including Müller and e-Builder.
Cash and cash equivalents were $571.0 million at quarter-end, with no short-term investments, versus $537.4 million in cash and short-term investments at fiscal year-end 2017. Total debt carrying value was $1,286.6 million; principal outstanding was $1,301.3 million. Current assets were $1,386.9 million and current liabilities $717.0 million. Cash used in investing activities was $384.8 million, including $532.9 million of net cash paid for acquisitions; financing provided $337.6 million. Cash increased $212.5 million during the first half. Accounts-receivable days sales outstanding improved to 52 from 56, while inventory turns declined to 5.1 from 5.4.
Interest expense, net, rose to $18.6 million in Q2 from $6.0 million, and to $28.1 million for the first half from $12.1 million. Effective tax rates were 19% for Q2 and 16% for the first half, versus 26% and 24%, respectively, in 2017. The filing also reports non-GAAP diluted EPS of $0.50 for Q2 and $0.95 for the first half; these exclude specified charges and tax adjustments and are not GAAP measures.
Material changes and notable items
- Trimble acquired four businesses in the first half for total cash consideration of $543.1 million, including SaaS construction-management provider e-Builder for $485.2 million. e-Builder contributed $15.6 million of first-half revenue and recorded a $1.5 million operating loss.
- On July 2, 2018, after quarter-end, Trimble acquired Viewpoint for $1.2 billion in cash. The transaction was financed with an additional $897.5 million of debt; pro forma total debt after the acquisition was $2,184.1 million. Viewpoint is to be reported in Buildings and Infrastructure.
- Trimble issued $300 million of 4.15% notes due 2023 and $600 million of 4.90% notes due 2028. Quarter-end debt also included $400 million of 4.75% notes due 2024. The company reported compliance with debt covenants at quarter-end.
- GAAP gross and operating margins improved year over year. Management cited stronger product mix in several segments and operating expense control, partly offset by higher acquired-intangible amortization and acquisition-related costs. Resources and Utilities segment margin was lower, in part due to Müller’s product mix.
- Foreign-currency translation reduced Q2 comprehensive income materially; the quarter’s foreign-currency translation adjustment was a $60.5 million loss, net of tax. Currency movements nevertheless increased Q2 revenue by $12.9 million and operating income by $3.9 million, according to management.
Outlook, risks and contingencies
- The filing gives no specific revenue, earnings or margin guidance. Management expects continued investment in R&D and describes a strategic shift toward software, services and recurring revenue. It believes available cash, investments and credit commitments should meet operating needs, debt service and planned capital expenditures for at least 12 months.
- Management said it intended to limit further acquisitions to prioritize deleveraging and had temporarily suspended the share-repurchase program. The program had $392.2 million of authorized funds remaining at quarter-end.
- Debt-related risks include higher interest expense, refinancing needs, covenant restrictions and potential limits on investment or repurchases. Moody’s downgraded Trimble from Baa2 to Baa3 following the Viewpoint announcement; S&P maintained its rating but assigned a negative outlook. The credit agreement allows temporarily higher leverage limits following the Viewpoint closing.
- The IRS assessed $51.2 million of tax and penalties for fiscal 2011 following a partial settlement of a broader $67.0 million assessment; Trimble filed a U.S. Tax Court petition disputing the remaining issues. Unrecognized tax benefits were $81.0 million at quarter-end. The company was still evaluating certain Tax Act effects, including GILTI.
- Other disclosed commitments included $163.1 million of future operating lease payments and $197.4 million of unconditional purchase obligations. Management reported no other material legal proceedings beyond routine litigation. Foreign-exchange exposure, interest rates, economic conditions, seasonality and successful integration of e-Builder and Viewpoint remain relevant risks.
- Adoption of the new revenue-recognition standard was retrospective and changed some prior-period presentations, including balance-sheet amounts. Management said the effect on fiscal 2017 income-statement results was not material; investors should note adjusted comparatives when assessing trends.
Important facts for investors to verify
- Viewpoint’s post-close contribution, integration progress, realized synergies and the pace of debt reduction from the pro forma $2.18 billion debt level.
- Debt covenant headroom, rating-agency actions, floating-rate exposure and the effect of interest costs on earnings and cash flow.
- How much reported growth is organic versus acquisition-driven, and whether margin expansion persists across segments.
- Resolution and cash impact of the disputed $51.2 million IRS assessment, along with final Tax Act and GILTI accounting.
- Conversion of deferred revenue and remaining performance obligations into revenue. The filing reports approximately $1.0 billion of remaining performance obligations and states expected recognition of approximately 74% over the next 12 months and 15% over the next 24 months; verify the intended timing interpretation.