Trimble Inc. — Q3 2019 Form 10-Q
Reporting period: Fiscal third quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. Fiscal year-to-date (“YTD”) figures cover the first three quarters. Amounts are in millions except per-share data.
Business context
Trimble provides technology solutions combining sensors, software, connectivity, and information for construction, geospatial, agriculture and utilities, and transportation markets. Management’s strategy emphasizes integrated workflow solutions, software and subscription growth, R&D, international expansion, and selective acquisitions. Viewpoint, acquired in Q3 2018, contributed to Buildings and Infrastructure results and YTD growth.
Financial results
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $783.9 | $795.2 | $2,440.3 | $2,322.9 |
| Gross margin | $422.0; 53.8% | $426.9; 53.7% | $1,320.9; 54.1% | $1,245.8; 53.6% |
| Operating income | $91.7; 11.7% | $77.4; 9.7% | $287.7; 11.8% | $231.1; 9.9% |
| Net income attributable to Trimble | $78.1 | $73.7 | $235.0 | $196.3 |
| Diluted EPS | $0.31 | $0.29 | $0.93 | $0.78 |
| Operating cash flow | Not separately provided | Not separately provided | $462.8 | $384.8 |
- Q3 revenue declined 1% year over year; YTD revenue grew 5%. Q3 product revenue fell 8%, while service rose 7% and subscription rose 13%. YTD product revenue fell 4%; service increased 19% and subscription 26%.
- Q3 GAAP operating income rose despite lower revenue, aided by lower purchased-intangible amortization, strong Buildings and Infrastructure results, and lower corporate expense. YTD operating income also benefited from Viewpoint.
- Non-GAAP diluted EPS was $0.48 for Q3 versus $0.49 a year earlier, and $1.45 YTD versus $1.46. These measures exclude specified items and should be considered alongside GAAP results.
Segments and material changes
- Buildings and Infrastructure: Revenue increased 5% in Q3 and 18% YTD, substantially reflecting Viewpoint and growth in software, service, and subscription offerings. Segment operating margins improved.
- Geospatial: Revenue declined 16% in Q3 and 12% YTD; weakness in OEM hardware sales, particularly in China, and softer government survey sales weighed on results.
- Resources and Utilities: Revenue declined 9% in Q3 and 1% YTD, amid agriculture OEM/reseller weakness and market uncertainty, partly offset by positioning services growth.
- Transportation: Revenue grew 4% in Q3 and 5% YTD, but segment income declined as hardware mix compressed gross margin and R&D spending increased.
- Recurring revenue continued to gain share. YTD growth reflected Viewpoint and organic growth in Buildings and Infrastructure and Transportation, offset in part by Geospatial weakness.
Cash, debt, and liquidity
- Cash and cash equivalents were $184.6 at quarter-end, versus $172.5 at fiscal 2018 year-end. Current assets of $1,061.8 compared with current liabilities of $1,059.3.
- Principal debt outstanding was $1,761.6, down from $1,981.9 at fiscal 2018 year-end; balance-sheet debt was $1,750.3 net of discounts and issuance costs. The company repaid $10.8 of debt, net of borrowings, during Q3 and was in compliance with debt covenants.
- YTD investing cash outflow was $68.7, compared with $1,612.8 in the prior year, when Viewpoint and e-Builder acquisitions drove spending. YTD financing cash outflow was $377.2, including $179.8 of share repurchases.
- Management said cash and available credit facilities and senior-note capacity should be sufficient for anticipated operating needs, debt service, and planned capital expenditures for at least the next 12 months.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects continued investment in R&D and a shift toward software, subscriptions, and services; it believes recurring revenue can improve business visibility over time.
- Management cited seasonal patterns in construction and agricultural equipment, while noting diversification and subscription growth may reduce seasonality. Global macroeconomic conditions could affect demand.
- Foreign exchange reduced Q3 revenue by $8.1 and operating income by $0.6; YTD impacts were $37.1 and $1.5, respectively. The company uses short-term currency forwards and does not use derivatives for speculation.
- Q3’s 1% effective tax rate included a benefit from releases of tax reserves following statute expirations. The company reported that a Tax Court decision on its 2011 federal tax matter resulted in no change to its federal tax liability. It had $60.9 of unrecognized tax benefits at quarter-end.
- Lease accounting adoption added $133.7 of operating lease right-of-use assets and $138.1 of lease liabilities at quarter-end; the standard materially affected the balance sheet but not reported income or cash flows.
- Unconditional purchase obligations were approximately $263.7, plus $9.0 of capital commitments related to an equity investment. The company reported no material legal proceedings and no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether Geospatial and agriculture-related weakness persists, and whether service and subscription growth offsets product declines.
- How much future Buildings and Infrastructure growth and profitability depends on Viewpoint, and the progress and costs of integrating that acquisition.
- Debt repayment capacity, refinancing needs, covenant headroom, and the effect of interest rates and foreign exchange.
- The sustainability of GAAP earnings improvement, including the roles of lower amortization, tax-reserve releases, and other adjustments; compare GAAP results with the company’s non-GAAP measures.
- The timing and conversion of the reported $1.1 billion of remaining performance obligations into revenue; the filing states approximately 71% and 17% are expected over the next 12 and 24 months, respectively, with the remainder thereafter.