Trimble Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter ended June 28, 2019; comparative periods are the quarter and first two quarters of fiscal 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
Trimble provides integrated technology solutions—including sensors, software, connectivity, and services—to construction, geospatial, agriculture, transportation, and related markets. Its strategy emphasizes software and subscription offerings, recurring revenue, innovation, and targeted acquisitions. Viewpoint, acquired in July 2018, is included in Buildings and Infrastructure results.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | First two quarters FY2019 | First two quarters FY2018 |
|---|---|---|---|---|
| Revenue | $854.8 | $785.5 | $1,656.4 | $1,527.7 |
| Gross margin | $460.6; 53.9% | $422.7; 53.8% | $898.9; 54.3% | $818.9; 53.6% |
| Operating income | $109.7; 12.8% | $89.5; 11.4% | $196.0; 11.8% | $153.7; 10.1% |
| Net income attributable to Trimble | $94.6 | $64.1 | $156.9 | $122.6 |
| Diluted EPS | $0.37 | $0.25 | $0.62 | $0.49 |
| Non-GAAP diluted EPS | $0.53 | $0.51 | $0.97 | $0.97 |
- Revenue rose 9% in Q2 and 8% for the first two quarters, as reported. Service revenue increased 28% and subscription revenue 34% in Q2; product revenue declined 2%.
- Q2 GAAP gross margin was broadly stable year over year; operating margin improved. Non-GAAP operating margin was 20.4% in Q2 versus 20.7%, and 19.7% year to date versus 19.9%.
- Q2 non-operating income was $5.7, compared with expense of $10.3 a year earlier. A gain on sale of an equity investment and increased equity-method investment income were partly offset by higher interest expense. Q2 interest expense was $20.6 versus $18.6.
Cash flow, debt, and liquidity
- First-half operating cash flow was $325.5, up from $267.8. Investing used $19.8, compared with $384.8 used in the prior-year period; the prior period included the e-Builder acquisition. Financing used $279.3, versus $337.6 provided, primarily reflecting net debt repayments.
- Cash was $199.6 at June 28, 2019, versus $172.5 at fiscal year-end 2018. Current assets were $1,121.4 and current liabilities $1,075.2.
- Debt carrying value was $1,742.9; principal outstanding was $1,754.7, down from $1,981.9 at fiscal year-end. The company repaid $153.6 of debt, net of borrowings, during Q2 and reported compliance with all debt covenants.
- Management said cash and available borrowing capacity were expected to cover anticipated operating needs, debt service, and planned capital expenditures for at least the next 12 months.
- Deferred revenue was $452.4. Remaining performance obligations were approximately $1.1 billion; Trimble expected to recognize approximately 72% over the next 12 months and 17% over the following 12 months.
Material changes and management commentary
- Growth reflected Viewpoint and organic growth, particularly in Buildings and Infrastructure, Transportation, and Resources and Utilities; unfavorable currency movements and Geospatial declines were offsets. Management reported approximately 2% unfavorable currency impact on revenue.
- Buildings and Infrastructure revenue grew 24% in Q2, led by Viewpoint and software, maintenance, and subscription growth. Geospatial revenue fell 11%, primarily due to weaker OEM hardware sales in Asia Pacific, especially China. Resources and Utilities revenue rose 5%; Transportation rose 9%.
- Management expects continued investment in product development and a continuing shift toward software, subscriptions, and services. The filing provides no specific full-year revenue or earnings guidance.
- Q2 effective tax rate was 18%, versus 19% a year earlier, including a one-time benefit from foreign tax refunds; the first-half rate was 18%, versus 16%. Other income included a gain from sale of an equity investment.
Risks, contingencies, and unusual items
- Trimble adopted the new lease accounting standard in FY2019. At adoption it recognized $123.5 of operating lease right-of-use assets and $126.1 of lease liabilities; the change materially affected the balance sheet but not income or cash-flow statements.
- The IRS assessed $51.2 in tax and penalties for fiscal 2011. Trimble disputes the assessment; the tax court set the case to begin on or after May 1, 2020. The company reported $69.0 of unrecognized tax benefits and $13.0 accrued for tax interest and penalties.
- Unconditional purchase obligations were approximately $246.1. The company also disclosed $37.1 of operating leases not yet commenced. It reported no material litigation beyond routine matters and no material changes to risk factors since its FY2018 Form 10-K.
- Foreign currency, interest rates, macroeconomic conditions, seasonality, agricultural market weakness, and successful integration of Viewpoint are among the risks discussed. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported growth and margin performance is attributable to Viewpoint versus organic growth, and whether recurring software and subscription growth continues.
- Whether Geospatial OEM demand, particularly in China, and agricultural demand recover or remain weak.
- Debt repayment pace, interest costs, covenant headroom, and liquidity against planned capital spending and obligations.
- Resolution and potential financial effect of the IRS tax dispute, including changes in tax reserves or effective tax rate.
- Performance against management’s stated recurring-revenue strategy; the filing does not provide specific full-year financial guidance.