Trimble Inc. — Q1 FY2018 Form 10-Q
Business context and reporting period. Trimble provides technology, software and services across Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation. This unaudited quarter ended March 30, 2018; comparisons are with Q1 FY2017, whose figures were adjusted retrospectively for the new revenue-recognition standard. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $742.2 | $610.6 | +22% |
| Gross profit / margin | $396.2 / 53.4% | $324.3 / 53.1% | Margin +0.3 percentage points |
| Operating income / margin | $64.2 / 8.6% | $54.7 / 9.0% | Income +17%; margin −0.4 points |
| Net income attributable to Trimble | $58.5 | $49.8 | +17% |
| Diluted EPS | $0.23 | $0.19 | +$0.04 |
| Cash from operations | $82.9 | $104.0 | −$21.1 |
Product, service and subscription revenue each rose about 21–22%. Revenue increased across all four segments: Buildings and Infrastructure +20%, Geospatial +17%, Resources and Utilities +32%, and Transportation +19%. Management cited broad organic growth, acquisitions (notably Müller), and favorable currency translation. Foreign exchange added $22.0 to revenue but reduced operating income by $4.8.
GAAP gross margin improved slightly, helped by Geospatial mix and pricing, partly offset by acquisition mix. Operating margin declined despite higher operating income, reflecting higher corporate expense, acquisition-related costs and intangible amortization. Non-GAAP operating income was $139.5, or 18.8% of revenue, versus $107.3, or 17.6%, a 30% increase; this measure excludes specified expenses including purchased-intangible amortization, stock compensation and acquisition/divestiture items.
Cash, liquidity and debt
- Cash and cash equivalents were $274.5 at quarter-end, down from $358.5 at fiscal year-end; the company had no short-term investments at quarter-end. Cash plus short-term investments fell from $537.4.
- Operating cash flow was $82.9. Investing used $353.5, principally reflecting $518.7 of net cash paid for acquisitions; financing provided $180.3, including debt proceeds and repayments. Ending cash was $274.5.
- Principal debt was $1,126.4, up from $918.2 at fiscal year-end. Balance-sheet debt was $1,122.3 after discounts and issuance costs; $430.5 was classified as short-term and $691.8 as long-term. The company reported covenant compliance.
- Working-capital indicators: receivable days increased to 58 from 56; inventory turns declined to 5.2 from 5.4.
Material changes, outlook and notable items
- Acquisitions and divestiture: Trimble acquired e-Builder for $485.2 and two businesses for total consideration of $526.9 during the quarter. Acquisitions contributed less than 2% of quarterly revenue in aggregate; e-Builder contributed $5.0 revenue and a $1.5 operating loss after its February 2 close. Acquisition and divestiture costs were $16.0, including accelerated e-Builder option compensation. Trimble also sold Geoline, recording a $2.6 gain.
- Viewpoint transaction after quarter-end: On April 23, 2018, Trimble agreed to acquire Viewpoint for $1.2 billion in cash, with closing expected in Q3 FY2018 subject to approvals and customary conditions. Committed financing includes a bridge facility of up to $1.2 billion and a delayed-draw term loan facility of up to $500 million. Trimble said it would temporarily suspend share repurchases and limit further acquisitions while reducing leverage.
- Outlook: The filing gives no quantified revenue or earnings guidance. Management described continued investment in R&D and a strategic shift toward software, services and recurring revenue. Remaining performance obligations were approximately $1.0 billion; the filing expects about 73% recognized over the next 12 months and 16% over the following 24-month horizon, with the remainder thereafter.
- Taxes and contingencies: The effective tax rate was 12%, versus 22%, reflecting the lower U.S. federal rate and other tax benefits, partly offset by tax on certain foreign earnings. The IRS assessed $51.0 of tax and penalties for 2011 after a partial settlement; Trimble disputes the remaining position and planned to petition Tax Court. Management believes reserves are adequate. The company also cautioned that acquisition integration, goodwill and intangible valuations, debt service, floating rates, and foreign-exchange movements could affect results.
- Credit ratings: Following the Viewpoint announcement and expected additional borrowing, Moody’s downgraded Trimble from Baa2 to Baa3; S&P maintained its rating but assigned a negative outlook. Trimble expected the downgrade to raise interest expense on specified facilities by 0.25 percentage points annually.
- Accounting change: Trimble adopted the revenue-recognition standard retrospectively. Q1 FY2017 revenue was adjusted from $613.9 to $610.6; management said the primary balance-sheet effects included earlier revenue recognition and capitalization of eligible contract-acquisition commissions.
Investor verification priorities
- Track Viewpoint’s closing, final financing mix, resulting leverage and interest costs, and progress on deleveraging.
- Assess organic growth separately from acquisition contributions and currency effects, and monitor whether recurring-revenue growth continues.
- Review cash conversion and working capital, particularly the decline in operating cash flow and higher inventory investment.
- Monitor segment margins and the effect of acquisition-related costs and purchase accounting on GAAP results.
- Follow the IRS dispute and any further Tax Act accounting adjustments; verify the assumptions underlying remaining performance obligations.