Trimble Navigation Limited (now Trimble Inc.) — Q3 FY2014 10-Q
Reporting period: Quarter ended October 3, 2014; year-to-date figures cover the first three fiscal quarters. The filing presents unaudited results and compares Q3 FY2014 with Q3 FY2013 and year-to-date FY2014 with year-to-date FY2013.
Business context and financial performance
Trimble provides positioning, software, and connected-workflow solutions across engineering and construction, agriculture and other field markets, mobile workforce and asset management, and advanced devices.
| Metric | Q3 FY2014 | Q3 FY2013 | First 3 quarters FY2014 | First 3 quarters FY2013 |
|---|---|---|---|---|
| Revenue | $584.8 million | $556.5 million | $1,831.7 million | $1,688.9 million |
| Gross margin | $316.8 million; 54.2% | $295.1 million; 53.0% | $998.2 million; 54.5% | $884.4 million; 52.4% |
| GAAP operating income | $11.1 million; 1.9% | $63.0 million; 11.3% | $183.9 million; 10.0% | $184.4 million; 10.9% |
| Net income attributable to Trimble | $11.8 million | $54.5 million | $158.3 million | $158.9 million |
| Diluted EPS | $0.04 | $0.21 | $0.60 | $0.61 |
| Cash from operating activities | Not stated for the quarter | $310.5 million | $278.4 million |
Q3 revenue increased 5%, while year-to-date revenue increased 8%. Service revenue grew 15% in Q3 and 16% year to date; product revenue grew 3% and 7%, respectively. Subscription revenue rose 2% in Q3 and 8% year to date. Gross margin improved in both comparisons, reflecting a richer mix of software, maintenance, and subscription revenue.
Management also reported non-GAAP operating income of $118.4 million in Q3, approximately flat with $118.2 million a year earlier; non-GAAP diluted EPS was $0.33 versus $0.39. For the first three quarters, non-GAAP operating income was $395.6 million versus $348.8 million, and non-GAAP diluted EPS was $1.17 versus $1.14. These company-defined measures exclude items including purchased-intangible amortization, stock compensation, acquisition-related costs, and litigation expenses.
Segments and material changes
- Engineering and Construction: Q3 revenue rose 10% to $342.3 million; year-to-date revenue rose 14% to $1,019.6 million. Management cited continued market penetration and improving U.S. construction and geospatial markets; Europe showed slower growth.
- Field Solutions: Q3 revenue fell 11% to $88.8 million; year-to-date revenue fell 6% to $341.4 million. The filing attributes the decline to agricultural-market softness, lower commodity prices and farmer income, and customer cutbacks; GIS sales partly offset the weakness.
- Mobile Solutions: Revenue increased 7% in both periods, to $121.2 million in Q3 and $362.7 million year to date, primarily from transportation and logistics demand.
- Advanced Devices: Q3 revenue was nearly flat at $32.6 million; year-to-date revenue rose 13% to $108.0 million, reflecting stronger timing, positioning, and military-specific product sales.
Q3 GAAP operating income fell sharply primarily because Trimble recorded a $51.3 million reserve after a jury verdict against it in the Recreational Data Services (RDS) case. The verdict also generated a related discrete tax benefit, contributing to a Q3 income tax benefit of $4.7 million and a reported effective tax benefit rate of 66%. Year-to-date net income was nearly unchanged despite revenue and gross-margin growth, chiefly because of the litigation reserve and higher operating expenses.
During the first three quarters, Trimble completed ten acquisitions; collectively they contributed less than 1% of revenue in that period. The company also sold a 15% interest in VirtualSite Solutions to Caterpillar, reducing its ownership to 50% and resulting in deconsolidation and a $15.1 million gain. The investment is now accounted for under the equity method.
Cash, debt, and liquidity
- At October 3, cash and cash equivalents were $139.5 million, versus $147.2 million at FY2013 year-end. Total debt was $646.7 million, down from $758.5 million; the quarter-end balance was primarily a term loan. Cash less total debt was approximately $507.3 million.
- Year-to-date operating cash flow was $310.5 million, compared with $278.4 million. Investing activities used $202.4 million, including $170.9 million for acquisitions; financing activities used $108.5 million, including $65.0 million for share repurchases and net debt repayments.
- Current assets were $916.0 million and current liabilities were $624.3 million. Deferred revenue totaled $231.0 million, including current and non-current amounts.
- The $1.4 billion unsecured credit facility includes a $700 million revolving facility and a $700 million term loan. Trimble reported compliance with its financial covenants. The weighted average interest rate on current and non-current facility debt was 1.41% at quarter-end.
- Management said cash and available credit were expected to cover operating needs, debt service, planned capital expenditures, and planned repurchases for at least the next 12 months. Cash held by foreign subsidiaries was $122.9 million.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or EPS guidance. Management expects continued product development and identifies an Oracle ERP upgrade, equipment, software, and facility-related investment as planned capital uses.
- Management warned that continued agricultural-market weakness could further affect results. Other disclosed exposures include seasonal demand, foreign-currency fluctuations, customer and working-capital conditions, and acquisition-related costs and integration.
- The RDS jury awarded $51.3 million in damages. Trimble recorded the amount as an expense and current liability, disputes the verdict, and intends to seek reversal through post-trial motions and appeal. The expense and liability would be reversed if the verdict is overturned.
- Separate LightSquared-related lawsuits seek $1.9 billion in damages from multiple defendants, including Trimble. The company considers the claims without merit and intends to contest them; it warns an unfavorable outcome could materially affect results, liquidity, or financial position.
- In August 2014, the board authorized a new $300 million repurchase program. Trimble repurchased 2.08 million shares for $65.0 million during the first three quarters; it repurchased a further 1.15 million shares for $32.8 million through November 7.
- The filing reports no material changes to risk-factor disclosures since the FY2013 10-K. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Subsequent developments and legal status of the RDS verdict, including the recorded $51.3 million liability and potential appeal outcomes.
- Progress and possible exposure in the LightSquared litigation, given the plaintiffs’ stated $1.9 billion damages claim.
- Whether agricultural demand and customer cutbacks continue, and whether growth in Engineering and Construction and Mobile Solutions offsets that weakness.
- Cash generation, acquisition spending, debt repayment, covenant compliance, and the pace of share repurchases relative to available liquidity.
- How management-defined non-GAAP results reconcile to GAAP results, especially given the large litigation charge and the Q3 tax benefit.