Business context and reporting period
Trimble Navigation Limited provides positioning solutions for construction, surveying, agriculture, mapping, and mobile asset management. This unaudited Form 10-Q covers the three and nine months ended October 1, 2010; comparisons are with the corresponding 2009 periods. Fiscal quarters may be affected by seasonality and economic conditions.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $318.2 million | $269.7 million | $970.6 million | $848.7 million |
| Gross margin | $159.7 million; 50.2% | $132.5 million; 49.1% | $482.2 million; 49.7% | $419.2 million; 49.4% |
| Operating income | $31.7 million; 10.0% | $20.2 million; 7.5% | $108.3 million; 11.2% | $73.1 million; 8.6% |
| Net income attributable to Trimble | $32.8 million | $15.6 million | $67.1 million | $53.9 million |
| Diluted EPS | $0.27 | $0.13 | $0.54 | $0.44 |
For the nine months, operating cash flow was $87.0 million, versus $139.1 million; investing cash outflow was $109.1 million, versus $86.7 million; and financing cash outflow was $40.5 million, versus $14.8 million of inflow. Cash declined by $62.8 million to $211.1 million from $273.8 million at fiscal year-end. Management attributed weaker operating cash flow chiefly to higher receivables and inventory spending and the IRS settlement.
At October 1, 2010, total debt was $153.1 million, primarily a $151.0 million revolving-credit borrowing. Cash exceeded debt by approximately $58.0 million. Current assets were $686.1 million and current liabilities $262.3 million. The company reported compliance with debt covenants and said cash and available revolving credit should cover anticipated operating needs and stock purchases for at least the next 12 months.
Material changes and segment trends
- Revenue rose 18% in Q3 and 14% for the nine-month period, primarily reflecting recovery in Engineering and Construction and stronger agricultural demand. Gross margin percentage and operating margin improved, with management citing product mix, higher revenue, and operating leverage.
- Engineering and Construction revenue grew 27% in Q3 and 26% year to date; segment operating income rose 73% and 109%, respectively.
- Field Solutions revenue grew 21% in Q3 and 4% year to date, supported by agricultural products. Year-to-date segment operating income was nearly flat.
- Mobile Solutions revenue declined 5% in Q3 and 3% year to date; Q3 segment operating income was a loss of $0.1 million. Management cited loss of a large subscription customer and reduced higher-margin subscription revenue, partly offset by acquisitions and earlier hardware revenue recognition.
- Advanced Devices revenue fell 6% in Q3 but rose 7% year to date; Q3 operating income declined 9%.
- Cash used for acquisitions increased: business acquisitions, net of cash acquired, used $90.8 million in the first nine months, versus $50.8 million in 2009. The company also repurchased $73.8 million of stock during the period.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management expects continued new-product development and planned capital expenditures, and believes liquidity is adequate for at least the next 12 months.
- The IRS concluded its 2005–2007 examination in May 2010. The settlement produced a $27.5 million net income-tax impact in Q2; Trimble paid $49.7 million of tax and interest in July, plus approximately $2.5 million of state tax and interest. The elevated nine-month effective tax rate was 43.0%, compared with 27.0% in 2009; Q3’s rate was 14.3%.
- Results include higher equity-method income, including improved results from Nikon-Trimble, and other income; these contributed to higher non-operating income. The filing does not clearly identify all components of Q3 other income.
- Fiscal 2010 early adoption of new multiple-deliverable revenue guidance increased reported revenue by $3.4 million in Q3 and $6.6 million year to date versus the prior guidance basis, according to the filing.
- Acquisition-related earn-outs and holdbacks recorded were $17.1 million; maximum remaining payments, including recorded amounts, were $44.0 million through 2013. Unconditional purchase obligations were $66.2 million and future operating lease commitments totaled $50.2 million.
- Risks include economic and seasonal demand, customer retention and subscription revenue, working-capital management, currency and interest-rate exposure, and acquisition integration and contingent payments. The company reported no material changes to risk factors in its prior 10-K and no material legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether Engineering and Construction growth and agricultural demand persist, and whether Mobile Solutions can stabilize subscription revenue and profitability.
- How quickly receivables and the $176.9 million inventory balance convert to cash; operating cash flow fell despite higher earnings.
- The ongoing effects of the IRS settlement, including remaining tax exposures and the unusually high nine-month tax rate.
- Acquisition performance, integration costs, goodwill of $812.6 million, and potential earn-out and holdback payments.
- Future capital allocation, including the remaining $50.3 million authorization under the stock-repurchase program, planned investment, and refinancing of the revolving facility due February 2012.
- Non-GAAP comparisons alongside GAAP results: management’s measures exclude items including amortization, stock compensation, restructuring, acquisition items, and the IRS settlement.