Trimble Navigation Limited — Q2 2010 Form 10-Q
Business context and reporting period
Trimble provides positioning solutions for surveying, agriculture, construction, asset management, mapping and mobile resource management. This unaudited filing covers the quarter ended July 2, 2010, and the six months then ended; comparisons are with the corresponding 2009 periods.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $333.4 million | $290.1 million | $652.4 million | $579.0 million |
| Gross margin | $163.4 million; 49.0% | $142.8 million; 49.2% | $322.4 million; 49.4% | $286.8 million; 49.5% |
| Operating income | $40.6 million; 12.2% | $28.7 million; 9.9% | $76.7 million; 11.8% | $53.0 million; 9.1% |
| Net income attributable to Trimble | $6.4 million | $20.9 million | $34.3 million | $38.3 million |
| GAAP diluted EPS | $0.05 | $0.17 | $0.28 | $0.32 |
Revenue rose 15% in Q2 and 13% year to date, led by Engineering and Construction. Operating income increased on higher sales and operating leverage, while gross margin percentage edged down, mainly because of product mix in Mobile Solutions. Management-reported non-GAAP operating margin was 18.5% in Q2 versus 18.1%, and 18.2% year to date versus 17.0%; non-GAAP diluted EPS was $0.42 and $0.76, respectively, compared with $0.31 and $0.59. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Q2 GAAP earnings were sharply reduced by the IRS audit settlement: the filing reports a net tax charge of $27.5 million after releases and other offsets. The effective tax rate was 83.4% for Q2 and 56.6% year to date, versus 29.0% and 27.2% a year earlier.
Cash flow, debt and liquidity
- Six-month operating cash flow was $95.3 million, down from $108.7 million. Investing used $60.7 million; financing used $41.3 million, including $60.5 million of share repurchases. Cash declined by $12.2 million to $261.7 million.
- Cash and cash equivalents were $261.7 million; an additional $17.2 million was restricted for a business acquisition and unavailable for operations. Total debt was $153.0 million, primarily a $151.0 million revolving-credit draw. The credit facility provides up to $300 million and matures in February 2012; the company reported compliance with its financial covenants.
- Current assets were $719.9 million and current liabilities $293.8 million. Accounts receivable was $219.6 million and inventory $159.2 million at July 2, 2010. Management said cash and credit facilities should cover anticipated operating needs and planned repurchases for at least 12 months.
Material changes and management commentary
- Engineering and Construction revenue grew 28% in Q2 and 26% year to date, reflecting a return to growth in U.S. and other markets. Field Solutions was broadly flat in Q2 and down 2% year to date; Mobile Solutions revenue fell 2% in both periods. Advanced Devices revenue increased 11% and 13%, respectively.
- Mobile Solutions profitability fell substantially: segment operating income was $0.3 million in Q2 versus $3.6 million, and $2.2 million year to date versus $6.8 million. Management cited the loss of a large customer and reduced higher-margin subscription revenue; hardware revenue recognition partly offset the revenue decline.
- Trimble resumed its stock-repurchase program in Q2, buying about 2.36 million shares for $67.7 million at an average $28.69 per share. About $56.4 million remained authorized at quarter-end.
- The company made acquisitions and formed 50%-owned ventures during the period, including acquisitions of Definiens, LET Systems and Pondera Engineers, and joint ventures in China and Russia. It early adopted new multiple-deliverable revenue guidance prospectively; reported revenue was $2.4 million higher for Q2 and $3.2 million higher year to date than under the prior guidance.
- Management expected its ongoing tax rate beyond 2010 to be lower following the IRS settlement. The filing provides no quantified revenue or earnings guidance. Management noted seasonality, economic conditions and market growth as factors affecting results.
Risks, contingencies and unusual items
- The IRS settlement covered tax years 2005–2007. Trimble paid $49.7 million on July 15, 2010, after quarter-end, and expected approximately $2.5 million of additional state tax and interest. Tax examinations continue in multiple jurisdictions; the company said future changes in unrecognized tax benefits were possible but not reasonably estimable.
- Unconditional purchase obligations were approximately $65.3 million. Acquisition earn-outs and holdbacks recorded at quarter-end totaled $22.2 million, with maximum remaining payments not to exceed $46.6 million. Operating lease commitments totaled $41.3 million.
- The company cited foreign-exchange exposure and uses derivatives for risk management, not speculation. It reported no material legal proceedings beyond routine matters and no material changes to the risk factors in its 2009 Form 10-K.
- Disclosure controls were deemed effective; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Q2’s GAAP earnings decline is attributable to the one-time tax settlement, and whether the anticipated lower ongoing tax rate materializes.
- Whether Mobile Solutions can replace the lost large customer and recover subscription revenue and segment margins.
- Whether Engineering and Construction growth and operating leverage persist as economic conditions and seasonal demand change.
- Cash conversion and working-capital trends, especially receivables, inventory and operating cash flow, alongside planned repurchases and acquisition spending.
- Available borrowing capacity and covenant headroom under the revolving facility, plus the timing and final cost of acquisition obligations and tax matters.