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Trimble Navigation’s (TRMB - Analyst Report) first-quarter 2014 earnings of 35 cents exceeded the Zacks Consensus Estimate by 3 cents.

Revenues

Trimble’s first-quarter revenues of $604.7 million were up 0.9% sequentially and 8.7% year over year. However, first-quarter revenues were at the lower end of the company’s guided range of $610–$630 million and below the Zacks Consensus Estimate of $621.0 million. The revenues in the first quarter were driven by strong performance in the Field Solutions and Advanced Devices segments.

Revenues by Segment

The Engineering and Construction (E&C), Field Solutions (TFS), Mobile Solutions (TMS) and Advanced Devices (AD) segments generated 51%, 23%, 20% and 6% of the total revenue, respectively.

E&Cunit revenues of $309.3 million were down 6.6% sequentially but up 15.9% year over year. The year-over-year increase was attributable to improving core construction market and heavy civil building construction products due to a revival in the U.S. residential and commercial market. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing as well as survey instruments.

Of these, heavy civil, though continuing to grow, is currently under pressure due to Australian recession, the lack of European investment and the absence of a solution to the U.S. Highway funding. However, management expects the overall E&C market to further improve in 2014.

TFSrevenues of $138.2 million were up 24.4% sequentially but down 6.3% year over year. The lower-than-expected year-over-year growth was due to weaker sales in agricultural solutions, partially offset by growth in Geographical Information System (GIS) solutions.

Management expects agricultural business revenues to stabilize in the upcoming quarter and grow at a double-digit rate in the long term, driven by the expansion in the new product categories and a higher rate of product introductions.

TMS revenues of $118.6 million were down 5.8% sequentially but up 7.7% from the comparable quarter of 2013. The sequential decline was due to weakness in the Field Services, which was partially affected by delays in major contract awards, construction supply and public safety. While the core business contributed to growth in the last quarter, most of the year-over-year increase was on the back of strong sales in the transportation and logistics market.

The AD segment was up 24.1% sequentially and 22.3% from the year-ago quarter to $38.7 million. The strong performance was due to strength in several businesses in the portfolio.

Margins

Trimble’s gross margin for the quarter was 54.1%, up 80 basis points (bps) sequentially and 250 bps year over year. The increase was due to a favorable mix. Acquisitions are adding software to the portfolio, in turn, positively impacting the gross margin.

Trimble reported operating expenses of $251.2 million, down 0.4% sequentially but up 9.0% from the year-ago quarter. As a percentage of sales, research and development expense decreased from the year-ago quarter, while sales & marketing and general & administrative expenses increased. As a result, the operating margin was 12.5%, up 630 bps sequentially and 230 bps year over year.

Net Income

Pro-forma net income was $93.8 million or 35 cents compared with $90.0 million in the year-ago quarter. Pro-forma estimate in the first reported quarter excludes restructuring charges, amortization of intangibles, gain on an equity sale, acquisition-related costs and other adjustments on a tax-adjusted basis but includes stock-based compensation. Our pro-forma estimate may not match management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

On a GAAP basis, the company recorded a net profit (for Trimble shareholders) of $68.6 million (26 cents per share) compared with $60.0 million (23 cents per share) in the previous quarter and a net profit of $49.8 million (19 cents per share) in the comparable prior-year quarter.

Balance Sheet

Inventories were up 4.9% sequentially to $266.7 million. Accounts receivables were $397.7 million, up from $337.9 million in the prior quarter. Days sales outstanding (DSOs) were up from around 55 days to 60 days.

Trimble generated $83.4 million of cash from operations, down from $136.0 million in the prior quarter. Total debt (long-term plus short-term) at quarter-end stood at $664.7 million, down from $758.5 million in the fourth quarter.

Guidance

Management expects second-quarter revenues in the range of $605–$630 million, while the Zacks Consensus Estimate for revenues is pegged at $643 million. Earnings per share on a GAAP basis are expected in the range of 22–26 cents and on a non-GAAP basis within 38–42 cents. The calculation of non-GAAP earnings per share excludes one-time charges such as amortization of intangibles of $37.0 million, anticipated acquisition costs of $4.0 million and stock-based compensation of $11.0 million. The tax rate is expected in the range of 20–22%, while share count is likely to be 265.0 million.

Summary

Trimble is seeing much stronger construction markets and a few of its businesses have started witnessing normal seasonality. Additionally, management’s initiatives, such as lowering the cost structure, strategic acquisitions, product enhancements and international expansion appear to be paying off. However, quite a significant amount of its business, whether directly or indirectly, is dependent on government spending in the U.S. Though the softness in certain areas of business is related to macro concerns and the nature of new business acquired, improving trends in the domestic construction market, increasing adoption of technology in the agricultural market and well-planned acquisitions in the TMS segment remain secular drivers.

Stocks that have been performing well and are worth a look include GrafTech International Ltd. (GTI - Snapshot Report), Universal Electronics (UEIC - Snapshot Report) and Garmin Ltd. (GRMN - Analyst Report). GrafTech and Universal Electronics sport a Zacks Rank #1 (Strong Buy), while Garmin carries a Zacks Rank #2 (Buy).

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