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Trimble Navigation’s (TRMB - Analyst Report) second quarter earnings were in line with the Zacks Consensus Estimate. While GAAP earnings were in line with management expectations, non-GAAP earnings fell short.
However, despite softness in some markets, Trimble’s solid portfolio (enhanced by acquisitions), strong market position and strategic partnerships will continue to drive both revenue and earnings over the next few quarters.
Seasonality typically causes huge sequential fluctuations in both revenue and margins. As a result, management generally compares results on a year-over-year basis. We have included sequential comparisons, where required.
Trimble’s second quarter revenue of $517.6 million was up 3.0% sequentially and 27.1% year over year, higher than the guided range of $510-515 million (up 2.0% sequentially, up 25.9% year over year at the mid-point). Revenues have grown at a strong double-digit rate in each of the last 10 quarters.
In addition to the weakening demand and currency issues related to Europe, sluggish construction markets (both residential and commercial), Trimble had to contend with the North American drought, all of which had a negative impact on quarterly revenue. This was mainly because of the number of acquisitions that Trimble has made over the past year or so, which built the product portfolio, positioned the company in markets with better growth prospects and generated solid revenue growth.
Revenue by Segment
E&C unit revenue of $284.2 million was up 14.2% sequentially and 20.1% year over year. E&C usually witnesses sequential strength in the first two quarters of the year and declines in the next two. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing in that order.
Of these, only the heavy and highway construction business continued to grow strongly, with survey and geospatial instruments businesses weakening. While all construction markets in North America remain rather weak, there appears to be a growing awareness regarding the state of domestic infrastructure, which given the productivity enhancements offered by Trimble products could generate revenue growth in the future. Infrastructure build-outs in emerging economies remain an attractive growth area.
TFS revenue of $123.4 million was down 16.4% sequentially and 18.6% from last year. The segment, which is largely driven by the agricultural market, is particularly weak in the second and third quarters, with revenue stabilizing in December and jumping up in March. In addition to this general seasonal softness was the extended drought in North America, which impacted results in the last quarter.
TMS revenue of $81.4 million was up 3.9% sequentially and 102.4% from the comparable quarter of 2011. While the core business contributed to the growth in the last quarter, most of the increase was the impact of acquisitions. Trimble has been doing a lot of work here, disposing off non-focus areas and building a desired portfolio through successive acquisitions.
The company is now taking a more focused approach to target industries, such as forestry, construction supply, transportation and logistics, communications, environmental, field services and public safety.
The AD segment generated less than 6% of revenue, which was up 17.2% sequentially and 13.7% from a year ago, helped by stronger sales of timing devices.
Revenue by Geography
North America remains the largest segment for Trimble, with a 55% revenue share. Revenue from the region was up 6.9% sequentially and 39.8% from the year-ago quarter, reflecting gradual recovery and the impact of acquisitions.
Approximately 21% of revenue came from Europe, which was down 9.8% sequentially and up 6.8% from last year.
The Asia/Pacific accounted for 17% of Trimble’s revenue in the last quarter, up 16.8% sequentially and 35.1% year over year due to the success of targeted programs in China and India, as well as acquisitions over the last few months.
The rest of the world contributed 7% of revenue, down 9.8% sequentially and 1.1% year over year.
Trimble’s pro forma gross margin for the quarter was 54.3%, up 11 basis points (bps) sequentially and 107 bps year over year. Gross profit dollars grew 3.3% sequentially and 29.7% from last year.
Acquisitions are adding software to the portfolio, which is having a positive impact on the gross margin. Trimble continues to benefit from the addition of high-margin subscription revenue, as well as positive mix changes throughout the business. Acquisitions have also been positive for gross margins, while adding operating leverage.
Trimble reported operating expenses of $184.1 million that were flattish sequentially and up 28.1% from the year-ago quarter. The operating margin was 18.8%, up 101 bps sequentially and 78 bps year over year.
All expenses except R&D (up 43 bps) declined sequentially as a percentage of sales R&D also increased 106 bps from the year-ago quarter, while other expenses declined. The increasing R&D is reflective of Trimble’s recent acquisitions, which while generating higher gross margins have added to its opex.
The GAAP operating margins by unit were E&C 20.9% (up 483 bps sequentially), TFS 37.8% (down 449 bps), TMS 6.9%(down 248 bps) and the AD segment 13.7% (up 153 bps). E&C, TMS and AD segment margins saw significant expansion from the year-ago quarter. E&C expanded 107 bps, TMS 1,358 bps and AD 374 bps. TFS dropped 310 bps. E&C and AD also expanded sequentially, while the other segments declined.
The pro forma net income was $84.8 million, or a 16.4% net income margin compared to $79.4 million, or 15.8% in the previous quarter and $69.3 million, or 17.0% net income margin in the comparable prior-year quarter. The pro forma calculations in the last quarter exclude inventory adjustments, restructuring charges, acquisition-related costs, amortization of intangibles and acquisition gains on a tax-adjusted basis.
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 fully diluted GAAP basis, the company recorded a net profit of $53.7 million ($0.42 per share) compared to $50.8 million ($0.40 per share) in the previous quarter and a net profit of $54.7 million ($0.43 per share) in the comparable prior-year quarter.
Inventories were up 1.5% during the quarter to $227.9 million, with annualized inventory turns staying relatively flat at 4.1X. Days sales outstanding (DSOs) were down from around 59 to around 56.
Trimble generated $87.4 million of cash from operations, spending $236.3 million on acquisitions, $13.7 million on capex and did not repurchase any shares in the last quarter. The cash position at quarter-end dropped $87.2 million during the quarter to $121.9 million. The net debt position at quarter-end was $575.4 million, up from a net debt position of $414.0 million at the beginning of the quarter.
Management expects third quarter revenue of $492-497 million (down 4.9% to 4.0% sequentially, up 17.9-19.1% year over year) and better than consensus expectations of a little over $485 million. Earnings on a GAAP basis are expected to be 33-35 cents per share and on a non GAAP basis, 62-64 cents per share (the Zacks Consensus was 62 cents).
The one-time charges excluded for the calculation of non-GAAP EPS are intangibles amortization and acquisition expenses of $31.5 million, acquisition costs of $4.0 million and stock-based compensation of $8.9 million. Both the GAAP and non GAAP EPS are after interest charges of around $4 million, using a tax rate of 15-17% and a share count of 128.5 million.
Trimble is seeing much stronger end markets and a few of its businesses have started seeing normal seasonality. Additionally, management initiatives, such as the lowering of the cost structure, strategic acquisitions, product enhancements and international expansion appear to be paying off.
The softness in certain areas of the business is related to macro concerns, short-term climatic variations and nature of new business acquired. We remain optimistic about Trimble’s results going forward based on the way the company performed through the downturn and solid management execution.
The Zacks Rank on Trimble shares is #3, implying a short-term Hold recommendation.