Trimble Navigation’s (TRMB) fourth quarter earnings exceeded the Zacks Consensus Estimate by 3 cents, or 7.0%. While GAAP earnings exceeded 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.
Revenue
Trimble’s fourth quarter revenue of $435.2 million was up 4.2% sequentially and 34.6% year over year, exceeding the high end of the guided range of $415-420 million (flat sequentially, up 28-30% year over year).
While the weakness in U.S. commercial and residential construction remains, Trimble’s business was not unduly impacted in the last quarter. Trimble has also made a number of acquisitions in recent months, which are helping to build the product portfolio and position the company in markets with better growth prospects.
Revenue by Segment
E&C unit revenue of $238.7 million was down 1.0% sequentially and up 30.1% 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, the heavy and highway construction and survey instruments businesses continued to strengthen.
The commercial and residential markets remained soft in both the U.S. and Europe. However, there appears to be a growing awareness regarding the state of domestic infrastructure, which given the productivity enhancements offered by Trimble products could result in strong revenue growth in the future.
Infrastructure build-outs in emerging economies remain an attractive growth area (despite the fact that China was impacted by temporary issues in railway construction). The commercial and residential construction business in Europe remains weak. Last quarter’s results also benefited from the Tekla acquisition, which is a leader in the building information modeling (BIM) segment.
TFS revenue of $95.5 million was up 4.9% sequentially and 27.7% 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. Therefore, results in the last quarter may be considered good.
Trimble stated that the revenues in the last quarter were helped by both the agricultural and geographic information system (“GIS”) sides of the business. The agricultural business benefited from new value-added products and continued strength of the global agricultural economy. The company also entered into an agreement with US Sugar, which operates on the basis of the connected farm philosophy. GIS was constrained by conservative municipal and state budgets, but grew strong double-digits from the year-ago quarter.
TMS revenue of $75.8 million was up 30.5% sequentially and 87.5% from the comparable quarter of 2010. 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 down 7.2% sequentially and up 1.8% from a year ago. Segment results were impacted by the macro economic weakness and continued caution at customers.
Revenue by Geography
North America remains the largest segment for Trimble, with a 52% revenue share. Revenue from the region was up 6.3% sequentially and 190.3% from the year-ago quarter, reflecting continued recovery in the market.
Approximately 23% of revenue came from Europe, which was flat sequentially and up 30.8% from last year.
The Asia/Pacific accounted for 16% of Trimble’s revenue in the last quarter, up 11.2% sequentially and 24.4% 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 31% of revenue, up 223.2% sequentially and 19.5% year over year.
Margins
Trimble’s pro forma gross margin for the quarter was 53.3%, down 18 basis points (bps) sequentially and up 278 bps year over year. Gross profit dollars grew 3.9% sequentially and 42.0% from last year.
Acquisitions are adding software to the portfolio, which is having a positive impact on the gross margin. Margins in the Mobile Solutions business continued to expand, and the growing number of subscribers that were signed up at the beginning of the year started generating high-margin subcription revenue in the back half of the year.
Trimble reported operating expenses of $170.5 million that were up 8.4% sequentially and 26.1% from the year-ago quarter. The operating margin was 14.1%, down 166 bps sequentially and up 541 bps year over year.
All expenses except S&M (down 51 bps) increased sequentially. S&M also saw the most significant decline (264 bps) when compared with the year-ago quarter although all except R&D expenses declined as a percentage of sales.
The GAAP operating margins by unit were E&C 15.3% (down 234 bps sequentially), TFS 35.7% (up 159 bps), TMS 7.9% (up 358 bps) and the AD segment 13.7% (down 92 bps). Both E&C and TMS segment margins saw significant expansion from the year-ago quarter. E&C expanded 354 bps, while TMS expanded 855 bps.
TFS and AD were down 50 bps and 23 bps, respectively. Tekla is expected to be accretive to Trimble’s results beginning in the first quarter of 2012. TMS gained from the impact of acquisitions, as well as the targeting of specific industry verticals.
Net Income
The pro forma net income was $58.7 million, or a 13.5% net income margin compared to $59.2 million, or 14.2% in the previous quarter and $44.7 million, or 13.8% net income margin in the prior-year quarter.
The pro forma calculations in the last quarter exclude restructuring charges, amortization of intangibles and acquisition-related costs and other adjustments 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 (for Trimble shareholders) of $28.7 million ($0.23 per share) compared to $28.0 million ($0.23 per share) in the previous quarter and a net profit of $35.8 million ($0.29 per share) in the comparable prior-year quarter.
Balance Sheet
Inventories were flattish sequentially at $232.1 million, with annualized inventory turns going down from around 3.6X to around 3.5X. Days sales outstanding (DSOs) were down from around 63 to around 58.
Trimble generated $79.8 million of cash from operations, spending $759.6 million on acquisitions, $21.6 million on capex and did not repurchase any shares in the last quarter. The cash position at quarter-end increased $16.4 million during the quarter to $154.6 million. The net debt position at quarter-end was $409.8 million, down from a net debt position of $499.0 million at the beginning of the quarter.
Guidance
Management expects first quarter revenue of 477-482 million (up 9.6-10.8% sequentially, up 24.1-25.4% year over year). Earnings on a GAAP basis are expected to be 32-34 cents per share and on a non GAAP basis, 61-63 cents per share.
The one-time charges excluded for the calculation of non-GAAP EPS are intangibles amortization and acquisition expenses of $35.5 million and stock based compensation of $7.6 million. Both the GAAP and non GAAP EPS are after interest charges of around $3 million, using a tax rate of 15-17% and a share count of 128.0 million.
In Summary
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 and nature of new business acquired and we are optimistic about its results going forward.
The Zacks Rank on Trimble shares is #1, implying a short-term Strong Buy recommendation.
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