Trimble Navigation’s (TRMB) fourth quarter earnings exceeded the Zacks Consensus Estimate by 5 cents, or 16.1%. GAAP earnings were well ahead of management expectations, while non-GAAP earnings were in-line. Shares gained 3.14% in after-market trading, after losing 1.82% during the day.
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 $323.3 million was up 1.6% sequentially and 16.5% year over year, exceeding the high end of the guided range of $313-318 million (flat to down 1.6% sequentially) and coming in 1.7% ahead of the Zacks Consensus.
While the weakness in U.S. commercial and residential construction continues to impact Trimble’s business, other areas have started to pick up. 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 unitrevenue of $183.4 million was down 3.3% sequentially and up 18.9% year over year. E&C usually witnesses strength in the first two quarters of the year and declines in the next two. Trimble’s performance in the last quarter was below seasonal, as both residential and non-residential construction markets remained challenging. 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 showed strength in the last quarter. Commercial is improving very gradually and residential is likely to remain lumpy in the near term. Trimble stated that there was a growing awareness regarding the state of domestic infrastructure, which along with the productivity enhancements offered by its products would result in strong revenue growth in the future. At the same time, infrastructure build-outs in emerging economies would be a further boost to results.
TFS revenue of $74.8 million was up 11.3% sequentially and 30.9% 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 were above normal seasonality. Trimble’s revenues in the last quarter were helped by a strong farm economy, as well as product innovations in the geographic information systems (“GIS”) area.
TMS revenue of $40.4 million was up 7.2% sequentially and 6.5% from the comparable quarter of 2009. The segment’s results were helped by Trimble’s acquisitions of Accutest,Punch Telematix and the Tata Field Management operations, that offset the loss of revenue from a key customer that decided to build in-house capabilities in the second quarter. Although small and medium customers have started showing interest, a major impact on results is unlikely in the near term.
The AD segment generated 8% of revenue, down 12.1% sequentially and up 7.6% from a year ago. The segment has not been performing too well in the recent past due to weaker sales of embedded products. Growing international exposure and new deal wins are positives however.
Revenue by Geography
North Americaremains the largest segment for Trimble, with a 49% revenue share. Revenue from the region was down 4.2% sequentially and up 14.2% from the year-ago quarter. Results reflect a gradual recovery following the recession. Trimble expects the positive impact of the stimulus to continue over the next 6 months.
Europe was stronger, with a 23% revenue share. Sequential and year-over-year revenue increases in the region were 1.6% and 16.5%, respectively. Other than the fact that the European economy is also on the road to recovery, Trimble’s business was helped by a number of acquisitions.
The Asia/Pacific accounted for 18% of Trimble’s revenue in the last quarter, growing 7.6% sequentially and 10.4% year over year, due to the success of targeted programs in China and India, as well as geographic expansion over the last few months.
The rest of the world contributed 10% of revenue, up 27.0% sequentially 45.6% year over year.
Margins
Trimble’s pro forma gross margin for the quarter was 50.5%, down 173 basis points (bps) sequentially and up 98 bps year over year. Gross profit dollars declined 1.7% sequentially and up 18.8% from last year. Gross margin comparisons were the net impact of volume and mix changes across the various segments. Acquisitions and the loss of a major customer also impacted the gross margin in the last quarter.
Trimble reported operating expenses of $135.2 million that were up 13.5% sequentially and 24.0% from the year-ago quarter. The operating margin was 8.7%, down 609 bps sequentially and 156 bps year over year. S&M was the biggest contributor to the sequential decline, increasing 233 bps as a percentage of sales. This was followed by COGS (up 173 bps), R&D (up 119 bps) and G&A (up 85 bps). Trimble stated that part of the increase in opex was on account of the new agreement with Caterpillar (CAT). Also, while the increase in selling expenses was in-line with management expectations (Trimble Dimensions User Conference), R&D expenses were higher than anticipated.
The GAAP operating margins by unit were E&C 11.8% (down 749 bps sequentially), TFS 36.1% (up 488 bps), TMS -0.7%(down 44 bps) and the AD segment 14.0% (down 325 bps). On a year-over-year basis, the All except TMS margins grew on a year-over-year basis, although TFS saw the most significant ncrease. TMS was down1,167 bps. The improvement in the E&C margin was attributed to operating leverage from higher revenue, partially offset by higher S&M expenses. Volumes were also the main reason for expansion in the TFS margin. The Mobile solutions margin was impacted by a customer loss, as well as product mix during the quarter.
Net Income
The pro forma net income was $41.7 million, or a 12.9% net income margin compared to $43.4 million, or 13.6% in the previous quarter and $20.9 million, or 7.5% net income margin in the prior-year quarter. The pro forma calculations in the last quarter exclude restructuring charges andamortization of intangibles. 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 $35.8 million ($0.29 per share) compared to $32.8 million ($0.27 per share) in the previous quarter and a net profit of $9.3 million ($0.08 per share) in the prior-year quarter. Trimble recorded a tax gain in the last quarter due to the re-instatement of R&D tax credits, as well as the settlement with the IRS, which helped improve bottom line results.
Balance Sheet
Inventories were up 9.0% to $192.9 million, with annualized inventory turns going down from around 3.4X to around 3.3X. Days sales outstanding (DSOs) went from around 66 to around 63.
Trimble generated $37.0 million of cash from operations and spent $45.7 million on acquisitions, $6.0 million on capex and did not repurchase any shares in the last quarter and. The cash position at quarter-end increased $9.7 million during the quarter to $220.8 million. The net cash position at quarter-end was $67.6 million, up $9.7 million in the quarter.
Guidance
Management expects first quarter revenue of $370-375 million (up 14-16% sequentially, up 16-18% year over year). Earnings on a GAAP basis are expected to be 32-34 cents per share and on a non GAAP basis, 47-49 cents per share. The one-time charges excluded for the calculation of non-GAAP EPS are amortization of intangibles (approximately $13.8 million) and stock based compensation ($6.7 million). Both the GAAP and non GAAP EPS use a tax rate of 15-17% and a share count of 124.5 million.
For 2011, Trimble expects revenue increase of around 20%, with improved operating leverage and a tax rate of 15-17%.
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 stemming from the recession and we are optimistic about improvements here in 2011. Therefore, the Zacks Rank on Trimble shares is #2, implying a short-term Buy recommendation.
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