Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
|
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2016 |
OR
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission file number: 001-14845
TRIMBLE INC.
(Exact name of registrant as specified in its charter)
___________________________________
|
| | |
Delaware
| | 94-2802192 |
(State or other jurisdiction of | | (I.R.S. Employer Identification Number) |
incorporation or organization) | | |
935 Stewart Drive, Sunnyvale, CA 94085
(Address of principal executive offices) (Zip Code)
Telephone Number (408) 481-8000
(Registrant’s telephone number, including area code)
TRIMBLE NAVIGATION LIMITED
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | |
| Large Accelerated Filer | ý | Accelerated Filer | ¨ |
| | | |
| Non-accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of November 4, 2016, there were 250,583,803 shares of Common Stock, par value $0.001 per share, outstanding.
TRIMBLE INC.
FORM 10-Q for the Quarter Ended September 30, 2016
TABLE OF CONTENTS
|
| | |
PART I. | | Page |
| | |
ITEM 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
ITEM 2. | | |
| | |
ITEM 3. | | |
| | |
ITEM 4. | | |
| | |
PART II. | | |
| | |
ITEM 1. | | |
| | |
ITEM 1A. | | |
| | |
ITEM 2. | | |
| | |
ITEM 4. | | |
| | |
ITEM 6. | | |
| |
| |
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
| | | | | | | |
| Third Quarter of | | Fiscal Year End |
As of | 2016 | | 2015 |
(In millions) | | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 213.5 |
| | $ | 116.0 |
|
Short-term investments | 62.1 |
| | — |
|
Accounts receivable, net | 369.2 |
| | 361.9 |
|
Other receivables | 35.4 |
| | 14.9 |
|
Inventories | 224.3 |
| | 261.1 |
|
Other current assets | 53.4 |
| | 44.5 |
|
Total current assets | 957.9 |
| | 798.4 |
|
Property and equipment, net | 149.4 |
| | 159.2 |
|
Goodwill | 2,111.1 |
| | 2,106.4 |
|
Other purchased intangible assets, net | 371.1 |
| | 487.1 |
|
Other non-current assets | 141.9 |
| | 129.6 |
|
Total assets | $ | 3,731.4 |
| | $ | 3,680.7 |
|
LIABILITIES | | | |
Current liabilities: | | | |
Short-term debt | $ | 145.3 |
| | $ | 118.3 |
|
Accounts payable | 102.0 |
| | 99.8 |
|
Accrued compensation and benefits | 86.8 |
| | 98.9 |
|
Deferred revenue | 259.1 |
| | 234.6 |
|
Accrued warranty expense | 18.1 |
| | 18.5 |
|
Other current liabilities | 82.7 |
| | 90.8 |
|
Total current liabilities | 694.0 |
| | 660.9 |
|
Long-term debt | 524.5 |
| | 611.4 |
|
Non-current deferred revenue | 35.2 |
| | 29.6 |
|
Deferred income taxes liabilities | 45.4 |
| | 51.7 |
|
Other non-current liabilities | 112.6 |
| | 106.5 |
|
Total liabilities | 1,411.7 |
| | 1,460.1 |
|
Commitments and contingencies (Note 13) |
| |
|
EQUITY | | | |
Shareholders’ equity: | | | |
Preferred stock, no par value; 3.0 shares authorized; none outstanding | — |
| | — |
|
Common stock, no par value; 360.0 shares authorized; 250.2 and 250.7 shares issued and outstanding as of the end of the third quarter of fiscal 2016 and fiscal year end 2015, respectively | 1,316.0 |
| | 1,238.3 |
|
Retained earnings | 1,159.1 |
| | 1,148.2 |
|
Accumulated other comprehensive loss | (155.2 | ) | | (166.8 | ) |
Total Trimble Navigation Limited shareholders’ equity | 2,319.9 |
| | 2,219.7 |
|
Noncontrolling interests | (0.2 | ) | | 0.9 |
|
Total shareholders' equity | 2,319.7 |
| | 2,220.6 |
|
Total liabilities and shareholders’ equity | $ | 3,731.4 |
| | $ | 3,680.7 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements.
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
(In millions, except per share amounts) | 2016 | | 2015 | | 2016 | | 2015 |
Revenue: | | | | | | | |
Product | $ | 384.9 |
| | $ | 373.0 |
| | $ | 1,185.5 |
| | $ | 1,168.2 |
|
Service | 105.6 |
| | 103.9 |
| | 316.9 |
| | 310.5 |
|
Subscription | 93.6 |
| | 85.4 |
| | 274.3 |
| | 252.0 |
|
Total revenue | 584.1 |
| | 562.3 |
| | 1,776.7 |
| | 1,730.7 |
|
Cost of sales: | | | | | | | |
Product | 186.6 |
| | 175.5 |
| | 576.0 |
| | 554.0 |
|
Service | 40.7 |
| | 39.4 |
| | 126.3 |
| | 123.0 |
|
Subscription | 26.0 |
| | 26.1 |
| | 79.3 |
| | 75.8 |
|
Amortization of purchased intangible assets | 21.8 |
| | 23.3 |
| | 69.9 |
| | 68.8 |
|
Total cost of sales | 275.1 |
| | 264.3 |
| | 851.5 |
| | 821.6 |
|
Gross margin | 309.0 |
| | 298.0 |
| | 925.2 |
| | 909.1 |
|
Operating expense: | | | | | | | |
Research and development | 86.9 |
| | 79.6 |
| | 266.6 |
| | 251.3 |
|
Sales and marketing | 88.6 |
| | 89.1 |
| | 282.7 |
| | 281.8 |
|
General and administrative | 59.2 |
| | 63.2 |
| | 193.1 |
| | 192.1 |
|
Restructuring charges | 3.5 |
| | 2.7 |
| | 9.8 |
| | 9.0 |
|
Amortization of purchased intangible assets | 15.5 |
| | 17.4 |
| | 47.3 |
| | 53.4 |
|
Total operating expense | 253.7 |
| | 252.0 |
| | 799.5 |
| | 787.6 |
|
Operating income | 55.3 |
| | 46.0 |
| | 125.7 |
| | 121.5 |
|
Non-operating income (expense), net: | | | | | | | |
Interest expense | (6.6 | ) | | (6.4 | ) | | (19.8 | ) | | (19.1 | ) |
Foreign currency transaction gain (loss), net | — |
| | 0.1 |
| | (1.6 | ) | | 1.2 |
|
Income from equity method investments, net | 5.2 |
| | 4.7 |
| | 13.9 |
| | 14.1 |
|
Other income (expense), net | (1.7 | ) | | (0.9 | ) | | 1.7 |
| | 5.8 |
|
Total non-operating income (expense), net | (3.1 | ) | | (2.5 | ) | | (5.8 | ) | | 2.0 |
|
Income before taxes | 52.2 |
| | 43.5 |
| | 119.9 |
| | 123.5 |
|
Income tax provision | 13.0 |
| | 6.5 |
| | 25.4 |
| | 26.7 |
|
Net income | 39.2 |
| | 37.0 |
| | 94.5 |
| | 96.8 |
|
Less: Net loss attributable to noncontrolling interests | — |
| | (0.1 | ) | | (0.2 | ) | | (0.3 | ) |
Net income attributable to Trimble Navigation Limited: | $ | 39.2 |
| | $ | 37.1 |
| | $ | 94.7 |
| | $ | 97.1 |
|
Basic earnings per share | $ | 0.16 |
| | $ | 0.15 |
| | $ | 0.38 |
| | $ | 0.38 |
|
Shares used in calculating basic earnings per share | 249.7 |
| | 254.8 |
| | 250.5 |
| | 257.5 |
|
Diluted earnings per share | $ | 0.15 |
| | $ | 0.14 |
| | $ | 0.37 |
| | $ | 0.37 |
|
Shares used in calculating diluted earnings per share | 253.2 |
| | 257.2 |
| | 253.7 |
| | 260.3 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements.
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(In millions) | | | | | | | |
Net income | $ | 39.2 |
| | $ | 37.0 |
| | $ | 94.5 |
| | $ | 96.8 |
|
Foreign currency translation adjustments, net of tax | 4.5 |
| | (15.3 | ) | | 11.5 |
| | (70.5 | ) |
Net unrealized actuarial gain, net of tax | — |
| | — |
| | 0.1 |
| | 0.2 |
|
Comprehensive income | 43.7 |
| | 21.7 |
| | 106.1 |
| | 26.5 |
|
Less: Comprehensive loss attributable to noncontrolling interests | — |
| | (0.1 | ) | | (0.2 | ) | | (0.3 | ) |
Comprehensive income attributable to Trimble Navigation Limited | $ | 43.7 |
| | $ | 21.8 |
| | $ | 106.3 |
| | $ | 26.8 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements.
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| First Three Quarters of |
(In millions) | 2016 | | 2015 |
Cash flows from operating activities: | | | |
Net income | $ | 94.5 |
| | $ | 96.8 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation expense | 27.9 |
| | 27.0 |
|
Amortization expense | 117.2 |
| | 122.2 |
|
Provision for doubtful accounts | 2.5 |
| | 1.7 |
|
Deferred income taxes | 1.2 |
| | (0.5 | ) |
Stock-based compensation | 40.0 |
| | 37.3 |
|
Income from equity method investments | (13.9 | ) | | (14.1 | ) |
Divestitures (gain) loss, net | 0.1 |
| | (5.8 | ) |
Excess tax benefit for stock-based compensation | (5.0 | ) | | (1.4 | ) |
Provision for excess and obsolete inventories | 12.0 |
| | 5.1 |
|
Other non-cash items | 3.9 |
| | 9.0 |
|
Decrease (increase) in assets: | | | |
Accounts receivable | (9.9 | ) | | 12.3 |
|
Other receivables | (2.7 | ) | | 6.5 |
|
Inventories | 25.7 |
| | (6.4 | ) |
Other current and non-current assets | (11.1 | ) | | (9.5 | ) |
Increase (decrease) in liabilities: | | | |
Accounts payable | 2.7 |
| | (6.9 | ) |
Accrued compensation and benefits | (12.8 | ) | | (15.4 | ) |
Deferred revenue | 32.8 |
| | 38.6 |
|
Accrued warranty | (0.5 | ) | | (1.4 | ) |
Other liabilities | (22.6 | ) | | (18.7 | ) |
Net cash provided by operating activities | 282.0 |
| | 276.4 |
|
Cash flows from investing activities: | | | |
Acquisitions of businesses, net of cash acquired | (22.3 | ) | | (101.7 | ) |
Acquisitions of property and equipment | (19.7 | ) | | (35.7 | ) |
Purchases of equity method investments | (1.5 | ) | | (3.6 | ) |
Acquisitions of intangible assets | (0.3 | ) | | (0.1 | ) |
Purchases of available-for-sale investments | (62.1 | ) | | — |
|
Net proceeds from sale of businesses | 10.7 |
| | 12.1 |
|
Dividends received from equity method investments | 16.5 |
| | 15.3 |
|
Other | 0.1 |
| | 0.3 |
|
Net cash used in investing activities | (78.6 | ) | | (113.4 | ) |
Cash flows from financing activities: | | | |
Issuances of common stock, net of tax withholdings | 50.0 |
| | 29.1 |
|
Repurchase and retirement of common stock | (102.2 | ) | | (234.4 | ) |
Excess tax benefit for stock-based compensation | 5.0 |
| | 1.4 |
|
Proceeds from debt and revolving credit lines | 291.0 |
| | 458.0 |
|
Payments on debt and revolving credit lines | (351.3 | ) | | (431.1 | ) |
Net cash used in financing activities | (107.5 | ) | | (177.0 | ) |
Effect of exchange rate changes on cash and cash equivalents | 1.6 |
| | (10.4 | ) |
Net increase (decrease) in cash and cash equivalents | 97.5 |
| | (24.4 | ) |
Cash and cash equivalents, beginning of period | 116.0 |
| | 148.0 |
|
Cash and cash equivalents, end of period | $ | 213.5 |
| | $ | 123.6 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
NOTE 1. OVERVIEW AND BASIS OF PRESENTATION
Trimble Navigation Limited (Trimble or the Company) began operations in 1978 and incorporated in California in 1981. On October 1, 2016, subsequent to the end of the third quarter of fiscal 2016, Trimble Navigation Limited changed its name to Trimble Inc. and changed its state of incorporation from the State of California to the State of Delaware (the “Reincorporation”). As the change occurred subsequent to quarter-end, the Condensed Consolidated Financial Statements and accompanying notes continue to be presented as Trimble Navigation Limited. Other than the change in corporate domicile, the reincorporation did not result in any change in the business, physical location, management, assets, liabilities or total shareholders' equity of the Company, nor did it result in any change in location of the Company's employees, including the Company's management. Additionally, the reincorporation did not alter any shareholder's percentage ownership interest or number of shares owned in the Company. The Reincorporation was previously approved by the Company’s shareholders at its 2016 annual meeting of shareholders.
The Company provides technology solutions that enable professionals and field mobile workers to improve or transform their work processes. Trimble's solutions are used across a range of industries including agriculture, architecture, civil engineering, survey and land administration, construction, geospatial, environmental management, government, natural resources, transportation and utilities. Representative Trimble customers include engineering and construction firms, surveying companies, farmers and agricultural companies, enterprise firms with large-scale fleets, energy, mining and utility companies, and state, federal and municipal governments.
Trimble focuses on integrating broad technological and application capabilities to create system-level solutions that transform how work is done within the industries the Company serves. Products are sold based on return on investment and provide benefits such as lower operational costs, higher productivity, improved quality, enhanced safety and regulatory compliance, and reduced environmental impact. Representative products include equipment that automates large industrial equipment such as tractors and bulldozers; integrated systems that track fleets of vehicles and workers and provide real-time information and powerful analytics to the back-office; data collection systems that enable the management of large amounts of geo-referenced information; software solutions that connect all aspects of a construction site or a farm; and building information modeling (BIM) software that is used throughout the design, build, and operation of buildings.
Basis of Presentation
The Company has a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2015 was January 1, 2016. The third quarter of fiscal 2016 and 2015 ended on September 30, 2016 and October 2, 2015, respectively. Both fiscal 2016 and 2015 are 52-week years. Unless otherwise stated, all dates refer to the Company’s fiscal year and fiscal periods.
The Condensed Consolidated Financial Statements include the results of the Company and its consolidated subsidiaries. Inter-company accounts and transactions have been eliminated. Noncontrolling interests represent the noncontrolling shareholders’ proportionate share of the net assets and results of operations of the Company’s consolidated subsidiaries.
Unaudited Interim Financial Information
The accompanying financial data as of the end of the third quarter of fiscal 2016 and for the third quarter and the first three quarters of fiscal 2016 and 2015 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements, prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of fiscal year end 2015 is derived from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for fiscal year 2015. The following discussion should be read in conjunction with the Company’s 2015 Annual Report on Form 10-K.
In the opinion of management, all adjustments necessary have been made to present a fair statement of financial positions and results for the interim periods presented. The results of operations for the third quarter and the first three quarters of fiscal 2016 are not necessarily indicative of the operating results for the full fiscal year or any future periods. Individual segment revenue may be affected by seasonal buying patterns and general economic conditions.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in its Condensed Consolidated Financial Statements and accompanying notes. Estimates are used for allowances for doubtful accounts, sales returns reserve, allowances for inventory valuation, warranty costs, investments, goodwill impairment, intangibles impairment, purchased intangibles, stock-based compensation, and income taxes among others. Management bases its estimates on historical experience and various other
assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.
The Company has presented revenue and cost of sales separately for products, service and subscriptions. Product revenue includes primarily hardware, software licenses, parts and accessories; service revenue includes primarily hardware and software maintenance and support, training and professional services; subscription revenue includes software as a service (SaaS).
NOTE 2. UPDATES TO SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company’s significant accounting polices during the first three quarters of fiscal 2016 from those disclosed in the Company’s most recent Form 10-K, except as noted below.
Cash, cash equivalents and short-term investments
The Company invests in debt securities, including those of the U.S. government, corporate debt securities and commercial paper and municipal securities. The Company classifies all investments that are considered readily convertible to known amounts of cash and have stated maturities of three months or less from the date of purchase as cash equivalents, and those with stated maturities of greater than three months as short-term investments based on the nature of the investments and their availability for use in current operations.
The Company determines the appropriate classification of its investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its investments as available-for-sale. These investments are carried at fair value, and any unrealized gains and losses, net of taxes, are reported in accumulated other comprehensive income (loss), except for unrealized losses determined to be other-than-temporary, which would be recorded within other income (expense), net. Realized gains or losses on the sale of marketable securities are determined on a specific identification method, and such gains and losses are recorded as a component of other income (expense), net.
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard that replaces the current revenue recognition guidance under U.S. GAAP. The new standard requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since the issuance of the revised standard, the FASB has issued several updates to the guidance for which the Company is monitoring and reviewing in contemplation of adoption. The effective date for the Company under the new standard will be the beginning of fiscal 2018, with early adoption permitted as of fiscal 2017. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company expects to adopt this accounting standard update in the first quarter of fiscal 2018, and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In February 2015, the FASB issued amendments to the consolidation guidance. The amendments under the new guidance modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. The Company adopted the amendments beginning in the first quarter of fiscal 2016. The adoption did not have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued amendments to simplify the measurement of inventory. Under the amendments, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The guidance defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”. No other changes were made to the current guidance on inventory measurement. The amendments are effective for the Company beginning in fiscal 2017, although early adoption is permitted. The Company is currently evaluating the effect of this guidance on its consolidated financial statements and related disclosures.
In September 2015, the FASB issued new guidance related to business combinations. The new guidance requires that any adjustments to provisional amounts in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. The Company adopted the amendments beginning in the first quarter of fiscal 2016. The adoption did not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued final guidance that will require entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The amendments are effective for the Company beginning in fiscal 2018, although early adoption is permitted and should be applied by means of a cumulative-effect adjustment to the balance
sheet as of the beginning of the fiscal year of adoption, with certain exceptions. The Company is currently evaluating the effect of the updated standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued new guidance that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. Previous GAAP did not require lease assets and liabilities to be recognized for most leases. Additionally, companies are permitted to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. This new guidance is effective for the Company beginning in fiscal 2019, although early adoption is permitted. The Company is currently evaluating the effect of this guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued amendments to its guidance on the accounting for derivatives and hedging. The new guidance clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This guidance is effective for the Company beginning in fiscal 2017, although early adoption is permitted. The Company is currently evaluating the effect of this guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued new guidance related to equity investments and joint ventures. This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income will be recognized through earnings. This guidance is effective for the Company beginning in fiscal 2017, although early adoption is permitted. The Company is currently evaluating the effect of this guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued final guidance that will change how companies account for certain aspects of share-based payments to employees. Several aspects of the accounting for share-based payment award transactions are affected, including income tax consequences, classification of awards as either equity or liabilities, application of the forfeiture rate and classification on the statement of cash flows. The guidance is effective for the Company beginning in fiscal 2017, although early adoption is permitted. The Company is currently evaluating the effect of the updated standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented based on the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new standard is effective for the Company beginning in fiscal 2020. Early adoption for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 is permitted. The Company is currently evaluating the effect of the updated standard on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued new guidance related to statement of cash flows. This guidance amended the existing accounting standards for the statement of cash flows and provided guidance on eight classification issues related to the statement of cash flows. The new standard is effective for the Company beginning in fiscal 2019 and early adoption is permitted. The amendments should be applied retrospectively to all periods presented. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively as of the earliest date practicable. The Company is currently evaluating the timing and the impact of these amendments on its statement of cash flows.
In October 2016, the FASB issued new guidance related to income taxes. This standard requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance will be effective for the Company in its first quarter of fiscal 2018. The Company is currently evaluating the effect of the updated standard on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued amendments to its guidance on the accounting for related parties, which amends the consolidation guidance issued in February 2015 regarding the treatment of indirect interests held through related parties that are under common control. The standard will be effective for the Company in the first quarter of fiscal 2017. The Company is currently evaluating the effect of the updated standard on its consolidated financial statements and related disclosures.
NOTE 3. SHAREHOLDERS’ EQUITY
Stock Repurchase Activities
In August 2014, the Company's Board of Directors approved a stock repurchase program (2014 Stock Repurchase Program), authorizing the Company to repurchase up to $300.0 million of Trimble’s common stock, replacing a stock repurchase program which had been in place since 2011. In August 2015, the Company’s Board of Directors approved a stock repurchase program (2015 Stock Repurchase Program), authorizing the Company to repurchase up to $400.0 million of Trimble’s common stock, replacing the 2014 Stock Repurchase Program.
During the first three quarters of fiscal 2016, the Company repurchased approximately 4.2 million shares of common stock in open market purchases, at an average price of $24.20 per share, for a total of $102.2 million under the 2015 Stock Repurchase Program.
During the first three quarters of fiscal 2015, the Company repurchased approximately 7.5 million shares of common stock in open market purchases, at an average price of $21.29 per share. This total included $75.1 million and $84.3 million of open market purchases completed under the 2015 and 2014 Stock Repurchase Programs, respectively.
As part of the 2015 Stock Repurchase Program, in September 2015, the Company entered into an accelerated share repurchase agreement, or ASR, with an investment bank for $75.0 million. As previously reported, the ASR was completed in December 2015 and resulted in the aggregate repurchase of approximately 3.7 million shares of common stock with a volume weighted average price of $20.11 per share.
Stock repurchases are reflected as a decrease to common stock based on the average book value per share for all outstanding shares calculated at the time of each individual repurchase transaction. The excess of the purchase price over this average for each repurchase is charged to retained earnings. As a result of the 2016 repurchases, retained earnings was reduced by $80.8 million in the first three quarters of fiscal 2016. Common stock repurchases under the program were recorded based upon the trade date for accounting purposes. All common shares repurchased under the programs have been canceled.
At the end of the first three quarters of fiscal 2016, the 2015 Stock Repurchase Program had remaining authorized funds of $147.7 million. Under the share repurchase program, the Company may repurchase shares from time to time in open market transactions, privately negotiated transactions, accelerated share buyback programs, tender offers, or by other means. The timing and amount of repurchase transactions will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice.
Stock-Based Compensation Expense
Stock compensation expense is recognized based on the fair value of the portion of share-based payment awards that is expected to vest during the period and is net of estimated forfeitures.
The following table summarizes stock-based compensation expense for the third quarter and first three quarters of fiscal 2016 and 2015.
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(Dollars in millions) | | | | | | | |
Cost of sales | $ | 0.9 |
| | $ | 1.0 |
| | $ | 2.8 |
| | $ | 2.9 |
|
Research and development | 2.2 |
| | 2.1 |
| | 6.9 |
| | 6.4 |
|
Sales and marketing | 2.1 |
| | 2.2 |
| | 6.3 |
| | 6.7 |
|
General and administrative | 8.1 |
| | 7.5 |
| | 24.0 |
| | 21.3 |
|
Total operating expense | 12.4 |
| | 11.8 |
| | 37.2 |
| | 34.4 |
|
Total stock-based compensation expense | $ | 13.3 |
| | $ | 12.8 |
| | $ | 40.0 |
| | $ | 37.3 |
|
NOTE 4. BUSINESS COMBINATIONS
During the first three quarters of fiscal 2016, the Company acquired three businesses, with total cash consideration of $13.6 million, all in its Engineering and Construction segment. The Condensed Consolidated Statements of Income include the operating results of the businesses from the dates of acquisition. The acquisitions were not significant individually or in the aggregate. The largest acquisition was a cloud-based software developer for the design of sustainable and high-performance buildings, based in London
and New York. In the aggregate, the businesses acquired during the first three quarters of fiscal 2016 contributed less than one percent to the Company's total revenue during the first three quarters of fiscal 2016.
The Company determined the total consideration paid for each of its acquisitions as well as the fair value of the assets acquired and liabilities assumed as of the date of acquisition. For certain acquisitions completed in the last quarter of fiscal 2015 and the first three quarters of fiscal 2016, the fair value of the assets acquired and liabilities assumed are preliminary and may be adjusted as the Company obtains additional information, primarily related to adjustments for the true up of acquired net working capital in accordance with certain purchase agreements, and estimated values of certain net tangible assets and liabilities including tax balances, pending the completion of final studies and analyses. If there are adjustments made for these items, the fair value of intangible assets and goodwill could be impacted. Thus the provisional measurements of fair value are subject to change. Such changes could be significant. The Company expects to finalize the valuation of the net tangible and intangible assets as soon as practicable, but not later than one-year from the acquisition date.
The fair value of identifiable assets acquired and liabilities assumed were determined under the acquisition method of accounting for business combinations. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair value of intangible assets acquired is generally determined based on a discounted cash flow analysis. Acquisition costs directly related to the acquisitions, along with the changes in the fair value of the contingent consideration liabilities, of $0.9 million and $3.4 million for the third quarter and the first three quarters of fiscal 2016, respectively, and $2.7 million and $9.8 million for the corresponding periods of fiscal 2015, respectively, were expensed as incurred and were included in General and administrative expense in the Condensed Consolidated Statements of Income.
The following table summarizes the Company’s business combinations completed during the first three quarters of fiscal 2016.
|
| | | | |
| First Three Quarters of | |
| 2016 | |
(Dollars in millions) | | |
Fair value of total purchase consideration | $ | 13.6 |
| |
Less fair value of net assets acquired: | | |
Net tangible liabilities assumed | (1.9 | ) | |
Identifiable intangible assets | 6.5 |
| |
Goodwill | $ | 9.0 |
| |
Intangible Assets
The following table presents details of the Company’s total intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
As of | Third Quarter of Fiscal 2016 | | Fiscal Year End 2015 |
| Gross | | | | | | Gross | | | | |
| Carrying | | Accumulated | | Net Carrying | | Carrying | | Accumulated | | Net Carrying |
(Dollars in millions) | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
Developed product technology | $ | 810.6 |
| | $ | (615.2 | ) | | $ | 195.4 |
| | $ | 802.1 |
| | $ | (536.0 | ) | | $ | 266.1 |
|
Trade names and trademarks | 51.6 |
| | (42.4 | ) | | 9.2 |
| | 52.8 |
| | (39.8 | ) | | 13.0 |
|
Customer relationships | 447.0 |
| | (289.0 | ) | | 158.0 |
| | 448.1 |
| | (258.0 | ) | | 190.1 |
|
Distribution rights and other intellectual properties | 65.6 |
| | (57.1 | ) | | 8.5 |
| | 78.6 |
| | (60.7 | ) | | 17.9 |
|
| $ | 1,374.8 |
| | $ | (1,003.7 | ) | | $ | 371.1 |
| | $ | 1,381.6 |
| | $ | (894.5 | ) | | $ | 487.1 |
|
The estimated future amortization expense of purchased intangible assets as of the end of the third quarter of fiscal 2016 was as follows:
|
| | | |
(Dollars in millions) | |
2016 (Remaining) | $ | 35.1 |
|
2017 | 128.4 |
|
2018 | 100.3 |
|
2019 | 59.8 |
|
2020 | 31.4 |
|
Thereafter | 16.1 |
|
Total | $ | 371.1 |
|
Goodwill
The changes in the carrying amount of goodwill by segment for the first three quarters of fiscal 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Engineering and Construction | | Field Solutions | | Mobile Solutions | | Advanced Devices | | Total |
(Dollars in millions) | | | | | | | | | |
Balance as of fiscal year end 2015 | $ | 1,140.1 |
| | $ | 125.7 |
| | $ | 820.7 |
| | $ | 19.9 |
| | $ | 2,106.4 |
|
Additions due to acquisitions and current year acquisitions' purchase price adjustments | 9.0 |
| | — |
| | — |
| | — |
| | 9.0 |
|
Purchase price adjustments- prior years' acquisitions and others | (1.2 | ) | | 0.1 |
| | 0.1 |
| | — |
| | (1.0 | ) |
Foreign currency translation adjustments | 1.4 |
| | 0.8 |
| | 0.6 |
| | 0.5 |
| | 3.3 |
|
Divestitures | — |
| | — |
| | (6.6 | ) | | — |
| | (6.6 | ) |
Balance as of the end of the third quarter of fiscal 2016 | $ | 1,149.3 |
| | $ | 126.6 |
| | $ | 814.8 |
| | $ | 20.4 |
| | $ | 2,111.1 |
|
In the first three quarters of 2016, the Company sold the Omega Group assets and Advanced Public Safety (APS) business. Both businesses provided software solutions for public safety agencies and were part of the Company’s Mobile Solutions segment. The sales resulted in a $4.9 million gain in the first three quarters of fiscal 2016, and that was included in Other income, net on the Company's Condensed Consolidated Statements of Income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
|
| | | | | | | |
| Third Quarter of | | Fiscal Year End |
As of | 2016 | | 2015 |
(Dollars in millions) | | | |
Raw materials | $ | 81.8 |
| | $ | 107.5 |
|
Work-in-process | 7.8 |
| | 5.9 |
|
Finished goods | 134.7 |
| | 147.7 |
|
Total inventories | $ | 224.3 |
| | $ | 261.1 |
|
Finished goods included $15.3 million and $14.6 million of costs that were deferred in connection with deferred revenue arrangements as of the end of the third quarter of fiscal 2016 and fiscal year end 2015, respectively.
NOTE 6. SEGMENT INFORMATION
To achieve distribution, marketing, production and technology advantages, the Company manages its operations in the following four segments:
| |
• | Engineering and Construction: This segment primarily serves customers working in architecture, engineering, construction, geospatial and government. Within this segment our most substantial product portfolios are focused on civil engineering and construction, building construction, and geospatial. |
| |
• | Field Solutions: This segment provides solutions for the farming, government and consumer markets, with its products focused on agriculture and geographic information systems (GIS). |
| |
• | Mobile Solutions: This segment provides solutions that enable end-users to monitor and manage their mobile work, mobile workers and mobile assets in the areas of transportation and logistics and field services management. |
| |
• | Advanced Devices: The various operations that comprise this segment are aggregated on the basis that these operations do not exceed 10% of the Company’s total revenue, operating income or assets. This segment is comprised of the Embedded Technologies, Timing, Applanix, Military and Advanced Systems and ThingMagic businesses. |
The Company’s chief operating decision maker (CODM), its Chief Executive Officer, evaluates each of its segment’s performance and allocates resources based on segment operating income before income taxes and some corporate allocations. The Company and each of its segments employ consistent accounting policies. In each of its segments the Company sells many individual products. For this reason, it is impracticable to segregate and identify revenue for each of the individual products or group of products.
The following table presents revenue, operating income, depreciation expense and identifiable assets for the four segments. Operating income is revenue less cost of sales and operating expense, excluding general corporate expense, acquisition costs, amortization of purchased intangible assets, restructuring charges, stock-based compensation and executive transition costs. The identifiable assets that the CODM views by segment are accounts receivable, inventories and goodwill.
|
| | | | | | | | | | | | | | | | | | | |
| Reporting Segments |
| Engineering and Construction | | Field Solutions | | Mobile Solutions | | Advanced Devices | | Total |
(Dollars in millions) | | | | | | | | | |
Third Quarter of Fiscal 2016 | | | | | | | | | |
Revenue | $ | 332.4 |
| | $ | 77.9 |
| | $ | 138.5 |
| | $ | 35.3 |
| | $ | 584.1 |
|
Operating income | 69.1 |
| | 22.1 |
| | 22.4 |
| | 14.3 |
| | 127.9 |
|
Depreciation expense | 3.2 |
| | 0.3 |
| | 1.4 |
| | 0.2 |
| | 5.1 |
|
Third Quarter of Fiscal 2015 | | | | | | | | | |
Revenue | $ | 326.4 |
| | $ | 73.5 |
| | $ | 131.6 |
| | $ | 30.8 |
| | $ | 562.3 |
|
Operating income | 68.8 |
| | 19.5 |
| | 23.1 |
| | 10.8 |
| | 122.2 |
|
Depreciation expense | 3.5 |
| | 0.3 |
| | 1.4 |
| | 0.1 |
| | 5.3 |
|
First Three Quarters of Fiscal 2016 | | | | | | | | | |
Segment revenue | $ | 993.4 |
| | $ | 271.0 |
| | $ | 412.9 |
| | $ | 99.4 |
| | $ | 1,776.7 |
|
Operating income | 175.0 |
| | 81.5 |
| | 60.2 |
| | 36.1 |
| | 352.8 |
|
Depreciation expense | 10.4 |
| | 0.9 |
| | 4.1 |
| | 0.5 |
| | 15.9 |
|
First Three Quarters of Fiscal 2015 | | | | | | | | | |
Segment revenue | $ | 964.2 |
| | $ | 275.9 |
| | $ | 388.1 |
| | $ | 102.5 |
| | $ | 1,730.7 |
|
Operating income | 166.3 |
| | 85.0 |
| | 62.5 |
| | 37.1 |
| | 350.9 |
|
Depreciation expense | 10.6 |
| | 0.9 |
| | 4.0 |
| | 0.4 |
| | 15.9 |
|
As of the Third Quarter of Fiscal 2016 | | | | | | | | | |
Accounts receivable | $ | 214.1 |
| | $ | 59.3 |
| | $ | 71.7 |
| | $ | 24.1 |
| | $ | 369.2 |
|
Inventories | 146.7 |
| | 32.6 |
| | 30.9 |
| | 14.1 |
| | 224.3 |
|
Goodwill | 1,149.3 |
| | 126.6 |
| | 814.8 |
| | 20.4 |
| | 2,111.1 |
|
As of Fiscal Year End 2015 | | | | | | | | | |
Accounts receivable | $ | 215.9 |
| | $ | 57.1 |
| | $ | 69.6 |
| | $ | 19.3 |
| | $ | 361.9 |
|
Inventories | 178.0 |
| | 36.0 |
| | 30.4 |
| | 16.7 |
| | 261.1 |
|
Goodwill | 1,140.1 |
| | 125.7 |
| | 820.7 |
| | 19.9 |
| | 2,106.4 |
|
A reconciliation of the Company’s consolidated segment operating income to consolidated income before income taxes is as follows:
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(Dollars in millions) | | | | | | | |
Consolidated segment operating income | $ | 127.9 |
| | $ | 122.2 |
| | $ | 352.8 |
| | $ | 350.9 |
|
Unallocated corporate expense (1) | (18.0 | ) | | (19.7 | ) | | (58.9 | ) | | (60.1 | ) |
Restructuring charges (2) | (4.0 | ) | | (3.0 | ) | | (11.0 | ) | | (9.8 | ) |
Stock-based compensation | (13.3 | ) | | (12.8 | ) | | (40.0 | ) | | (37.3 | ) |
Amortization of purchased intangible assets | (37.3 | ) | | (40.7 | ) | | (117.2 | ) | | (122.2 | ) |
Consolidated operating income | 55.3 |
| | 46.0 |
| | 125.7 |
| | 121.5 |
|
Non-operating income (expense), net: | (3.1 | ) | | (2.5 | ) | | (5.8 | ) | | 2.0 |
|
Consolidated income before taxes | $ | 52.2 |
| | $ | 43.5 |
| | $ | 119.9 |
| | $ | 123.5 |
|
(1) Unallocated corporate expense includes general corporate expense, acquisition costs and executive transition costs.
(2) Restructuring charges primarily consist of severance and benefits, resulting from employee headcount reductions in connection with the Company's restructuring programs related to decisions to streamline processes and reduce the cost structure. As of the end of the third quarter of fiscal 2016, the Company's restructuring liability was $2.6 million, which was expected to be settled by the third quarter of fiscal 2017. Restructuring liabilities are reported within Other current liabilities on the Condensed Consolidated Balance Sheets.
NOTE 7. DEBT
Debt consisted of the following:
|
| | | | | | | |
| Third Quarter of | | Fiscal Year End |
As of | 2016 | | 2015 |
(Dollars in millions) | | | |
Notes: | | | |
Principal amount | $ | 400.0 |
| | $ | 400.0 |
|
Unamortized discount on Notes | (2.6 | ) | | (2.8 | ) |
Debt issuance costs | (2.5 | ) | | (2.7 | ) |
Credit Facilities: | | | |
2014 Credit Facility | 129.0 |
| | 216.0 |
|
Uncommitted facilities | 145.0 |
| | 118.0 |
|
Promissory notes and other debt | 0.9 |
| | 1.2 |
|
Total debt | 669.8 |
| | 729.7 |
|
Less: Short-term debt | 145.3 |
| | 118.3 |
|
Long-term debt | $ | 524.5 |
| | $ | 611.4 |
|
Notes
In November 2014, the Company issued $400.0 million of Senior Notes (Notes) in a public offering registered with the Securities and Exchange Commission. The Notes mature on December 1, 2024 and accrue interest at a rate of 4.75% per annum, payable semiannually in arrears in cash on December 1 and June 1 of each year. The Notes are classified as long-term in the Condensed Consolidated Balance Sheet and are presented net of unamortized discount and debt issuance costs. The discount and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Notes.
In connection with the Notes offering, Trimble entered into an Indenture with U.S. Bank National Association, as trustee. Trimble may redeem the Notes at its option at any time, in accordance with the terms and conditions set forth in the Indenture. The Indenture contains no financial covenants. Further details regarding the terms of the Notes, including the redemption rights, and the Indenture, are provided in the Company’s fiscal 2015 Annual Report on Form 10-K.
Credit Facilities
2014 Credit Facility
In November 2014, the Company entered into a five-year credit agreement with a group of lenders, which provides for an unsecured revolving loan facility of $1.0 billion (2014 Credit Facility). Under the 2014 Credit Facility, the Company may borrow, repay and
reborrow funds under the revolving loan facility until its maturity on November 24, 2019, at which time the revolving facility will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. The interest rate on the non-current debt outstanding under the 2014 Credit Facility was 1.73% and 1.46% at the end of the third quarter of fiscal 2016 and fiscal year end 2015, respectively, and is payable on a quarterly basis. Amounts not borrowed under the revolving facility will be subject to a commitment fee.
The outstanding balance of $129.0 million as of the end of the third quarter of fiscal 2016 and $216.0 million at the end of fiscal 2015 are classified as long-term debt in the Condensed Consolidated Balance Sheet. Unamortized debt issuance costs associated with the 2014 Credit Facility are presented as assets in the Condensed Consolidated Balance sheet and are being amortized to interest expense using the effective interest rate method over the term of the 2014 Credit Facility.
In February 2016, the Company entered into an amendment to the 2014 Credit Facility to facilitate the Company's proposed reincorporation from California to Delaware and to effect other non-financial terms. In August 2016, the Company entered into a second amendment to revise a definition used in determining when a change of control of the Company may occur.
The Company was in compliance with all covenants pertaining to the 2014 Credit Facility at the end of the third quarter of fiscal 2016.
Uncommitted Facilities
The Company also has two $75 million revolving credit facilities which are uncommitted (Uncommitted Facilities). The Uncommitted Facilities may be called by the lenders at any time, have no covenants and no specified expiration date. The $145.0 million outstanding at the end of the third quarter of fiscal 2016 and the $118.0 million outstanding at the end of fiscal 2015 under the Uncommitted Facilities are classified as short-term debt in the Condensed Consolidated Balance Sheet. The weighted average interest rate on the Uncommitted Facilities was 1.40% at the end of the third quarter of fiscal 2016 and 1.37% the end of fiscal 2015.
Promissory Notes and Other Debt
At the end of the third quarter of fiscal 2016 and the year end of fiscal 2015, the Company had promissory notes and other notes payable totaling approximately $0.9 million and $1.2 million, respectively, of which $0.6 million and $0.9 million, respectively, were classified as long-term in the Condensed Consolidated Balance Sheet.
Debt Maturities
At the end of the third quarter of fiscal 2016, the Company's debt maturities based on outstanding principal were as follows (in millions):
|
| | | |
Year Payable | |
2016 (Remaining) | $ | 145.1 |
|
2017 | 0.3 |
|
2018 | 0.2 |
|
2019 | 129.1 |
|
2020 | 0.2 |
|
Thereafter | 400.0 |
|
Total | $ | 674.9 |
|
NOTE 8. CASH EQUIVALENTS AND INVESTMENTS
In September 2016, the Company invested $94.9 million in available-for-sale securities. The Company did not have any investments as of its fiscal 2015 year end. The following table summarizes the Company’s available-for-sale securities as of the end of the third quarter of fiscal 2016.
|
| | | | | | | | | | | | | | | |
| Third Quarter of Fiscal 2016 |
(Dollars in millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale securities: | | | | | | | |
U.S. Treasury securities | $ | 11.7 |
| | $ | — |
| | $ | — |
| | $ | 11.7 |
|
Municipal debt securities | 10.0 |
| | — |
| | — |
| | 10.0 |
|
Corporate debt securities | 15.8 |
| | — |
| | — |
| | 15.8 |
|
Commercial paper | 57.4 |
| | — |
| | — |
| | 57.4 |
|
Total available-for-sale securities | $ | 94.9 |
| | $ | — |
| | $ | — |
| | $ | 94.9 |
|
| | | | | | | |
Reported as: | | | | | | | |
Cash and cash equivalents | $ | 32.8 |
| | $ | — |
| | $ | — |
| | $ | 32.8 |
|
Short-term investments | 62.1 |
| | — |
| | — |
| | 62.1 |
|
Total | $ | 94.9 |
| | $ | — |
| | $ | — |
| | $ | 94.9 |
|
The Company did not recognize any realized gains or losses on its available-for-sale securities during the third quarter of fiscal 2016, or any unrealized gains or losses on its investments as of the end of the third quarter of fiscal 2016 due to the short duration of time the investments were held.
The following table presents the contractual maturities of the Company's available-for-sale investments as of the end of the third quarter of fiscal 2016.
|
| | | |
| Third Quarter of Fiscal 2016 |
(Dollars in millions) | Amortized Cost |
Due in less than 1 year | $ | 65.0 |
|
Due in 1 to 5 years | 19.9 |
|
Due in 5-10 years | 2.0 |
|
Due after 10 years | 8.0 |
|
Total | $ | 94.9 |
|
The Company’s available-for-sale securities are liquid and maybe sold in the future to fund future operating needs. As a result, the Company recorded all of its available-for-sale securities, not classified as cash equivalents, in Short-term investments as of the end of the third quarter of fiscal 2016, regardless of the contractual maturity date of the securities.
NOTE 9. FAIR VALUE MEASUREMENTS
The Company determines fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Where available, fair value is based on observable market prices or parameters. Where observable prices or inputs are not available, valuation models are applied. Hierarchical levels, defined by the guidance on fair value measurements, are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:
Level I—Quoted prices in active markets for identical assets or liabilities.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level III—Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Values as of the end of the Third Quarter of Fiscal 2016 | | Fair Values as of Fiscal Year End 2015 |
(Dollars in millions) | Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
Assets | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | |
U.S. Treasury securities (1) | $ | — |
| | $ | 11.7 |
| | $ | — |
| | $ | 11.7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Municipal debt securities (1) | — |
| | 10.0 |
| | — |
| | 10.0 |
| | — |
| | — |
| | — |
| | — |
|
Corporate debt securities (1) | — |
| | 15.8 |
| | — |
| | 15.8 |
| | — |
| | — |
| | — |
| | — |
|
Commercial paper (1) | — |
| | 57.4 |
| | — |
| | 57.4 |
| | — |
| | — |
| | — |
| | — |
|
Total available-for-sale securities | — |
| | 94.9 |
| | — |
| | 94.9 |
| | — |
| | — |
| | — |
| | — |
|
Deferred compensation plan assets (2) | 22.5 |
| | — |
| | — |
| | 22.5 |
| | 21.1 |
| | — |
| | — |
| | 21.1 |
|
Derivative assets (3) | — |
| | 0.2 |
| | — |
| | 0.2 |
| | — |
| | 2.9 |
| | — |
| | 2.9 |
|
Contingent consideration assets (4) | — |
| | — |
| | 7.0 |
| | 7.0 |
| | — |
| | — |
| | 7.0 |
| | 7.0 |
|
Total assets measured at fair value | $ | 22.5 |
| | $ | 95.1 |
| | $ | 7.0 |
| | $ | 124.6 |
| | $ | 21.1 |
| | $ | 2.9 |
| | $ | 7.0 |
| | $ | 31.0 |
|
Liabilities | | | | | | | | | | | | | | | |
Deferred compensation plan liabilities (2) | $ | 22.5 |
| | $ | — |
| | $ | — |
| | $ | 22.5 |
| | $ | 21.1 |
| | $ | — |
| | $ | — |
| | $ | 21.1 |
|
Derivative liabilities (3) | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 2.1 |
| | — |
| | 2.1 |
|
Contingent consideration liabilities (5) | — |
| | — |
| | 4.5 |
| | 4.5 |
| | — |
| | — |
| | 6.6 |
| | 6.6 |
|
Total liabilities measured at fair value | $ | 22.5 |
| | $ | 0.1 |
| | $ | 4.5 |
| | $ | 27.1 |
| | $ | 21.1 |
| | $ | 2.1 |
| | $ | 6.6 |
| | $ | 29.8 |
|
| |
(1) | The Company’s available-for sale securities are valued using readily available pricing sources for comparable instruments, or model-driven valuations using significant inputs derived from or corroborated by observable market data, including yield curves and credit ratings. |
| |
(2) | The Company maintains a self-directed, non-qualified deferred compensation plan for certain executives and other highly compensated employees. The plan assets and liabilities are invested in actively traded mutual funds and individual stocks valued using observable quoted prices in active markets. Deferred compensation plan assets and liabilities are included in Other non-current assets and Other non-current liabilities, respectively, on the Company's Condensed Consolidated Balance Sheets. |
| |
(3) | Derivative assets and liabilities primarily represent forward currency exchange contracts. The Company typically enters into these contracts to minimize the short-term impact of foreign currency exchange rates on certain trade and inter-company receivables and payables. Derivative assets and liabilities are included in Other current assets and Other current liabilities on the Company's Condensed Consolidated Balance Sheets. |
| |
(4) | Contingent consideration assets represent arrangements for buyers to pay the Company for certain businesses that it has divested. The fair value is determined based on the Company's expectations of future receipts. The minimum amount to be received under these arrangements is $3.5 million. Contingent consideration assets are included in Other receivables and Other non-current assets on the Company's Condensed Consolidated Balance Sheets. |
| |
(5) | Contingent consideration liabilities represent arrangements to pay the former owners of certain companies that Trimble acquired. The undiscounted maximum payment under the arrangements is $18.1 million at the end of the third quarter of fiscal 2016, based on estimated future revenues, gross margins or other milestones. Contingent consideration liabilities are included in Other current liabilities and Other non-current liabilities on the Company's Condensed Consolidated Balance Sheets. |
Additional Fair Value Information
The following table provides additional fair value information relating to the Company’s financial instruments outstanding:
|
| | | | | | | | | | | | | | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
As of | Third Quarter of Fiscal 2016 | | Fiscal Year End 2015 |
(Dollars in millions) | | | | | | | |
Liabilities: | | | | | | | |
Notes | $ | 400.0 |
| | $ | 407.0 |
| | $ | 400.0 |
| | $ | 399.9 |
|
2014 Credit Facility | 129.0 |
| | 129.0 |
| | 216.0 |
| | 216.0 |
|
Uncommitted facilities | 145.0 |
| | 145.0 |
| | 118.0 |
| | 118.0 |
|
Promissory notes and other debt | 0.9 |
| | 0.9 |
| | 1.2 |
| | 1.2 |
|
The fair value of the Notes was determined based on observable market prices in less active markets and is categorized accordingly as Level II in the fair value hierarchy. The fair value of the bank borrowings and promissory notes has been calculated using an estimate of the interest rate the Company would have had to pay on the issuance of notes with a similar maturity and discounting the cash flows at that rate, and is categorized as Level II in the fair value hierarchy. The fair values do not give an indication of the amount that the Company would currently have to pay to extinguish any of this debt.
NOTE 10. PRODUCT WARRANTIES
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, technical support, labor costs, and costs incurred by third parties performing work on the Company’s behalf. The Company’s expected future costs are primarily estimated based upon historical trends in the volume of product returns within the warranty period and the costs to repair or replace the equipment. When products sold include warranty provisions, they are covered by a warranty for periods ranging generally from 1 year to 2 years.
While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required.
Changes in the Company’s product warranty liability during the first three quarters of fiscal 2016 are as follows:
|
| | | |
(Dollars in millions) | |
Balance as of fiscal year end 2015 | $ | 18.5 |
|
Accruals for warranties issued | 13.5 |
|
Changes in estimates | 0.5 |
|
Warranty settlements (in cash or in kind) | (14.4 | ) |
Balance as of the end of the third quarter of fiscal 2016 | $ | 18.1 |
|
NOTE 11. EARNINGS PER SHARE
Basic earnings per share is computed by dividing Net income attributable to Trimble Navigation Limited by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing Net income attributable to Trimble Navigation Limited by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan and restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
The following table shows the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(In millions, except per share amounts) | | | | | | | |
Numerator: | | | | | | | |
Net income attributable to Trimble Navigation Limited | $ | 39.2 |
| | $ | 37.1 |
| | $ | 94.7 |
| | $ | 97.1 |
|
Denominator: | | | | | | | |
Weighted-average shares outstanding | 249.7 |
| | 254.8 |
| | 250.5 |
| | 257.5 |
|
Effect of dilutive securities | 3.5 |
| | 2.4 |
|
| 3.2 |
|
| 2.8 |
|
Weighted-average dilutive shares outstanding | 253.2 |
| | 257.2 |
| | 253.7 |
| | 260.3 |
|
Basic earnings per share | $ | 0.16 |
| | $ | 0.15 |
| | $ | 0.38 |
| | $ | 0.38 |
|
Diluted earnings per share | $ | 0.15 |
| | $ | 0.14 |
| | $ | 0.37 |
| | $ | 0.37 |
|
For the third quarter of fiscal 2016 and 2015, the Company excluded 4.0 million and 8.8 million shares of outstanding stock options, respectively, from the calculation of diluted earnings per share because their effect would have been antidilutive. For the first three quarters of fiscal 2016 and 2015, the Company excluded 4.5 million and 5.8 million shares of outstanding stock options, respectively, from the calculation of diluted earnings per share because their effect would have been antidilutive.
NOTE 12. INCOME TAXES
For the third quarter of fiscal 2016, the Company’s effective income tax rate was 25%, as compared to 15% in the corresponding period in fiscal 2015. The lower tax rate in the third quarter of fiscal 2015 was primarily due to discrete tax benefits from U.S. research credits and U.S. production activities, and foreign net operating loss benefit. For the first three quarters of fiscal 2016, the Company's effective income tax rate, after discrete items, was 21% as compared to 22% in the corresponding period in fiscal 2015. The decrease in the tax rate for the first three quarters of fiscal 2016 was primarily due to a one time discrete tax benefit from the APS divestiture in the second quarter of fiscal 2016, partially offset by the differences in the geographic mix of pre-tax income and a tax benefit from a closure of a foreign tax audit in the first quarter of fiscal 2015.
Historically, the Company's effective tax rate has been lower than the U.S. federal statutory rate of 35% primarily due to favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions. The Company has not provided U.S. taxes for all of such earnings due to the indefinite reinvestment of some of those earnings outside the U.S.
The Company and its subsidiaries are subject to U.S. federal and state, and foreign income tax. The Company is currently in different stages of multiple year examinations by the Internal Revenue Service (IRS) as well as various state and foreign taxing authorities.
In the first quarter of fiscal 2015, the Company received a Notice of Proposed Adjustment from the IRS for the fiscal years 2010 and 2011. The proposed adjustments primarily relate to the valuations of intercompany transfers of acquired intellectual property. The assessments of tax, interest and penalties for the years in question total $67.0 million. The Company does not agree with the IRS position and filed a protest with the IRS Appeals Office in April 2015. The IRS appeals process commenced in March, 2016. While the Company and the IRS continue the appeals process, the Company has not changed its conclusions regarding its original filing positions. No payments have been made on the assessment, and the Company intends to continue to vigorously defend its position.
Based on the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized tax benefits within the next twelve months. The unrecognized tax benefits of $60.3 million and $52.7 million as of the end of the third quarter of fiscal 2016 and fiscal year end 2015, respectively, if recognized, would favorably affect the effective income tax rate in future periods. Unrecognized tax benefits are recorded in Other non-current liabilities and in the deferred tax accounts in the accompanying Condensed Consolidated Balance Sheets.
The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company's unrecognized tax benefit liabilities include interest and penalties as of the end of the third quarter of fiscal 2016 and fiscal year end 2015, of $8.6 million and $6.7 million, respectively, which were recorded in Other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Leases and Other Commitments
The estimated future minimum operating lease commitments as of the end of the third quarter of fiscal 2016 are as follows (in millions):
|
| | | |
2016 (Remaining) | $ | 8.5 |
|
2017 | 29.4 |
|
2018 | 21.8 |
|
2019 | 15.9 |
|
2020 | 11.7 |
|
Thereafter | 32.7 |
|
Total | $ | 120.0 |
|
As of the end of the third quarter of fiscal 2016, the Company had unconditional purchase obligations of approximately $146.8 million. These unconditional purchase obligations primarily represent open non-cancelable purchase orders for material purchases with the Company’s vendors. Purchase obligations exclude agreements that are cancelable without penalty.
Litigation
On September 2, 2011, Recreational Data Services, LLC filed a lawsuit in the Superior Court for the State of Alaska in Anchorage against Trimble Navigation Limited, Cabela’s Incorporated, AT&T Mobility and Alascom, Inc., alleging breach of contract, breach of fiduciary duty, interference with contract, promissory estoppel, fraud, and negligent misrepresentation. The case was tried in front of a jury in Alaska beginning on September 9, 2014. On September 26, 2014, the jury returned a verdict in favor of the plaintiff and awarded the plaintiff damages of $51.3 million. On January 29, 2015, the court granted our Motion for Judgment notwithstanding the Verdict, and on March 18, 2015, the Court awarded the Company a portion of its incurred attorneys’ fees and costs, and entered Final Judgment in the Company’s favor in the amount of $0.6 million. The Final Judgment also provides that the plaintiff take nothing on its claims. On April 17, 2015, the plaintiff filed a Notice of Appeal to the Alaska Supreme Court. The parties have completed all appellate briefing, and oral arguments were heard before the Alaska Supreme Court on February 24, 2016. A decision by the Alaska Supreme Court has not been made.
From time to time, the Company is also involved in litigation arising out of the ordinary course of our business. There are no other material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of the Company's or its subsidiaries' property is subject.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. These statements include, among other things:
| |
• | the portion of our revenue coming from sales to international customers; |
| |
• | seasonal fluctuations in our construction and agricultural equipment business revenues, geospatial and macroeconomic conditions and business conditions in the markets we serve; |
| |
• | our plans to continue to invest in research and development at a rate consistent with our past, to develop and introduce new products, and to improve our competitive position, and to enter new markets; |
| |
• | our belief that increases in recurring revenue from our software and solutions will provide us with enhanced business visibility over time; |
| |
• | our potential exposure in connection with pending proceedings; |
| |
• | our belief that our cash and cash equivalents, together with borrowings under our 2014 Credit Facility, will be sufficient to meet our anticipated operating cash needs, debt service, planned capital expenditures, and stock purchases under the stock repurchase program for at least the next twelve months; |
| |
• | our expectation that planned capital expenditures will constitute a partial use of our cash resources; and |
| |
• | fluctuations in interest rates. |
The forward-looking statements regarding future events and the future results of Trimble Inc. (formerly Trimble Navigation Limited) (“Trimble” or “the Company” or “we” or “our” or “us”) are based on current expectations, estimates, forecasts, and projections about the industries in which Trimble operates and the beliefs and assumptions of the management of Trimble. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These forward-looking statements involve certain risks and uncertainties that could cause actual results, levels of activity, performance, achievements, and events to differ materially from those implied by such forward-looking statements, including but not limited to those discussed in “Risk Factors” below and elsewhere in this report, as well as in the Company’s Annual Report on Form 10-K for fiscal year 2015 and in other reports Trimble files with the Securities and Exchange Commission, each as it may be amended from time to time. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. We reserve the right to update these forward-looking statements for any reason, including the occurrence of material events, but assume no duty to update these statements to reflect subsequent events.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U. S. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. We base our estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on our best knowledge of current events and actions that may impact us in the future, actual results may be different from the estimates.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Management believes that there have been no significant changes during the third quarter of fiscal 2016 to the items that we disclosed as our critical accounting policies and estimates in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements, see Note 2 to our Condensed Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
EXECUTIVE LEVEL OVERVIEW
Trimble began operations in 1978 and incorporated in California in 1981. On October 1, 2016, Trimble Navigation Limited changed its name to Trimble Inc. and changed its state of incorporation from the State of California to the State of Delaware (the “Reincorporation”). The Reincorporation was previously approved by our shareholders at our 2016 annual meeting of shareholders.
Trimble is a leading provider of technology solutions that optimize the work processes of office and mobile field professionals around the world. Our comprehensive process solutions are used across a range of industries including agriculture, architecture, civil engineering, construction, government, natural resources, transportation and utilities. Representative Trimble customers include engineering and construction firms, contractors, surveying companies, farmers and agricultural companies, transportation and logistics companies, energy, mining and utility companies, and state, federal and municipal governments.
Trimble focuses on integrating its broad technological and application capabilities to create vertically-focused, system-level solutions that transform how work is done within the industries we serve. The integration of sensors, software, connectivity, and information in our portfolio gives us the unique ability to provide an information model specific to the customer’s workflow. For example, in construction, our strategy is centered on the concept of a "constructible model" which is at the center of our "Connected Construction Site" solutions which provide real-time, connected, and cohesive information environments for the design, build, and operational phases of projects. In agriculture, we continue to develop “Connected Farm” solutions to optimize operations across the agriculture workflow. In transportation and logistics, our “Connected Fleet” solutions provide transportation companies with tools to enhance fuel efficiency, safety, and transparency through connected vehicles and fleets across the enterprise.
Our growth strategy is centered on multiple elements:
| |
• | Focus on attractive markets with significant growth and profitability potential - We focus on large markets historically underserved by technology that offer significant potential for long-term revenue growth, profitability and market leadership. Our core industries such as construction, agriculture, and transportation markets are each multi-trillion dollar global industries which operate in increasingly demanding environments with technology adoption in the early phases relative to other industries. With the emergence of mobile computing capabilities, the increasing technological know-how of end users and the compelling return on investment to our customers, we believe many of our markets are ripe for substituting Trimble’s technology and solutions in place of traditional operating methods. |
| |
• | Domain knowledge and technological innovation that benefit a diverse customer base - We have over time redefined our technological focus from hardware-driven point solutions to integrated work process solutions by developing domain expertise and heavily reinvesting in R&D and acquisitions. We have been spending an average of 13% to 15% of revenue over the past several years on R&D and currently have over 1,100 unique patents. We intend to continue to take advantage of our technology portfolio and deep domain knowledge to quickly and cost-effectively deliver specific, targeted solutions to each of the vertical markets we serve. We look for growth where the opportunity for technological change is high and which have a requirement for the integration of multiple technologies into complete vertical solutions. |
| |
• | Increasing focus on software and services - Software and services are increasingly important elements of our solutions and are core to our growth strategy. Trimble has an open application programming interface (API) philosophy and open vendor environment which leads to increased adoption of our software offerings. Professional services constitute an additional growth channel that helps our customers integrate and optimize the use of our offerings in their environment. The increased recurring revenue from these solutions will provide us with enhanced business visibility over time. |
| |
• | Geographic expansion with localization strategy - We view international expansion as an important element of our strategy and we continue to position ourselves in geographic markets that will serve as important sources of future growth. We currently have a physical presence in 43 countries and distribution channels in over 100 countries. In the third quarter of fiscal 2016, 50% of our sales were to customers located in countries outside of the U.S. |
| |
• | Optimized distribution channels to best access our markets - We utilize vertically-focused distribution channels that leverage domain expertise to best serve the needs of individual markets domestically and abroad. These channels include independent dealers, joint ventures, original equipment manufacturers (OEM) sales, and distribution alliances with key partners, such as CNH Global, Caterpillar, and Nikon, as well as direct sales to end-users, that provide us with broad market reach and localization capabilities to effectively serve our markets. |
| |
• | Strategic acquisitions - Organic growth continues to be our primary focus, while acquisitions serve to enhance our market position. We acquire businesses that bring technology, products, or distribution capabilities that augment our portfolio and allow us to penetrate existing markets more effectively, or to establish a market beachhead. Our level of success in targeting and effectively integrating acquisitions is an important aspect of our growth strategy. |
Trimble’s focus on these growth drivers has led over time to growth in revenue and profitability as well as an increasingly diversified business model. Software and services growth is driving increased recurring revenue, leading to improved visibility in some of our businesses. As our solutions have expanded, our go to market model has also evolved, with a balanced mix between direct, distribution and OEM customers, and an increasing number of enterprise level customer relationships.
For the third quarter of 2016, revenue increased by $21.8 million as compared to the third quarter of 2015. By geography, performance in the third quarter was mixed. North America was slightly up, Europe was slightly down, Asia-Pacific and the rest of the world was up year over year. Within the quarter, we continued to experience a shift in revenue towards a more significant mix of software, recurring revenue, and services, driven both by organic growth and acquisitions.
During the first three quarters of fiscal 2016, we acquired three businesses, with total cash consideration of $13.6 million, all in our Engineering and Construction segment. The largest acquisition was a cloud-based software developer for the design of sustainable and high-performance buildings, based in London and New York. Our Condensed Consolidated Statements of Income include the operating results of the businesses from the dates of acquisition.
In addition, during the first three quarters of 2016, we sold the Omega Group assets and Advanced Public Safety (APS) business for total cash consideration of $12.0 million. Both divested businesses provide software solutions for public safety agencies and were part of our Mobile Solutions segment. Our Condensed Consolidated Statements of Income exclude the operating results of the businesses from the dates of divestiture.
Seasonality of Business
Construction purchases tend to occur in early spring, and U.S. governmental agencies tend to utilize funds available at the end of the government’s fiscal year for additional purchases at the end of our third fiscal quarter in September of each year. Our agricultural equipment business revenues have historically been the highest in the first quarter, followed by the second quarter, reflecting buying in anticipation of the spring planting season in the Northern hemisphere. However, overall as a company, as a result of diversification of our business across segments and the increased impact of subscription revenues, we may experience less seasonality in the future. Changes in global macroeconomic conditions could also impact the level of seasonality we experience.
RESULTS OF OPERATIONS
Overview
The following table is a summary of revenue, gross margin and operating income for the periods indicated and should be read in conjunction with the narrative descriptions below.
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(Dollars in millions) | | | | | | | |
Revenue: | | | | | | | |
Product | $ | 384.9 |
| | $ | 373.0 |
| | $ | 1,185.5 |
| | $ | 1,168.2 |
|
Service | 105.6 |
| | 103.9 |
| | 316.9 |
| | 310.5 |
|
Subscription | 93.6 |
| | 85.4 |
| | 274.3 |
| | 252.0 |
|
Total revenue | $ | 584.1 |
| | $ | 562.3 |
| | 1,776.7 |
| | 1,730.7 |
|
Gross margin | $ | 309.0 |
| | $ | 298.0 |
| | $ | 925.2 |
| | $ | 909.1 |
|
Gross margin % | 52.9 | % | | 53.0 | % | | 52.1 | % | | 52.5 | % |
Operating income | $ | 55.3 |
| | $ | 46.0 |
| | $ | 125.7 |
| | $ | 121.5 |
|
Operating income % | 9.5 | % | | 8.2 | % |
| 7.1 | % |
| 7.0 | % |
Revenue
In the third quarter of fiscal 2016, total revenue increased $21.8 million or 4% as compared to the third quarter of fiscal 2015. Product revenue increased $11.9 million or 3%, service revenue increased $1.7 million or 2%, and subscription revenue increased $8.2 million or 10%. In the first three quarters of fiscal 2016, total revenue increased $46.0 million or 3%, as compared to the first three quarters of fiscal 2015. Of this increase, product revenue increased $17.3 million or 1%, service revenue increased $6.4 million or 2%, and subscription revenue increased $22.3 million or 9%. For the third quarter, the product, service and subscription increases were primarily due to organic growth in Engineering and Construction and Mobile Solutions and to a lesser extent, acquisition growth in Field Solutions. Advanced Devices also contributed to the product revenue for the quarter. For the first three quarters, product, service and subscription revenue increases were due to organic growth in Engineering and Construction and Mobile Solutions, partially offset by a decrease within Field Solutions and Advanced Devices for the first three quarters of the year. We consider organic growth to include all revenue except for revenue associated with acquisitions made within the last four quarters.
On a segment basis, Engineering and Construction revenue for the third quarter of fiscal 2016 increased $6.0 million or 2%, Mobile Solutions increased $6.9 million or 5%, Field Solutions increased $4.4 million or 6%, and Advanced Devices increased $4.5 million or 15%, as compared to the third quarter of fiscal 2015. Engineering and Construction revenue for the first three quarters of fiscal 2016 increased $29.2 million or 3% and Mobile Solutions increased $24.8 million or 6%, partially offset by a decrease in Field Solutions of $4.9 million or 2% and Advanced Devices of $3.1 million or 3%, as compared to the corresponding period of fiscal 2015. For the third quarter, Engineering and Construction revenue increased primarily driven by civil engineering and construction organic growth, partially offset by declines in geospatial. Field Solutions revenue increased due to strong performance in agriculture, particularly in Latin America. Mobile Solutions revenue increased due to continued growth in the transportation and logistics market. Advanced Devices revenue increased for the third quarter due to strong OEM and end user demand. For the first three quarters, Engineering and Construction revenue increased driven by civil engineering and construction, partially offset by declines in geospatial. Field Solutions revenue was down for the first three quarters due to softness in agriculture markets in the first quarter. Mobile Solutions revenue increased due to continued growth in the transportation and logistics market. Advanced Devices revenue was down for the first three quarters due to decreased OEM and end user demand in the first quarter as compared to prior year first quarter sales.
Gross Margin
Gross margin varies due to a number of factors including product mix, pricing, distribution channel, production volumes and foreign currency translations.
Gross margin increased by $11.0 million and $16.1 million for the third quarter and first three quarters of fiscal 2016, respectively, as compared to the corresponding periods in fiscal 2015. Gross margin as a percentage of total revenue was 52.9% and 52.1% for the third quarter and first three quarters of fiscal 2016, respectively, as compared to 53.0% and 52.5% for the corresponding periods in fiscal 2015. The slight decrease for the third quarter and first three quarters was primarily attributable to geospatial product mix within Engineering and Construction and transportation and logistics hardware and subscription product mix within Mobile Solutions, partially offset by product mix within Field Solutions.
Operating Income
Operating income increased by $9.3 million and $4.2 million for the third quarter and the first three quarters of fiscal 2016, respectively, as compared to the corresponding periods in fiscal 2015. Operating income as a percentage of total revenue was 9.5% for the third quarter and 7.1% for the first three quarters of fiscal 2016, respectively, as compared to 8.2% and 7.0% for the corresponding periods in fiscal 2015.
The increases to operating income and operating income percentage for the third quarter were attributable to revenue increases across all segments and strong operating expense control as well as lower amortization of purchased intangible assets, partially offset by selected investments in growth opportunities in Engineering and Construction and Mobile Solutions. Operating income and operating income percentage for the first three quarters of fiscal 2016 was negatively impacted by a decrease in Field Solutions and Advanced Devices sales in the first quarter as compared to the prior year period.
Results by Segment
To achieve distribution, marketing, production, and technology advantages in our targeted markets, we manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices. Operating income is revenue less cost of sales and operating expense, excluding general corporate expense, acquisition/divestiture costs, amortization of purchased intangible assets, restructuring charges, stock-based compensation and executive transition costs.
The following table is a summary of revenue and operating income by segment:
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(Dollars in millions) | | | | | | | |
Engineering and Construction | | | | | | | |
Revenue | $ | 332.4 |
| | $ | 326.4 |
| | $ | 993.4 |
| | $ | 964.2 |
|
Segment revenue as a percent of total revenue | 57 | % | | 58 | % | | 56 | % | | 56 | % |
Operating income | $ | 69.1 |
| | $ | 68.8 |
| | $ | 175.0 |
| | $ | 166.3 |
|
Operating income as a percent of segment revenue | 21 | % | | 21 | % | | 18 | % | | 17 | % |
Field Solutions | | | | | | | |
Revenue | $ | 77.9 |
| | $ | 73.5 |
| | $ | 271.0 |
| | $ | 275.9 |
|
Segment revenue as a percent of total revenue | 13 | % | | 13 | % | | 15 | % | | 16 | % |
Operating income | $ | 22.1 |
| | $ | 19.5 |
| | $ | 81.5 |
| | $ | 85.0 |
|
Operating income as a percent of segment revenue | 28 | % | | 27 | % | | 30 | % | | 31 | % |
Mobile Solutions | | | | | | | |
Revenue | $ | 138.5 |
| | $ | 131.6 |
| | $ | 412.9 |
| | $ | 388.1 |
|
Segment revenue as a percent of total revenue | 24 | % | | 23 | % | | 23 | % | | 22 | % |
Operating income | $ | 22.4 |
| | $ | 23.1 |
| | $ | 60.2 |
| | 62.5 |
|
Operating income as a percent of segment revenue | 16 | % | | 18 | % | | 15 | % | | 16 | % |
Advanced Devices | | | | | | | |
Revenue | $ | 35.3 |
| | $ | 30.8 |
| | $ | 99.4 |
| | $ | 102.5 |
|
Segment revenue as a percent of total revenue | 6 | % | | 6 | % | | 6 | % | | 6 | % |
Operating income | $ | 14.3 |
| | $ | 10.8 |
| | $ | 36.1 |
| | $ | 37.1 |
|
Operating income as a percent of segment revenue | 41 | % | | 35 | % | | 36 | % | | 36 | % |
A reconciliation of our consolidated segment operating income to consolidated income before taxes follows:
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(Dollars in millions) | | | | | | | |
Consolidated segment operating income | $ | 127.9 |
| | $ | 122.2 |
| | $ | 352.8 |
| | $ | 350.9 |
|
Unallocated corporate expense | (18.0 | ) | | (19.7 | ) | | (58.9 | ) | | (60.1 | ) |
Restructuring charges | (4.0 | ) | | (3.0 | ) | | (11.0 | ) | | (9.8 | ) |
Stock-based compensation | (13.3 | ) | | (12.8 | ) | | (40.0 | ) | | (37.3 | ) |
Amortization of purchased intangible assets | (37.3 | ) | | (40.7 | ) | | (117.2 | ) | | (122.2 | ) |
Consolidated operating income | 55.3 |
| | 46.0 |
| | 125.7 |
| | 121.5 |
|
Non-operating income (expense), net: | (3.1 | ) | | (2.5 | ) | | (5.8 | ) | | 2.0 |
|
Consolidated income before taxes | $ | 52.2 |
| | $ | 43.5 |
| | $ | 119.9 |
| | $ | 123.5 |
|
Unallocated corporate expense includes general corporate expense, acquisition costs and executive transition costs.
Engineering and Construction
Engineering and Construction revenue increased by $6.0 million or 2% and $29.2 million or 3% for the third quarter and first three quarters of fiscal 2016, respectively, as compared to the corresponding periods in fiscal 2015. Segment operating income was flat for the third quarter and increased $8.7 million or 5% for the first three quarters of fiscal 2016, respectively, as compared to the corresponding periods in fiscal 2015.
The revenue increase for the third quarter and first three quarters of fiscal 2016 was primarily due to civil engineering and construction driven by strong OEM sales, partially offset by declines in geospatial due to continued challenges in the North American market from the after effects of lower oil and gas prices which reduced product demand. Operating income increased for the third quarter and first three quarters of fiscal 2016 primarily due to stronger results in civil engineering and construction
and operating expense control across all businesses, partially offset by weaker geospatial results and growth related investments in the segment.
Field Solutions
Field Solutions revenue increased $4.4 million or 6% for the third quarter of fiscal 2016 and decreased by $4.9 million or 2% for the first three quarters of fiscal 2016, as compared to the corresponding periods in fiscal 2015. Segment operating income increased by $2.6 million or 13% for the third quarter and decreased by $3.5 million or 4% for the first three quarters of fiscal 2016, as compared to the corresponding periods in fiscal 2015.
Field Solutions revenue increased for the third quarter, due to strong performance in agriculture, particularly in Latin America as well as the impact of acquisitions, partially offset by a decline in GIS. Operating income was up for the third quarter due to stronger agriculture results including higher margin product mix and expense control across all businesses, partially offset by weaker GIS results. Field Solutions revenue and operating income decreased for the first three quarters primarily due to softness in the agriculture markets in the first quarter and continued weakness in GIS, partially offset by the impact of acquisitions.
Mobile Solutions
Mobile Solutions revenue increased by $6.9 million or 5% and $24.8 million or 6% for the third quarter and first three quarters of fiscal 2016, respectively, as compared to the corresponding periods in fiscal 2015. Segment operating income was flat for the third quarter of fiscal 2016 and decreased by $2.3 million or 4% for first three quarters of fiscal 2016, as compared to the corresponding periods in fiscal 2015.
Mobile Solutions revenue increased for the third quarter and first three quarters of fiscal 2016 primarily due to continued organic growth in the transportation and logistics business, with strength expected throughout the year. Although revenue was up, operating income was down for third quarter and first three quarters of fiscal 2016 primarily due to the impact of lower margin product mix and growth related investments in the segment.
Advanced Devices
Advanced Devices revenue increased by $4.5 million or 15% for the third quarter of fiscal 2016 and decreased by $3.1 million or 3% for the first three quarters of fiscal 2016, as compared to the corresponding periods in fiscal 2015. Segment operating income increased by $3.5 million or 32% for the third quarter and decreased by $1.0 million or 3% for the first three quarters of fiscal 2016, as compared to the corresponding periods in fiscal 2015.
Advanced Devices revenue and operating income increased for the third quarter of fiscal 2016 primarily due to strong OEM and end user sales and operating expense control. Advanced Devices revenue and operating income decreased for the first three quarters of fiscal 2016 primarily due to weaker OEM and end user sales in the first quarter, as compared to the corresponding period in the prior year.
Research and Development, Sales and Marketing and General and Administrative Expense
Research and development (R&D), sales and marketing (S&M) and general and administrative (G&A) expense are summarized in the following table:
|
| | | | | | | | | | | | | | | |
| Third Quarter of | | First Three Quarters of |
| 2016 | | 2015 | | 2016 | | 2015 |
(Dollars in millions) | | | | | | | |
Research and development | $ | 86.9 |
| | $ | 79.6 |
| | $ | 266.6 |
| | $ | 251.3 |
|
Percentage of revenue | 15 | % | | 14 | % | | 15 | % | | 15 | % |
Sales and marketing | $ | 88.6 |
| | $ | 89.1 |
| | $ | 282.7 |
| | $ | 281.8 |
|
Percentage of revenue | 15 | % | | 16 | % | | 16 | % | | 16 | % |
General and administrative | $ | 59.2 |
| | $ | 63.2 |
| | $ | 193.1 |
| | $ | 192.1 |
|
Percentage of revenue | 10 | % | | 11 | % | | 11 | % | | 11 | % |
Total | $ | 234.7 |
| | $ | 231.9 |
| | $ | 742.4 |
| | $ | 725.2 |
|
Percentage of revenue | 40 | % | | 41 | % | | 42 | % | | 42 | % |
Overall, R&D, S&M and G&A expense increased by approximately $2.8 and $17.2 million for the third quarter and first three quarters of fiscal 2016, respectively, as compared to the corresponding periods in fiscal 2015