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TRMB > SEC Filings for TRMB > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for TRIMBLE NAVIGATION LTD /CA/

Form 10-Q for TRIMBLE NAVIGATION LTD /CA/


12-May-2014

Quarterly Report


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 There have been no material changes to our significant accounting polices during the first quarter of fiscal 2014 from those disclosed in our 2013 Form 10-K. Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued a new accounting standard that generally requires the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Condensed Consolidated Balance Sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We adopted this new standard on a prospective basis in the first quarter of fiscal 2014. The implementation had no material impact on our Condensed Consolidated Financial Statements.
In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014; however, early adoption is permitted as is a retrospective application. We will adopt the amendments beginning in the first quarter of fiscal 2015. We do not anticipate a material impact on our Condensed Consolidated Financial Statements as a result of this change.
EXECUTIVE LEVEL OVERVIEW
Trimble's focus is on integrating its broad technological and application capabilities to create system-level solutions that transform how work is done within the industries we serve, enhancing productivity, accuracy, safety and regulatory compliance for our customers. The majority of our markets are end-user markets, including engineering and construction firms, surveyors, farmers, governmental organizations, energy and utility companies and organizations that must manage fleets of mobile workers and assets. We also provide components to original equipment manufacturers to incorporate into their products. In the end-user markets, we provide stand-alone systems which may consist of software, hardware or some combination of the two, as well as integrated enterprise or workflow solutions which address the entire work process. We manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices. Solutions targeted at the end-user make up a significant majority of our revenue. With the exception of our Mobile Solutions and Advanced Devices segments, our products are primarily sold through a dealer channel, and it is crucial that we maintain a proficient, global, third-party distribution channel. Some of the more significant developments in our business during the quarter included:


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Engineering and Construction Segment
We expanded our Trimble Connected Site® portfolio of solutions to add new functionality to the Trimble VisionLink® fleet, asset and site productivity management solution. VisionLink version 2.10 allows project managers to remotely manage daily or total payload reporting from Trimble LOADRITE X2350 excavator scales and LT2180 wheel loader scales. We introduced the Trimble SNM41 Connected Site Gateway. The new ruggedized telematics device is used for tracking and managing the efficiency of site assets, light equipment and haul vehicles. Coupled with VisionLink version 2.10, the low-cost SNM451 provides project owners, fleet managers and equipment rental companies the critical information they need to more effectively allocate resources and improve the productivity of their mixed fleet. Also in the heavy civil construction market, we introduced a new Trimble PCS900 Paving Control System for GOMACO slip-form concrete pavers, which will be available through GOMACO in North America. The PCS900 system allows contractors to pave an accurate and consistent concrete surface with increased productivity and yield. We also announced expanded collaboration with Caterpillar to better serve global customers from project design through completion, with critical technologies and services focused on fleet management and site productivity across a contractor's entire equipment fleet, regardless of brand.
We released SketchUp 2014, a major enhancement to the world's most widely used 3D modeling software. The release includes expansion of the 3D Warehouse to enable users to view and orbit 3D models before importing them into their projects. To provide increased efficiency and interoperability with Building Information Modeling (BIM) workflows, SketchUp Pro 2014 includes functions for classification of objects and exports to industry-standard IFC 2x3 formats. We announced that AECOM, one of the world's largest providers of professional, technical and management support services for transportation, facilities, environment, energy, water and government, will deploy several solutions from Trimble's Design-Build-Operate (DBO) software portfolio to improve project workflows, increase visibility and accuracy while enhancing team collaboration for construction projects. AECOM will use a range of Trimble software solutions including SketchUp Pro, Tekla Structures, Vico Office, WinEst, Modelogix, Prolog, Quantm, Plancal Nova, Trimble AutoBid Mechanical and Trimble Accubid Enterprise Estimating. The software packages provide 3D design, building information modeling, virtual construction, estimation, cost modeling, project management, alignment planning and integrated CAD/BIM computations. We also announced that BSF Swissphoto, a Swiss-German company providing a comprehensive portfolio of geodata service in Europe, Africa and the Americas, deployed the Trimble AX60 airborne LiDAR system in its fixed-wing aircraft and helicopters. The AX60 provides data collection capabilities at high altitudes with consistent point distribution in mountainous and topographically challenging areas. BSF Swissphoto will use the system as part of its geodata services portfolio for various wide area and corridor mapping applications. Our continued execution of our global SITECH distribution strategy resulted in establishing a new SITECH Technology Dealer in Poland. Field Solutions Segment
We added the Trimble UX5 unmanned aircraft system (UAS) to our portfolio for the Agriculture solutions portfolio. When used for aerial imaging and mapping, the UX5 enables service providers to capture aerial images for scouting and monitoring crop health, and detecting pests, weeds and nitrogen deficiencies. The system can locate cattle and their available forage over large areas, measure crop height and generate topographic maps and models for land leveling and drainage applications.
Mobile Solutions segment
We extended our capabilities in the forestry market with the introduction of the next generation Enterprise Forest Management software solution. The solution provides a platform for managing asset inventory as well as developing short- and long-term strategic and operational plans. As part of Trimble's Connected Forest solutions, Trimble's Enterprise Forest Management software can help organizations analyze options and priorities, optimally allocate resources, track progress and roll information up to a management level. We also announced that Hindustan Petroleum Corporation Limited (HPCL) will deploy the Trimble trako Fleet Management and Visual Cargo™ consignment management solutions in their outbound logistics fleet that transports finished products to locations across India. HPCL markets its petroleum products through its retail pumps as well as terminals and depots across India. Advanced Devices segment
We announced that our ThingMagic® Micro and Micro-LTE UHF RFID modules now operate within the recently ratified 920 MHz ultra-high frequency (UHF) standard in Japan, an example of our continuing focus to provide solutions for specific markets and needs.


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RECENT BUSINESS DEVELOPMENTS
The following companies or business assets were acquired during the fifteen months ended April 4, 2014 and are combined in our results of operations since the date of acquisition:
Field3D
On March 10, 2014, we acquired SVS Innovations' (SVSi) construction software business and its advanced Field3D mobile technology of Tampere, Finland. Field3D is an easy-to-use 3D collaboration software solution for BIM that works on mobile devices, enabling stakeholders in a construction workflow to access complete 3D model information for an entire building on smartphones and tablets. Field3D's performance is reported under our Engineering and Construction business segment.
GeoDesy Kft
On February 24, 2014, we acquired the assets of privately-held GeoDesy and GeoDesy Free Space Optics (FSO) of Budapest, Hungary. GeoDesy is a European engineering and development company focused on delivering accessories for the geomatics, surveying, mapping and construction industries. GeoDesy Kft's performance is reported under our Engineering and Construction business segment. IQ Irrigation Assets
On August 30, 2013, we acquired the assets of privately-held IQ Irrigation of Christchurch, New Zealand. IQ Irrigation is a provider of a hardware and software solution for controlling linear and pivot irrigation systems. IQ Irrigation's performance is reported under our Field Solutions business segment. RainWave and Hydro-Engineering
On August 23, 2013, we acquired the assets of privately-held RainWave, LLC and Hydro-Engineering Solutions, LLC of Auburn, Alabama. RainWave provides precipitation monitoring services for agribusinesses, construction and engineering, government and consumer industries. Hydro-Engineering Solutions is a civil engineering company that specializes in hydrology and hydraulics. RainWave and Hydro-Engineering's performance is reported under our Field Solutions business segment.
Actronic Holdings Limited
On June 5, 2013, we acquired privately-held Actronic Holdings Limited of Auckland, New Zealand. Actronic Technologies is a provider of weighing technology and payload information systems for construction, aggregates, mining and waste markets. Actronic Holdings' performance is reported under our Engineering and Construction business segment. Trade Service Company, LLC
On May 31, 2013, we acquired privately-held Trade Service Company, LLC based in San Diego, California. Trade Service is a provider in content acquisition, aggregation, management, publishing and distribution of product and pricing information used by manufacturers, distributors and contractors in the Architecture, Engineering, and Construction (AEC) industry. Trade Service's performance is reported under our Engineering and Construction business segment. Penmap Software
On January 11, 2013, we acquired a suite of software solutions from Penmap.com Ltd. of Bradford, United Kingdom. Penmap.com's solutions include both office and field data collection software specifically designed for the cadastral and surveying markets. Penmap Software's performance is reported under our Engineering and Construction business segment. Seasonality of Business
* Our individual segment revenue may be affected by seasonal buying patterns. Historically, the second fiscal quarter has been the strongest quarter for the Company driven by the construction buying season. However, as a result of diversification of our business into software and subscription revenue, we may experience less seasonality in the future.

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.


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                           First Quarter of
                          2014          2013
(Dollars in thousands)
Revenue:
Product                $ 442,569     $ 412,787
Service                   93,319        81,596
Subscription              68,833        61,728
Total revenue            604,721       556,111
Gross margin           $ 326,892     $ 286,914
Gross margin %              54.1 %        51.6 %
Operating income       $  75,711     $  56,457
Operating income %          12.5 %        10.2 %

Revenue
In the first quarter of fiscal 2014, total revenue increased by $48.6 million or 9%, as compared to the first quarter of fiscal 2013. Of this increase, product revenue increased $29.8 million or 7%, service revenue increased $11.7 million or 14%, and subscription revenue increased $7.1 million or 12%.
The product, service, and subscription revenue increases were driven primarily by growth across Engineering and Construction, and to a lesser extent, Mobile Solutions and Advanced Devices. The growth included organic growth as well as the impact of the acquisitions which were not applicable in the prior period. The product revenue growth was partially offset by a decrease in Field Solutions revenue primarily due to softness in agriculture markets. 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 first quarter of fiscal 2014 increased $42.4 million or 16%, Mobile Solutions increased $8.5 million or 8%, and Advanced Devices increased $7.1 million or 22%, partially offset by a decrease in Field Solutions of $9.3 million or 6%, as compared to the first quarter of fiscal 2013.
Revenue growth within Engineering and Construction was driven by growth due to global sales of building construction, heavy civil and survey products, in both the U.S. and Europe. Mobile Solutions increased due to growth in the transportation and logistics market. Advanced Devices revenue increased primarily due to stronger sales of Applanix product solutions. Field Solutions revenue decreased primarily due to softness in agriculture markets. 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 $40.0 million for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. The increase was primarily due to increased sales and gross margin expansion in Engineering and Construction and to a lesser extent in Mobile Solutions. Gross margin as a percentage of total revenue for the first quarter of fiscal 2014 was 54.1%, as compared to 51.6% for the first quarter of fiscal 2013. The increase was primarily due to an increase in sales of higher margin products, primarily software, maintenance, and subscription revenue, primarily due to organic growth, particularly in Engineering and Construction and to a lesser extent, in Mobile Solutions. Operating Income
Operating income increased by $19.3 million for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. Operating income as a percentage of total revenue was 12.5% for the first quarter of fiscal 2014, as compared to 10.2% for the first quarter of fiscal 2013.
The increase in operating income in the first quarter was primarily driven by higher revenue and gross margin expansion, partially offset by an increase in operating expenses. The increase in operating income percentage was primarily driven by higher margin software, maintenance, and subscription revenue, particularly in Engineering and Construction. Results by Segment


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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 equals net revenue less cost of sales and operating expense, excluding general corporate expense, amortization of purchased intangible assets, amortization of inventory step-up charges, acquisition costs and restructuring costs. Operating leverage is defined as an increase in operating income as a percentage of the increase in revenue.
The following table is a summary of revenue and operating income by segment:

                                                     First Quarter of
                                                    2014          2013
(Dollars in thousands)
Engineering and Construction
Revenue                                          $ 309,276     $ 266,871
Segment revenue as a percent of total revenue           51 %          48 %
Operating income                                 $  57,515     $  42,973
Operating income as a percent of segment revenue        19 %          16 %
Field Solutions
Revenue                                          $ 138,165     $ 147,481
Segment revenue as a percent of total revenue           23 %          27 %
Operating income                                 $  52,937     $  59,526
Operating income as a percent of segment revenue        38 %          40 %
Mobile Solutions
Revenue                                          $ 118,628     $ 110,164
Segment revenue as a percent of total revenue           20 %          20 %
Operating income                                 $  16,170        11,573
Operating income as a percent of segment revenue        14 %          11 %
Advanced Devices
Revenue                                          $  38,652     $  31,595
Segment revenue as a percent of total revenue            6 %           5 %
Operating income                                 $  11,676     $   6,485
Operating income as a percent of segment revenue        30 %          21 %

A reconciliation of our consolidated segment operating income to consolidated income before taxes follows:

                                                First Quarter of
                                               2014          2013
(Dollars in thousands)
Consolidated segment operating income       $ 138,298     $ 120,557
Unallocated corporate expense                 (20,622 )     (21,350 )
Amortization of purchased intangible assets   (40,569 )     (39,332 )
Acquisition costs                              (1,396 )      (3,418 )
Consolidated operating income                  75,711        56,457
Non-operating income (loss), net               12,764        (2,088 )
Consolidated income before taxes            $  88,475     $  54,369

Unallocated corporate expense includes general corporate expense, amortization of inventory step-up charges and restructuring costs. Engineering and Construction


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Engineering and Construction revenue increased by $42.4 million or 16% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. Segment operating income increased $14.5 million or 34% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013.
Revenue growth for the first quarter of fiscal 2014 was driven by continued organic growth due to global sales of building construction, heavy civil and survey products primarily in the U.S. and Europe, as well as growth from acquisitions. The primary drivers were increased market penetration due to continuing adoption of our products, particularly in the construction industry as technology is playing a broader role. For example, our newer product solutions, that cover both civil and building construction, integrate both hardware and software across an entire work flow. There was also continued improvement in the residential and commercial construction markets. Segment operating income increased primarily due to higher revenue and product mix, including higher software, maintenance and subscription revenue. Field Solutions
Field Solutions revenue decreased by $9.3 million or 6% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. Segment operating income decreased by $6.6 million or 11% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013.
Field Solution revenue decreased for the first quarter of fiscal 2014, primarily due to softness in agriculture markets. Harsh weather conditions in the first quarter of the year, particularly in North America, among other factors, including channel execution challenges, contributed to slower than anticipated agriculture sales. North American weather conditions for the second year in a row included drought conditions in the West and extremely wet condition in much of the East, which kept farmers out of the field for much of what is usually a high activity period. Segment operating income decreased due to reduced operating leverage in our agriculture business. The agriculture decrease was partially offset by an increase in Geographic Information System (GIS) sales. Mobile Solutions
Mobile Solutions revenue increased by $8.5 million or 8% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. Segment operating income increased by $4.6 million or 40% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. Mobile Solutions revenue increased for the first quarter of fiscal 2014, primarily due to continued organic growth in the transportation and logistics market, which focuses on enterprise solutions. The majority of the sales are in the U.S., however there is continuing focus on geographic expansion. Operating income increased due to increased revenue and product mix, including higher software, maintenance and subscription revenue. Advanced Devices
Advanced Devices revenue increased by $7.1 million or 22% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013. Segment operating income increased by $5.2 million or 80% for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013.
The increase in revenue and operating income for the first quarter of fiscal 2014 was due to increased sales of timing, embedded and inertial/GNSS positioning and orientation systems.
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:


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                             First Quarter of
                             2014        2013
(Dollars in thousands)
Research and development    76,376      73,608
Percentage of revenue           13 %        13 %
Sales and marketing         97,354      83,623
Percentage of revenue           16 %        15 %
General and administrative  57,433      51,970
Percentage of revenue            9 %        10 %
Total                      231,163     209,201
Percentage of revenue           38 %        38 %

Overall, R&D, S&M and G&A expense increased by approximately $22.0 million for the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013.
Research and development expense increased by $2.8 million for the first quarter of fiscal 2014, as compared to the corresponding period of fiscal 2013. Research and development spending overall was at approximately 13% of revenue in both the first quarter of fiscal 2014 and 2013. The cost of software developed for external sale subsequent to reaching technical feasibility was not material and was expensed as incurred.
The increase in R&D expense in the first quarter of fiscal 2014, as compared to the corresponding period of fiscal 2013 was primarily due to the inclusion of expense of $2.6 million from acquisitions not applicable in the prior corresponding period, a $4.3 million increase in compensation related expense due to headcount increases, partially offset by $4.0 million increase in cost reimbursement from joint ventures.
* We believe that the development and introduction of new products are critical to our future success and we expect to continue active development of new products. Sales and marketing expense increased by $13.7 million for the first quarter of fiscal 2014, as compared to the corresponding period of fiscal 2013. Sales and marketing spending overall was at approximately 16% of revenue in the first quarter of fiscal 2014, as compared to 15% of revenue in the first quarter of fiscal 2013. The increase in Sales and marketing expense in the first quarter of fiscal 2014, as compared to the corresponding period of fiscal 2013 was primarily due to a $4.5 million increase in travel/marketing cost due to two global dealer meetings, a $4.4 million increase in compensation related expense, $3.1 million of expense from acquisitions not applicable in the prior period, and a $1.7 million increase in other expense.
* Our future growth will depend in part on the timely development and continued viability of the markets in which we currently compete, as well as our ability to continue to identify and develop new markets for our products. General and administrative expense increased by $5.5 million for the first quarter of fiscal 2014, as compared to the corresponding period of fiscal 2013. General and administrative spending overall was at approximately 9% of revenue in the first quarter of fiscal 2014, as compared to 10% of revenue in the first quarter of fiscal 2013. The increase in G&A expenses in the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013 was primarily due to a $3.2 million increase in compensation related expense, $2.4 million of expense from acquisitions not applicable in the first quarter of fiscal 2013, a $0.6 million increase in bad debt expense and a $1.3 million increase in other expense, partially offset by a $2.0 million decrease in merger and acquisition costs. Amortization of Purchased Intangible Assets Amortization of purchased intangible assets was $40.6 million in the first quarter of fiscal 2014, as compared to $39.3 million in the first quarter of fiscal 2013. Of the total $40.6 million in the first quarter of fiscal 2014, $19.7 million is presented as a separate line within Operating expense and $20.9 million is presented as a separate line within Cost of sales on our Condensed Consolidated Statements of Income. The increase was due to acquisitions not included in the first quarter of fiscal 2013, partially offset by the expiration of amortization for prior acquisitions. As of the first quarter of fiscal 2014, future amortization of intangible assets is expected to be $111.3 million during the remaining three quarters of fiscal 2014, $139.4 million during 2015, $120.6 million during 2016, $98.8 million during 2017, $68.5 million during 2018 and $44.5 million thereafter. . . .

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