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
17
--------------------------------------------------------------------------------
Table of Contents
RECENT ACCOUNTING PRONOUNCEMENTS For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 2 of the Notes to our Condensed Consolidated Financial Statements in Item 1, which is incorporated herein by reference. EXECUTIVE LEVEL OVERVIEW Trimble began operations in 1978 and was originally incorporated inCalifornia asTrimble Navigation Limited in 1981. OnOctober 1, 2016 ,Trimble Navigation Limited changed its name toTrimble Inc. and changed its state of incorporation from theState of California to theState of Delaware . Trimble is a leading provider of technology solutions that enable professionals and field mobile workers to improve or transform their work processes. Our comprehensive work process solutions are used across a range of industries including agriculture, architecture, civil engineering, survey and land administration, construction, geospatial, government, natural resources, transportation, and utilities.Representative Trimble customers include engineering and construction firms, contractors, owners, surveying companies, farmers and agricultural companies, trucking companies, energy, 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" that is at the center of our "Connected Construction " solutions, which provides real-time, connected, and cohesive information environments for the design, build, and operational phases of construction projects. In agriculture, we continue to develop "Connected Farm " solutions to optimize operations across the agriculture workflow. In long haul trucking, 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 that 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 attractive 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 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 approximately 15% of revenue over the past two years on R&D and currently have over 1,200 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 opportunities where the potential for technological change is high and that have a requirement for the integration of multiple technologies into complete vertical solutions. • Increasing focus on software and subscription offerings - Software and subscription services are increasingly important elements of our solutions and are core to our growth strategy. Trimble has an open application programming interface philosophy and open vendor environment, which leads to increased adoption of our software and subscription offerings. We believe that increased recurring revenue from these solutions will provide us with enhanced business visibility over time. Professional services constitute an additional growth channel that helps our customers integrate and optimize the use of our offerings in their environment. • 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 over 40 countries and distribution channels over 85 countries. • Optimized go to market strategies to best access our markets - We utilize vertically focused distribution channels that leverage domain expertise to best serve the needs of individual markets both domestically and abroad. These channel capabilities include independent dealers, joint ventures, original equipment manufacturers ("OEM"), and sales and distribution alliances with key partners, such as CNH Global, Caterpillar, and Nikon, as well as direct sales to end-users. This provides 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 domain expertise, technology, products, or distribution capabilities that augment 18
--------------------------------------------------------------------------------
Table of Contents
our portfolio and allow us to penetrate existing markets more effectively, or to establish a market beachhead. Our 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 subscription growth is driving increased recurring revenue and 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. We continue to experience a shift in revenue towards a more significant mix of software, recurring revenue, and services,which represented 58% of first quarter revenue. Additionally, our recurring revenue, which consists of software maintenance and subscription revenue, was up 7% year-over-year. During the first quarter of fiscal 2020, we acquired privately held Kuebix, a leading transportation management system provider and creator ofNorth America's largest connected shipping community. This acquisition will enable us to bring together our network of private fleet and commercial carrier customers, which collectively represent more than 1.3 million commercial trucks inNorth America , with Kuebix's extensive community of more than 21,000 shipping companies, creating a new platform for planning, execution and, freight demand-capacity matching. COVID-19 UPDATE In earlyMarch 2020 , a novel coronavirus disease ("COVID-19") was characterized as a pandemic by theWorld Health Organization . COVID-19 has spread rapidly, with most countries and territories worldwide experiencing confirmed cases of COVID-19, and a high concentration of cases inthe United States and many other countries in which we operate. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus such as travel bans and restrictions, quarantines, shelter-in-place orders, and business shutdowns. As the COVID-19 pandemic unfolded globally, we moved quickly to transition all our employees to safe working conditions to ensure that our employees have the flexibility and resources they need to stay safe and healthy. Most of our employee base is currently working remotely and for those who perform essential services on-site, we have implemented measures to insure a safe and secure working environment based upon health authority guidance. To support our customers, we are continuing to provide the high standard of products and services they expect. Additionally, our Trimble charitable organization and employees are helping to support our local communities. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers, or third-party business partners conduct business. During the first two months of 2020, while COVID-19 was primarily limited to specific countries inAsia andEurope , overall we continued to see growth. During the second half of March, the contraction of the global economy resulted in a decline in sales. We expect our hardware and associated software revenue will be impacted in the second quarter and the rest of the year by economic disruptions related to COVID-19. In addition, we expect that our Geospatial segment will continue to be impacted by oil and gas markets. Our recurring revenue, including software maintenance and subscription, is expected to remain relatively stable. Operating income was relatively strong for the quarter, however we expect that operating income in the second quarter and the rest of the year will be impacted by revenue and gross margin shortfalls. In addition to travel and other natural reductions in spending from COVID-19 restrictions, we have actively implemented cost reductions, all of which are expected to partially offset revenue and gross margin shortfalls. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition. See "Risk Factors" below for further discussion of the possible impact of the COVID-19 pandemic on our business. 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: 19
--------------------------------------------------------------------------------
Table of Contents First Quarter of 2020 2019 (In millions) Revenue: Product$ 463.8 $ 488.4 Service 162.4 159.2 Subscription 166.1 154.0 Total revenue$ 792.3 $ 801.6 Gross margin$ 441.0 $ 438.3 Gross margin as a % of revenue 55.7 % 54.7 % Operating income$ 98.3 $ 86.3 Operating income as a % of revenue 12.4 % 10.8 % Diluted earnings per share$ 0.25 $ 0.25 Total non-GAAP revenue *$ 794.0 $ 804.5 Non-GAAP operating income *$ 161.2 $ 155.7
Non-GAAP operating income as a % of Non-GAAP Revenue* 20.3 % 19.4 % Non-GAAP diluted earnings per share *
$ 0.49 $ 0.45 * See SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES for a reconciliation of our GAAP results to our non-GAAP measures. Revenue Total revenue decreased$9.3 million or 1% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, due to declines in Geospatial and Transportation, partially offset by organic growth and acquisition revenue in Resources and Utilities and to a lesser extent, Buildings and Infrastructure organic growth. By revenue category, product revenue decreased$24.6 million or 5%, service revenue increased$3.2 million or 2%, and subscription revenue increased$12.1 million or 8% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Product revenue decreased primarily due to weakness in our Geospatial and Transportation hardware sales. Service and subscription revenue increased primarily due to organic growth in Buildings and Infrastructure and organic growth and acquisition revenue in Resources and Utilities. Gross Margin Gross margin varies due to a combination of factors including product mix, pricing, and customer mix, including distribution partners and end user sales. Gross margin increased by$2.7 million for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, primarily due to Geospatial product mix and Resources and Utilities revenue growth and product mix, partially offset by Transportation revenue declines. Gross margin as a percentage of total revenue was 55.7% for the first quarter of fiscal 2020, compared to 54.7% for the corresponding period in fiscal 2019, driven by increased higher margin software sales in Geospatial and Resources and Utilities. 20
--------------------------------------------------------------------------------
Table of Contents
Operating Income Operating income increased by$12.0 million for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, due to strong operating results in Resources and Utilities and favorable Corporate expense. This operating income increase was partially offset by Transportation revenue declines. Operating income as a percentage of total revenue was 12.4% for the first quarter of fiscal 2020, compared to 10.8% for the corresponding period in fiscal 2019, due to the same factors described in the preceding paragraph. Research and Development, Sales and Marketing, and General and Administrative Expense Research and development (R&D), sales and marketing (S&M), and general and administrative (G&A) expense are summarized in the following table: First Quarter of 2020 2019 (In millions) Research and development$ 118.2 $ 118.2 Percentage of revenue 14.9 % 14.7 % Sales and marketing$ 131.7 $ 127.4 Percentage of revenue 16.6 % 15.9 % General and administrative$ 73.0 $ 82.8 Percentage of revenue 9.2 % 10.3 % Total$ 322.9 $ 328.4 Overall, R&D, S&M, and G &A expenses decreased by$5.5 million or 2% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Research and development expense remained flat for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Research and development expenses from the Cityworks and Kuebix acquisitions were not applicable in the prior year and were wholly offset by lower consulting fees and favorable foreign currency impacts. Overall, research and development expense was 14.9% of revenue in the first quarter of fiscal 2020, compared to 14.7% in the corresponding period in fiscal 2019. We believe that the development and introduction of new solutions are critical to our future success, and we expect to continue active development of new products. Sales and marketing expense increased by$4.3 million or 3% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. The increase was due to the Cityworks and Kuebix acquisitions not applicable in the prior year, partially offset by travel reductions and favorable foreign currency impacts. Overall, spending for sales and marketing was 16.6% of revenue in the first quarter of fiscal 2020, respectively, compared to 15.9% in the corresponding period in fiscal 2019. General and administrative expense decreased by$9.8 million or 12% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. The expense decrease was due to lower compensation expense, primarily incentive compensation plans and, to a lesser extent, favorable foreign currency impacts. Overall, general and administrative spending was 9.2% of revenue in the first quarter of fiscal 2020, compared to 10.3% in the corresponding period in fiscal 2019. 21
--------------------------------------------------------------------------------
Table of Contents
Amortization of Purchased Intangible Assets
First Quarter of 2020 2019 (In millions) Cost of sales$ 23.5 $ 24.2 Operating expenses 16.9 20.1
Total amortization expense of purchased intangibles
Total amortization expense of purchased intangibles represented 5% of revenue in the first quarter of fiscal 2020, compared to 6% in the corresponding period in fiscal 2019. The expense for the first quarter of fiscal 2020 was lower as compared to the corresponding period in fiscal 2019 due to the expiration of prior acquisitions' amortization. Non-operating Expense, Net The components of Non-operating expense, net, were as follows: First Quarter of 2020 2019 (In millions) Interest expense, net$ (20.5 ) $ (21.9 )
Income from equity method investments, net 9.4 8.8 Other income (expense), net
(7.8 ) 2.0 Total non-operating expense, net$ (18.9 ) $ (11.1 )
Non-operating expense, net increased by
22
--------------------------------------------------------------------------------
Table of Contents
Income Tax Provision Our effective income tax rate for the first quarter of fiscal 2020 was 22%, as compared to 17% in the corresponding period in fiscal 2019. The increase was primarily due to geographic income mix and a lower tax benefit from stock-based compensation deductions. Results by Segment We report our financial performance, including revenue and operating income, based on four reportable segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation. Our Chief Executive Officer (chief operating decision maker) views and evaluates operations based on the results of our reportable operating segments under our management reporting system. For additional discussion of our segments, see Note 6 of the Notes to the Condensed Consolidated Financial Statements. The following table is a summary of revenue and operating income by segment: First Quarter of 2020 2019 (In millions) Buildings and Infrastructure Segment revenue$ 296.9 $ 294.7 Segment revenue as a percent of total revenue 37 % 37 % Segment operating income$ 60.8 $ 62.5
Segment operating income as a percent of segment revenue 20.5 % 21.2 % Geospatial Segment revenue
$ 146.2 $ 161.2 Segment revenue as a percent of total revenue 18 % 20 % Segment operating income$ 30.5 $ 29.4
Segment operating income as a percent of segment revenue 20.9 % 18.2 % Resources and Utilities Segment revenue
$ 180.3 $ 159.5 Segment revenue as a percent of total revenue 23 % 20 % Segment operating income$ 66.9 $ 51.1
Segment operating income as a percent of segment revenue 37.1 % 32.0 % Transportation Segment revenue
$ 170.6 $ 189.1 Segment revenue as a percent of total revenue 21 % 23 % Segment operating income$ 16.9 $ 31.2
Segment operating income as a percent of segment revenue 9.9 % 16.5 %
23
--------------------------------------------------------------------------------
Table of Contents
The following table is a reconciliation of our consolidated segment operating income to consolidated income before taxes:
First Quarter of 2020 2019 (In millions) Consolidated segment operating income$ 175.1 $ 174.2 Unallocated corporate expense (13.9 ) (18.5 ) Restructuring charges (3.2 ) (3.7 ) COVID-19 expenses (3.8 ) - Acquired deferred revenue adjustment (1.7 ) (2.9 ) Amortization of purchased intangible assets (40.4 ) (44.3 )
Stock-based compensation and deferred compensation (4.5 ) (19.1 ) Amortization of acquired capitalized commissions 1.5 1.7 Acquisition / divestiture items
(10.8 ) (1.1 ) Consolidated operating income 98.3 86.3 Non-operating expense, net (18.9 ) (11.1 ) Consolidated income before taxes$ 79.4 $ 75.2 Buildings and Infrastructure Buildings and Infrastructure revenue increased by$2.2 million or 1% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Segment operating income decreased$1.7 million or 3% for the first quarter of fiscal 2020, respectively, compared to the corresponding period in fiscal 2019. For the first quarter of fiscal 2020, revenue increased due to continued strength in services, primarily software maintenance and subscription revenue. Civil engineering and construction experienced growth in service and subscription revenue, and Viewpoint experienced subscription revenue growth as well. Despite a slight revenue increase, segment operating income decreased slightly for the first quarter of fiscal 2020 due to increased trade show costs. Geospatial Geospatial revenue decreased$15.0 million or 9% for the first quarter of fiscal 2020, respectively, compared to the corresponding period in fiscal 2019. Segment operating income increased by$1.1 million or 4% for the first quarter of fiscal 2020, respectively, compared to the corresponding period in fiscal 2019. For the first quarter of fiscal 2020, revenue decreased mainly due to weakness in geospatial survey sales from weak macroeconomic conditions including weakness in oil and gas markets as well as COVID-19 impacts. Despite the revenue shortfall, segment operating income increased for the first quarter of fiscal 2020 primarily due to higher margin software survey sales and strong cost control. Resources and Utilities Resources and Utilities revenue increased$20.8 million or 13% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Segment operating income increased by$15.8 million or 31% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. For the first quarter of fiscal 2020, revenue increased mainly due to relative strength in agriculture, particularly inEurope andLatin America , as well as growth in positioning services. Acquisitions, including Cityworks, also contributed. Segment operating income increased for the first quarter of fiscal 2020 primarily due to revenue and gross margin expansion and strong cost control. 24
--------------------------------------------------------------------------------
Table of Contents
Transportation
Transportation revenue decreased by$18.5 million or 10% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Segment operating income decreased$14.3 million or 46% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. For the first quarter of fiscal 2020, revenue decreased primarily due to reduced hardware upgrades and subscriber declines, attributable in part due to challenges with the ELD transition, as well as COVID-19 impacts. Segment operating income decreased for the first quarter of fiscal 2020, primarily due to the revenue shortfall, as well as higher operating expense primarily from the Kuebix acquisition. OFF-BALANCE SHEET FINANCINGS AND LIABILITIES Other than inventory purchases and other commitments incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities. In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers, lessors, and parties to other transactions with us, with respect to certain matters. We may agree to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In connection with divesting some of our businesses or assets, we may also indemnify purchasers for certain matters in the normal course of business, such as breaches of representations, covenants, or excluded liabilities. In addition, we entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements were not material and no liabilities have been recorded for these obligations on the Condensed Consolidated Balance Sheets as of the end of the first quarter of fiscal 2020 and fiscal year end 2019. 25
--------------------------------------------------------------------------------
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
First Quarter of Fiscal Year End As of 2020 2019 (In millions, except percentages) Cash and cash equivalents $ 216.8 $ 189.2 As a percentage of total assets 3.2 % 2.8 % Principal balance of outstanding debt$ 1,985.7 $ 1,854.0 First Quarter of 2020 2019 (In millions) Cash provided by operating activities $ 155.7 $ 147.6 Cash used in investing activities (214.4 ) (9.6 ) Cash provided by (used in) financing activities 99.6 (94.3 ) Effect of exchange rate changes on cash and cash equivalents (13.3 ) 0.5 Net increase in cash and cash equivalents $ 27.6 $ 44.2
Cash and Cash Equivalents and Short-Term Investments
As of the end of the first quarter of fiscal 2020, cash and cash equivalents
totaled
We have considered the effects of the current environment, and we believe that our cash and cash equivalents and borrowings, as described below under the heading "Debt", along with cash provided by operations will be sufficient to meet our anticipated operating cash needs, debt service, any stock repurchases under the stock repurchase program, and planned capital expenditures in the next twelve months. Operating Activities Cash provided by operating activities was$155.7 million for the first quarter of fiscal 2020, compared to$147.6 million for the first quarter of fiscal 2019. The increase of$8.1 million was primarily driven by an increase in net income as adjusted for non-cash items, a decrease in accounts receivable, a decrease in accrued compensation and benefits, partially offset by an increase in deferred revenue compared with the first quarter of fiscal 2019. Investing Activities Cash used in investing activities was$214.4 million for the first quarter of fiscal 2020, compared to$9.6 million for the first quarter of fiscal 2019. The increase of cash used in investing activities of$204.8 million was primarily due to the Kuebix acquisition. Financing Activities Cash provided by financing activities was$99.6 million for the first quarter of fiscal 2020, compared to cash used in financing activities of$94.3 million for the first quarter of fiscal 2019. The increase in cash flows from financing activities of$193.9 million was primarily driven by the increase in debt proceeds, net of repayment. Debt During the first quarter of fiscal 2020, net debt proceeds were$137.3 million . Each of our debt agreements requires us to maintain compliance with certain debt covenants, all of which we were in compliance with at the end of the first quarter of fiscal 2020. OnMay 4, 2020 , the Company entered into a loan modification with JP Morgan Chase andBank of America , along with certain other institutional lenders, to extend the maturity date of the remaining term loan amount of$225.0 million toJuly 2, 2022 . Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for more information regarding our debt. SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES To supplement our condensed consolidated financial information, we believe that the following information is helpful to an overall understanding of our past financial performance and prospects for the future. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. The non-GAAP financial measures and detailed explanations to the adjustments to comparable GAAP measures are below. First Quarter 2020 2019 Dollar % of Dollar % of (In millions, except per share amounts) Amount Revenue Amount Revenue
REVENUE:
GAAP revenue:$ 792.3 $ 801.6 Acquired deferred revenue adjustment (A) 1.7 2.9 Non-GAAP Revenue:$ 794.0 $ 804.5 GROSS MARGIN: GAAP gross margin:$ 441.0 55.7 %$ 438.3 54.7 % Acquired deferred revenue adjustment (A) 1.7 2.9 Restructuring charges (B) 0.3 0.2 Amortization of purchased intangible assets (D) 23.5 24.2 Stock-based compensation and deferred compensation (E) 0.7 1.4 Acquisition / divestiture items (F) 1.7 - Non-GAAP gross margin:$ 468.9 59.1 %$ 467.0 58.0 % OPERATING EXPENSES: GAAP operating expenses:$ 342.7 43.3 %$ 352.0 43.9 % Restructuring charges (B) (2.9 ) (3.5 ) COVID-19 expenses (C) (3.8 ) - Amortization of purchased intangible assets (D) (16.9 ) (20.1 ) Stock-based compensation and deferred compensation (E) (3.8 ) (17.7 ) Acquisition / divestiture items (F) (9.1 ) (1.1 ) Amortization of acquired capitalized commissions (G) 1.5$ 1.7 Non-GAAP operating expenses:$ 307.7 38.8 %$ 311.3 38.7 % OPERATING INCOME: GAAP operating income:$ 98.3 12.4 %$ 86.3 10.8 % Acquired deferred revenue adjustment (A) 1.7 2.9 Restructuring charges (B) 3.2 3.7 COVID-19 expenses (C) 3.8 - Amortization of purchased intangible assets (D) 40.4 44.3 Stock-based compensation and deferred compensation (E) 4.5 19.1 Acquisition / divestiture items (F) 10.8 1.1 Amortization of acquired capitalized commissions (G) (1.5 ) (1.7 ) Non-GAAP operating income:$ 161.2 20.3 %$ 155.7 19.4 % NON-OPERATING EXPENSE, NET: GAAP non-operating expense, net:$ (18.9 ) $ (11.1 ) Deferred compensation (E) 6.2 (2.8 ) Acquisition / divestiture items (F) - 0.3 Non-GAAP non-operating expense, net:$ (12.7 ) $ (13.6 ) GAAP and GAAP and Non-GAAP Non-GAAP Tax Rate % Tax Rate % ( J ) ( J ) INCOME TAX PROVISION: GAAP income tax provision:$ 17.5 22.0 %$ 12.8 17.0 % Non-GAAP items tax effected (H) 15.2 11.4 Difference in GAAP and Non-GAAP tax rate (I) (6.7 ) 4.3 Non-GAAP income tax provision:$ 26.0 17.5 %$ 28.5 20.0 % NET INCOME: GAAP net income attributable to Trimble Inc.:$ 61.9 $ 62.3 Acquired deferred revenue adjustment (A) 1.7 2.9 Restructuring charges (B) 3.2 3.7 COVID-19 expenses (C) 3.8 - Amortization of purchased intangible assets (D) 40.4 44.3 Stock-based compensation and deferred compensation (E) 10.7 16.3 Acquisition / divestiture items (F) 10.8 1.4 Amortization of acquired capitalized commissions (G) (1.5 ) (1.7 ) Non-GAAP tax adjustments (H)-(I) (8.5 ) (15.7 ) Non-GAAP net income attributable to Trimble Inc.:$ 122.5 $ 113.5 DILUTED NET INCOME PER SHARE: GAAP diluted net income per share attributable to Trimble Inc.:$ 0.25 $ 0.25 Acquired deferred revenue adjustment (A) 0.01 0.01 Restructuring charges (B) 0.01 0.02 COVID-19 expenses (C) 0.02 - Amortization of purchased intangible assets (D) 0.16 0.17 Stock-based compensation and deferred compensation (E) 0.04 0.06 Acquisition / divestiture items (F) 0.04 0.01 Amortization of acquired capitalized commissions (G) (0.01 ) (0.01 ) Non-GAAP tax adjustments (H)-(I) (0.03 ) (0.06 ) Non-GAAP diluted net income per share attributable to Trimble Inc.:$ 0.49 $ 0.45 ADJUSTED EBITDA: GAAP operating income:$ 98.3 $ 86.3 Acquired deferred revenue adjustment (A) 1.7 2.9 Restructuring charges (B) 3.2 3.7 COVID-19 expenses (C) 3.8 - Amortization of purchased intangible assets (D) 40.4 44.3 Stock-based compensation and deferred compensation (E) 4.5 19.1 Acquisition / divestiture items (F) 10.8 1.1 Amortization of acquired capitalized commissions (G) (1.5 ) (1.7 ) Non-GAAP operating income: 161.2 155.7 Depreciation expense 9.8 10.2 Income from equity method investments, net 9.4 8.8 Adjusted EBITDA$ 180.4 $ 174.7 Non-GAAP Revenue and Operating Income Results Non-GAAP revenue decreased by$10.5 million or 1% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, due to Geospatial and Transportation declines from market weakness including COVID-19 impacts, partially offset by Resources and Utilities, both organic growth and acquisition revenue, and to a lesser extent, Buildings and Infrastructure organic growth. Non-GAAP operating income increased by$5.5 million or 4% for the first quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, due to strong operating results in Resources and Utilities and favorable Corporate expense, partially offset by Transportation revenue declines. Despite Geospatial's revenue shortfall, segment operating income increased primarily due to higher margin software survey sales and strong cost control. Non-GAAP Explanations Non-GAAP revenue We believe this measure helps investors understand the performance of our business as non-GAAP revenue excludes the effects of certain acquired deferred revenue that was written down to fair value in purchase accounting. Management believes that excluding fair value purchase accounting adjustments more closely correlates with the ordinary and ongoing course of the acquired company's operations and facilitates analysis of revenue growth and business trends. Non-GAAP gross margin We believe our investors benefit by understanding our non-GAAP gross margin as a way of understanding how product mix, pricing decisions, and manufacturing costs influence our business. Non-GAAP gross margin excludes the effects of acquired deferred revenue that was written down to fair value in purchase accounting, restructuring charges, amortization of purchased intangible assets, stock-based compensation, deferred compensation, and acquisition/divestiture items associated with the acceleration of acquisition stock options from GAAP gross margin. We believe that these adjustments offer investors additional information that may be useful to view trends in our gross margin performance. Non-GAAP operating expenses We believe this measure is important to investors evaluating our non-GAAP spending in relation to revenue. Non-GAAP operating expenses exclude restructuring charges, COVID-19 expenses, amortization of purchased intangible assets, stock-based compensation, deferred compensation, and acquisition/divestiture items associated with external and incremental costs resulting directly from merger and acquisition activities such as: legal, due diligence, integration, and other costs including the acceleration of acquisition stock options, adjustment to the fair value of earn-out liabilities, and the effects of certain acquired capitalized commissions that were eliminated in purchase accounting from GAAP operating expenses. We believe that these adjustments offer investors supplemental information to facilitate comparison of our operating expenses to our prior results. Non-GAAP operating income We believe our investors benefit by understanding our non-GAAP operating income trends, which are driven by revenue, gross margin, and spending. Non-GAAP operating income excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, COVID-19 expenses, amortization of purchased intangible assets, stock-based compensation, deferred compensation, and acquisition/divestiture items from GAAP operating income. We believe that these adjustments offer an alternative means for our investors to evaluate current operating performance compared to results of other periods. Non-GAAP non-operating expense, net We believe this measure helps investors evaluate our non-operating income trends. Non-GAAP non-operating expense, net, excludes deferred compensation, acquisition/divestiture gains/losses associated with unusual acquisition related items such as intangible asset impairment charges, gains or losses related to the acquisitions or sale of certain businesses and investments. We believe that these exclusions provide investors with a supplemental view of our ongoing financial results. Non-GAAP income tax provision We believe that providing investors with the non-GAAP income tax provision is beneficial because it provides for consistent treatment of the excluded items in our non-GAAP presentation. Non-GAAP net income This measure provides a supplemental view of net income trends, which are driven by non-GAAP income before taxes and our non-GAAP tax rate. Non-GAAP net income excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, COVID-19 expenses, amortization of purchased intangible assets, stock-based compensation, deferred compensation, acquisition/divestiture items, and non-GAAP tax adjustments from GAAP net income. We believe our investors benefit from understanding these adjustments and from an alternative view of our net income performance as compared to our past net income performance. Non-GAAP diluted net income per share We believe our investors benefit by understanding our non-GAAP operating performance as reflected in a per share calculation as a way of measuring non-GAAP operating performance by ownership in the company. Non-GAAP diluted net income per share excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, COVID-19 expenses, amortization of purchased intangible assets, stock-based compensation, deferred compensation, acquisition/divestiture items, and non-GAAP tax adjustments from GAAP diluted net income per share. We believe that these adjustments offer investors a useful view of our diluted net income per share as compared to our past diluted net income per share. Adjusted EBITDA We believe that adjusted EBITDA assists investors in comparing our performance over various reporting periods on a consistent basis. Adjusted EBITDA refers to non-GAAP operating income plus depreciation and income from equity method investments. We also believe the measure provides useful information to investors in understanding and evaluating our operating results in the same manner as our management and board of directors. These non-GAAP measures can be used to evaluate our historical and prospective financial performance, as well as our performance relative to competitors. We believe some of our investors track our "core operating performance" as a means of evaluating our performance in the ordinary, ongoing, and customary course of our operations. Core operating performance excludes items that are non-cash, not expected to recur, or not reflective of ongoing financial results. Management also believes that looking at our core operating performance provides a supplemental way to provide consistency in period-to-period comparisons. Accordingly, management excludes from non-GAAP those items relating to the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, COVID-19 expenses, amortization of purchased intangible assets, stock-based compensation, deferred compensation, acquisition/divestiture items, and non-GAAP tax adjustments. (A). Acquired deferred revenue adjustment. Purchase accounting generally requires us to write-down acquired deferred revenue to fair value. Our GAAP revenue includes the fair value impact from purchase accounting for post-contract support and subscriptions contracts assumed in connection with our acquisitions. The non-GAAP adjustment to our revenue is intended to reflect the full amount of such revenue. We believe this adjustment is useful to investors as a measure of the ongoing performance of our business and facilitates analysis of revenue growth and business trends. (B). Restructuring charges. Included in our GAAP presentation of cost of sales and operating expenses, restructuring charges recorded are primarily for employee compensation resulting from reductions in employee headcount in connection with our company restructurings. We exclude restructuring charges from our non-GAAP measures because we believe they do not reflect expected future operating expenses, they are not indicative of our core operating performance, and they are not meaningful in comparisons to our past operating performance. We have incurred restructuring expense in each of the periods presented. However the amount incurred can vary significantly based on whether a restructuring has occurred in the period and the timing of headcount reductions. (C). COVID-19 expenses. Included in our GAAP presentation of operating expenses, COVID-19 expenses consist of costs incurred as a direct impact from the COVID-19 virus pandemic, such as cancellation fees of trade shows due to public safety issues, additional costs for disinfecting facilities, personal protective equipment, and labor. We exclude COVID-19 expenses from our non-GAAP measures because we believe they are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance. (D). Amortization of purchased intangible assets. Included in our GAAP presentation of gross margin and operating expenses is amortization of purchased intangible assets.U.S. GAAP accounting requires that intangible assets are recorded at fair value and amortized over their useful lives. Consequently, the timing and size of our acquisitions will cause our operating results to vary from period to period, making a comparison to past performance difficult for investors. This accounting treatment may cause differences when comparing our results to companies that grow internally because the fair value assigned to the intangible assets acquired through acquisition may significantly exceed the equivalent expenses that a company may incur for similar efforts when performed internally. Furthermore, the useful life that we use to amortize our intangible assets over may be substantially different from the time period that an internal growth company incurs and recognizes such expenses. We believe that by excluding the amortization of purchased intangible assets, which primarily represents technology and/or customer relationships already developed, this provides an alternative way for investors to compare our operations pre-acquisition to those post-acquisition and to those of our competitors that have pursued internal growth strategies. However, we note that companies that grow internally will incur costs to develop intangible assets that will be expensed in the period incurred, which may make a direct comparison more difficult. (E). Stock-based compensation and deferred compensation. Included in our GAAP presentation of cost of sales and operating expenses are stock-based compensation consists of expenses for employee stock options and awards and purchase rights under our employee stock purchase plan. Additionally included in our GAAP presentation of cost of sales and operating expenses are income or expense associated with movement in our non-qualified deferred compensation plan liabilities. Changes in non-qualified deferred compensation plan assets, included in non-operating expense, net, offset the income or expense in the plan liabilities. We exclude them from our non-GAAP measures because some investors may view it as not reflective of our core operating performance as they are a non-cash item. (F). Acquisition / divestiture items. Included in our GAAP presentation of cost of sales and operating expenses, acquisition costs consist of external and incremental costs resulting directly from merger and acquisition and strategic investment activities such as legal, due diligence, integration, and other closing costs including the acceleration of acquisition stock options and adjustments to the fair value of earn-out liabilities. Included in our GAAP presentation of non-operating expense, net, acquisition/divestiture items includes unusual acquisition, investment, and/or divestiture gains/losses. Although we do numerous acquisitions, the costs that have been excluded from the non-GAAP measures are costs specific to particular acquisitions. These are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance. (G). Amortization of acquired capitalized commissions. Purchase accounting generally requires us to eliminate capitalized sales commissions balances as of the acquisition date. Our GAAP sales and marketing expenses generally do not reflect the amortization of these capitalized sales commissions balances. The non-GAAP adjustment to increase our sales and marketing expenses is intended to reflect the full amount of amortization related to such balances as though the acquired companies operated independently in the periods presented. We believe this adjustment to sales and marketing expenses is useful to investors as a measure of the ongoing performance of our business. (H). Non-GAAP items tax effected. This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (G ) on non-GAAP net income. We believe this information is useful to investors because it provides for consistent treatment of the excluded items in this non-GAAP presentation. (I). Difference in GAAP and Non-GAAP tax rate. This amount represents the difference between the GAAP and Non-GAAP tax rates applied to the Non-GAAP operating income plus the Non-GAAP non-operating expense, net. The non-GAAP tax rate excludes net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property. We believe that investors benefit from excluding this amount from our non-GAAP income tax provision because it facilitates a comparison of the non-GAAP tax provision in the current and prior periods. (J). GAAP and non-GAAP tax rate percentages. These percentages are defined as GAAP income tax provision as a percentage of GAAP income before taxes and non-GAAP income tax provision as a percentage of non-GAAP income before taxes. We believe that investors benefit from a presentation of non-GAAP tax rate percentage as a way of facilitating a comparison to non-GAAP tax rates in prior periods.
© Edgar Online, source