TRIMBLE, INC. 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 withU.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. Management believes that the Notes to the Condensed Consolidated Financial Statements have had no significant changes during the first three quarters of fiscal 2020 as compared 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 2019 Annual Report on Form 10-K. 20 -------------------------------------------------------------------------------- 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 in 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. 21 -------------------------------------------------------------------------------- Table of Contents •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 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 revenue for the first three quarters of fiscal 2020. Our annualized recurring revenue ("ARR") is a performance measure we use to assess the health and trajectory of our business. ARR represents the estimated annualized value of recurring revenue contracts for the quarter, including subscription, maintenance and support, and term licenses. See the section entitled "SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES AND ANNUALIZED RECURRING REVENUE" for additional details. Our success in driving growth in ARR has positively affected our revenue mix and growth over time. At the end of the third quarter of fiscal 2020, ARR was$1,259.1 million , as compared to$1,147.6 million for the corresponding period in fiscal 2019, representing 10% year over year growth. The growth was driven by organic conversion from perpetual licenses to term licenses and subscription revenue, and to a lesser extent, acquisition growth. COVID-19 UPDATE In earlyMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. As the COVID-19 pandemic unfolded globally, we implemented protocols intended to safeguard our employees, customers, suppliers, third-party business partners, and communities and ensure business continuity. During the third quarter of fiscal 2020, overall revenue was up 1%. Consistent with the prior quarters, recurring revenue, including software maintenance and subscription, increased. Hardware sales were relatively flat, with increased sales across Buildings and Infrastructure, Geospatial, and Resources and Utilities, partially offset by a decline in Transportation. Professional services revenue was significantly down. During the first three quarters, due to the economic disruptions related to COVID-19 that began in the last weeks of March, we experienced an overall revenue decline, primarily due to significantly reduced hardware and professional services sales in the first two quarters. For the first three quarters of 2020, our recurring revenue increased. Operating income increased during the third quarter and first three quarters of fiscal 2020 due to gross margin expansion and reduced spending related to cost containment measures as well as natural reductions in spending resulting from COVID-19 restrictions. Although revenue and operating income increased for the third quarter, as the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration, the nature and extent of the impact to our business, our condensed consolidated results of operations, and our financial condition. To the extent that regions where we do business or source our products experience additional closures or restrictions on business activity, our results of operations could be harmed. See "Risk Factors" in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter endedApril 3, 2020 for further discussion of the possible impact of the COVID-19 pandemic on our business. 22 -------------------------------------------------------------------------------- Table of Contents 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 2020 2019 2020 2019 (In millions, except per share amounts) Revenue: Product$ 461.4 $ 458.8 $ 1,337.6 $ 1,468.3 Service 160.7 168.0 479.7 501.8 Subscription 170.0 157.1 500.7 470.2 Total revenue$ 792.1 $ 783.9 2,318.0 2,440.3 Gross margin$ 439.7 $ 422.0 $ 1,286.4 $ 1,320.9 Gross margin as a % of revenue 55.5 % 53.8 % 55.5 % 54.1 % Operating income$ 102.0 $ 91.7
Operating income as a % of revenue 12.9 % 11.7 % 12.9 % 11.8 % Diluted earnings per share$ 0.34 $ 0.31
Total non-GAAP revenue *$ 792.8 $ 784.3 $ 2,322.0 $ 2,444.6 Non-GAAP operating income *$ 191.8 $ 161.9 $ 522.9 $ 493.4 Non-GAAP operating income as a % of Non-GAAP Revenue* 24.2 % 20.6 % 22.5 % 20.2 %
Non-GAAP diluted earnings per share *
* See SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES for further information. Revenue Total revenue increased$8.2 million or 1% and decreased$122.3 million or 5% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. By revenue category, product revenue increased$2.6 million or 1%, service revenue decreased$7.3 million or 4%, and subscription revenue increased$12.9 million or 8% for the third quarter of fiscal 2020, compared to the corresponding period in fiscal 2019. Product revenue increased slightly due to higher hardware sales, particularly in Geospatial and Resources and Utilities, largely offset by weakness in Transportation sales. Service revenue decreased due to lower professional services associated with customer installations. Subscription revenue increased primarily due to strong organic growth in Building and Infrastructure, and, to a lesser extent, acquisition revenue from Resources and Utilities, partially offset by weakness in Transportation. For the first three quarters of fiscal 2020, product revenue decreased$130.7 million or 9%, service revenue decreased$22.1 million or 4%, and subscription revenue increased$30.5 million or 6%, compared to the corresponding period in fiscal 2019. Product revenue decreased due to weakness in our hardware sales for the first two quarters, particularly in Buildings and Infrastructure, Geospatial, and Transportation, partially offset by growth in Resources and Utilities. Service revenue decreased due to lower professional services associated with customer installations. Subscription revenue increased primarily due to strong organic growth in Buildings and Infrastructure, and, to a lesser extent, acquisition revenue from Resources and Utilities, partially offset by weakness in Transportation. 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$17.7 million for the third quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, primarily due to an increase in higher margin revenue in Buildings and Infrastructure, Geospatial, and Resources and Utilities, partially offset by a decrease in lower margin revenue in Transportation. Gross margin decreased by$34.5 million for 23 -------------------------------------------------------------------------------- Table of Contents the first three quarters of fiscal 2020, compared to the corresponding period in fiscal 2019, primarily due to revenue declines, partially offset by improved revenue mix. Gross margin as a percentage of total revenue was 55.5% for the third quarter and the first three quarters of fiscal 2020, compared to 53.8% and 54.1% for the corresponding periods in fiscal 2019, driven by improved revenue mix, including increased higher margin software and subscription sales in Buildings and Infrastructure and Resources and Utilities and new product introductions and less discounting in Geospatial. Operating Income Operating income increased by$10.3 million and increased by$10.2 million for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019, primarily due to increased revenue and gross margin expansion in Buildings and Infrastructure, Geospatial, and Resources and Utilities, particularly in the third quarter, partially offset by weaker results in Transportation. Despite higher restructuring costs, operating expense reductions also contributed to the increase. Operating income as a percentage of total revenue was 12.9% for the third quarter and the first three quarters of fiscal 2020, compared to 11.7% and 11.8% for the corresponding periods in fiscal 2019, due to improved gross margin and operating expense reductions as described in the preceding paragraph. Research and Development, Sales and Marketing, and General and Administrative Expense Research and development (R&D), sales and marketing (S&M), and general and administrative (G&A) expense are summarized in the following table: Third Quarter of First Three Quarters of 2020 2019 2020 2019 (In millions) Research and development$ 117.9 $ 112.3 $ 350.1 $ 350.1 Percentage of revenue 14.9 % 14.3 % 15.1 % 14.3 % Sales and marketing$ 111.6 $ 119.7 $ 346.9 $ 375.9 Percentage of revenue 14.1 % 15.3 % 15.0 % 15.4 % General and administrative$ 79.4 $ 77.2 $ 221.2 $ 239.9 Percentage of revenue 10.0 % 9.8 % 9.5 % 9.8 % Total$ 308.9 $ 309.2 $ 918.2 $ 965.9 Overall, R&D, S&M, and G &A expenses decreased by$0.3 million or less than 1% and decreased by$47.7 million or 5% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. Research and development expense increased$5.6 million or 5% and remained flat for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. The increase in the third quarter of fiscal 2020 was primarily due to higher compensation expense, including incentive compensation and Cityworks and Kuebix expenses not applicable in the corresponding prior period, partially offset by lower consulting and outside services and travel reductions. Overall, research and development expense was 14.9% and 15.1% of revenue in the third quarter and the first three quarters of fiscal 2020, compared to 14.3% and 14.3% in the corresponding periods 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 decreased by$8.1 million or 7% and decreased by$29.0 million or 8% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. The decrease was primarily due to travel reductions, lower advertising costs, and lower compensation expense, partially offset by Cityworks and Kuebix expenses not applicable in the corresponding prior periods. Overall, spending for sales and marketing was 14.1% and 15.0% of revenue in the third quarter and the first three quarters of fiscal 2020, respectively, compared to 15.3% and 15.4% in the corresponding periods in fiscal 2019. General and administrative expense increased by$2.2 million or 3% for the third quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, mainly due to higher compensation expense, including incentive compensation and Cityworks and Kuebix expenses not applicable in the corresponding prior period, partially offset by lower consulting and 24 -------------------------------------------------------------------------------- Table of Contents outside services as well as lower merger and acquisitions costs. General and administrative expense decreased by$18.7 million or 8% for the first three quarters of fiscal 2020, compared to the corresponding period in fiscal 2019, primarily due to lower compensation expense, including incentive compensation, lower consulting and outside services, and, to a lesser extent, travel reductions, partially offset by Cityworks and Kuebix expenses not applicable in the corresponding prior period. Overall, general and administrative spending was 10.0% and 9.5% of revenue in the third quarter and the first three quarters of fiscal 2020, compared to 9.8% and 9.8% in the corresponding periods in fiscal 2019. Amortization of Purchased Intangible Assets Third Quarter of First Three Quarters of 2020 2019 2020 2019 (In millions) Cost of sales$ 23.3 $ 23.3 $ 70.0 $ 71.3 Operating expenses 16.7 17.5 50.2 57.3 Total amortization expense of purchased intangibles$ 40.0 $
40.8
Total amortization expense of purchased intangibles represented 5% of revenue in
each of the third quarter and the first three quarters of fiscal 2020 and the
corresponding periods in fiscal 2019. The expense for the third quarter and the
first three quarters of fiscal 2020 was lower as compared to the corresponding
periods 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:
Third Quarter of First Three Quarters of
2020 2019 2020 2019
(In millions)
Interest expense, net $ (19.6) $ (19.7) $ (59.7) $ (62.2)
Income from equity method investments, net 10.8 8.8 29.9 30.5
Other income (expense), net 3.2 (1.9) (1.4) 13.5
Total non-operating expense, net $ (5.6) $
(12.8)
Non-operating expense, net decreased by$7.2 million for the third quarter of fiscal 2020, compared to the corresponding period in fiscal 2019, due to fluctuations in our deferred compensation plan included in Other income (expense), net, and to a lesser extent, an increase in joint venture profitability. Non-operating expense, net increased by$13.0 million for the first three quarters of fiscal 2020, compared to the corresponding period in fiscal 2019, primarily due to a prior year gain on sale of an equity interest included in Other income (expense), net, partially offset by lower interest expense associated with lower debt balance and a decrease in interest rates. Income Tax Provision Our effective income tax rate for the third quarter of fiscal 2020 was 12.0%, as compared to 1.0% in the corresponding period in fiscal 2019; the increase was primarily due to a lower tax benefit from reserve releases due to expiration of theU.S. federal statute of limitations for certain tax years. For the first three quarters of fiscal 2020, our effective income tax rate was 21.3%, as compared to 12.8% in the corresponding period in fiscal 2019; the increase was primarily due to a one-time charge related to increased valuation allowance arising fromCalifornia tax legislation, a lower tax benefit from reserve releases due to expiration of theU.S. federal statute of limitations for certain tax years, and geographic income mix. Results by Segment We report our financial performance, including revenue and operating income, based on four reportable segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation. 25 -------------------------------------------------------------------------------- Table of Contents Our Chief Executive Officer (chief operating decision maker) views and evaluates operations based on the results of our reportable operating segments under our management reporting system. For additional discussion of our segments, see Note 6 of the Notes to the Condensed Consolidated Financial Statements. The following table is a summary of revenue and operating income by segment: Third Quarter of First Three Quarters of 2020 2019 2020 2019 (In millions) Buildings and Infrastructure Segment revenue$ 317.4 $ 309.8 $ 909.6 $ 944.4 Segment revenue as a percent of total revenue 40 % 40 % 39 % 39 % Segment operating income$ 95.9 $ 81.7 $ 242.1 $ 228.8 Segment operating income as a percent of segment revenue 30.2 % 26.4 % 26.6 % 24.2 %
Geospatial
Segment revenue$ 165.6 $ 155.1 $ 457.0 $ 480.7 Segment revenue as a percent of total revenue 21 % 20 % 20 % 20 % Segment operating income$ 51.4 $ 30.6 $ 119.3 $ 91.1 Segment operating income as a percent of segment revenue 31.0 % 19.7 % 26.1 % 19.0 % Resources and Utilities Segment revenue$ 150.6 $ 121.1 $ 474.7 $ 433.3 Segment revenue as a percent of total revenue 19 % 15 % 20 % 18 % Segment operating income$ 54.3 $ 34.5 $ 170.3 $ 131.1 Segment operating income as a percent of segment revenue 36.1 % 28.5 % 35.9 % 30.3 %
Transportation
Segment revenue$ 159.2 $ 198.3 $ 480.7 $ 586.2 Segment revenue as a percent of total revenue 20 % 25 % 21 % 24 % Segment operating income$ 8.6 $ 31.2 $ 39.9 $ 95.3 Segment operating income as a percent of segment revenue 5.4 % 15.7 % 8.3 % 16.3 % 26
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Table of Contents
The following table is a reconciliation of our consolidated segment operating
income to consolidated income before taxes:
Third Quarter of First Three Quarters of
2020 2019 2020 2019
(In millions)
Consolidated segment operating income $ 210.2 $ 178.0 $ 571.6 $ 546.3
Unallocated corporate expense (18.4) (16.1) (48.7) (52.9)
Restructuring charges / executive transition
costs (13.5) (3.6) (21.9) (10.2)
COVID-19 expenses (1.2) - (4.8) -
Acquired deferred revenue adjustment (0.7) (0.4) (4.0) (4.3)
Amortization of purchased intangible assets (40.0) (40.8) (120.2) (128.6)
Stock-based compensation / deferred
compensation (32.0) (18.5) (61.9) (55.9)
Amortization of acquired capitalized
commissions 1.3 1.5 4.2 4.8
Acquisition / divestiture items (3.7) (8.4) (16.4) (11.5)
Consolidated operating income 102.0 91.7 297.9 287.7
Non-operating expense, net (5.6) (12.8) (31.2) (18.2)
Consolidated income before taxes $ 96.4 $
78.9
Buildings and Infrastructure Buildings and Infrastructure revenue increased$7.6 million or 2% and decreased$34.8 million or 4% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. Segment operating income increased$14.2 million or 17% and increased$13.3 million or 6% for the third quarter and the first three quarters of fiscal 2020, respectively, compared to the corresponding periods in fiscal 2019. For the third quarter of fiscal 2020, revenue increased primarily due to an increase in software maintenance and subscription revenue. Hardware sales were relatively flat, an improvement from the second quarter of fiscal 2020, driven in part by pent up demand, particularly in civil engineering and construction. Professional services continued to be down. For the first three quarters of fiscal 2020, revenue decreased primarily due to a decline in civil engineering and construction hardware, especially in the first two quarters of fiscal 2020, and lower professional services due to the economic impacts of COVID-19, partially offset by higher software maintenance and subscription revenue. Segment operating income increased for the third quarter and the first three quarters of fiscal 2020 primarily due to gross margin expansion resulting from a higher mix of software maintenance and subscription revenue as well as cost reductions. Geospatial Geospatial revenue increased$10.5 million or 7% and decreased$23.7 million or 5% for the third quarter and the first three quarters of fiscal 2020, respectively, compared to the corresponding periods in fiscal 2019. Segment operating income increased$20.8 million or 68% and increased$28.2 million or 31% for the third quarter and the first three quarters of fiscal 2020, respectively, compared to the corresponding periods in fiscal 2019. For the third quarter of fiscal 2020, revenue increased primarily due to an increase in hardware sales to OEMs. Geospatial survey sales were flat, an improvement from the second quarter of fiscal 2020, driven by new product introductions and pent up demand. For the first three quarters of fiscal 2020, revenue decreased mainly from a decline in geospatial survey sales due to the economic impacts of COVID-19. Segment operating income increased for the third quarter and the first three quarters of fiscal 2020 primarily due to gross margin expansion resulting from new higher margin product introductions and less discounting, as well as cost reductions. Resources and Utilities Resources and Utilities revenue increased$29.5 million or 24% and increased$41.4 million or 10% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. Segment operating income increased by$19.8 million or 57% and increased$39.2 million or 30% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. 27 -------------------------------------------------------------------------------- Table of Contents For the third quarter and the first three quarters of fiscal 2020, revenue increased as a result of Agriculture business strength in the reseller channel due to improved market conditions, including government stimulus programs and weather conditions. To a lesser extent, acquisition revenue including Cityworks also contributed. For the first three quarters of fiscal 2020, revenue increased primarily due to acquisition revenue in the first three quarters and strength in Agriculture in the third quarter. Segment operating income increased for the third quarter and the first three quarters of fiscal 2020 primarily due to gross margin expansion resulting from higher margin software maintenance and subscription sales as well as cost reductions. Transportation Transportation revenue decreased$39.1 million or 20% and decreased$105.5 million or 18% for the third quarter and the first three quarters of fiscal 2020, respectively, compared to the corresponding periods in fiscal 2019. Segment operating income decreased$22.6 million or 72% and decreased$55.4 million or 58% for the third quarter and the first three quarters of fiscal 2020, compared to the corresponding periods in fiscal 2019. For the third quarter and the first three quarters 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. Conversion of customers from perpetual software to subscription products also reduced revenue. Segment operating income decreased for the third quarter and the first three quarters of fiscal 2020 primarily due to the revenue declines, a discrete inventory charge in the third quarter, as well as higher operating expense due to the Kuebix acquisition, partially offset by cost reductions. 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 third quarter of fiscal 2020 and fiscal year end 2019. 28 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Third Quarter of Fiscal Year End As of 2020 2019 (In millions, except percentages) Cash and cash equivalents $ 184.0$ 189.2 As a percentage of total assets 2.8 % 2.8 % Principal balance of outstanding debt $
1,679.7
First Three Quarters of
2020 2019
(In millions)
Cash provided by operating activities $ 483.7 $ 462.8
Cash used in investing activities (244.1) (68.7)
Cash used in financing activities (243.1) (377.2)
Effect of exchange rate changes on cash and cash equivalents (1.7) (4.8)
Net increase (decrease) in cash and cash equivalents $ (5.2) $ 12.1
Cash and Cash Equivalents and Short-Term Investments As of the end of the third quarter of fiscal 2020, cash and cash equivalents totaled$184.0 million compared to$189.2 million as of fiscal year end 2019. Our ability to continue to generate cash from operations will depend in large part on profitability, the rate of collections of accounts receivable, our inventory turns, and our ability to manage other areas of working capital. Our cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions considered to be of reputable credit and to present little credit risk. 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$483.7 million for the first three quarters of fiscal 2020, compared to$462.8 million for the first three quarters of fiscal 2019. The increase of$20.9 million was primarily driven by higher net income adjusted for non-cash items and positive working capital changes, including lower accounts receivable due to improved sales linearity, and higher accrued compensation, partially offset by increased inventory and decreased deferred revenue. Investing Activities Cash used in investing activities was$244.1 million for the first three quarters of fiscal 2020, compared to$68.7 million for the first three quarters of fiscal 2019. The increase of cash used in investing activities of$175.4 million was primarily due to the Kuebix acquisition. Financing Activities Cash used in financing activities was$243.1 million for the first three quarters of fiscal 2020, compared to cash used in financing activities of$377.2 million for the first three quarters of fiscal 2019. The decrease in cash flows used in financing activities of$134.1 million was primarily driven by the decrease in repurchases of common stock, and to a lesser extent, a decrease in debt repayments, net of proceeds. Debt During the first three quarters of fiscal 2020, net debt payments were$179.5 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 third quarter of fiscal 2020. OnMay 4, 2020 , we entered into a loan amendment with JP Morgan Chase andBank of America , along with certain 29 -------------------------------------------------------------------------------- Table of Contents other institutional lenders, to extend the maturity date of the remaining term loan amount of$225.0 million toJuly 2, 2022 . At the end of the third quarter of fiscal 2020,$100.0 million was outstanding under the Term Loan. Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for more information regarding our debt. SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES AND ANNUALIZED RECURRING REVENUE To supplement our condensed consolidated financial information, we believe that the following information is helpful to gain an overall understanding of our past financial performance and prospects for the future. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. The non-GAAP financial measures and detailed explanations to the adjustments to comparable GAAP measures are below. Third Quarter of First Three Quarters of 2020 2019 2020 2019 Dollar % of Dollar % of Dollar % of Dollar % of (In millions, except per share amounts) Amount Revenue Amount Revenue Amount Revenue Amount Revenue REVENUE: GAAP revenue:$ 792.1 $ 783.9 $ 2,318.0 $ 2,440.3 Acquired deferred revenue adjustment (A) 0.7 0.4 4 4.3 Non-GAAP Revenue:$ 792.8 $ 784.3 $ 2,322.0 $ 2,444.6 GROSS MARGIN: GAAP gross margin:$ 439.7 55.5 %$ 422.0 53.8 %$ 1,286.4 55.5 %$ 1,320.9 54.1 % Acquired deferred revenue adjustment (A) 0.7 0.4 4.0 4.3 Restructuring charges (B) 0.3 - 0.7 0.2 COVID-19 expenses (C) - - 0.3 - Amortization of purchased intangible assets (D) 23.3 23.3 70.0
71.3
Stock-based compensation / deferred compensation (E) 2.5 1.5 5.2
4.4
Acquisition / divestiture items (F) - - 1.7
-
Non-GAAP gross margin:$ 466.5 58.8 %$ 447.2 57.0 %$ 1,368.3 58.9 %$ 1,401.1 57.3 % OPERATING EXPENSES: GAAP operating expenses:$ 337.7 42.6 %$ 330.3 42.1 %$ 988.5 42.6 %$ 1,033.2 42.3 % Restructuring charges / executive transition costs (B) (13.2) (3.6) (21.2) (10.0) COVID-19 expenses (C) (1.2) - (4.5) - Amortization of purchased intangible assets (D) (16.7) (17.5) (50.2)
(57.3)
Stock-based compensation / deferred compensation (E) (29.5) (17.0) (56.7)
(51.5)
Acquisition / divestiture items (F) (3.7) (8.4) (14.7)
(11.5)
Amortization of acquired capitalized commissions (G) 1.3 1.5 4.2
4.8
Non-GAAP operating expenses:$ 274.7 34.6 %$ 285.3 36.4 %$ 845.4 36.4 %$ 907.7 37.1 % OPERATING INCOME: GAAP operating income:$ 102.0 12.9 %$ 91.7 11.7 %$ 297.9 12.9 %$ 287.7 11.8 % Acquired deferred revenue adjustment (A) 0.7 0.4 4.0
4.3
Restructuring charges / executive transition costs (B) 13.5 3.6 21.9 10.2 COVID-19 expenses (C) 1.2 - 4.8 - Amortization of purchased intangible assets (D) 40.0 40.8 120.2
128.6
Stock-based compensation / deferred compensation (E) 32.0 18.5 61.9
55.9
Acquisition / divestiture items (F) 3.7 8.4 16.4
11.5
Amortization of acquired capitalized commissions (G) (1.3) (1.5) (4.2)
(4.8)
Non-GAAP operating income:$ 191.8 24.2 %$ 161.9 20.6 %$ 522.9 22.5 %$ 493.4 20.2 % NON-OPERATING EXPENSE, NET: GAAP non-operating expense, net:$ (5.6) $ (12.8) $ (31.2) $ (18.2) 30
-------------------------------------------------------------------------------- Table of Contents Deferred compensation (E) (4.2) 0.1 (4.8)
(3.8)
Acquisition / divestiture items (F) 0.1 0.3 2.5
(12.5)
Non-GAAP non-operating expense, net:$ (9.7) $ (12.4) $ (33.5) $ (34.5) GAAP and GAAP and Non-GAAP GAAP and GAAP and Non-GAAP Non-GAAP Tax Rate % Non-GAAP Tax Rate % Tax Rate % Tax Rate % (J) (J) (J) (J) INCOME TAX PROVISION: GAAP income tax provision:$ 11.6 12.0 %$ 0.8 1.0 %$ 56.8 21.3 %$ 34.4 12.8 % Non-GAAP items tax effected (H) 10.3 0.7 46.2
21.4
Difference in GAAP and Non-GAAP tax rate (I) 7.3 26.9 (20.7)
34.5
Non-GAAP income tax provision:$ 29.2 16.0 %$ 28.4 19.0 %$ 82.3 16.8 %$ 90.3 19.7 % NET INCOME: GAAP net income attributable to Trimble Inc.:$ 84.7 $ 78.1 $ 209.6 $ 235.0 Acquired deferred revenue adjustment (A) 0.7 0.4 4.0 4.3 Restructuring charges / executive transition costs (B) 13.5 3.6 21.9 10.2 COVID-19 expenses (C) 1.2 - 4.8 - Amortization of purchased intangible assets (D) 40.0 40.8 120.2 128.6 Stock-based compensation / deferred compensation (E) 27.8 18.6 57.1
52.1
Acquisition / divestiture items (F) 3.8 8.7 18.9 (1.0) Amortization of acquired capitalized commissions (G) (1.3) (1.5) (4.2) (4.8) Non-GAAP tax adjustments (H)-(I) (17.6) (27.6) (25.5) (55.9) Non-GAAP net income attributable to Trimble Inc.:$ 152.8 $ 121.1 $ 406.8 $ 368.5 DILUTED NET INCOME PER SHARE: GAAP diluted net income per share attributable to Trimble Inc.:$ 0.34 $ 0.31 $ 0.83 $ 0.93 Acquired deferred revenue adjustment (A) - - 0.02 0.01 Restructuring charges / executive transition costs (B) 0.05 0.01 0.08 0.04 COVID-19 expenses (C) - - 0.02 - Amortization of purchased intangible assets (D) 0.16 0.16 0.48 0.51 Stock-based compensation / deferred compensation (E) 0.11 0.07 0.23
0.20
Acquisition / divestiture items (F) 0.02 0.03 0.07 - Amortization of acquired capitalized commissions (G) (0.01) - (0.02) (0.02) Non-GAAP tax adjustments (H)-(I) (0.07) (0.10) (0.10) (0.22) Non-GAAP diluted net income per share attributable to Trimble Inc.:$ 0.60 $ 0.48 $ 1.61
ADJUSTED EBITDA: GAAP net income attributable to Trimble Inc.:$ 84.7 $ 78.1 $ 209.6 $ 235.0 Non-operating expense, net, income tax provision, and net gain attributable to noncontrolling interests 17.3 13.6 88.3 52.7 GAAP operating income: 102.0 91.7 297.9 287.7 Acquired deferred revenue adjustment (A) 0.7 0.4 4.0 4.3 Restructuring charges / executive transition costs (B) 13.5 3.6 21.9 10.2 COVID-19 expenses (C) 1.2 - 4.8 - 31
-------------------------------------------------------------------------------- Table of Contents Amortization of purchased intangible assets (D) 40.0 40.8 120.2 128.6 Stock-based compensation / deferred compensation (E) 32.0 18.5 61.9 55.9 Acquisition / divestiture items (F) 3.7 8.4 16.4 11.5 Amortization of acquired capitalized commissions (G) (1.3) (1.5) (4.2) (4.8) Non-GAAP operating income: 191.8 161.9 522.9 493.4 Depreciation expense 9.9 9.4 29.4 29.7 Income from equity method investments, net 10.8 8.8 29.9 30.5 Adjusted EBITDA$ 212.5 $ 180.1 $ 582.2 $ 553.6 Annualized Recurring Revenue Explanation In addition to providing non-GAAP financial measures, we provide an annualized recurring revenue ("ARR") performance measure in order to provide investors with a supplementary indicator of the value of our current recurring revenue contracts. ARR represents the estimated annualized value of recurring contracts for the quarter, including subscription, maintenance and support, and term licenses. ARR is calculated by adding the portion of the contract value of all of our term licenses attributable to the current quarter to our non-GAAP recurring revenue for the current quarter and dividing that sum by the number of days in the quarter and then multiplying that quotient by 365. ARR should be viewed independently of revenue and deferred revenue as it is a performance measure and is not intended to be combined with or to replace either of those items. 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, COVID-19 expenses, 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, executive transition costs, 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, adjustments 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, executive transition costs, 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 32 -------------------------------------------------------------------------------- Table of Contents intangible asset impairment charges, and 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 this measure helps investors because it provides for consistent treatment of excluded items in our non-GAAP presentation and a difference in the GAAP and non-GAAP tax rates. The non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property and significant one-time reserve releases upon statute of limitations expirations. 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, executive transition costs, 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, executive transition costs, 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 Adjusted EBITDA is a financial performance measure that we believe offers a useful view of the overall operations of our business. We believe these adjustments are useful because they facilitate company-to-company operating performance comparisons by removing potential differences caused by variations unrelated to operating performance, such as capital structures (interest expense), income taxes, and the age and book appreciation of property/equipment (and related depreciation expense). Adjusted EBITDA refers to non-GAAP operating income plus depreciation plus income from equity method investments, net. Other companies define Adjusted EBITDA differently and so our measure may not be directly comparable to similarly titled measures. Our investors should consider the limitations of using Adjusted EBITDA, including the fact that this measure does not provide a complete measure of our operating performance. Adjusted EBITDA is not intended to purport to be an alternative to net income or operating income as a measure of operating performance or to cash flow from operating activities as a measure of liquidity. In particular, Adjusted EBITDA is not intended to be a measure of cash flow available for our discretionary expenditures, as this measure does not consider certain cash requirements, such as COVID-19 expenses, restructuring charges, executive transition costs, acquisition and divestiture items, interest payments, tax payments and other debt service requirements. 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, executive transition costs, 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 / executive transition costs. 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, and lease and building costs. Additionally, included in our 33 -------------------------------------------------------------------------------- Table of Contents GAAP presentation of operating expenses are amounts paid to former Company executives under the terms of the executive severance agreements. We exclude restructuring charges and executive transition costs 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 expenses 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. Further, we believe that excluding executive transition costs from our non-GAAP results is useful to investors because it allows for period-over-period comparability. (C).COVID-19 expenses. Included in our GAAP presentation of cost of sales and 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 cost of sales 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 / 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 charges and benefits such as net deferred tax impacts resulting from a non-U.S. intercompany transfer of 34
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Table of Contents intellectual property and significant one-time reserve releases upon statute of limitations expirations. 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.
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