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TRIMBLE NAVIGATION LTD /CA/ - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and those
listed under "Risks Factors." We have attempted to identify forward-looking
statements in this report by placing an asterisk (*) before paragraphs
containing such material.
EXECUTIVE LEVEL OVERVIEW
Trimble's focus is on integrating its broad technological and application
capabilities to create system-level solutions that transform how work is done
within the industries we serve, enhancing productivity, accuracy, safety and
regulatory compliance for our customers. The majority of our markets are
end-user markets, including engineering and construction firms, surveyors,
farmers, governmental organizations, energy and utility companies and
organizations who must manage fleets of mobile workers and assets. We also
provide components to original equipment manufacturers to incorporate into their
products. In the end user markets, we provide stand-alone systems which may
consist of software, hardware or some combination of the two, as well as
integrated enterprise or workflow solutions which address the entire work
process. Some examples of our solutions include products that automate and
simplify the process of surveying land, products that automate the control,
management and utilization of equipment such as tractors and bulldozers,
products for engineering or building design, construction and operations
management, products that enable a company to manage its mobile workforce and
assets, and products that allow municipalities or utilities to manage their
fixed assets and operations. To achieve distribution, marketing, production, and
technology advantages in our targeted markets, we manage our operations in the
following four segments: Engineering and Construction, Field Solutions, Mobile
Solutions, and Advanced Devices.
Solutions targeted at the end-user make up a significant majority of our
revenue. To create compelling products, we must attain an understanding of the
end users' needs and work flow, and of how our broad based technological
capabilities can be deployed and integrated to enable that end user to work
faster, more efficiently, more accurately and more safely. We use this knowledge
to create highly innovative solutions that change the way work is done by the
end-user. With the exception of our Mobile Solutions and Advanced Devices
segments, our products are primarily sold through a dealer channel, and it is
crucial that we maintain a proficient, global, third-party distribution channel.
We continue to execute our strategy with a series of actions across new and
existing markets:
Reinforcing our position in new and existing markets
We believe many of our markets continue to be underpenetrated and provide us
with additional, substantial potential for substituting our technology for
traditional methods. We continue to utilize the strength of the Trimble brand in
our markets to expand our revenue by bringing new products to both new and
existing users.
In our Engineering and Construction segment, during the year we acquired
SketchUp, one of the most popular 3D modeling tools in the world which allows
modelers worldwide, across a wide range of industries, to express design
concepts easily, accurately and efficiently. Subsequently, we were able to
extend our BIM-to-Field Capabilities for building contractors by launching the
first integration of SketchUp file import capabilities into the Trimble Field
Link layout software. Trimble Field Link now allows contractors to take their 3D
SketchUp Pro models from the office into the field for quick site verification
and viability testing of the proposed prototype. We demonstrated our leadership
in technology innovation by introducing the Trimble R10 GNSS system, which is
our next generation state-of-the-art GNSS surveying solution. It is the smallest
and lightest receiver in its class yet combines powerful features and
groundbreaking technologies.
In our Field Solutions segment, the Agriculture division introduced four new
innovations designed to assist growers with planting and spreading
operations-Vehicle Sync, seed monitoring capability, application management of
up to two variable rate products and spinner speed control. These innovations
enable enhanced grower efficiency by increasing the quality of seed placement
and providing real-time wireless communication between vehicles in the field.
Furthermore, we launched the Connected Farm application for smartphone platforms
which gives farmers an easy-to-use tool to capture field data for later viewing
and analysis online, while also providing agronomists with access to additional
data they can use to better assess the needs of their customers.
In our Mobile Solutions segment, our acquisition of trucking industry enterprise
software TMW Systems will further expand our transportation and logistics reach.
TMW's software capability spans the entire surface transportation lifecycle,
delivering visibility, control and decision support for the intricate
relationships and complex processes involved in the movement of freight. TMW's
enterprise software currently integrates with Trimble's T&L solutions on many
fleets and when combined will jointly serve more than 3,000 fleets around the
world.
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In our Advanced Devices segment, we introduced our next-generation UHF RFID
reader module which is designed to be embedded into a wide variety of handheld,
portable and stationary devices. The exceptionally small size and powerful
performance of the Mercury6e-Micro yields increased efficiency, reduced
development costs and time-to-market advantages for RFID applications.
Bringing existing technology to new geographic markets
We continue to position ourselves in newer geographic markets that will serve as
important sources of future growth. In our Engineering and Construction segment,
we further expanded our network of SITECH Technology Dealers during the year by
adding new dealerships to serve geographic markets such as Bahrain, Kuwait,
Qatar, United Arab Emirates, Tunisia and Siberia. We also expanded coverage of
our satellite-delivered Trimble RTX technology to most of the world. This
technology enables the Trimble xFill service, a new technique in surveying that
allows surveyors to continue working in the event the primary correction stream
is not available. In our Field Solutions segment, our high-accuracy CenterPoint
RTX correction service is also now available worldwide for agriculture
customers. This GPS and GLONASS-enabled correction service is delivered via
cellular communications and is currently certified for use in 38 countries on 5
continents. In our Mobile Solutions segment, we announced that Holcim Services
(South Asia) Limited, a unit of Holcim Group, one of the largest global cement
manufacturers, will deploy the Trimble trako Fleet Management and Visual Cargo
solutions in their outbound logistics fleet that transports cement to various
destinations across India.
Our acquisition of Plancal Corporation (headquartered in Horgen, Switzerland), a
leading 3D CAD/CAE and ERP software provider for the mechanical, electrical, and
plumbing (MEP) and HVAC industries also helps to broaden our industry-leading
BIM to Field solutions for MEP and HVAC contractors in Western Europe.
We also continue to focus on expansion initiatives in Africa, China, India, the
Middle-East, Russia, South America and South East Asia.
Recent Development
On February 11, 2013, our Board of Directors approved a 2-for-1 split of all
outstanding shares of our common stock. Each shareholder of record of our common
stock on the close of business on March 6, 2013 will be entitled to receive one
additional share of common stock for every outstanding share held on the record
date. The distribution of the new shares will occur on March 20, 2013 and
trading will begin on a split-adjusted basis on March 21, 2013. All shares and
per share information presented herein does not reflect the upcoming stock
split.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements. The preparation of financial statements and
related disclosures in conformity with U.S. generally accepted accounting
principles requires us to make judgments, assumptions, and estimates that affect
the amounts reported in the Consolidated Financial Statements and accompanying
Notes to the Consolidated Financial Statements. We consider the accounting
polices described below to be our critical accounting policies. These critical
accounting policies are impacted significantly by judgments, assumptions, and
estimates used in the preparation of the Consolidated Financial Statements, and
actual results could differ materially from the amounts reported based on these
policies.
Revenue Recognition
We recognize product revenue when persuasive evidence of an arrangement exists,
shipment has occurred, the fee is fixed or determinable, and collectibility is
reasonably assured. In instances where final acceptance of the product is
specified by the customer or is uncertain, revenue is deferred until all
acceptance criteria have been met.
Contracts and/or customer purchase orders are used to determine the existence of
an arrangement. Shipping documents and customer acceptance, when applicable, are
used to verify delivery. We assess whether the fee is fixed or determinable
based on the payment terms associated with the transaction and whether the sales
price is subject to refund or adjustment. We assess collectibility based
primarily on the creditworthiness of the customer as determined by credit checks
and analyses, as well as the customer's payment history.
Revenue for orders is generally not recognized until the product is shipped and
title has transferred to the buyer. We bear all costs and risks of loss or
damage to the goods up to that point. Our shipment terms for U.S. orders and
international orders fulfilled from our European distribution center typically
provide that title passes to the buyer upon delivery of the goods to the carrier
named by the buyer at the named place or point. If no precise point is indicated
by the buyer, delivery is deemed to occur when the carrier takes the goods into
its charge from the place determined by us. Other shipment terms may provide
that title passes to the buyer upon delivery of the goods to the buyer. Shipping
and handling costs are included in Cost of sales.
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Revenue from sales to distributors and resellers is recognized upon shipment,
assuming all other criteria for revenue recognition have been met. Distributors
and resellers do not have a right of return.
Revenue from purchased extended warranty and post contract support (PCS)
agreements is deferred and recognized ratably over the term of the warranty or
support period.
We present revenue net of sales taxes and any similar assessments.
Our software arrangements generally consist of a perpetual license fee and PCS.
We generally have established vendor-specific objective evidence (VSOE) of fair
value for our PCS contracts based on the renewal rate. The remaining value of
the software arrangement is allocated to the license fee using the residual
method. License revenue is primarily recognized when the software has been
delivered and fair value has been established for all remaining undelivered
elements.
Some of our subscription product offerings include hardware, subscription
services and extended warranty. Under these hosted arrangements, the customer
typically does not have the contractual right to take possession of the software
at any time during the hosting period without incurring a significant penalty
and it is not feasible for the customer to run the software either on its own
hardware or on a third-party's hardware. Upfront fees related to our hosted
solutions typically consist of amounts for the in-vehicle enabling hardware
device and peripherals.
Our multiple deliverable product offerings include hardware with embedded
firmware, extended warranty, software, PCS services and subscription services,
which are considered separate units of accounting. For certain of our products,
software and non-software components function together to deliver the tangible
product's essential functionality.
In evaluating the revenue recognition for our hardware or subscription
agreements which contain multiple deliverable arrangements, we determined that
in certain instances we were not able to establish VSOE for some or all
deliverables in an arrangement as we infrequently sold each element on a
standalone basis, did not price products within a narrow range, or had a limited
sales history. When VSOE cannot be established, we attempt to establish the
selling price of each element based on relevant third-party evidence (TPE). TPE
is determined based on competitor prices for similar deliverables when sold
separately. Generally, our go-to-market strategy differs from that of
competitors, and offerings may contain a significant level of proprietary
technology, customization or differentiation such that the comparable pricing of
products with similar functionality cannot be obtained. Furthermore, we are
unable to reliably determine what similar competitor products' selling prices
are on a stand-alone basis. Therefore, we typically are not able to establish
the selling price of an element based on TPE.
When we are unable to establish selling price using VSOE or TPE, we use our best
estimate of selling price (BESP) in our allocation of arrangement consideration.
The objective of BESP is to determine the price at which we would transact a
sale if the product or service were sold on a stand-alone basis. BESP is
generally used for offerings that are not typically sold on a stand-alone basis
or for new or highly customized offerings. We determine BESP for a product or
service by considering multiple factors including, but not limited to, pricing
practices, market conditions, competitive landscape, internal costs, geographies
and gross margin. The determination of BESP is made through consultation with
and formal approval by our management, taking into consideration our
go-to-market strategy.
Allowance for Doubtful Accounts
Our accounts receivable balance, net of allowance for doubtful accounts and
sales returns reserve, was $323.5 million at the end of fiscal 2012, as compared
with $275.2 million at the end of fiscal 2011. The allowance for doubtful
accounts was $6.3 million and $6.7 million at the end of fiscal 2012 and 2011,
respectively. We evaluate ongoing collectibility of our trade accounts
receivable based on a number of factors such as age of the accounts receivable
balances, credit quality, historical experience, and current economic conditions
that may affect a customer's ability to pay. In circumstances where we are aware
of a specific customer's inability to meet its financial obligations to us, a
specific allowance for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount we believe will ultimately be
collected. In addition to specific customer identification of potential bad
debts, bad debt charges are recorded based on our recent past loss history and
an overall assessment of past due trade accounts receivable amounts outstanding.
Inventory Valuation
Our inventories, net balance was $240.5 million at the end of fiscal 2012 as
compared with $232.1 million at the end of fiscal 2011. Our inventory allowances
at the end of fiscal 2012 were $40.3 million, as compared with $37.6 million at
the end of fiscal 2011. Our inventories are stated at the lower of standard cost
(which approximates actual cost on a first-in, first-out basis) or market.
Adjustments to reduce the cost of inventory to its net realizable value, if
required, are made for estimated excess, or obsolescence balances. Factors
influencing these adjustments include decline in demand, technological changes,
product life cycle
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and development plans, component cost trends, product pricing, physical
deterioration and quality issues. If actual factors are less favorable than
those projected by us, additional inventory write-downs may be required.
Income Taxes
Income taxes are accounted for under the liability method whereby deferred tax
asset or liability account balances are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. A valuation allowance is recorded to
reduce the carrying amounts of deferred tax assets if it is more likely than not
such assets will not be realized.
Relative to uncertain tax positions, we only recognize the tax benefit if it is
more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. Our practice is to recognize interest
and/or penalties related to income tax matters in income tax expense.
Our valuation allowance is primarily attributable to net operating losses and
research and development credit carryforwards. Management believes that it is
more likely than not that we will not realize these deferred tax assets, and,
accordingly, a valuation allowance has been provided for such amounts. Valuation
allowance adjustments associated with an acquisition after the measurement
period are recorded through income tax expense.
Goodwill and Purchased Intangible Assets
Goodwill represents the excess of the purchase consideration over the fair value
of the net tangible and identifiable intangible assets acquired in a business
combination. Intangible assets acquired individually, with a group of other
assets, or in a business combination, are recorded at fair value. Identifiable
intangible assets are comprised of distribution channels and distribution
rights, patents, licenses, technology, acquired backlog, trademarks, and
in-process research and development. The fair value of intangible assets
acquired is generally determined based on a discounted cash flow analysis.
Identifiable intangible assets are being amortized over the period of estimated
benefit using the straight-line method, reflecting the pattern of economic
benefits associated with these assets, and have estimated useful lives ranging
from one to ten years with a weighted average useful life of 6.5 years. Goodwill
is not subject to amortization, but is subject to at least an annual assessment
for impairment, applying a fair-value based test.
Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets
We evaluate goodwill, at a minimum, on an annual basis and whenever events and
changes in circumstances suggest that the carrying amount may not be
recoverable. The annual goodwill impairment testing is performed in the fourth
fiscal quarter of each year based on the values on the first day of that
quarter. Goodwill is reviewed for impairment utilizing a two-step process.
However, the provisions of the accounting standard for goodwill and other
intangibles allows us to first assess qualitative factors to determine whether
it is necessary to perform the two-step quantitative goodwill impairment test.
For our annual goodwill impairment test in the fourth quarter of fiscal 2012, we
performed a quantitative test for all of our reporting units. In the first step
of this test, goodwill is tested for impairment at the reporting unit level by
comparing the reporting unit's carrying amount, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using a discounted cash flow approach. If the carrying amount of the
reporting unit exceeds its fair value, a second step is performed to measure the
amount of impairment loss, if any. In step two, the implied fair value of
goodwill is calculated as the excess of the fair value of a reporting unit over
the fair values assigned to its assets and liabilities. If the implied fair
value of goodwill is less than the carrying value of the reporting unit's
goodwill, the difference is recognized as an impairment loss. When we perform a
quantitative assessment of goodwill impairment, the determination of fair value
of a reporting unit involves the use of significant estimates and assumptions.
The discounted cash flows are based upon, among other things, assumptions about
expected future operating performance using risk-adjusted discount rates. Actual
future results may differ from those estimates. As of the first day of the
fourth quarter of fiscal 2012, for each reporting unit, our estimated fair
values exceeded the carrying value by substantial margins on a percentage basis.
However for certain earlier stage reporting units, due to the smaller magnitude
of the carrying value and fair value of each respective reporting units, the
margins by which the fair value exceeded the carrying value on an absolute
dollar basis were relatively small.
Depreciation and amortization of the intangible assets and other long-lived
assets is provided using the straight-line method over their estimated useful
lives, reflecting the pattern of economic benefits associated with these assets.
Changes in circumstances such as technological advances, changes to our business
model, or changes in the capital strategy could result in the actual useful
lives of intangible assets or other long-lived assets differing from initial
estimates. In those cases where we determine that the useful life of an asset
should be revised, the net book value in excess of the estimated residual value
will be depreciated over its revised remaining useful life. These assets are
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable based on their
future cash flows. The estimated future cash flows are based upon, among other
things, assumptions about expected future operating performance and may differ
from actual cash
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flows. The assets evaluated for impairment are grouped with other assets to the
lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. If the sum of the
projected undiscounted cash flows (excluding interest) is less than the carrying
value of the assets, the assets will be written down to the estimated fair
value.
Warranty Costs
The liability for product warranties was $17.1 million at the end of fiscal
2012, as compared with $18.4 million at the end of fiscal 2011. We accrue for
warranty costs as part of cost of sales based on associated material product
costs, technical support labor costs, and costs incurred by third parties
performing work on our behalf. Our expected future cost is primarily estimated
based upon historical trends in the volume of product returns within the
warranty period and the cost to repair or replace the equipment. The products
sold are generally covered by a warranty for periods ranging from 90 days to 5.5
years.
While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates, material usage, and
service delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage, or service delivery costs differ from our
estimates, revisions to the estimated warranty accrual and related costs may be
required.
Stock-Based Compensation
We recognize compensation expense for all share-based payment awards made to our
employees and directors based on estimated fair values. The grant date fair
value for options is estimated using a binomial valuation model. The fair value
of rights to purchase shares under our employee stock purchase plan is estimated
using the Black-Scholes option-pricing model.
The determination of fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include our expected stock price volatility over the term of the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rates, and expected dividends. In addition, the binomial model
incorporates actual option-pricing behavior and changes in volatility over the
option's contractual term.
We base the expected stock price volatility for stock purchase rights on implied
volatilities of traded options on our stock and our expected stock price
volatility for stock options is based on a combination of our historical stock
price volatility for the period commensurate with the expected life of the stock
option and the implied volatility of traded options. The use of implied
volatilities is based upon the availability of actively traded options on our
stock with terms similar to our awards and also upon our assessment that implied
volatility is more representative of future stock price trends than historical
volatility. However, because the expected life of our stock options is greater
than the terms of our traded options, we use a combination of our historical
stock price volatility commensurate with the expected life of our stock options
and implied volatility of traded options.
We estimate the expected life of the awards based on an analysis of our
historical experience of employee exercise and post-vesting termination behavior
considered in relation to the contractual life of the options and purchase
rights. The risk-free interest rate assumption is based upon observed interest
rates appropriate for the expected term of the awards.
We do not currently pay cash dividends on our common stock and do not anticipate
doing so in the foreseeable future. Accordingly, our expected dividend yield is
zero.
Stock-based compensation expense recognized in the Consolidated Statement of
Income for fiscal 2012, 2011 and 2010 is based on awards ultimately expected to
vest, and has been reduced for estimated forfeitures. The stock-based
compensation guidance requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on historical experience.
If factors change and we employ different assumptions to determine the fair
value of our share-based payment awards granted in future periods, the
compensation expense that we record under it may differ significantly from what
we have recorded in the current period. In addition, valuation models, including
the Black-Scholes and binomial models, may not provide reliable measures of the
fair values of our stock-based compensation. Consequently, there is a risk that
our estimates of the fair values of our stock-based compensation awards on the
grant dates may bear little resemblance to the actual values realized upon the
exercise, expiration, early termination, or forfeiture of those stock-based
payments in the future. Certain stock-based payments, such as employee stock
options, may expire worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant date and reported
in our financial statements. Alternatively, values may be realized from these
instruments that are significantly higher than the fair values originally
estimated on the grant date and reported in our financial statements.
See Note 2 and Note 12 to the Consolidated Financial Statements for additional
information.
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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.
Fiscal Years 2012 2011 2010
(Dollars in thousands)
Revenues:
Product $ 1,566,975 $ 1,345,876 $ 1,090,420
Service 262,889 159,095 109,185
Subscription 210,249 139,094 94,332
Total revenue $ 2,040,113 $ 1,644,065 $ 1,293,937
Gross margin 1,046,177 829,581 645,501
Gross margin % 51.3 % 50.5 % 49.9 %
Total consolidated operating income 212,568 156,402 127,602
Operating income % 10.4 % 9.5 % 9.9 %
Basis of Presentation
We have a 52-53 week fiscal year, ending on the Friday nearest to December 31,
which for fiscal 2012 was December 28, 2012. Fiscal 2012, 2011, and 2010 were
all 52-week years.
Revenue
Beginning in the first quarter of fiscal 2012, we have presented revenue
separately for products, services and subscriptions. Prior year amounts have
been reclassified to conform to the current year presentation.
In fiscal 2012, total revenue increased by $396.0 million, or 24%, to $2.04
billion from $1.64 billion in fiscal 2011. Of this increase, product revenue
increased $221.1 million, or 16%, service revenue increased $103.8 million, or
65%, and subscription revenue increased $71.2 million, or 51%. The product and
service revenue increase in fiscal 2012 as compared to fiscal 2011 was driven by
organic growth and acquisitions not applicable in the prior periods including
Tekla and PeopleNet which were both acquired in the third quarter of 2011.
Subscription revenue increased primarily due to organic growth and PeopleNet.
On a segment basis, the increase in fiscal 2012 was primarily due to stronger
results from the Engineering and Construction, Field Solutions and Mobile
Solutions segments. Engineering and Construction revenue increased $182.9
million, or 20%, Field Solutions increased $68.2 million, or 16%, Mobile
Solutions increased $129.6 million, or 59%, and Advanced Devices increased $15.3
million, or 15%, as compared to fiscal 2011. Revenue growth within Engineering
and Construction was driven by growth from all main product categories,
particularly sales of heavy and highway and vertical construction solutions, as
well as the impact of acquisitions. Field Solutions revenue increased primarily
due to continued strength in the Agriculture market driven by continued strength
in commodity prices and farmer income and to a lesser extent, a full year of
revenue from Tekla. Mobile Solutions revenue increased primarily due to
PeopleNet's continued organic growth as well as the incremental impact of the
PeopleNet acquisition itself, which closed in the third quarter of fiscal 2011.
To a lesser extent, the fourth quarter 2012 TMW acquisition also had an impact
on Mobile Solutions revenue growth. Advanced Devices revenue increased primarily
due to unusually stronger sales of timing devices related to cellular
infrastructure build-outs and to a lesser extent, stronger sales of embedded
devices.
In fiscal 2011, total revenue increased by $350.1 million, or 27%, to $1.64
billion from $1.29 billion in fiscal 2010. Of this increase, product revenue
increased $255.5 million, or 23%, service revenue increased $49.9 million, or
46%, and subscription revenue increased $44.8 million, or 47%. The product and
service revenue increase in fiscal 2011 as compared to fiscal 2010 was driven by
organic growth and acquisitions not applicable in the prior periods including
Tekla and PeopleNet which were both acquired in the third quarter of 2011.
Subscription revenue increased primarily due to organic growth and PeopleNet.
On a segment basis, the increase in fiscal 2011 was primarily due to stronger
results from the Engineering and Construction and Field Solutions segments.
Engineering and Construction revenue increased $187.4 million, or 26%, Field
Solutions increased $95.6 million, or 30%, Mobile Solutions increased $64.3
million, or 41%, and Advanced Devices increased $2.8 million, or 3%, as compared
to fiscal 2010. Revenue growth within Engineering and Construction was driven by
strong organic growth due to expanded distribution, improved end user markets
and acquisitions, including Tekla. Sales were strong in the U.S. and Europe for
heavy and highway and survey products. Additionally, Field Solutions revenue
increased primarily due to the increased demand
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for agricultural products as relatively high commodity prices led to good farmer
income and spending. Mobile Solutions revenue increased primarily due to the
PeopleNet acquisition and growth within the existing business, partially offset
by the loss of a large customer in the second quarter of 2010.
* During fiscal 2012, sales to customers in the United States represented 47%,
Europe represented 22%, Asia Pacific represented 16% and other regions
represented 15% of our total revenue. During fiscal 2011, sales to customers in
the United States represented 45%, Europe represented 24%, Asia Pacific
represented 15%, and other regions represented 16% of our total revenue. During
the 2010 fiscal year, sales to customers in the United States represented 46%,
Europe represented 22%, Asia Pacific represented 18%, and other regions
represented 14% of our total revenue. We anticipate that sales to international
customers will continue to account for a significant portion of our revenue.
* No single customer accounted for 10% or more of our total revenue in fiscal
2012, 2011 and 2010. It is possible, however, that in future periods the failure
of one or more large customers to purchase products in quantities anticipated by
us may adversely affect the results of operations.
Gross Margin
Our gross margin varies due to a number of factors including product mix,
pricing, distribution channel, production volumes, new product start-up costs,
and foreign currency translations.
In fiscal 2012, our gross margin increased by $216.6 million as compared to
fiscal 2011 primarily due to the increase in total revenue. Gross margin as a
percentage of total revenue was 51.3% in fiscal 2012 and 50.5% in fiscal 2011.
The increase in the gross margin percentage was due to improved product mix in
Engineering and Construction, Field Solutions and Mobile Solutions, particularly
software, software maintenance and subscription revenue which was partially
offset by higher amortization of purchased intangibles.
In fiscal 2011, our gross margin increased by $184.1 million as compared to
fiscal 2010 primarily due to the increase in total revenue. Gross margin as a
percentage of total revenue was 50.5% in fiscal 2011 and 49.9% in fiscal 2010.
The increase in gross margin percentage was primarily due to an increase in
sales of higher margin products, primarily software and subscription revenue,
which were partially offset by higher amortization of purchased intangibles.
* Because of potential product mix changes within and among the industry
markets, market pressures on unit selling prices, fluctuations in unit
manufacturing costs, including increases in component prices and other factors,
current level gross margin cannot be assured in the future.
Operating Income
Operating income increased by $56.2 million for fiscal 2012 as compared to
fiscal 2011. Operating income as a percentage of total revenue for fiscal 2012
was 10.4% as compared to 9.5% for fiscal 2011. The increase in operating income
and operating income percentage was primarily driven by higher revenue and
associated gross margin, partially offset by higher amortization of purchased
intangibles due to acquisitions.
Operating income increased by $28.8 million for fiscal 2011 as compared to
fiscal 2010. Operating income as a percentage of total revenue for fiscal 2011
was 9.5% as compared to 9.9% for fiscal 2010. The increase in operating income
was primarily driven by higher revenue and associated gross margin. The decrease
in operating income percentage was primarily due to higher amortization of
purchased intangibles due to acquisitions.
Results by Segment
To achieve distribution, marketing, production, and technology advantages in our
targeted markets, we manage our operations in the following four segments:
Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced
Devices. Operating income equals net revenue less cost of sales and operating
expense, excluding general corporate expense, amortization of purchased
intangible assets, amortization of inventory step-up, acquisition costs, and
restructuring charges.
The following table is a breakdown of revenue and operating income by segment
for the periods indicated and should be read in conjunction with the narrative
descriptions below.
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Fiscal Years 2012 2011 2010
(Dollars in thousands)
Engineering and Construction
Revenue 1,089,424 906,497 719,053
Segment revenue as a percent of total revenue 53 % 55 % 55 %
Operating income 207,174 149,015 110,965
Operating income as a percent of segment revenue 19 % 16 %
15 %
Field Solutions
Revenue 481,962 413,721 318,137
Segment revenue as a percent of total revenue 24 % 25 % 25 %
Operating income 182,134 160,139 116,373
Operating income as a percent of segment revenue 38 % 39 %
37 %
Mobile Solutions
Revenue 348,147 218,540 154,254
Segment revenue as a percent of total revenue 17 % 13 % 12 %
Operating income 32,459 4,461 1,873
Operating income as a percent of segment revenue 9 % 2 %
1 %
Advanced Devices
Revenue 120,580 105,307 102,493
Segment revenue as a percent of total revenue 6 % 7 % 8 %
Operating income 19,166 13,891 18,325
Operating income as a percent of segment revenue 16 % 13 %
18 %
A reconciliation of our consolidated segment operating income to consolidated
income before income taxes follows:
Fiscal Years 2012 2011 2010
(in thousands)
Consolidated segment operating income $ 440,933 $ 327,506 $ 247,536
Unallocated corporate expense (80,996 ) (70,310 ) (55,758 )
Acquisition costs (21,662 ) (14,892 ) (6,537 )
Amortization of purchased intangible assets (125,707 ) (85,902 ) (57,639 )
Consolidated operating income 212,568 156,402 127,602
Non-operating income, net 16,856 11,052 13,485
Consolidated income before taxes $ 229,424 $ 167,454 $ 141,087
Unallocated corporate expense includes general corporate expense, amortization
of inventory step-up, and restructuring cost.
Engineering and Construction
Engineering and Construction revenue increased by $182.9 million, or 20%, while
segment operating income increased by $58.2 million, or 39.0%, for fiscal 2012
as compared to fiscal 2011. The revenue growth was primarily driven by organic
growth due to increased sales of heavy and highway and vertical construction
products and acquisitions not applicable in the prior periods, including Tekla
which was acquired at the beginning of the third quarter of fiscal 2011. The
growth within Engineering and Construction was partially offset by the negative
impact of foreign currency exchange rates. Segment operating income increased
primarily due to higher revenue, improved gross margin due to greater software
sales and increased operating leverage. The foreign exchange impact was
immaterial to operating income.
Engineering and Construction revenue increased by $187.4 million, or 26%, while
segment operating income increased by $38.1 million, or 34.3%, for fiscal 2011
as compared to fiscal 2010. The revenue growth was primarily driven by strong
organic growth due to expanded distribution and improved end user markets and
acquisitions, including Tekla. Sales were strong in the U.S. and Europe for
heavy and highway and survey products. Although residential and commercial
construction was flat in the U.S. and most parts of Europe, and China sales
slowed, products sales associated with infrastructure build out were strong.
Operating income increased primarily due to higher revenue, higher gross margin,
and increased operating leverage.
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Field Solutions
Field Solutions revenue increased by $68.2 million, or 16%, while segment
operating income increased by $22.0 million, or 13.7%, for fiscal year 2012 as
compared to fiscal 2011. There was growth in all major regions in our
Agriculture markets due to market penetration as a result of demand for new
information and flow control products and increased sales presence and to a
lesser extent, Tekla. Segment operating income increased primarily due to higher
revenue and associated higher gross margin.
Field Solutions revenue increased by $95.6 million, or 30%, while segment
operating income increased by $43.8 million, or 37.6%, for fiscal year 2011 as
compared to fiscal 2010. The revenue growth was primarily due to higher sales
across the world for our agricultural products as relatively high commodity
prices increased farmer income and spending. Sales for agricultural products
were robust across the Americas, Europe, and Asia Pacific regions. Additionally,
GIS contributed to strong Field Solutions revenue due to the new product
introductions and the Tekla acquisition. Operating income increased primarily
due to higher revenue, higher gross margin, and increased operating leverage.
Mobile Solutions
Mobile Solutions revenue increased by $129.6 million, or 59%, while segment
operating income increased by $28.0 million, or 627.6%, for fiscal 2012 as
compared to fiscal 2011. The revenue increase was primarily due to PeopleNet's
continued organic growth as well as acquisition-related growth from a partial
period of PeopleNet results in fiscal 2011. Operating income increased due to
primarily higher subscription revenue with contributions from PeopleNet as well
as field service management gross margin expansion and operating leverage.
Mobile Solutions revenue increased by $64.3 million, or 41%, while segment
operating income increased by $2.6 million, or 138.2%, for fiscal 2011 as
compared to fiscal 2010. The revenue increase was primarily due to acquisitions,
including PeopleNet, and growth within the existing business, partially offset
by a loss of a large customer in the second quarter of fiscal 2010. Operating
income increased primarily due to the PeopleNet acquisition and organic growth.
Advanced Devices
Advanced Devices revenue increased by $15.3 million, or 15%, and segment
operating income increased by $5.3 million, or 38.0%, for fiscal 2012 as
compared to fiscal 2011. The increase in revenue and operating income was
primarily driven by unusually stronger sales of timing devices related to
infrastructure build-outs for cellular networks and to a lesser extent, stronger
sales of embedded devices.
Advanced Devices revenue increased by $2.8 million, or 3%, and segment operating
income decreased by $4.4 million, or 24.2%, for fiscal 2011 as compared to
fiscal 2010. The increase in revenue was driven by new product introductions
within Applanix and acquisition revenue, partially offset by a reduction in
demand for GPS-based timing and synchronization devices. The decrease in
operating income was primarily driven by product mix and acquisitions.
Research and Development, Sales and Marketing, and General and Administrative
Expenses
The following table shows research and development ("R&D"), sales and marketing,
and general and administrative ("G&A") expenses in absolute dollars and as a
percentage of total revenue for fiscal years 2012, 2011 and 2010 and should be
read in conjunction with the narrative descriptions of those operating expenses
below.
Fiscal Years 2012 2011 2010(Dollars in thousands)
Research and development $ 256,458 $ 197,007 $ 150,089
Percentage of revenue
13 % 12 % 11 %
Sales and marketing 313,692 266,804 215,127
Percentage of revenue
15 % 16 % 17 %
General and administrative 195,802 158,375 118,352
Percentage of revenue 10 % 10 % 9 %
Total $ 765,952 $ 622,186 $ 483,568
Percentage of revenue 38 % 38 % 37 %
Overall, R&D, sales and marketing, and G&A expenses increased by approximately
$143.8 million in fiscal 2012 compared to fiscal 2011.
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Research and development expense increased by $59.5 million in fiscal 2012, as
compared to fiscal 2011. Substantially all of our R&D costs have been expensed
as incurred. Overall research and development spending was approximately 13% of
revenue in fiscal 2012 and 12% in fiscal 2011. The increase in R&D expense in
fiscal 2012, as compared to fiscal 2011 was primarily due to the inclusion of
expense of $39.4 million from acquisitions not applicable in fiscal 2011, a $3.2
million increase in engineering costs associated with new product roll-outs, a
$12.6 million increase in compensation related expense, and a $8.7 million
increase in other expense, partially offset by a $4.4 million decrease due to
favorable foreign currency exchange rates.
Research and development expense increased by $46.9 million in fiscal 2011, as
compared to fiscal 2010. Overall research and development spending was
approximately 12% of revenue in fiscal 2011 and 11% in fiscal 2010. The increase
in R&D expense in fiscal 2011, as compared to fiscal 2010 was primarily due to
the inclusion of expense of $27.8 million from acquisitions not applicable in
fiscal 2010, a $8.0 million increase in engineering costs associated with new
product roll-outs, a $4.9 million increase in compensation related expense, a
$3.6 million increase due to unfavorable foreign currency exchange rates, and a
$2.6 million increase in other expenses.
* We believe that the development and introduction of new products are critical
to our future success and we expect to continue active development of new
products.
Sales and marketing expense increased by $46.9 million in fiscal 2012 as
compared to fiscal 2011. Spending overall was approximately 15% of revenue in
fiscal 2012 compared to 16% in fiscal 2011. The increase in sales and marketing
expense in fiscal 2012, as compared to fiscal 2011 was primarily due to the
inclusion of expense of $34.5 million from acquisitions not applicable in the
prior period, a $12.8 million increase in compensation related expense and a
$5.3 million increase in other expense, including a bi-annual trade show,
partially offset by a $5.7 million decrease due to favorable foreign currency
exchange rates.
Sales and marketing expense increased by $51.7 million in fiscal 2011 as
compared to fiscal 2010. Spending overall was approximately 16% of revenue in
fiscal 2011 compared to 17% in fiscal 2010. The increase in sales and marketing
expense in fiscal 2011, as compared to fiscal 2010 was primarily due to the
inclusion of expense of $35.9 million from acquisitions not applicable in fiscal
2010, a $12.0 million increase in compensation related expense, a $4.5 million
increase due to unfavorable foreign currency exchange rates, partially offset by
a $0.7 million decrease in other expenses.
* Our future growth will depend in part on the timely development and continued
viability of the markets in which we currently compete as well as our ability to
continue to identify and develop new markets for our products.
General and administrative expense increased by $37.4 million in fiscal 2012
compared to fiscal 2011. Spending overall was at approximately 10% of revenue in
both fiscal 2012 and 2011. The increase in general and administrative expense in
fiscal 2012, as compared to fiscal 2011 was primarily due the inclusion of
expense of $17.5 million from acquisitions not applicable in the prior year, a
$6.8 million increase in non-recurring acquisition related costs, an $11.9
million increase in compensation related expense, a $4.8 million increase in
tax, legal and consulting expense, partially offset by a $2.1 million decrease
due to favorable foreign currency exchange rates and a $0.2 million decrease in
other expense.
General and administrative expense increased by $40.0 million in fiscal 2011
compared to fiscal 2010. Spending overall was at approximately 10% of revenue in
fiscal 2011 compared to 9% in fiscal 2010. The increase in general and
administrative expense in fiscal 2011, as compared to fiscal 2011 was primarily
due to the inclusion of expense of $19.3 million from acquisitions not
applicable in fiscal 2010, an $8.4 million increase in non-recurring acquisition
related costs, a $4.0 million increase in tax, legal and consulting expense, a
$1.9 million increase in compensation related expense, a $1.5 million increase
due to unfavorable foreign currency exchange rates, a $1.3 million increase in
travel expense, and a $3.5 million increase in other expenses.
Other Operating Expenses
Amortization of Purchased and Other Intangible Assets
Fiscal Years 2012 2011 2010
(in thousands)
Cost of sales $ 60,277 $ 37,197 $ 24,900
Operating expenses 65,430 48,705 32,739
Total
$ 125,707 $ 85,902 $ 57,639
Total amortization expense of purchased and other intangible assets was $125.7
million in fiscal 2012, of which $60.3 million was recorded in Cost of sales and
$65.4 million was recorded in Operating expenses. Total amortization expense of
purchased and other intangibles represented 6.2% of revenue in fiscal 2012, an
increase of $39.8 million from fiscal 2011 when it represented 5.2% of revenue.
The increase was primarily due to the Tekla, PeopleNet and SketchUp acquisitions
and to a lesser extent, other
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acquisitions made in fiscal 2012, as well as fiscal 2011 acquisition intangibles
that included a full year impact of amortization expense in fiscal 2012.
Total amortization expense of purchased and other intangible assets was $85.2
million in fiscal 2011, of which $36.5 million was recorded in Cost of sales and
$48.7 million was recorded in Operating expenses. Total amortization expense of
purchased and other intangibles represented 5.2% of revenue in fiscal 2011, an
increase of $27.5 million from fiscal 2010 when it represented 4.5% of revenue.
The increase was primarily due to the Tekla and PeopleNet acquisitions and to a
lesser extent, other acquisitions made in fiscal 2011, as well as fiscal 2010
acquisition intangibles that included a full year impact of amortization expense
in fiscal 2011.
Non-operating Income, Net
The following table shows non-operating income, net for the periods indicated
and should be read in conjunction with the narrative descriptions below:
Fiscal Years 2012 2011 2010
(in thousands)
Interest expense, net $ (16,357 ) $ (7,277 ) $ (669 )
Foreign currency transaction gain (loss), net (2,526 ) 1,053 (836 )
Income from equity method investments, net 24,727 15,349 11,795
Other income, net 11,012 1,927 3,195
Total non-operating income, net $ 16,856 $ 11,052 $ 13,485
Total non-operating income, net increased by $5.8 million during fiscal 2012
compared with fiscal 2011. The increase was primarily due to the impact of
higher income from equity method investments, namely joint ventures, and a gain
on the sale of an investment included in Other income, net, partially offset by
higher interest expense due to an increase in debt associated with acquisitions
and the impact of foreign currency transaction fluctuations.
Total non-operating income, net decreased by $2.4 million during fiscal 2011
compared with fiscal 2010. The decrease was primarily due to an increase in
interest expense due to an increase in debt associated with acquisitions, and a
reduction in deferred compensation plan asset gains and losses included in Other
income, net, offset by the impact of foreign currency transaction gain primarily
related to foreign exchange hedges associated with two of our larger
acquisitions, and the impact of higher income from equity method investments.
Income Tax Provision
Our effective income tax rate for fiscal years 2012, 2011 and 2010 was 17%, 11%
and 27% respectively. The 2012 rate was less than the U.S. federal statutory
rate of 35% primarily due to the geographical mix of our pre-tax income. The
2011 rate was less than the U.S. federal statutory rate of 35% primarily due to
the geographical mix of our pre-tax income and the inclusion of the U.S. federal
R&D credit. The 2010 rate was less than the U.S. federal statutory rate of 35%
primarily due to the geographical mix of our pre-tax income and valuation
allowance release, offset by the net impact of the U.S. Internal Revenue Service
(IRS) 2005 through 2007 audit settlement in 2010.
The federal research and development credit expired on December 31, 2011. On
January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law.
Under this act, the federal research and development credit was retroactively
extended for amounts paid or incurred after December 31, 2011 and before January
1, 2014. The effects of these changes in the tax law will result in a tax
benefit which will be recognized in the first quarter of 2013, which is the
quarter in which the law was enacted.
Litigation Matters
* From time to time, we are involved in litigation arising out of the ordinary
course of our business. There are no known claims or pending litigation that are
expected to have a material effect on our overall financial position, results of
operations, or liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
Other than lease commitments incurred in the normal course of business (see
Contractual Obligations table below), we do not have any off-balance sheet
financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets, or any obligation arising out of a
material variable interest in an unconsolidated entity. We do not have any
majority-owned subsidiaries that are not included in the consolidated financial
statements. Additionally, we do not have any interest in, or relationship with,
any special purpose entities.
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In the normal course of business to facilitate sales of its products, we
indemnify other parties, including customers, lessors, and parties to other
transactions with us, with respect to certain matters. We have agreed 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 addition, we
have 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
Consolidated Balance Sheets at the end of fiscal 2012 and 2011.
LIQUIDITY AND CAPITAL RESOURCES
At the End of Fiscal Year 2012 2011 2010
(Dollars in thousands)
Cash and cash equivalents $ 157,771 $ 154,621 $ 220,788
As a percentage of total assets 4.5 % 5.8 % 11.8 %
Total debt $ 911,158 $ 564,436 $ 153,153
Fiscal Years 2012 2011 2010
(Dollars in thousands)
Cash provided by operating activities $ 340,700 $ 241,629 $ 124,030
Cash used in investing activities $ (764,286 ) $ (773,565 ) $ (156,374 )
Cash provided by (used in) financing
activities $ 426,407 $ 464,167 $ (20,164 )
Effect of exchange rate changes on cash and
cash equivalents $ 329 $ 1,602 $ (552 )
Net increase (decrease) in cash and cash
equivalents $ 3,150 $ (66,167 ) $ (53,060 )
Cash and Cash Equivalents
At the end of fiscal 2012, cash and cash equivalents totaled $157.8 million
compared to $154.6 million at the end of fiscal 2011. We had debt of $911.2
million at the end of fiscal 2012 compared to $564.4 million at the end of
fiscal 2011.
* 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.
*We believe that our cash and cash equivalents, together with borrowings under
our 2012 Credit Facility as described below under the heading "Debt", will be
sufficient to meet our anticipated operating cash needs, debt service, planned
capital expenditures, and stock purchases under the stock repurchase program for
at least the next twelve months.
* We anticipate that planned capital expenditures primarily for the building of
a facility in Westminster, Colorado which began in 2012 and an upgrade of our
Oracle ERP system, as well as computer equipment, software, manufacturing tools
and test equipment and leasehold improvements associated with business
expansion, will constitute a partial use of our cash resources. Decisions
related to how much cash is used for investing are influenced by the expected
amount of cash to be provided by operations.
Operating Activities
Cash provided by operating activities was $340.7 million for fiscal 2012, as
compared to $241.6 million for fiscal 2011. The increase of $99.1 million was
due to an increase in net income before non-cash depreciation and amortization,
primarily attributable to Engineering and Construction, Field Solutions and
Mobile Solutions segments' increased revenue, and to a lesser extent, a decrease
in working capital requirements due to higher accounts payable due to the timing
of purchases.
Cash provided by operating activities was $241.6 million for fiscal 2011, as
compared to $124.0 million for fiscal 2010. The increase of $117.6 million was
due to an increase in net income before non-cash depreciation and amortization,
primarily attributable to Engineering and Construction and Field Solutions
segments' increased revenue, offset by an increase in accounts receivable due to
higher revenue from Engineering and Construction and Field Solutions segments.
Additionally, fiscal 2010 included the payment of income taxes payable
associated with the IRS tax settlement which is not applicable in fiscal 2011.
Investing Activities
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Cash used in investing activities was $764.3 million for fiscal 2012, as
compared to $773.6 million for fiscal 2011, primarily due to cash used for
business and intangible asset acquisitions. Fiscal 2012 acquisitions included
TMW, SketchUp, and other acquisitions. Fiscal 2011 acquisitions included Tekla,
PeopleNet and other acquisitions.
Cash used in investing activities was $773.6 million for fiscal 2011, as
compared to $156.4 million for fiscal 2010. The increase of $617.2 million was
primarily due to higher cash used for business and intangible asset acquisitions
in fiscal 2011, with the largest cash requirement due to the Tekla acquisition.
Financing Activities
Cash provided by financing activities was $426.4 million for fiscal 2012, as
compared to $464.2 million during fiscal 2011. The decrease of $37.8 million was
primarily due to a decrease in debt proceeds, net of repayments, primarily used
for acquisitions, slightly offset by an increase in proceeds received from the
issuance of common stock related to stock option exercises.
Cash provided by financing activities was $464.2 million for fiscal 2011, as
compared to cash used of $20.2 million during fiscal 2010. The increase of
$484.3 million was primarily due to an increase in debt proceeds, net of
repayments, primarily used for acquisitions, partially offset by the repurchase
of common stock during fiscal 2010 which was not applicable in 2011.
Accounts Receivable and Inventory Metrics
At the End of Fiscal Year 2012 2011
Accounts receivable days sales outstanding 57 58
Inventory turns per year
4.1 3.8
Accounts receivable days sales outstanding were down at 57 days at the end of
fiscal 2012, as compared to 58 days at the end of fiscal 2011. Our accounts
receivable days sales outstanding are calculated based on ending accounts
receivable, net, divided by revenue for the fourth fiscal quarter, times a
quarterly average of 91 days. Our inventory turns were 4.1 at the end of fiscal
2012, as compared to 3.8 at the end of fiscal 2011. Our inventory turnover is
based on the total cost of sales for the fiscal period over the average
inventory for the corresponding fiscal period.
Repatriation of Foreign Earnings and Income Taxes
A significant portion of our foreign earnings continue to be permanently
reinvested in our foreign subsidiaries, and it is anticipated this reinvestment
will not impede cash needs at the parent company level. In our determination of
which foreign earnings are permanently reinvested, we consider numerous factors,
including the financial requirements of the U.S. parent company, the financial
requirements of the foreign subsidiaries, and the tax consequences of remitting
the foreign earnings back to the U.S. There are no other material impediments to
our ability to access sources of liquidity and our resulting ability to meet
short and long-term liquidity needs, other than in the event we are not in
compliance with the covenants under our 2012 Credit Facility or the tax costs of
remitting foreign earnings back to the U.S.
Debt
On November 21, 2012, we entered into an amended and restated credit agreement
with a group of lenders (the "2012 Credit Facility"). This credit facility
provides for unsecured credit facilities in the aggregate principal amount of
$1.4 billion, comprised of a five-year revolving loan facility of $700.0 million
and a five-year $700.0 million term loan facility. Subject to the terms of the
2012 Credit Facility, the revolving loan facility may be increased, and/or
additional term loan commitments may be established, in an aggregate principal
amount up to $300.0 million. Additionally, the Company has a $75 million
uncommitted revolving loan facility (the "2011 Uncommitted Facility"), which is
callable by the bank at any time and has no covenants. The interest rate on the
2011 Uncommitted Facility is 1.00% plus either LIBOR or the bank's cost of funds
or as otherwise agreed upon by the bank and us.
At the end of fiscal 2012, our total debt was comprised primarily of a term loan
of $700.0 million and a revolving credit line of $208.0 million under the 2012
Credit Facility. Of the total outstanding balance, $665.0 million of the term
loan and the $208.0 million revolving credit line are classified as long-term in
the Consolidated Balance Sheet. For additional discussion of our debt, see Note
7 of Notes to the Consolidated Financial Statements.
The funds available under the 2012 Credit Facility may be used for general
corporate purposes, the financing of certain acquisitions and the payment of
transaction fees and expenses related to such acquisitions. Under the 2012
Credit Facility, we may borrow, repay and reborrow funds under the revolving
loan facility until its maturity on November 21, 2017, at which time the
revolving facility will terminate, and all outstanding loans, together with all
accrued and unpaid interest, must be repaid. Amounts not
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borrowed under the revolving facility will be subject to a commitment fee, to be
paid in arrears on the last day of each fiscal quarter, ranging from 0.15% to
0.35% per annum depending on our leverage ratio as of the most recently ended
fiscal quarter. The term loan will be repaid in quarterly installments, with the
last quarterly payment to be made at September 29, 2017, with the remaining
outstanding balance being due and payable on November 21, 2017. On an annualized
basis, the amortization of the term loan is as follows: 5%, 5%, 10%, 10%, and
70% for years one through five respectively. The term loan may be prepaid in
whole or in part, subject to certain minimum thresholds, without penalty or
premium. Amounts repaid or prepaid with respect to the term loan facility may
not be reborrowed.
We may borrow funds under the 2012 Credit Facility in U.S. Dollars, Euros or in
certain other agreed currencies, and borrowings will bear interest, at our
option, at either: (i) a floating per annum base rate based on the
administrative agent's prime rate or other agreed-upon rate, depending on the
currency borrowed, plus a margin of between 0.00% and 1.00%, depending on the
Company's leverage ratio as of the most recently ended fiscal quarter, or (ii) a
reserve-adjusted fixed per annum rate based on LIBOR, EURIBOR, or other
agreed-upon rate, depending on the currency borrowed, plus a margin of between
1.00% and 2.00%, depending on our leverage ratio as of the most recently ended
fiscal quarter. Interest will be paid on the last day of each fiscal quarter
with respect to borrowings bearing interest based on a floating rate, or on the
last day of an interest period, but at least every three months, with respect to
borrowings bearing interest at a fixed rate. Our obligations under the 2012
Credit Facility are guaranteed by several of our domestic subsidiaries.
The 2012 Credit Facility contains various customary representations and
warranties by us, which include customary use of materiality, material adverse
effect and knowledge qualifiers. The 2012 Credit Facility also contains
customary affirmative and negative covenants including, among other
requirements, negative covenants that restrict our ability to dispose of assets,
create liens, incur indebtedness, repurchase stock, pay dividends, make
acquisitions and make investments. Further, the 2012 Credit Facility contains
financial covenants that require the maintenance of minimum interest coverage
and maximum leverage ratios. Specifically, we must maintain as of the end of
each fiscal quarter a ratio of (a) EBITDA (as defined in the 2012 Credit
Facility) to (b) interest expenses for the most recently ended period of four
fiscal quarters of not less than 3.5 to 1. We must also maintain, at the end of
each fiscal quarter, a ratio of (x) total indebtedness to (y) EBITDA (as defined
in the 2012 Credit Facility) for the most recently ended period of four fiscal
quarters of not greater than the applicable ratio set forth in the table below;
provided, that on the completion of a material acquisition, we may increase the
applicable ratio in the table below by 0.25 for the fiscal quarter during which
such acquisition occurred and each of the three subsequent fiscal quarters.
Fiscal Quarter Ending Maximum Leverage Ratio
Prior to June 28, 2013 3.50 to 1
On and after June 28, 2013 and prior to September 27, 2013 3.25 to 1
On and after September 27, 2013
3 to 1
We were in compliance with these covenants at the end of fiscal 2012.
The 2012 Credit Facility contains events of default that include, among others,
non-payment of principal, interest or fees, breach of covenants, inaccuracy of
representations and warranties, cross defaults to certain other indebtedness,
bankruptcy and insolvency events, material judgments and events constituting a
change of control. Upon the occurrence and during the continuance of an event of
default, interest on the obligations will accrue at an increased rate and the
lenders may accelerate our obligations under the 2012 Credit Facility, however
that acceleration will be automatic in the case of bankruptcy and insolvency
events of default.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at the end of fiscal
2012:
Payments Due By Period
Less More
than 1 1-3 3-5 than
Total year years years 5 years
(in thousands)
Principal payments on debt (1) $ 908,000 $ 35,000 $ 105,000 $ 768,000 $ -
Interest payments on debt (2) 76,674 3,433 4,582 68,659 -
Operating leases 79,581 25,586 32,896 18,200 2,899
Other purchase obligations and
commitments (3) 94,370 89,745 4,625 - -
Total $ 1,158,625 $ 153,764 $ 147,103 $ 854,859 $ 2,899
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(1) Amount represents principal payments over the life of the debt obligations.
(See Note 7 of the Notes to the Consolidated Financial Statements for
further financial information regarding debt.)
(2) Amount represents the expected interest cash payments relating to our debt.
Interest was estimated interest payments that are not recorded on our
Consolidated Balance Sheets. Interest was estimated to be 1.96% per annum,
based upon recent trends, and is not included in our Consolidated Balance
Sheets.
(3) Other purchase obligations and commitments primarily represent open non-cancelable purchase orders for material purchases with our vendors, and
also include estimated payments due for acquisition related earn-outs and
holdbacks. Purchase obligations exclude agreements that are cancelable
without penalty.
At the end of fiscal 2012 we had unrecognized tax benefits (included in Other
non-current liabilities) of $22.3 million, including interest and penalties. At
this time, we cannot make a reasonably reliable estimate of the period of cash
settlement with tax authorities regarding this liability, and therefore, such
amounts are not included in the contractual obligations table above.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The impact of recent accounting pronouncements is disclosed in Note 2 of the
Notes to Consolidated Financial Statements.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
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
included in the following table are set forth below:
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 restructuring costs,
amortization of purchased intangible assets, stock-based compensation and
amortization of acquisition-related inventory step-up from GAAP gross margin. We
believe that these exclusions 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 costs, amortization of purchased intangible assets, stock-based
compensation and acquisition costs associated with external and incremental
costs resulting directly from merger and acquisition activities such as legal,
due diligence, integration costs and acquisition bonus payments from GAAP
operating expenses. We believe that these exclusions 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 restructuring costs, amortization of purchased
intangible assets, stock-based compensation, amortization of acquisition-related
inventory step-up and acquisition costs associated with external and incremental
costs resulting directly from merger and acquisition activities such as legal,
due diligence, integration costs and acquisition bonus payments. We believe that
these exclusions offer an alternative means for our investors to evaluate
current operating performance compared to results of other periods.
Non-GAAP non-operating income, net
We believe this measure helps investors evaluate our non-operating income
trends. Non-GAAP non-operating income, net excludes acquisition and divestiture
gains associated with unusual acquisition related items such as an adjustment to
a gain on bargain purchase (resulting from the fair value of identifiable net
assets acquired exceeding the consideration transferred), adjustments to the
fair value of earn-out liabilities and gains related to sale of certain
businesses and investments. These gains are specific to particular acquisitions
and divestitures and vary significantly in amount and timing. Non-GAAP
non-operating income, net also excludes the write-off of debt issuance costs
associated with a terminated or modified credit facility as well as foreign
exchange (gains) losses specifically associated with hedges for two of our
acquisitions. We believe that these exclusions provide investors with a
supplemental view of our ongoing financial results.
Non-GAAP income tax provision
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Investors benefit from the exclusion of an IRS settlement because it facilitates
comparisons to our past income tax provisions. Non-GAAP income tax provisions
exclude an IRS settlement and a valuation allowance release from GAAP income tax
provision and includes non-GAAP items tax effected. Non-GAAP items tax effected
adjusts the provision for income taxes to reflect the effect of certain non-GAAP
items on non-GAAP net income. We believe this information is useful to investors
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 restructuring costs, amortization of purchased intangible assets,
stock-based compensation, amortization of acquisition-related inventory step-up,
acquisition and divestiture costs, a write-off of debt issuance costs associated
with a terminated or modified credit facility, foreign exchange (gains) losses
from hedges associated with two acquisitions, and non-GAAP tax adjustments from
GAAP net income. We believe our investors benefit from understanding these
exclusions 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 restructuring costs, amortization of purchased
intangible assets, stock-based compensation, amortization of acquisition-related
inventory step-up, acquisition and divestiture costs, a write-off of debt
issuance costs associated with a terminated or modified credit facility, foreign
exchange (gains) losses from hedges associated with two acquisitions, and
non-GAAP tax adjustments from GAAP diluted net income per share. We believe that
these exclusions offer investors a useful view of our diluted net income per
share as compared to our past diluted net income per share.
Non-GAAP operating leverage
We believe this information is beneficial to investors as a measure of how much
incremental revenue is contributed to our operating income. Non-GAAP operating
leverage is the increase in non-GAAP operating income as a percentage of the
increase in revenue. We believe that this information offers investors
supplemental information to evaluate our current performance and to compare to
our past non-GAAP operating leverage.
Non-GAAP segment operating income
Non-GAAP segment operating income excludes stock-based compensation from GAAP
segment operating income. We believe this information is useful to investors
because some may exclude stock-based compensation as an alternative view when
assessing trends in the operating income of our segments.
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
restructuring, amortization of purchased intangible assets, stock based
compensation, amortization of acquisition-related inventory step-up, acquisition
and divestiture costs, a write-off of debt issuance costs associated with a
terminated or modified credit facility, foreign exchange (gains) losses from
hedges associated with two acquisitions, and non-GAAP tax adjustments. For
detailed explanations of the adjustments made to comparable GAAP measures, see
items (A)-(L) below,
Fiscal Years
2012 2011 2010
(Dollars in thousands, Dollar % of Dollar % of Dollar % of
except per share data) Amount Revenue Amount Revenue Amount Revenue
GROSS MARGIN:
GAAP gross margin: $ 1,046,177 51.3 % $ 829,581 50.5 % $ 645,501 49.9 %
Restructuring ( A ) 156 - % 466 - % 443 - %
Amortization of
purchased intangible
assets ( B ) 60,277 3.0 % 37,197 2.3 % 24,900 1.9 %
Stock-based compensation ( C ) 2,005 0.1 % 1,955 0.1 % 1,816 0.1 %
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Amortization of
acquisition-related inventory
step-up ( D ) 2,357 0.1 % 3,802 0.2 % 728 0.1 %
Non-GAAP gross margin: $ 1,110,972 54.5 % $ 873,001 53.1 % $ 673,388 52.0 %
OPERATING EXPENSES:
GAAP operating expenses: $ 833,609 40.9 % $ 673,179 40.9 % $ 517,899 40.0 %
Restructuring ( A ) (2,227 ) (0.1 )% (2,288 ) (0.1 )% (1,592 ) (0.1 )%
Amortization of purchased
intangible assets
( B ) (65,430 ) (3.2 )% (48,705 ) (3.0 )% (32,739 ) (2.5 )%
Stock-based compensation
( C ) (30,655 ) (1.5 )% (26,496 ) (1.6 )% (21,309 ) (1.7 )%
Acquisition costs
( E ) (21,662 ) (1.1 )% (14,892 ) (0.9 )% (6,537 ) (0.5 )%
Non-GAAP operating expenses:
$ 713,635 35.0 % $ 580,798 35.3 % $ 455,722 35.2 %
OPERATING INCOME:
GAAP operating income: $ 212,568 10.4 % $ 156,402 9.5 % $ 127,602 9.9 %
Restructuring ( A ) 2,383 0.1 % 2,754 0.2 % 2,035 0.2 %
Amortization of purchased
intangible assets ( B ) 125,707 6.2 % 85,902 5.2 % 57,639 4.4 %
Stock-based compensation ( C ) 32,660 1.6 % 28,451 1.8 % 23,125 1.8 %
Amortization of
acquisition-related inventory
step-up ( D ) 2,357 0.1 % 3,802 0.2 % 728 - %
Acquisition costs ( E ) 21,662 1.1 % 14,892 0.9 % 6,537 0.5 %
Non-GAAP operating income: $ 397,337 19.5 % $ 292,203 17.8 % $ 217,666 16.8 %
NON-OPERATING INCOME, NET:
GAAP non-operating income,
net: $ 16,856 $ 11,052 $ 13,485
Acquisition / divestiture gain ( E ) (7,257 ) (264 ) (3,177 )
Debt issuance cost write-off ( F ) 82 377 -
Foreign exchange (gain) loss
associated with acquisitions ( G ) 1,578 (1,768 ) -
Non-GAAP non-operating income,
net: $ 11,259 $ 9,397 $ 10,308
GAAP and GAAP and GAAP and
Non-GAAP Non-GAAP Non-GAAP
Tax Rate % (K) Tax Rate % (K) Tax Rate % (K)
INCOME TAX PROVISION:
GAAP income tax provision: $ 39,708 17 % $ 18,545 11 % $ 37,474 27 %
Non-GAAP items tax effected: (H) 30,635 13,696 10,935
IRS settlement (I) - - (27,540 )
Valuation allowance release (J) - - 7,628
Non-GAAP income tax provision: $ 70,343 17 % $ 32,241 11 % $ 28,497 13 %
NET INCOME:
GAAP net income attributable
to Trimble Navigation Ltd. $ 191,060 $ 150,755 $ 103,660
Restructuring ( A ) 2,383 2,754 2,035
Amortization of purchased
intangible assets ( B ) 125,707 85,902 57,639
Stock-based compensation ( C ) 32,660 28,451 23,125
Amortization of
acquisition-related inventory
step-up ( D ) 2,357 3,802 728
Acquisition / divestiture
costs, net ( E ) 14,405 14,627 3,360
Debt issuance cost write-off ( F ) 82 377 -
Foreign exchange (gain) loss
associated with acquisitions ( G ) 1,578 (1,768 ) -
Non-GAAP tax adjustments (H),(I),(J) (30,635 ) (13,696 ) 8,986
Non-GAAP net income
attributable to Trimble
Navigation Ltd. $ 339,597 $ 271,204 $ 199,533
DILUTED NET INCOME PER SHARE:
GAAP diluted net income per
share attributable to Trimble
Navigation Ltd. $ 1.49 $ 1.20 $ 0.84
Restructuring (A) 0.02 0.02 0.02
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Amortization of
purchased intangible
assets (B) 0.98 0.67 0.46
Stock-based compensation (C) 0.25 0.23 0.19
Amortization of
acquisition-related
inventory step-up (D) 0.02 0.03 -
Acquisition /
divestiture costs, net (E) 0.11 0.12 0.03
Debt issuance cost
write-off (F) - - -
Foreign exchange (gain)
loss associated with
acquisitions (G) 0.01 (0.01 ) -
Non-GAAP tax adjustments (H),(I),(J) (0.23 ) (0.11 ) 0.07
Non-GAAP diluted net
income per share
attributable to Trimble
Navigation Ltd. $ 2.65 $ 2.15 $ 1.61
OPERATING LEVERAGE:
Increase in non-GAAP
operating income $ 105,134 $ 74,537 $ 45,605
Increase in revenue $ 396,048 $ 350,128 $ 167,678
Operating leverage
(increase in non-GAAP
operating income as a %
of increase in revenue) 26.5 % 21.3 % 27.2 %
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Fiscal Years
2012 2011 2010
% of % of % of
(Dollars in thousands, Segment Segment Segment
except per share data) Revenue Revenue Revenue
SEGMENT OPERATING
INCOME:
Engineering and
Construction
GAAP operating income
before corporate
allocations: $ 207,174 19.0 % $ 149,015 16.4 % $ 110,965 15.4 %
Stock-based compensation (L) 11,954 1.1 % 10,140 1.2 % 7,886 1.1 %
Non-GAAP operating
income before corporate
allocations: $ 219,128 20.1 % $ 159,155 17.6 % $ 118,851 16.5 %
Field Solutions
GAAP operating income
before corporate
allocations: $ 182,134 37.8 % $ 160,139 38.7 % $ 116,373 36.6 %
Stock-based compensation (L) 2,750 0.6 % 2,269 0.6 % 1,978 0.6 %
Non-GAAP operating
income before corporate
allocations: $ 184,884 38.4 % $ 162,408 39.3 % $ 118,351 37.2 %
Mobile Solutions
GAAP operating income
before corporate
allocations: $ 32,459 9.3 % $ 4,461 2 % $ 1,873 1.2 %
Stock-based compensation (L) 2,115 0.6 % 2,943 1.4 % 3,444 2.2 %
Non-GAAP operating
income before corporate
allocations: $ 34,574 9.9 % $ 7,404 3.4 % $ 5,317 3.4 %
Advanced Devices
GAAP operating income
before corporate
allocations: $ 19,166 15.9 % $ 13,891 13.2 % $ 18,325 17.9 %
Stock-based compensation (L) 2,467 2 % 2,566 2.4 % 1,934 1.9 %
Non-GAAP operating
income before corporate
allocations: $ 21,633 17.9 % $ 16,457 15.6 % $ 20,259 19.8 %
A. Restructuring cost. Included in our GAAP presentation of cost of sales and
operating expenses, restructuring costs recorded are primarily for employee
compensation resulting from reductions in employee headcount in connection
with our company restructurings. We exclude restructuring 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.
B. Amortization of purchased intangible assets. Included in our GAAP
presentation of gross margin and operating expenses is amortization of purchased intangible assets. US 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 expense 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
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technology and/or customer relationships already developed, it enhances
comparability by allowing investors to compare our operations pre-acquisition to
those post-acquisitions and to those of our competitors that have pursued
internal growth strategies
C. Stock-based compensation. Included in our GAAP presentation of cost of sales
and operating expenses, stock-based compensation consists of expenses for
employee stock options and awards and purchase rights under our employee
stock purchase plan. We exclude stock-based compensation expense from our
non-GAAP measures because some investors may view it as not reflective of our core operating performance as it is a non-cash expense. For fiscal years
2012, 2011 and 2010, stock-based compensation was allocated as follows:
Fiscal Years
(in thousands) 2012 2011 2010
Cost of sales $ 2,005 $ 1,955 $ 1,816Research and development 5,319 4,624 3,991
Sales and Marketing
7,017 6,672 5,611
General and administrative 18,319 15,200 11,707
$ 32,660 $ 28,451 $ 23,125
D. Amortization of acquisition-related inventory step-up. The purchase accounting entries associated with our business acquisitions require us to
record inventory at its fair value, which is sometimes greater than the
previous book value of the inventory. Included in our GAAP presentation of
cost of sales, the increase in inventory value is amortized to cost of sales
over the period that the related product is sold. We exclude inventory
step-up amortization from our non-GAAP measures because it is a non-cash
expense that we do not believe is indicative of our ongoing operating
results. We further believe that excluding this item from our non-GAAP
results is useful to investors in that it allows for period-over-period
comparability.
E. Acquisition / divestiture items. Included in our GAAP presentation of operating expenses, acquisition costs consist of external and incremental
costs resulting directly from merger and acquisition activities such as
legal, due diligence, integration costs and acquisition bonus payments.
Included in our GAAP presentation of non-operating income, net, acquisition
/ divestiture gain includes unusual acquisition or divestiture related items
such as an adjustment to a gain on bargain purchase (resulting from the fair
value of identifiable net assets acquired exceeding the consideration
transferred), gains on divestitures of certain businesses and investments,
and adjustments to the fair value of earn-out liabilities. 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.
F. Debt issuance cost write-off. Included in our non-operating income, net this
amount represents a write-off of debt issuance cost for a terminated credit
facility in fiscal 2011 and a modified credit facility in fiscal 2012. We
excluded the debt issuance cost write-off from our non-GAAP measures. We
believe that investors benefit from excluding this item from our
non-operating income to facilitate a more meaningful evaluation of our
non-operating income trends.
G. Foreign exchange (gain) loss associated with acquisitions. This amount
represents the (gain) loss on foreign exchange hedges associated with two of
our acquisitions. We excluded the foreign exchange (gain) loss from our
non-GAAP measures because we believe that the exclusion of this item
provides investors an enhanced view of the cost structure of our operations
and facilitates comparisons with the results of other periods.
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. IRS settlement. This amount represents a net charge of $27.5 million in the
second quarter of 2010 resulting from the IRS audit settlement. We excluded
this because it is not indicative of our future operating results. We
believe that investors benefit from excluding this charge from our operating
results to facilitate comparisons to past operating performance.
J. Valuation allowance release. This amount represents a benefit of $7.6 million in the fourth quarter of 2010 resulting from a valuation allowance
release. We excluded this from our non-GAAP results to enhance comparability
of results across periods.
K. GAAP and non-GAAP tax rate %. 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.
L. Stock-based compensation. The amounts consist of expenses for employee stock
options and awards and purchase rights under our employee stock purchase
plan. As referred to above we exclude stock-based compensation here because
investors may view it as not reflective of our core operating performance as
it is a non-cash expense. However, management does include stock-based
compensation for budgeting and incentive plans as well as for reviewing
internal financial reporting. We discuss our operating results by segment
with and without stock-based compensation expense, as we believe it is
useful
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to investors. Stock-based compensation not allocated to the reportable segments
was approximately $13.4 million, $10.5 million, and $7.9 million for fiscal
years 2012, 2011, and 2010, respectively.
Non-GAAP Operating Income
Non-GAAP operating income increased by $105.1 million for fiscal 2012 as
compared to fiscal 2011, and increased by $74.5 million for fiscal 2011 as
compared to fiscal 2010. Non-GAAP operating income as a percentage of total
revenue was 19.5%, 17.8%, and 16.8% for fiscal years 2012, 2011, and 2010,
respectively.
The increase in operating income for 2012 was primarily driven by higher revenue
in Engineering and Construction, Field Solutions and Mobile Solutions. The
increase in the operating income percentage for 2012 was primarily driven by
higher operating leverage in Engineering and Construction and Mobile Solutions.
The increase in the operating income and operating income percentage for 2011
was primarily driven by higher revenue and associated operating leverage in
Engineering and Construction and Field Solutions.
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