What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-28 · 307 added, 276 removed, 235 unchanged (71% of the section changed)

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Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under “Risks Factors.” This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2018.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K, as amended, for the fiscal year ended January 3, 2020.

EXECUTIVE LEVEL OVERVIEW

Trimble began operations in 1978 and was originally incorporated in California as Trimble Navigation Limited in 1981.

On October 1, 2016, Trimble Navigation Limited changed its name to Trimble Inc.

and changed its state of incorporation from the State of California to the State of Delaware.

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.

We are 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 architecture, building construction, civil engineering, geospatial, survey and mapping, agriculture, natural resources, utilities, transportation, and government.

Our representative customers include construction owners, contractors, engineering and construction firms, surveying companies, farmers and agricultural companies, energy and utility companies, trucking companies, and state, federal, and municipal governments.

Further information on our business is presented in Part I, Item 1, “ Business ” .

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 14% of revenue over the past two years on R&D and currently have over 1,200 unique patents.

We intend to continue to take advantage of our technology portfolio and deep domain knowledge to quickly and cost-effectively deliver specific, targeted solutions to each of the vertical markets we serve.

We look for opportunities where the potential for technological change is high and that have a requirement for the integration of multiple technologies into complete vertical solutions.

Increasing focus on software and subscription offerings - Software and subscription services are increasingly important elements of our solutions and are core to our growth strategy.

Trimble has an open application programming interface philosophy and open vendor environment, which leads to increased adoption of our software and subscription offerings.

We believe that increased recurring revenue from these solutions will provide us with enhanced business visibility over time.

Professional services constitute an additional growth channel that helps our customers integrate and optimize the use of our offerings in their environment.

Geographic expansion with localization strategy - We view international expansion as an important element of our strategy, and we continue to position ourselves in geographic markets that will serve as important sources of future growth.

We currently have a physical presence in over 40 countries and distribution channels over 85 countries.

Optimized go-to-market strategies to best access our markets - We utilize vertically focused distribution channels that leverage domain expertise to best serve the needs of individual markets both domestically and abroad.

These channel capabilities include independent dealers, joint ventures, original equipment manufacturers ("OEM"), and sales and distribution alliances with key partners, such as CNH Global, Caterpillar, and Nikon, as well as direct sales to end-users.

This provides us with broad market reach and localization capabilities to effectively serve our markets.

Strategic acquisitions - Organic growth continues to be our primary focus, while acquisitions serve to enhance our market position.

We acquire businesses that bring domain expertise, technology, products, or distribution capabilities that augment 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, 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.

During fiscal 2019, the Company acquired four businesses with total purchase consideration of $247.0 million.

The largest acquisition was Cityworks, which we acquired in the fourth quarter of 2019.

Cityworks is a provider of enterprise asset management (EAM) software for utilities and local government.

During fiscal 2018, we acquired six businesses with total cash consideration of $1.8 billion.

The largest acquisition was Viewpoint, which we acquired in the third quarter of 2018 with total cash consideration of $1.2 billion.

Viewpoint is a provider of construction management software, which integrates a contractor’s financial and resource management to their project operations in the field.

The acquisition is highly complementary to our construction technology portfolio and positions us to further our strategy to lead the industry's transformation.

With Viewpoint, we offer customers a central workflow platform for delivering integrated end-to-end construction management, while further enabling connectivity across the complete construction life cycle.

In January 2020, a novel strain of coronavirus was identified in China, resulting in shutdowns of manufacturing and commerce, as well as global travel restrictions to contain the virus.

The impact has extended to other regions.

We have suppliers and employees in China, and the region represents an end market for our products.

Our customers and suppliers within China and other impacted countries are also affected by the coronavirus related restrictions and closures.

The coronavirus is expected to have a negative effect on our financial results for fiscal 2020.

The full extent and duration are uncertain and could be material.

• Executing on our Connect and Scale 2025 strategy;

• Focus on attractive markets with significant growth and profitability potential;

• Domain knowledge and technological innovation that benefit a diverse customer base;

• Increasing focus on software and services;

• Geographic expansion with localization strategy;

• Optimized go-to-market strategies to best access our markets;

• Strategic acquisitions

Our focus on these growth drivers has led over time to growth in revenue and profitability and an increasingly diversified business model.

We continue to experience a shift in revenue towards a more significant mix of software, recurring revenue, and services, which represented 58% of total revenue for fiscal 2020, and is leading to improved visibility in our businesses.

Additionally, our success in driving annualized recurring revenue (“ARR”) (1) growth of 9% year-over-year for fiscal 2020 has positively impacted our revenue mix and growth over time.

As our solutions have expanded, our go-to-market model has also evolved with a balanced mix between direct, distribution, and OEM customers as well as an increasing number of enterprise level customer relationships.

(1) See Supplemental Disclosure of Annualized Recurring Revenue and Non-GAAP Financial Measures for definition.

COVID-19 UPDATE

In early March 2020, the World Health Organization characterized COVID-19 as a pandemic.

As the COVID-19 pandemic unfolded globally, we implemented protocols to safeguard our employees, customers, suppliers, third-party business partners and communities, and ensure business continuity.

The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors outside of our control, such as its continued and future overall impact on the global economy and in the industries where we operate.

We experienced an overall revenue decline in fiscal 2020, due to economic disruptions related to COVID-19 that began in the last weeks of March, primarily in hardware and professional services for the first two quarters.

Overall revenue increased in the third and fourth quarters.

Despite the revenue shortfall, operating income increased due to improved mix of higher margin sales and reduced spending due to cost containment measures as well as natural reductions in spending resulting from COVID-19 restrictions.

As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration, and the nature and extent of its impact on our business, financial condition, and results of operations.

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.

Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Determining whether an uncertain tax position is effectively settled requires judgment.

Changes in recognition

or measurement of our uncertain tax positions would result in the recognition of a tax benefit or an additional charge to the tax provision.

Changes in recognition or measurement of our uncertain tax positions would result in the recognition of a tax benefit or an additional charge to the tax provision.

Income taxes are accounted for under the liability method, whereby deferred tax assets 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.

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Identifiable intangible assets are comprised of distribution channels and distribution rights, patents, licenses, technology, acquired backlog, trademarks, and in-process research and development.

We evaluate goodwill at the reporting unit level in the fourth quarter of each fiscal year or more frequently if indicators of potential impairment exist.

We evaluate goodwill on an annual basis or more frequently if indicators of potential impairment exist.

We utilize either a qualitative assessment or a quantitative test to assess the likelihood of an impairment.

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We amortize identifiable intangible assets over their estimated useful lives on a straight-line basis.

Changes in circumstances such as technological advances, changes to its business model, or changes in the capital strategy could result in a revised useful life.

Changes in circumstances such as technological advances, changes to business models, or changes in the capital strategy could result in a revised useful life.

If the useful life of an asset is revised, the net book value of the estimated residual value is amortized over its revised remaining useful life.

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RESULTS OF OPERATIONS

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.

The following table shows revenue by category, gross margin and gross margin as a percentage of revenue, operating income and operating income as a percentage of revenue, and diluted earnings per share for the periods indicated:

Fiscal Years 2020 2019 2018

(In millions)

Product $ 1,828.0 $ 1,934.8 $ 1,999.9

Service 644.8 686.2 588.7

Subscription 674.9 643.3 519.8

Total revenue $ 3,147.7 $ 3,264.3 $ 3,108.4

Gross margin 1,754.9 1,780.9 1,681.0

Gross margin % 55.8 % 54.6 % 54.1 %

Operating income 419.8 375.9 320.7

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Non-GAAP revenue (1)

$ 3,152.0 $ 3,271.3 $ 3,132.0

Non-GAAP operating income (1)

719.6 674.0 642.7

Non-GAAP operating income as a % of Non-GAAP Revenue (1)

22.8 % 20.6 % 20.5 %

Non-GAAP diluted earnings per share (1)

*See SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES for a reconciliation of our GAAP results to our non-GAAP measures.

$ 2.23 $ 1.99 $ 1.94

Annualized Recurring Revenue (“ARR”) (1)

$ 1,295.8 $ 1,193.2 $ 1,106.7

(1) S ee Supplemental Disclosure of Annualized Recurring Revenue and Non-GAAP Financial Measures for definitions.

Basis of Presentation

We have a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2020 was January 1, 2021.

Fiscal 2019 was a 53-week year, and 2018 and 2017 were 52-week years.

In fiscal 2019 , total revenue increased by $155.9 million , or 5% , to $3.26 billion from $3.11 billion in fiscal 2018.

Overall revenue increased due to organic growth in Buildings and Infrastructure and to a lesser extent, Transportation and Resources and Utilities, partially offset by a decrease in Geospatial.

Acquisitions, including Viewpoint, contributed to growth, particularly in service and subscription revenue.

Fiscal 2020 and 2018 were both 52-week years.

Fiscal 2019 was a 53-week year.

Fiscal Year 2020 Compared with Fiscal Year 2019

In fiscal 2020, total revenue decreased by $116.6 million or 4%.

Overall revenue decreased due to weakness in Transportation, and to a lesser extent, Buildings and Infrastructure and Geospatial, which were impacted in the first two quarters by COVID-19.

The decrease was partially offset by organic and acquisitions growth in Resources and Utilities, as well as recovery in Buildings and Infrastructure and Geospatial in the third and fourth quarters.

We consider acquisition growth to include acquisition revenue that was not applicable in the prior corresponding periods.

By revenue category, overall product revenue decreased $65.1 million , or 3% , service revenue increased $97.5 million , or 17% , and subscription revenue increased $123.5 million , or 24% .

Product revenue decreased primarily due to ongoing weakness in our Geospatial OEM hardware sales and, to a lesser extent, Resources and Utilities agriculture OEM sales.

Service and subscription revenue increased across all segments, with the biggest impact due to an increase in Buildings and Infrastructure due to the Viewpoint acquisition as well as organic growth, and to a lesser extent, Transportation, Resources and Utilities, and Geospatial.

By segment, Buildings and Infrastructure revenue increased $170.5 million , or 16% , Transportation increased $39.2 million , or 5% , Resources and Utilities revenue increased $3.3 million or 1%, and Geospatial revenue decreased $73.7 million , or 10% , as compared to fiscal 2018 .

Buildings and Infrastructure revenue increased due to the Viewpoint acquisition, which was acquired in the third quarter of fiscal 2018, and organic growth.

Transportation revenue increased due to increased organic growth and acquisition revenue.

Resources and Utilities was up slightly due to organic and acquisition growth.

Geospatial revenue decreased mainly due to market softness.

During fiscal 2019 , sales to customers in North America represented 55%, Europe represented 28%, Asia Pacific represented 11%, and the rest of world represented 6% 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 2019 or 2018 .

No single customer accounted for 10% or more of our accounts receivable as of fiscal years ended 2019 and 2018 .

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 2019 , our gross margin increased by $99.9 million as compared to fiscal 2018 , primarily due to increased organic service and subscription revenue growth in Buildings and Infrastructure, as well as the Viewpoint acquisition, partially offset by a decrease in Geospatial due to revenue declines.

Gross margin as a percentage of total revenue was relatively flat at 54.6% in fiscal 2019 and 54.1% in fiscal 2018 due to Buildings and Infrastructure improved product mix, largely offset by Geospatial revenue decline and Transportation product mix and pricing pressures.

By revenue category, overall product revenue decreased $106.8 million or 6%, service revenue decreased $41.4 million or 6%, and subscription revenue increased $31.6 million or 5%.

Product revenue decreased primarily due to weakness in our hardware sales in Transportation, and to a lesser extent, Buildings and Infrastructure, partially offset by growth in Resources and Utilities.

Geospatial was relatively flat.

The decrease in Geospatial hardware sales in the first two quarters was largely offset by increased hardware sales in the third and fourth quarters.

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.

During fiscal 2020, sales to customers in North America represented 52%;

Europe represented 29%;

Asia Pacific represented 13%;

and the rest of world represented 6% of our total revenue.

No single customer accounted for 10% or more of our total revenue in fiscal 2020 and 2019.

No single customer accounted for 10% or more of our accounts receivable at the end of fiscal 2020 and 2019.

Gross margin varies due to several factors including product mix, pricing, distribution channel, production volumes, new product start-up costs, and foreign currency translations.

In fiscal 2020, gross margin decreased by $26.0 million or 1% primarily due to revenue declines as noted above, partially offset by improved product mix.

Gross margin as a percentage of total revenue was 55.8% in fiscal 2020 compared to 54.6% in fiscal 2019.

This growth in gross margin percentage was driven by improved revenue mix, including increased higher margin software and subscription sales in Buildings and Infrastructure and Resources and Utilities, as well as new product introductions and less discounting in Geospatial, partially offset by product mix and pricing pressures in Transportation.

Operating Income

Operating income increased by $ 55.2 million for fiscal 2019 as compared to fiscal 2018 .

Operating income as a percentage of total revenue for fiscal 2019 was 11.5% as compared to 10.3% for fiscal 2018 .

The increase in operating income was attributable to lower intangible asset amortization resulting from expiration of prior acquisitions' amortization and strong operating results in Buildings and Infrastructure.

These increases were partially offset by Geospatial revenue decline and Transportation gross margin compression and increased research and development costs.

In fiscal 2020, operating income increased by $43.9 million or 12%.

Operating income as a percentage of total revenue for fiscal 2020 was 13.3% compared to 11.5% in fiscal 2019.

Despite the revenue shortfall, operating income and operating income as a percentage of total revenue increased due to strong results in Buildings and Infrastructure, Geospatial, and Resources and Utilities including improved mix of higher margin sales, as well as operating expense reductions across all segments, partially offset by weaker sales and gross margin compression in Transportation.

Research and Development, Sales and Marketing, and General and Administrative Expenses

Research and development (R&D), sales and marketing (S&M), and general and administrative (G&A) expense are summarized in the following table:

The following table shows research and development (“R&D”), sales and marketing (“S&M”), and general and administrative (“G&A”) expense along with these expenses as a percentage of revenue for the periods indicated:

Fiscal Years 2020 2019 2018

(In millions)

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Percentage of revenue 9.6 % 10.1 % 11.3 %

Overall, R&D, sales and marketing, and G&A expenses increased by approximately $28.8 million in fiscal 2019 compared to fiscal 2018 .

Research and development expense increased by $ 23.6 million , or 5% , in fiscal 2019 , as compared to fiscal 2018 .

Overall, research and development spending was 14% of revenue in fiscal 2019 and 2018 , respectively.

As compared to the prior year, the increase in fiscal 2019 was primarily due to the impact of the Viewpoint acquisition and, to a lesser extent, increased compensation expenses in Transportation, partially offset by favorable foreign currency impacts.

Total $ 1,243.8 $ 1,304.5 $ 1,275.7

Fiscal Year 2020 Compared with Fiscal Year 2019

In fiscal 2020, overall, R&D, S&M, and G&A expenses decreased by $60.7 million or 5%.

R&D expense increased by $6.2 million or 1%.

The increase in R&D expense was primarily due to higher compensation expense, including incentive compensation, and increased R&D expenses from acquired businesses not included in the prior corresponding period, partially offset by lower consulting and outside services and travel reductions.

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 $24.4 million , or 5% , in fiscal 2019 , as compared to fiscal 2018 .

Overall, spending for sales and marketing was 15% of revenue in fiscal 2019 and 2018 , respectively.

As compared to the prior year, the increase in fiscal 2019 was primarily due to the impact of the Viewpoint acquisition and, to a lesser extent, an increase in compensation expense, partially offset by favorable foreign currency impacts.

General and administrative expense decrease d by $19.2 million , or 5% , in fiscal 2019 , as compared to fiscal 2018 .

Overall, general and administrative spending was 10% and 11% of revenue in fiscal 2019 and 2018 , respectively.

As compared to the prior year, the decrease in fiscal 2019 was primarily due to lower compensation expense related to incentive compensation plans and, to a lesser extent, lower consulting costs and favorable foreign currency impacts, partially offset by the impact of the Viewpoint acquisition.

S&M expense decreased by $37.2 million or 7%.

The decrease in S&M expenses was primarily due to travel reductions, lower advertising costs, and lower compensation expense, partially offset by higher S&M expenses from acquired businesses not included in the prior corresponding p eriod.

G&A expense decreased by $29.7 million or 9%.

The decrease in G&A expense was primarily due to lower compensation expense, lower tax and legal costs, and travel reductions, partially offset by increased G&A expenses from acquired businesses not included in the prior corresponding period.

Amortization of Purchased Intangible Assets

The following table shows amortization of purchased intangible assets for the periods indicated:

Fiscal Years 2020 2019 2018

(In millions)

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Operating expenses 65.5 73.7 76.4

Total amortization expense of purchased intangibles decreased $ 11.8 million as compared to fiscal 2018 .

The decrease was primarily due to the expiration of prior acquisitions' amortization.

Non-operating Income (Expense), Net

The following table shows non-operating income (expense), net for the periods indicated and should be read in conjunction with the narrative descriptions below:

Total $ 157.8 $ 167.8 $ 179.6

In fiscal 2020, total amortization of purchased intangibles decreased $10.0 million or 6% primarily due to the expiration of prior year acquisitions' amortization.

Non-operating expense, net

The following table shows non-operating expense, net for the periods indicated:

Fiscal Years 2020 2019 2018

(In millions)

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Other income, net 13.4 15.5 1.8

Total non-operating income (expense), net

Total non-operating expense, net decreased by $11.6 million during fiscal 2019 compared with fiscal 2018 .

The decrease was due to increased joint venture profitability and a gain from the sale of an equity investment included in Other income, net, partially offset by higher interest costs due to Viewpoint acquisition debt being outstanding for a full year in fiscal 2019.

Total non-operating expense, net $ (24.8) $ (31.1) $ (42.7)

In fiscal 2020, total non-operating expense, net decreased by $6.3 million or 20% primarily due to lower interest costs and increased joint venture profitability, partially offset by unfavorable impacts fro m foreign currency exchange incl uded in Other income, net.

Income Tax Provision

The 2017 Tax Cuts and Jobs Act (the "Tax Act") reduced the U.S.

federal tax rate from 35% to 21%, imposed a one-time transition tax on accumulated foreign earnings and created new taxes on certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income ("GILTI").

As a result, we recorded a provisional net income tax expense of $80.2 million in fiscal 2017.

In fiscal 2018, we completed the accounting for the tax effects of the Tax Act and made immaterial adjustments to the provisional amounts recorded previously.

Additionally, in fiscal 2018, we finalized our accounting policy election to recognize deferred taxes in relation to GILTI.

To align with our international business operations, in the fourth quarter of 2019, we completed a non-U.S.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), enacted on March 27, 2020, provides tax relief to individuals and businesses in light of the impacts of COVID-19.

It did not result in material adjustments to our income tax provision or to our net deferred tax assets as of the end of the fourth quarter of fiscal 2020.

In December 2020, due to a change in the Netherlands tax law, the statutory tax rate was increased from 21.7% to 25.0%, effective January 1, 2021.

As a result, we recorded a one-time tax benefit of $64.0 million due to the revaluation of the Netherlands deferred tax assets.

In December 2019, to align with our international business operations, we completed a non-U.S.

intercompany transfer of our intellectual property to a subsidiary in the Netherlands.

The transaction resulted in deferred tax assets in the Netherlands and GILTI deferred tax liabilities in the U.S., recorded at the applicable statutory tax rates, resulting in a one-time income tax benefit of approximately $206.3 million.

The transaction resulted in deferred tax assets in the Netherlands and global intangible low-taxed income (“GILTI”) deferred tax liabilities in the U.S., recorded at the applicable statutory tax rates, resulting in a one-time income tax benefit of approximately $206.3 million in the fourth quarter of fiscal 2019.

Our effective income tax rates for fiscal 2020 and 2019 were 1.1% and -49.2%, respectively.

The fiscal 2019 rate was lower than the U.S.

federal statutory rate of 21%, primarily due to a one-time tax benefit from a non-U.S.

intercompany transfer of intellectual property, and benefits from reserve release due to expiration of the U.S.

federal statute of limitations for certain tax years.

The fiscal 2018 rate was lower than the U.S.

federal statutory rate of 21%, primarily due to benefits from reserve release due to expiration of the U.S.

federal statute of limitations for certain tax years, a one-time benefit from deferred taxes in relation to GILTI, and benefits from stock based compensation.

The effective income tax rates in fiscal 2020 increased compared to 2019 primarily due to the one-time tax benefit from the non-U.S.

intercompany transfer of intellectual property in the fourth quarter of fiscal 2019.

Results by Segment

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Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation.

Our Chief Executive Officer (chief operating decision maker) views and evaluates operations based on the results of our reportable operating segments under our management reporting system.

Our Chief Executive Officer and Chief Operating Decision Maker views and evaluates operations based on the results of our reportable operating segments under our management reporting system.

These results are not necessarily in conformance with U.S.

For additional discussion of our segments, see Note 5 of the Notes to the Consolidated Financial Statements.

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:

The following table shows a breakdown of revenue and operating income by segment for the periods indicated:

Fiscal Years 2020 2019 2018

(In millions)

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Segment operating income as a percent of segment revenue 7.8 % 15.9 % 19.0 %

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

The following table shows a reconciliation of our consolidated segment operating income to our consolidated income before income taxes for the periods indicated:

Fiscal Years 2020 2019 2018

(In millions)

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Acquired deferred revenue adjustment (4.3) (7.0) (23.6)

Restructuring charges

Amortization of acquired capitalized commissions 5.5 6.3 4.7

Amortization of purchased intangible assets (157.8) (167.8) (179.6)

Stock-based compensation

Amortization of acquisition-related inventory step-up — — (0.2)

Acquisition and divestiture items

Amortization of acquired capitalized commissions

Acquisition / divestiture items (21.4) (20.5) (38.9)

Stock-based compensation / deferred compensation (90.4) (81.2) (75.7)

Restructuring charges / executive transition costs (28.2) (27.9) (8.7)

COVID-19 expenses (3.2) — —

Consolidated operating income 419.8 375.9 320.7

Non-operating income (expense), net

Total non-operating expense, net (24.8) (31.1) (42.7)

Consolidated income before taxes $ 395.0 $ 344.8 $ 278.0

Fiscal Year 2020 Compared with Fiscal Year 2019

Buildings and Infrastructure

Buildings and Infrastructure revenue increased by $170.5 million , or 16% , and segment operating income increased by $63.2 million , or 25% , for fiscal 2019 as compared to fiscal 2018 .

Revenue increased due to the impact of the Viewpoint acquisition, as well as strong organic growth.

Building construction, including Viewpoint, and civil engineering and construction experienced strong growth in service, primarily software maintenance, and subscription revenue.

Segment operating income and operating income percentage increased due to organic revenue growth, higher margin service and subscription product mix and improved operating expense control, and, to a lesser extent, the impact of the Viewpoint acquisition.

Geospatial revenue decreased by $73.7 million , or 10% , and segment operating income decreased by $34.2 million , or 21% , for fiscal year 2019 as compared to fiscal 2018 .

Revenue decreased mainly due to continuing weakness in OEM hardware sales, primarily China, and softness in geospatial survey sales.

The hardware revenue decline was partially offset by stronger software sales, particularly in geospatial survey.

Segment operating income and operating income percentage decreased primarily due to the negative impact from the revenue shortfall.

Buildings and Infrastructure revenue decreased by $27.2 million or 2%, and segment operating income increased by $18.2 million or 6%.

Revenue decreased primarily due to a decline in civil engineering and construction hardware sales in the first two quarters of fiscal 2020 and lower revenue from professional services due to the economic impacts of COVID-19, partially offset by higher software maintenance and subscription revenue.

Hardware sales recovered in the third and fourth quarters due to improved market conditions including pent up demand and government stimulus programs.

Segment operating income and

operating income as a percentage of segment revenue increased due to gross margin improvements from higher mix of software maintenance and subscription revenue as well as cost reductions.

Geospatial revenue increased by $1.1 million or less than 1%, and segment operating income increased by $52.2 million or 39%.

Revenue was relatively flat for the year;

while survey sales recovered in the third and fourth quarters due to improved market conditions, including pent up demand, government stimulus programs, and new product introductions, there was a decline in the first two quarters due to the economic impacts of COVID-19.

Segment operating income and operating income as a percentage of segment revenue increased primarily due to gross margin improvements resulting from new higher margin product introductions and less discounting as well as cost reductions.

Resources and Utilities

Resources and Utilities revenue increased by $3.3 million , or 1% , and segment operating income increased by $0.9 million , or 1% , for fiscal year 2019 as compared to fiscal 2018 .

The revenue increased mainly due to growth in positioning services, utilities, and to a lesser extent acquisition revenue, partially offset by weakness in agriculture OEM and reseller hardware sales, due to continued market uncertainties.

Segment operating income increased slightly due to revenue growth and improved gross margin due to increased software, service, and subscription product mix.

Operating income percentage was flat.

Resources and Utilities revenue increased by $58.6 million or 10%, and segment operating income increased by $51.9 million or 31%.

Revenue increased due to strength in agriculture reseller and OEM channels resulting from improved market conditions, including stabilization of commodity prices, government stimulus programs, and weather conditions.

Acquisition revenue, primarily Cityworks, also contributed to growth.

Segment operating income and operating income as a percentage of segment revenue increased due to revenue expansion and gross margin improvements resulting from higher margin software maintenance and subscription sales, as well as cost reductions.

Transportation

Transportation revenue increased by $39.2 million , or 5% , while segment operating income decreased by $17.4 million , or 12% , for fiscal 2019 as compared to fiscal 2018 .

Revenue increased primarily due to subscription growth as customers convert from software licenses and hardware growth from transportation customers.

Segment operating income and operating income percentage decreased primarily due to gross margin compression resulting from hardware product mix, as well as pricing pressures, and increased research and development investments related to meeting demands of the electronic logging device regulatory mandate.

We expect revenue and operating income impacts from these factors to continue into fiscal 2020, as we meet the demands of the electronic logging device regulatory mandate.

Transportation revenue decreased by $151.8 million or 19%, and segment operating income decreased by $75.8 million or 60%.

Revenue decreased primarily due to reduced hardware upgrades and subscriber declines, attributable in part to challenges with the electronic logging device transition in the trucking industry, as well as the economic impacts of COVID-19.

Conversion of customers from perpetual software to subscription products also reduced revenue.

Segment operating income and operating income as a percentage of segment revenue decreased primarily due to the revenue declines, discrete inventory charges, and higher operating expense due to the Kuebix acquisition, partially offset by cost reductions.

OFF-BALANCE SHEET ARRANGEMENTS

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(In millions)

Cash and cash equivalents and short-term investments

Cash and cash equivalents $ 237.7 $ 189.2 $ 172.5

As a percentage of total assets 3.5 % 2.8 % 3.0 %

Principal balance of outstanding debt $ 1,555.9 $ 1,854.0 $ 1,981.9

Fiscal Years 2020 2019 2018

(In millions)

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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 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, stock repurchases under the stock repurchase program, and planned capital expenditures.

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, stock repurchases under our 2017 Stock Repurchase Program, and planned capital expenditures.

Operating Activities

Cash provided by operating activities was $585.0 million for fiscal 2019 , as compared to $486.7 million for fiscal 2018 .

The increase of $98.3 million was primarily driven by an increase in net income, net of non-cash items, and favorable working capital requirements mainly resulting from an increase in deferred revenue associated with revenue growth, partially offset by a decrease in accrued compensation and benefits.

Cash provided by operating activities was $672.0 million for fiscal 2020, compared to $585.0 million for fiscal 2019.

The increase of $87.0 million was primarily driven by an increase in net income, net of non-cash items, and favorable working capital changes, including positive accounts receivable impact, due to improved sales linearity and higher accrued compensation, partially offset by deferred revenue and accrued liabilities changes.

Investing Activities

Cash used in investing activities was $275.3 million for fiscal 2019 , as compared to $1,649.6 million for fiscal 2018 .

The decrease of $1,374.3 million used in investing activities was primarily due to spending for business acquisitions during fiscal 2018, including the $1,212.1 million purchase of Viewpoint and $485.5 million purchase of e-Builder, partially offset by proceeds from the sale of short-term investments, also in fiscal 2018.

Cash used in investing activities was $231.8 million for fiscal 2020, compared to $275.3 million for fiscal 2019.

The decrease of $43.5 million was primarily due to decreased spending for business acquisitions, and to a lessor extent, reduced spending on property and equipment.

The current year included Kuebix acquisition compared to the prior year, which included the Cityworks acquisition.

Financing Activities

Cash used in financing activities was $292.6 million for fiscal 2019 , as compared to cash provided by financing activities of $989.4 million during fiscal 2018 .

The decrease of cash provided by financing activities of $1,282.0 million was primarily driven by the repayment of debt, net of borrowings, in fiscal 2019 as compared to the increase in debt proceeds, net of repayments, used to fund the Viewpoint and e-Builder acquisitions in fiscal 2018.

During fiscal 2019, we repaid $127.5 million of debt, net of borrowings.

Cash used in financing activities was $400.3 million for fiscal 2020, compared to $292.6 million during fiscal 2019.

The increase of $107.7 million was primarily driven by the increase in debt repayments, net of proceeds, partially offset by a decrease in the repurchase of common stock.

During fiscal 2020, we repaid $312.2 million of debt, including the full repayment of our term loan, net of borrowings.

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 fiscal 2020.

Refer to Note 7 of the Notes to Consolidated Financial Statements for more information regarding our debt.

Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information regarding our debt.

CONTRACTUAL OBLIGATIONS

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Income taxes payable (5) 69.1 7.3 20.9 40.9 —

Amount represents principal payments over the life of the debt obligations.

For further information, see Note 7 to the Consolidated Financial Statements.

Amount represents the expected interest payments relating to our debt, calculated using rates in effect as of the end of fiscal 2019.

For further information, see Note 7 to the Consolidated Financial Statements.

Operating leases represent undiscounted lease payments and include short-term leases and leases that were signed, but have not yet commenced as of the end of fiscal year 2019.

Total $ 2,403.2 $ 577.7 $ 537.5 $ 553.4 $ 734.6

(1) Amount represents principal payments over the life of our debt obligations.

Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information regarding our debt.

(2) Amount represents the expected interest payments relating to our debt, calculated using rates in effect at the end of fiscal 2020.

Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information regarding our debt.

(3) Operating leases represent undiscounted lease payments and include short-term leases and leases that were signed, but have not yet commenced at the end of fiscal 2020.

Refer to Note 7 in the Notes to Consolidated Financial Statements for additional information regarding our leases.

(4) 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.

(5) Income taxes payable represents a one-time transition tax liability related to known amounts of cash taxes payable in future years as a result of the Tax Act.

For further information, see Note 13 to the Consolidated Financial Statements.

Excluded from the table above are unrecognized tax benefits of $55.4 million included in Other non-current liabilities, 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.

Refer to Note 12 in the Notes to Consolidated Financial Statements for additional information regarding our taxes.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

The impact of recent accounting pronouncements is disclosed in Note 1 of our accompanying Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

S UPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES

S UPPLEMENTAL DISCLOSURE OF ANNUALIZED RECURRING REVENUE AND NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial information, we believe that the following information is helpful to an overall understanding of our past financial performance and prospects for the future.

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The non-GAAP financial measures and detailed explanations to the adjustments to comparable GAAP measures are below.

(In millions, except per share data)

2020 2019 2018

(In millions, except per share data) Dollar

Revenue Dollar

GAAP revenue:

Acquired deferred revenue adjustment

$ 3,147.7 $ 3,264.3 $ 3,108.4

Acquired deferred revenue adjustment (A) 4.3 7.0 23.6

Non-GAAP revenue:

$ 3,152.0 $ 3,271.3 $ 3,132.0

GROSS MARGIN:

GAAP gross margin:

Acquired deferred revenue adjustment

Restructuring charges

Amortization of purchased intangible assets

Stock-based compensation

Amortization of acquisition-related inventory step-up

Acquisition / divestiture items

$ 1,754.9 55.8 % $ 1,780.9 54.6 % $ 1,681.0 54.1 %

Acquired deferred revenue adjustment (A) 4.3 7.0 23.6

Amortization of purchased intangible assets (C) 92.3 94.1 103.2

Amortization of acquisition-related inventory step-up (D) — — 0.2

Acquisition / divestiture items (E) 1.7 — 2.0

Stock-based compensation / deferred compensation (F) 7.2 5.9 4.5

Restructuring charges (G) 0.8 1.1 0.5

COVID-19 expenses (H) 0.4 — —

Non-GAAP gross margin:

$ 1,861.6 59.1 % $ 1,889.0 57.7 % $ 1,815.0 58.0 %

OPERATING EXPENSES:

GAAP operating expenses:

Restructuring charges

Amortization of purchased intangible assets

Stock-based compensation

Acquisition / divestiture items

Amortization of acquired capitalized commissions

$ 1,335.1 42.4 % $ 1,405.0 43.0 % $ 1,360.3 43.8 %

Amortization of acquired capitalized commissions (B) 5.5 6.3 4.7

Amortization of purchased intangible assets (C) (65.5) (73.7) (76.4)

Acquisition / divestiture items (E) (19.7) (20.5) (36.9)

Stock-based compensation / deferred compensation (F) (83.2) (75.3) (71.2)

Restructuring charges / executive transition costs (G) (27.4) (26.8) (8.2)

COVID-19 expenses (H) (2.8) — —

Non-GAAP operating expenses:

$ 1,142.0 36.2 % $ 1,215.0 37.1 % $ 1,172.3 37.4 %

OPERATING INCOME:

GAAP operating income:

Acquired deferred revenue adjustment

Restructuring charges

Amortization of purchased intangible assets

Stock-based compensation

Amortization of acquisition-related inventory step-up

Acquisition / divestiture items

Amortization of acquired capitalized commissions

$ 419.8 13.3 % $ 375.9 11.5 % $ 320.7 10.3 %

Acquired deferred revenue adjustment (A) 4.3 7.0 23.6

Amortization of acquired capitalized commissions (B) (5.5) (6.3) (4.7)

Amortization of purchased intangible assets (C) 157.8 167.8 179.6

Amortization of acquisition-related inventory step-up (D) — — 0.2

Acquisition / divestiture items (E) 21.4 20.5 38.9

Stock-based compensation / deferred compensation (F) 90.4 81.2 75.7

Restructuring charges / executive transition costs (G) 28.2 27.9 8.7

COVID-19 expenses (H) 3.2 — —

Non-GAAP operating income:

$ 719.6 22.8 % $ 674.0 20.6 % $ 642.7 20.5 %

NON-OPERATING INCOME (EXPENSE), NET:

GAAP non-operating expense, net:

Acquisition / divestiture items

Debt issuance costs

GAAP non-operating income (expense), net:

$ (24.8) $ (31.1) $ (42.7)

Acquisition / divestiture items (E) (12.2) (12.1) (0.3)

Deferred compensation (F) (7.5) (6.3) 1.2

Debt issuance costs (I) — — 6.7

Non-GAAP non-operating expense, net:

Tax Rate % (N)

$ (44.5) $ (49.5) $ (35.1)

Tax Rate % (N) GAAP and

Tax Rate % (N)

INCOME TAX PROVISION (BENEFIT):

GAAP income tax provision (benefit):

Non-GAAP items tax effected

Difference in GAAP and Non-GAAP tax rate

Tax reform impacts

Reserve release upon statute of limitations expiration

IP restructuring impacts

GAAP income tax (benefit) provision:

$ 4.4 1.1 % $ (169.7) (49.2) % $ (5.3) (1.9) %

Non-GAAP items tax effected (J) 48.5 29.6 19.1

Difference in GAAP and Non-GAAP tax rate (K) (4.9) 55.6 80.3

Tax reform impacts (L) — — 21.3

IP restructuring and tax law change impacts (M) $ 64.0 206.3 —

Non-GAAP income tax provision:

$ 112.0 16.6 % $ 121.8 19.5 % $ 115.4 19.0 %

GAAP net income attributable to Trimble Inc.:

Acquired deferred revenue adjustment

Restructuring charges

Amortization of purchased intangible assets

Stock-based compensation

Amortization of acquisition-related inventory step-up

Acquisition / divestiture items

Amortization of acquired capitalized commissions

Debt issuance costs

Non-GAAP tax adjustments

( I ) - ( M )

$ 389.9 $ 514.3 $ 282.8

Acquired deferred revenue adjustment (A) 4.3 7.0 23.6

Amortization of acquired capitalized commissions (B) (5.5) (6.3) (4.7)

Amortization of purchased intangible assets (C) 157.8 167.8 179.6

Amortization of acquisition-related inventory step-up (D) — — 0.2

Acquisition / divestiture items (E) 9.2 8.4 38.6

Stock-based compensation / deferred compensation (F) 82.9 74.9 76.9

Restructuring charges / executive transition costs (G) 28.2 27.9 8.7

COVID-19 expenses (H) 3.2 — —

Debt issuance costs (I) — — 6.7

Non-GAAP tax adjustments (J) - (M) (107.6) (291.5) (120.7)

Non-GAAP net income attributable to Trimble Inc.:

$ 562.4 $ 502.5 $ 491.7

DILUTED NET INCOME PER SHARE:

GAAP diluted net income per share attributable to Trimble Inc.:

Acquired deferred revenue adjustment

Restructuring charges

Amortization of purchased intangible assets

Stock-based compensation

Amortization of acquisition-related inventory step-up

Acquisition / divestiture items

Amortization of acquired capitalized commissions

Debt issuance costs

Non-GAAP tax adjustments

( I ) - ( M )

$ 1.55 $ 2.03 $ 1.12

Acquired deferred revenue adjustment (A) 0.02 0.03 0.09

Amortization of acquired capitalized commissions (B) (0.02) (0.02) (0.02)

Amortization of purchased intangible assets (C) 0.62 0.66 0.71

Amortization of acquisition-related inventory step-up (D) — — —

Acquisition / divestiture items (E) 0.04 0.03 0.15

Stock-based compensation / deferred compensation (F) 0.33 0.30 0.30

Restructuring charges / executive transition costs (G) 0.11 0.11 0.04

COVID-19 expenses (H) 0.01 — —

Debt issuance costs (I) — — 0.03

Non-GAAP tax adjustments (J) - (M) (0.43) (1.15) (0.48)

Non-GAAP diluted net income per share attributable to Trimble Inc.:

$ 2.23 $ 1.99 $ 1.94

ADJUSTED EBITDA:

OPERATING INCOME:

GAAP net income attributable to Trimble Inc.:

$ 389.9 $ 514.3 $ 282.8

Non-operating income (expense), net, income tax provision (benefit), and net gain attributable to noncontrolling interests 29.9 (138.4) 37.9

GAAP operating income:

Acquired deferred revenue adjustment

Restructuring charges

Amortization of purchased intangible assets

Stock-based compensation

Amortization of acquisition-related inventory step-up

Acquisition / divestiture items

Amortization of acquired capitalized commissions

419.8 375.9 320.7

Acquired deferred revenue adjustment (A) 4.3 7.0 23.6

Amortization of acquired capitalized commissions (B) (5.5) (6.3) (4.7)

Amortization of purchased intangible assets (C) 157.8 167.8 179.6

Amortization of acquisition-related inventory step-up (D) — — 0.2

Acquisition / divestiture items (E) 21.4 20.5 38.9

Stock-based compensation / deferred compensation (F) 90.4 81.2 75.7

Restructuring charges / executive transition costs (G) 28.2 27.9 8.7

COVID-19 expenses (H) 3.2 — —

Non-GAAP operating income:

$ 719.6 $ 674.0 $ 642.7

Depreciation expense 39.7 39.4 35.6

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Adjusted EBITDA:

Non-GAAP Revenue and Operating Income Results

Non-GAAP revenue increased by $ 139.3 million or 4% as compared to fiscal 2018, due to the impact of Viewpoint, which was acquired in the third quarter of fiscal 2018, and to a lesser extent organic growth in Buildings and Infrastructure and Transportation and Resources and Utilities, partially offset by Geospatial due to market softness.

Non-GAAP operating income increased by $23.9 million or 4% as compared to fiscal 2018, due to strong operating results in Buildings and Infrastructure, partially offset by Geospatial and Transportation.

Resources and Utilities operating income was relatively flat.

$ 798.7 $ 749.2 $ 707.0

Annualized Recurring Revenue Explanation

In addition to providing non-GAAP financial measures, we disclose ARR to provide investors with supplementary indicators of the value of our current recurring revenue contracts.

ARR represents the estimated annualized value of recurring revenue, including subscription, maintenance and software revenue, and term license contracts for the quarter.

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

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We believe this measure helps investors understand the performance of our business, as non-GAAP revenue excludes the effects of certain acquired deferred revenue that was written down to fair value in purchase accounting.

Management believes that excluding fair value purchase accounting adjustments more closely correlates with the ordinary and ongoing course of the acquired company’s operations and facilitates analysis of revenue growth and business trends.

Non-GAAP gross margin

We believe our investors benefit by understanding our non-GAAP gross margin as a way of understanding how product mix, pricing decisions, and manufacturing costs influence our business.

Non-GAAP gross margin excludes the effects of acquired deferred revenue that was written down to fair value in purchase accounting, restructuring charges, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, and acquisition/divestiture items associated with the acceleration of acquisition stock options from GAAP gross margin.

Non-GAAP gross margin excludes the effects of certain acquired deferred revenue, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, and COVID-19 expenses.

We believe that these adjustments offer investors additional information that may be useful to view trends in our gross margin performance.

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We believe this measure is important to investors evaluating our non-GAAP spending in relation to revenue.

Non-GAAP operating expenses exclude restructuring charges, amortization of purchased intangible assets, stock-based compensation, and acquisition/divestiture items associated with external and incremental costs resulting directly from merger and acquisition activities such as:

legal, due diligence, integration, and other costs including the acceleration of acquisition stock options, adjustment to the fair value of earn-out liabilities, and the effects of certain acquired capitalized commissions that were eliminated in purchase accounting from GAAP operating expenses.

We believe that these adjustments offer investors supplemental information to facilitate comparison of our operating expenses to our prior results.

Non-GAAP operating expenses exclude the effects of certain acquired capitalized commissions that were eliminated in purchase accounting, amortization of purchased intangible assets, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, executive transition costs, and COVID-19 expenses.

We believe that these adjustments offer investors supplemental information to facilitate comparison of our operating expenses to our prior results and trends.

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, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, 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 income (expense), net

Non-GAAP operating income excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, executive transition costs, and COVID-19 expenses.

We believe that these adjustments offer a supplemental means for our investors to evaluate current operating performance compared to prior results and trends.

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 acquisition/divestiture gains/losses associated with unusual acquisition related items such as intangible asset impairment charges, gains or losses related to the acquisitions or sale of certain businesses and investments, and debt issuance costs.

Non-GAAP non-operating expense, net, excludes acquisition/divestiture items, deferred compensation, and debt issuance costs.

We believe that these exclusions provide investors with a supplemental view of our ongoing financial results.

Non-GAAP income tax provision

We believe that providing investors with the non-GAAP income tax provision is beneficial because it provides for consistent treatment of the excluded items in our non-GAAP presentation.

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 results from the non-U.S.

intercompany transfer of intellectual property, tax law changes, net deferred tax impacts resulting from the U.S.

2017 Tax Act, and significant one-time reserve releases upon statute of limitations expirations.

We believe our non-GAAP tax rate facilitates a comparison of our period-to-period results, excluding the above items which can introduce volatility to our tax rate.

Non-GAAP net income

This measure provides a supplemental view of net income trends, that 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, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, debt issuance costs, 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.

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, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, restructuring charges, executive transition costs, COVID-19 expenses, debt issuance costs, and non-GAAP tax adjustments.

We believe our investors benefit from understanding these adjustments and from an alternative view of our net income performance as compared to prior periods and trends.

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, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, debt issuance costs, 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.

Non-GAAP diluted net income per share excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, restructuring charges, executive transition costs, COVID-19 expenses, debt issuance costs, and non-GAAP tax adjustments.

We believe that these adjustments offer investors a useful view of our diluted net income per share as compared to prior periods and trends.

Adjusted EBITDA

We believe that adjusted EBITDA assists investors in comparing our performance over various reporting periods on a consistent basis.

Adjusted EBITDA refers to non-GAAP operating income plus depreciation and income from equity method investments.

We also believe the measure provides useful information to investors in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA is a performance measure that we believe offers a useful view of the overall operations of our business.

We believe it is useful because it facilitates 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, depreciation and amortization expenses.

We define Adjusted EBITDA as non-GAAP operating income plus depreciation expense and 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 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.

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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, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, debt issuance costs, and non-GAAP tax adjustments.

Acquired deferred revenue adjustment .

Accordingly, management excludes from non-GAAP the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, executive transition costs, COVID-19 expenses, debt issuance costs, and non-GAAP tax adjustments.

(A) Acquired deferred revenue adjustment .

Purchase accounting generally requires us to write-down acquired deferred revenue to fair value.

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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.

Restructuring charges .

Included in our GAAP presentation of cost of sales and operating expenses, restructuring charges recorded are primarily for employee compensation resulting from reductions in employee headcount in connection with our company restructurings.

We exclude restructuring charges from our non-GAAP measures because we believe they do not reflect expected future operating expenses, they are not indicative of our core operating performance, and they are not meaningful in comparisons to our past operating performance.

We have incurred restructuring expense in each of the periods presented.

However, the amount incurred can vary significantly based on whether a restructuring has occurred in the period and the timing of headcount reductions.

Amortization of purchased intangible assets .

Included in our GAAP presentation of gross margin and operating expenses is amortization of purchased intangible assets.

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.

(B) 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.

Included in our GAAP presentation of cost of sales and operating expenses is amortization of purchased intangible assets.

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.

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 2019 , 2018 and 2017 , stock-based compensation was allocated as follows:

(In millions)

Cost of sales

Research and development

Sales and Marketing

General and administrative

Total stock-based compensation expense

Amortization of acquisition-related inventory step-up.

(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.

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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.

Acquisition/divestiture items .

(E) 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 include unusual acquisition, investment, and/or divestiture gains/losses.

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.

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.

We believe this adjustment to sales and marketing expenses is useful to investors as a measure of the ongoing performance of our business.

Debt issuance costs.

(F) 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.

(G) Restructuring charges / executive transition costs.

Additionally, included in our 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.

(H) 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, and personal protective equipment.

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.

(I) Debt issuance costs.

Included in our non-operating expense, net this amount represents incurred costs in connection with a bridge facility we put in place for the Viewpoint acquisition, costs associated with the issuance of new credit facilities and our senior notes issued in 2018 that were not capitalized as debt issuance costs, and a write-off of debt issuance costs for terminated and/or modified credit facilities.

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We believe that investors benefit from excluding this item from our non-operating income to facilitate an evaluation of our non-operating income trends.

Non-GAAP items tax effected .

This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (H) on non-GAAP net income.

(J) Non-GAAP items tax effected .

This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (I) on non-GAAP net income.

This amount excludes the GAAP tax rate impact resulting from the tax reform impacts and non-U.S.

intercompany transfer of intellectual property, which is separately disclosed in items (L) and (M).

We believe this information is useful to investors because it provides for consistent treatment of the excluded items in this non-GAAP presentation.

Difference in GAAP and Non-GAAP tax rate .

(K) 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 GAAP tax rate used for this calculation excludes the net deferred tax impacts resulting from the tax reform impacts and non-U.S.

intercompany transfer of intellectual property, which is separately disclosed in items (L) and (M).

T he non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts results from the non-U.S.

intercompany transfer of intellectual property, net deferred tax impacts resulting from the U.S.

2017 Tax Act, 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.

Tax reform impacts .

This amount represents the provision for income taxes recorded as a result of the Tax Act enacted in December 22, 2017.

(L) Tax reform impacts.

The provision primarily includes a one-time tax benefit from the policy election to establish deferred taxes in relation to GILTI as created by the Tax Act.

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We believe that investors benefit from excluding this item from our non-GAAP income tax provision because it allows for period-over-period comparability.

Reserve release upon statute of limitations expiration.

This amount represents a one time tax benefit resulting from a reserve release due to the expiration of statute of limitations for certain years.

We excluded this because it is non-recurring and is not indicative of our core operating performance.

IP restructuring impacts.

(M) IP restructuring and tax law change impacts.

These amounts represent net deferred tax impacts resulting from a non-U.S.

intercompany transfer of intellectual property, consistent with changes in tax laws and our international business operations.

intercompany transfer of intellectual property, consistent with tax law changes, including tax rates changes, and our international business operations.

We excluded this because it is not indicative of our core operating performance.

GAAP and non-GAAP tax rate percentages .

(N) 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis