Trimble Inc.
TRIMBLE NAVIGATION LTD /CA/ (Form: 10-Q, Received: 11/05/2007 06:03:26)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
 
(Mark One)
T            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2007

OR

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________


Commission file number: 0-18645

TRIMBLE NAVIGATION LIMITED
(Exact name of registrant as specified in its charter)

 
California
 
94-2802192
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 

 
935 Stewart Drive, Sunnyvale, CA 94085
(Address of principal executive offices) (Zip Code)

Telephone Number (408) 481-8000
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes T
No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer T
Accelerated Filer o
Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o
No T

As of October 31, 2007 there were 121,292,087 shares of Common Stock (no par value) outstanding.
 


 
TRIMBLE NAVIGATION LIMITED
FORM 10-Q for the Quarter Ended September 28, 2007
TABLE OF CONTENTS

PART I.
   
Page
         
ITEM 1.
     
       
     
3
   
 
   
     
4
   
 
   
     
5
         
     
6
         
ITEM 2.
   
21
         
ITEM 3.
   
32
         
ITEM 4.
   
33
         
PART II.
     
   
 
   
ITEM 1.
   
33
         
ITEM 1A.
   
33
         
ITEM 2.
   
33
         
ITEM 6.
   
34
         
     
35
 

PART I – FINANCIAL INFORMATION
I TE M 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TRIMBLE NAVIGATION LIMITED
CONDENSED CO NSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
September 28,
   
December 29,
 
   
2007
   
2006
 
(In thousands)
       
 
 
             
ASSETS
           
Current assets :
           
Cash and cash equivalents
  $
84,072
    $
129,621
 
Accounts receivable, net
   
242,589
     
177,054
 
Other receivables
   
10,677
     
6,014
 
Inventories, net
   
142,158
     
112,552
 
Other current assets
   
57,211
     
38,931
 
Total current assets
   
536,707
     
464,172
 
Property and equipment, net
   
51,667
     
47,998
 
Goodwill
   
669,608
     
374,510
 
Other purchased intangible assets, net
   
195,459
     
67,172
 
Other  non-current assets
   
51,092
     
29,625
 
Total assets
  $
1,504,533
    $
983,477
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $
167
    $
--
 
Accounts payable
   
63,358
     
49,194
 
Deferred revenue
   
53,598
     
28,060
 
Deferred income taxes
   
5,234
     
4,525
 
Income taxes payable
   
33,178
     
23,814
 
Other current liabilities
   
88,113
     
80,586
 
Total current liabilities
   
243,648
     
186,179
 
Non-current portion of long-term debt
   
80,923
     
481
 
Non-current deferred revenue
   
11,988
     
--
 
Deferred income taxes
   
39,907
     
21,633
 
Other non-current liabilities
   
55,475
     
27,519
 
Total liabilities
   
431,941
     
235,812
 
                 
Commitments and contingencies
               
                 
Shareholders' equity:
               
Preferred stock no par value; 3,000 shares authorized; none outstanding
   
--
     
--
 
Common stock, no par value; 180,000 shares authorized; 121,110 and 111,718 shares issued and outstanding at September 28, 2007 and December 29, 2006, respectively
   
650,454
     
435,371
 
Retained earnings
   
362,266
     
271,183
 
Accumulated other comprehensive income
   
59,872
     
41,111
 
Total shareholders' equity
   
1,072,592
     
747,665
 
Total liabilities and shareholders' equity
  $
1,504,533
    $
983,477
 

See accompanying Notes to the Condensed Consolidated Financial Statements.


TRIMBLE NAVIGATION LIMITED
 CONDENSED CONSO LIDATE D STATEMENTS OF INCOME
(UNAUDITED)

   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(In thousands, except per share data)
                       
                         
Revenue  (1)
  $
296,023
    $
234,851
    $
909,487
    $
706,030
 
Cost of sales (1)
   
149,083
     
118,660
     
452,248
     
360,721
 
Gross margin
   
146,940
     
116,191
     
457,239
     
345,309
 
                                 
Operating expenses
                               
Research and development
   
31,707
     
25,180
     
96,737
     
77,234
 
Sales and marketing
   
45,274
     
34,902
     
134,967
     
103,356
 
General and administrative
   
21,262
     
17,981
     
67,182
     
50,016
 
Restructuring charges
   
-
     
-
     
3,025
     
-
 
Amortization of purchased intangible assets
   
4,911
     
1,747
     
14,212
     
5,639
 
In-process research and development
   
-
     
50
     
2,112
     
1,000
 
Total operating expenses
   
103,154
     
79,860
     
318,235
     
237,245
 
Operating income
   
43,786
     
36,331
     
139,004
     
108,064
 
Non-operating income, net
                               
Interest income
   
770
     
1,402
     
2,607
     
2,677
 
Interest expense
    (1,616 )     (87 )     (5,476 )     (330 )
Income from joint ventures
   
1,943
     
1,047
     
6,445
     
4,238
 
Other income, net
    (8 )    
295
     
641
     
1,404
 
Total non-operating income, net
   
1,089
     
2,657
     
4,217
     
7,989
 
Income before taxes
   
44,875
     
38,988
     
143,221
     
116,053
 
Income tax provision
   
17,501
     
13,646
     
52,138
     
36,380
 
Net income
  $
27,374
    $
25,342
    $
91,083
    $
79,673
 
                                 
Basic earnings per share
  $
0.23
    $
0.23
    $
0.77
    $
0.73
 
Shares used in calculating basic earnings per share
   
120,591
     
110,678
     
118,553
     
109,618
 
                                 
Diluted earnings per share
  $
0.22
    $
0.22
    $
0.74
    $
0.69
 
Shares used in calculating diluted earnings per share
   
125,687
     
116,986
     
123,691
     
115,854
 
 
(1) Sales to related parties were $6.5 million and $5.2 million for the three months ended September 28, 2007 and September 29, 2006, respectively, with associated cost of sales to those related parties of $4.8 million and $3.5 million, respectively.  Sales to related parties were $18.3 million and $15.6 million for the nine months ended September 28, 2007 and September 29, 2006, respectively, with associated cost of sales to those related parties of $12.6 million and $9.7 million, respectively. In addition, cost of sales associated with related party net inventory purchases was $5.6 million and $5.0 million for the three months ended September 28, 2007 and September 29, 2006, respectively, and $19.8 million and $16.1 million for the nine months ended September 28, 2007 and September 29, 2006, respectively. See Note 5 regarding joint ventures for further information about related party transactions.


See accompanying Notes to the Condensed Consolidated Financial Statements.


TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Nine Months Ended
 
   
September 28,
   
September 29,
 
   
2007
   
2006
 
(In thousands)
           
             
Cash flow from operating activities:
           
Net income
  $
91,083
    $
79,673
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation expense
   
12,733
     
9,939
 
Amortization expense
   
28,615
     
9,082
 
Provision for doubtful accounts
   
684
     
181
 
Amortization of debt issuance cost
   
162
     
135
 
Deferred income taxes
    (6,547 )     (355 )
Non-cash restructuring charges
   
1,725
     
-
 
Stock-based compensation
   
10,949
     
9,437
 
In-process research and development
   
2,112
     
1,000
 
Equity gain from joint venture
    (6,445 )     (4,238 )
Excess tax benefit for stock-based compensation
    (13,283 )     (8,088 )
Provision for excess and obsolete inventories
   
3,513
     
5,830
 
Other non-cash items
   
144
     
131
 
Add decrease (increase) in assets:
               
Accounts receivable
    (42,971 )     (19,829 )
Other receivables
   
4,619
     
1,615
 
Inventories
    (15,512 )     (9,110 )
Other current and non-current assets
   
6,353
      (7,371 )
Add increase (decrease) in liabilities:
               
Accounts payable
    (7,518 )     (6,250 )
Accrued liabilities
    (832 )    
4,760
 
Deferred revenue
   
25,989
     
9,499
 
Income taxes payable
   
33,511
     
7,482
 
Net cash provided by operating activities
   
129,084
     
83,523
 
                 
Cash flow from investing activities:
               
Acquisitions of businesses, net of cash acquired
    (285,523 )     (43,167 )
Acquisitions of property and equipment
    (9,208 )     (13,966 )
Dividends received
   
2,888
     
2,244
 
Other
   
361
      (16 )
Net cash used in investing activities
    (291,482 )     (54,905 )
                 
Cash flow from financing activities:
               
Issuances of common stock
   
27,830
     
24,134
 
Excess tax benefit for stock-based compensation
   
13,283
     
8,088
 
Proceeds from long-term debt and revolving credit lines
   
250,000
     
-
 
Payments on long-term debt and revolving credit lines
    (170,037 )    
-
 
Other
   
-
      (911 )
Net cash provided by financing activities
   
121,076
     
31,311
 
                 
Effect of exchange rate changes on cash and cash equivalents
    (4,227 )    
2,620
 
                 
Net increase (decrease) in cash and cash equivalents
    (45,549 )    
62,549
 
Cash and cash equivalents, beginning of period
   
129,621
     
73,853
 
Cash and cash equivalents, end of period
  $
84,072
    $
136,402
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

NOTE 1. OVERVIEW AND BASIS OF PRESENTATION

Trimble Navigation Limited (the Company), incorporated in California in 1981, provides positioning product solutions to commercial and government users in a large number of markets. These markets include surveying, construction, agriculture, fleet and mobile worker, urban and resource management, military, transportation and telecommunications.

The Company has a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2006 was December 29. The third fiscal quarters of 2007 and 2006 ended on September 28, 2007 and September 29, 2006, respectively. Fiscal 2007 and 2006 are 52-week years. Unless otherwise stated, all dates refer to its fiscal year and fiscal periods.

The Condensed Consolidated Financial Statements include the results of the Company and its subsidiaries. Inter-company accounts and transactions have been eliminated.  The Condensed Consolidated Balance Sheet is derived from the December 29, 2006 audited Consolidated Financial Statements included in the Annual Report on Form 10-K of Trimble Navigation Limited for fiscal year 2006. Certain amounts from prior periods have been reclassified to conform to the current period presentation.
 
The accompanying financial data as of September 28, 2007 and for the three and nine months ended September 28, 2007 and September 29, 2006 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with the Company’s 2006 Annual Report on Form 10-K.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present a fair statement of financial position as of September 28, 2007, results of operations for the three and nine months ended September 28, 2007 and September 29, 2006 and cash flows for the nine months ended September 28, 2007 and September 29, 2006, as applicable, have been made. The results of operations for the three and nine months ended September 28, 2007 are not necessarily indicative of the operating results for the full fiscal year or any future periods.   Individual segment revenue may be affected by seasonal buying patterns.

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

On January 17, 2007, the Company’s Board of Directors approved a 2-for-1 split of all outstanding shares of the Company’s Common Stock, payable February 22, 2007 to stockholders of record on February 8, 2007. All shares and per share information presented have been adjusted to reflect the stock split on a retroactive basis for all periods presented.


NOTE 2. UPDATES TO SIGNIFICANT ACCOUNTING POLICIES
 
There have been no changes to the Company’s significant accounting polices during the nine months ended September 28, 2007 from those disclosed in the Company’s 2006 Form 10-K.  However, the Company is providing updated disclosures surrounding certain accounting policies, as provided below.

Revenue Recognition

The Company recognizes 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. The Company assesses 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. The Company assesses 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 are not recognized until the product is shipped and title has transferred to the buyer. The Company bears all costs and risks of loss or damage to the goods up to that point. The Company’s shipment terms for U.S. orders and international orders fulfilled from the Company’s 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, the Company may choose within the place or range stipulated where the carrier will take the goods into carrier’s charge. 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 the cost of goods sold.

 
Revenue 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 support agreements is deferred and recognized ratably over the term of the warranty/support period.

The Company presents revenue net of sales taxes and any similar assessments.

The Company applies Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” to products where the embedded software is more than incidental to the functionality of the hardware. This determination requires significant judgment including a consideration of factors such as marketing, research and development efforts and any post contract support (PCS) relating to the embedded software.

The Company’s software arrangements generally consist of a perpetual license fee and PCS. The Company has established vendor-specific objective evidence (VSOE) of fair value for the Company’s PCS contracts based on the renewal rate. The remaining value of the software arrangement is allocated to the license fee using the residual method, which revenue is primarily recognized when the software has been delivered and there are no remaining obligations. Revenue from PCS is recognized ratably over the term of the PCS agreement.

The Company applies Emerging Issues Task Force (EITF) Issue 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware” for hosted arrangements which the customer 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. Subscription revenue related to the Company’s hosted arrangements is recognized ratably over the contract period. Upfront fees for the Company’s hosted solution primarily consist of amounts for the in-vehicle enabling hardware device and peripherals, if any. For upfront fees relating to propriety hardware where the firmware is more than incidental to the functionality of the hardware in accordance with SOP No. 97-2, the Company defers the upfront fees at installation and recognizes them ratably over the minimum service contract period, generally one to five years. Product costs are also deferred and amortized over such period.

In accordance with EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” when a non-software sale involves multiple elements the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element is met.

Inventories  

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, obsolescence or impaired balances. Factors influencing these adjustments include decline in demand, technological changes, product life cycle 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.

Goodwill and Purchased Intangible Assets
 
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable intangible assets are comprised of distribution channels, patents, licenses, technology, acquired backlog and trademarks.  Identifiable intangible assets are being amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to ten 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

The Company evaluates 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 Company performs its annual goodwill impairment testing in the fourth fiscal quarter of each year.  Goodwill is reviewed for impairment utilizing a two-step process.  First, impairment of goodwill is tested 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.

 
Depreciation and amortization of the Company’s 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 the Company’s business model, or changes in the capital strategy could result in the actual useful lives differing from initial estimates. In those cases where the Company determines that the useful life of an asset should be revised, the Company will depreciate the net book value in excess of the estimated residual value 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. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash 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.

Recent Accounting Pronouncements
 
Updates to recent accounting standards as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2006 are as follows:
 
In June 2006, the Financial Accounting Standards Board (FASB) reached a consensus on EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision that should be disclosed. On December 30, 2006, the Company adopted EITF 06-3 and the adoption had no effect on the Company’s financial position, results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 applies to all tax positions related to income taxes subject to Statement of Financial Accounting Standard (SFAS) 109, “Accounting for Income Taxes.”  Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet.   On December 30, 2006, the Company adopted FIN 48 and, as a result of the implementation, no change to liabilities for uncertain tax positions were recorded (compared to amounts under SFAS 5, “Accounting for Contingencies,” represented in the financial statements for the 2006 year).

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 is effective for the Company beginning in its first quarter of fiscal 2008, although earlier adoption is encouraged. The Company does not expect the adoption of SFAS 157 to have a material impact on its financial position, results of operations or cash flows.
 
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.”  SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. If the Company elected to adopt SFAS 159, it would be effective for the Company beginning in its first quarter of fiscal 2008, with early adoption permitted provided that the Company also adopted SFAS 157. The Company does not expect the adoption of SFAS 159 to have a material impact on its financial position, results of operations or cash flows.


NOTE 3. ACQUISITIONS
 
@Road, Inc.
 
On December 10, 2006, the Company and @Road, Inc. (@Road) entered into a definitive merger agreement.  The acquisition became effective on February 16, 2007.  @Road is a global provider of solutions designed to automate the management of mobile resources and to optimize the service delivery process for customers across a variety of industries. The acquisition of @Road expands the Company’s investment and reinforces the existing growth strategy for its Mobile Solutions (TMS) segment.  @Road’s results of operations since February 17, 2006 have been included in the Company’s consolidated statements of income within the Mobile Solutions business segment.
 
Purchase Price
 
Under the terms of the agreement, the Company acquired all of the outstanding shares of @Road common stock for $7.50 per share.  The Company elected to issue $2.50 per share of the consideration in the form of the Company’s common stock (Common Stock) to be based upon the five-day average closing price of the Company’s shares six trading days prior to the closing of the transaction and the remaining $5.00 per share consideration was paid in cash. Further, each share of Series A-1 and Series A-2 Redeemable Preferred Stock, par value $0.001 per share, of @Road was converted into the right to receive an amount in cash equal to $100.00 plus all declared or accumulated but unpaid dividends with respect to such shares as of immediately prior to the effective time of the merger and each share of Series B-1 Redeemable Preferred Stock, par value $0.001 per share, of @Road and each share of Series B-2 Redeemable Preferred Stock, par value $0.001 per share, of @Road was converted into the right to receive an amount in cash equal to $831.39 plus all declared or accumulated but unpaid dividends with respect to such shares as of immediately prior to the effective time of the merger. In addition, all @Road vested stock options were terminated and the holders of each such option were entitled to receive the excess, if any, of the aggregate consideration over the exercise price. At the effective time of the merger, all unvested @Road stock options with an exercise price in excess of $7.50 were terminated and all unvested stock options that had exercise prices of $7.50 or less were assumed by the Company.

 
Concurrently with the merger, the Company amended and restated its existing $200 million unsecured revolving credit agreement with a syndicate of 11 banks with The Bank of Nova Scotia as the administrative agent (the 2007 Credit Facility) and incurred a five-year term loan under the 2007 Credit Facility.  See Note 9 to the Condensed Consolidated Financial Statements for additional information.

The Company paid approximately $327.3 million in cash from debt and existing cash, and issued approximately 5.9 million shares of the Company’s common stock based on an exchange ratio of 0.0893 shares of the Company’s common stock for each outstanding share of @Road common stock as of February 16, 2007. The common stock issued had a fair value of $161.9 million and was valued using the average closing price of the Company’s common stock of $27.69 over a range of two trading days (February 14, 2007 through February 15, 2007) prior to, and including, the close date (February 16, 2007) of the transaction, which is also the date that the amount of the Company’s shares to be issued in accordance with the merger agreement was settled. The total purchase price is estimated as follows (in thousands):
Cash consideration
  $
327,370
 
Common stock consideration
   
161,947
 
Merger costs *
   
5,698
 
Total Purchase price
  $
495,015
 
* Merger costs consist of legal, advisory, accounting and administrative fees.

Preliminary Purchase Price Allocation
 
In accordance with SFAS  141, "Business Combinations,” the total purchase price was allocated to @Road net tangible assets, identifiable intangible assets and in-process research and development based upon their estimated fair values as of February 16, 2007. The excess purchase price over the net tangible, identifiable intangible assets and in-process research and development was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on estimates and assumptions provided by management. The allocation of the total estimated purchase price is preliminary and may differ from the actual purchase price allocation upon realization of any accrued costs and final fair value determination of certain tangible assets, intangible assets and liabilities assumed.
 
The total preliminary purchase price has been allocated as follows (in thousands):
 
Value to be allocated to assets, based upon merger consideration
  $
495,015
 
Less: value of @Road’s assets acquired:
       
Net tangible assets acquired
   
139,884
 
         
Amortizable intangibles assets:
       
Developed product technology
   
66,600
 
Customer relationships
   
75,300
 
Trademarks and tradenames
   
5,200
 
Subtotal
   
147,100
 
         
In-process research and development
   
2,100
 
Deferred tax liability
    (56,855 )
Goodwill
  $
262,786
 
 
Net Tangible Assets
 
   
As of
 
   
February 16,
 
(in thousands)
 
2007
 
Cash and cash equivalents
  $
74,729
 
Accounts receivable, net
   
14,255
 
Other receivables
   
8,774
 
Inventory
   
15,272
 
Other current assets
   
11,953
 
Property and equipment, net
   
5,854
 
Deferred tax asset
   
42,471
 
Other non-current assets
   
8,111
 
 
       
Total assets acquired
  $
181,419
 
 
       
Accounts payable
   
19,285
 
Deferred revenue
   
7,365
 
Other accrued liabilities
   
14,885
 
 
       
Total liabilities assumed
  $
41,535
 
 
       
Total net assets acquired
  $
139,884
 
 
 
The Company reviewed and adjusted @Road's net tangible assets and liabilities to fair value, as necessary, as of February 16, 2007, including the following adjustments:
 
Fixed assets – the Company decreased @Road's historical value of fixed assets by $2.1 million to adjust fixed assets to an amount equivalent to fair value.
 
Deferred revenue and cost of sales – the Company reduced @Road's historical value of deferred revenue by $39.6 million to adjust deferred revenue to the fair value of the direct cost associated with servicing the underlying obligation plus a reasonable margin. @Road’s deferred revenue balance consists of upfront payments of its hosted product, licensed product, extended warranty and maintenance. The Company reduced @Road's historical value of deferred product cost by $47.1 million to adjust deferred product cost to the asset's underlying fair value. The deferred product costs adjustment to fair value related to deferral of cost of sales of hardware that have shipped, resulting in no fair value relating to the associated deferred product costs.
 
Other receivables and non-current assets – Other receivables and non-current assets were increased by $15.4 million to adjust for the fair value of future cash collections from customer contracts assumed for products delivered prior to the acquisition date.   As the products were delivered prior to the acquisition date, revenue is not recognizable in the Company’s Condensed Consolidated Statements of Income.
 
Intangible Assets
 
Developed product technology, which is comprised of products that have reached technological feasibility, includes products in @Road's current product offerings. @Road's technology includes hardware, software and services that serve the mobile resource management market internationally. The Company expects to amortize the developed and core technology over a weighted average estimated life of seven years.
 
Customer relationships represent the value placed on @Road’s distribution channels and end users. The Company expects to amortize the fair value of these assets over a weighted average estimated life of seven years.
 
Trademarks and tradenames represent the value placed on the @Road brand and recognition in the mobile resource management market. The Company expects to amortize the fair value of these assets over a weighted average estimated life of eight years.
 
In-process Research and Development
 
The Company recorded an expense of $2.1 million relating to in-process research and development projects in @Road’s license business.   In-process research and development represents incomplete @Road research and development projects that had not reached technological feasibility and had no alternative future use as of the consummation of the merger.
 
Goodwill
 
The excess purchase price over the net tangible, identifiable intangible assets and in-process research and development was recorded as goodwill. The goodwill was attributed to the premium paid for the opportunity to expand and better serve the global mobile resource management market and achieve greater long-term growth opportunities than either company had operating alone. The Company believes these opportunities could include accelerating the rate at which products are brought to market and increasing the diversity and global reach of those products. In addition, the Company expects that the combined companies may be able to obtain greater operating leverage by reducing costs in areas of redundancy.
 
 
Restructuring
 
Liabilities related to restructuring @Road's operations that meet the requirements of EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” have been recorded as adjustments to the purchase price and an increase in goodwill. Liabilities related to restructuring the Company's operations have been recorded as expenses in the Company's Condensed Consolidated Statements of Income in the period that the costs are incurred.

The Company is in the process of finalizing the total restructuring liability related to the @Road acquisition.  See Note 12 to the Condensed Consolidated Financial Statements for additional information.
 
Deferred tax assets/liabilities
 
The Company recognized $56.9 million in net deferred tax liabilities for the tax effects of differences between assigned values in the purchase price and the tax bases of assets acquired and liabilities assumed.

@Road stock options assumed
 
In accordance with the merger agreement, the Company assumed all @Road unvested stock options that had exercise prices of $7.50 or less.  The Company issued approximately 795,000 stock options based on an exchange ratio of 0.268 shares of the Company’s common stock for each unvested stock option with exercise prices of $7.50 or less as of February 16, 2007.  The fair value of these assumed options was determined to be $10.1 million which will be expensed over the remaining vesting terms of the assumed options which is approximately three to four years.  The assumed options were valued using the binomial model similar to previously granted Trimble stock options as discussed in the Company’s fiscal 2006 Form 10-K.
 
Pro-Forma Results
 
The following table presents pro-forma results of operations of the Company and @Road, as if the companies had been combined as of the beginning of the earliest period presented. The unaudited pro-forma results of operations are not necessarily indicative of results that would have occurred had the acquisition taken place on December 30, 2005 or of future results.  Included in the pro-forma results are fair value adjustments based on the fair values of assets acquired and liabilities assumed as of the acquisition date of February 16, 2007 and adjustments for interest expense related to debt and stock options assumed as part of the merger consideration.

The Company excluded the effect of non-recurring items for all periods presented as the impact is short-term in nature. The pro-forma information is as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 29,
   
September 28,
   
September 29,
 
   
2006 (b)
   
2007 (a)
   
2006 (b)
 
(in thousands, except per share data)
                 
Pro-forma revenue
  $
254,728
    $
918,961
    $
762,186
 
Pro-forma net income
   
16,496
     
82,639
     
53,464
 
Pro-forma basic net income per share
  $
0.14
    $
0.68
    $
0.46
 
Pro-forma diluted net income per share
  $
0.13
    $
0.66
    $
0.44
 

(a)
The pro-forma results of operations represent the Company’s results for the nine months ended September 28, 2007, including @Road beginning from February 17, 2007, and @Road historical results and pro-forma adjustments based on the fair values of assets acquired and liabilities assumed as of the acquisition date of February 16, 2007 for the beginning of @Road’s first quarter of fiscal 2007 to February 16, 2007.  Pro-forma revenue includes a $1.4 million decrease due to deferred revenue write-downs and customer contracts where the product was delivered prior to the acquisition date.   Pro-forma net income includes revenue write-downs and related deferred cost of sales write-downs of $0.1 million, amortization of intangible assets related to the acquisition of $2.8 million, interest expense for debt used to purchase @Road of $1.4 million, and stock-based compensation for @Road options assumed of $0.2 million.
(b)
The pro-forma results of operations represent the Company’s results for the three and nine months ended September 29, 2006, including @Road’s historical results and  pro-forma adjustments based on the fair values of assets acquired and liabilities assumed as of the acquisition date of February 16, 2007 for the three and nine months ending September 29, 2006.  Pro-forma revenue for the three and nine months ended September 29, 2006 includes a $ 5.3 million and $ 16.9 million decrease, respectively, due to deferred revenue write-downs and customer contracts for which the product was delivered prior to the acquisition date.  Pro-forma net income for the three and nine months ended September 29, 2006 includes revenue write-downs and related deferred cost of sales write-downs of $ 0.6 million and $ 2.5 million, respectively, amortization of intangible assets related to the acquisition of $4.6 million and $13.7 million, respectively, interest expense for debt used to purchase @Road of $ 2.8 million and $ 8.4 million, respectively, and stock-based compensation for @Road options assumed of $ 0.2  million and $ 0.6 million, respectively.

 
NOTE 4. STOCK-BASED COMPENSATION

The Company accounts for its employee stock options and rights to purchase shares under its stock participation plans at fair value, in accordance with SFAS 123(R), “Share-Based Payment.” SFAS 123(R) requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the related employees’ requisite service periods in the Company’s Condensed Consolidated Statements of Income.

The following table summarizes stock-based compensation expense, net of tax, related to employee stock-based compensation included in the Consolidated Condensed Statements of Income in accordance with SFAS 123(R) for the three and nine months ended September 28, 2007 and September 29, 2006.

   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(in thousands)
                       
Cost of sales
  $
469
    $
285
    $
1,240
    $
881
 
Research and development
   
868
     
620
     
2,619
     
1,926
 
Sales and marketing
   
1,059
     
663
     
2,800
     
2,115
 
General and administrative
   
1,408
     
1,380
     
4,290
     
4,515
 
Total operating expenses
   
3,335
     
2,663
     
9,709
     
8,556
 
Total stock-based compensation expense
   
3,804
     
2,948
     
10,949
     
9,437
 
Tax benefit (1)
   
294
      (263 )     (574 )     (851 )
Total stock-based compensation expense, net of tax
  $
4,098
    $
2,685
    $
10,375
    $
8,586
 
 
(1) Tax benefit related to U.S. non-qualified options only, as allowed by the applicable tax requirements using the statutory tax rate for the respective periods.

Options

Stock option expense recognized during the period is based on the value of the portion of the stock option that is expected to vest during the period. The fair value of each stock option is estimated on the date of grant using a binomial valuation model. The Black-Scholes model was used to value those options granted prior to the fourth quarter of fiscal 2005.  Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. For options granted for the three and nine months ended September 28, 2007 and September 29, 2006, the following assumptions were used:

   
Three Months Ended
   
Nine Months Ended
 
   
September 28, 2007
   
September 29, 2006
   
September 28, 2007
   
September 29, 2006
 
Expected dividend yield
   
--
     
--
     
--
     
--
 
Expected stock price volatility
   
37.0%
     
42.7%
     
37.2%
     
42.2%
 
Risk free interest rate
   
4.4%
     
5.1%
     
4.5%
     
4.7%
 
Expected life of options after vesting
 
3.9 years
   
4.7 years
   
3.9 years
   
4.6 years
 

Expected Dividend Yield – The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Expected Stock Price Volatility – The Company’s computation of expected volatility is based on a combination of implied volatilities from traded options on the Company’s stock and historical volatility, commensurate with the expected life of the stock options.

Expected Risk Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected life of the stock options.

Expected Life Of Option – The Company’s expected life represents the period that the Company’s stock options are expected to be outstanding and was determined based on historical experience of similar stock options with consideration to the contractual terms of the stock options, vesting schedules and expectations of future employee behavior.

 
NOTE 5. JOINT VENTURES

Caterpillar Trimble Control Technologies Joint Venture

On April 1, 2002, Caterpillar Trimble Control Technologies LLC (CTCT), a joint venture formed by the Company and Caterpillar began operations. CTCT develops advanced electronic guidance and control products for earth moving machines in the construction and mining industries. The joint venture is 50% owned by the Company and 50% owned by Caterpillar, with equal voting rights. The joint venture is accounted for under the equity method of accounting. Under the equity method, the Company’s share of profits and losses are included in Income from joint ventures in the Non-operating income, net section of the Condensed Consolidated Statements of Income.   During the three and nine months ended September 28, 2007, the Company recorded $1.6 million and $6.1 million, respectively, as its proportionate share of CTCT net income.  During the comparable periods of 2006 the Company recorded $0.8 million and $3.8 million, respectively, as its proportionate share of CTCT net income.  The carrying amount of the investment in CTCT was $7.9 million at September 28, 2007 and $4.1 million at December 29, 2006, and is included in Other non-current assets on the Condensed Consolidated Balance Sheets.

The Company acts as a contract manufacturer for CTCT. Products are manufactured based on orders received from CTCT and are sold at direct cost plus a mark-up for the Company’s overhead costs to CTCT. CTCT then resells products at cost plus a mark-up in consideration for CTCT’s research and development efforts to both Caterpillar and to the Company for sales through their respective distribution channels. Generally, the Company sells products through its after-market dealer channel, and Caterpillar sells products for factory and dealer installation. CTCT does not have net inventory on its balance sheet in that the resale of products to Caterpillar and the Company occur simultaneously when the products are purchased from the Company.  During the three and nine months ended September 28, 2007, the Company recorded $3.9 million and $8.8 million of revenue, respectively, and $3.4 million and $7.8 million of cost of sales, respectively, for the manufacturing of products sold by the Company to CTCT and then sold through the Caterpillar distribution channel.  During the comparable three and nine month periods of fiscal 2006, the Company recorded $2.0 million and $6.3 million of revenue, respectively, and $1.8 million and $5.5 million of cost of sales, respectively.   In addition, during the three and nine months ended September 28, 2007, the Company recorded $5.6 million and $19.8 million in net cost of sales for the manufacturing of products sold by the Company to CTCT and then repurchased by the Company upon sale through the Company’s distribution channel.  The comparable net cost of sales recorded by the Company for the three and nine months ended September 29, 2006 were $5.0 million and $16.1 million, respectively.

In addition, the Company received reimbursement of employee-related costs from CTCT for company employees dedicated to CTCT or performance of work for CTCT totaling $3.7 million and $10.0 million for the three and nine months ended September 28, 2007, respectively, and totaling $3.3 million and $10.2 million for the three and nine months ended September 29, 2006, respectively.  The reimbursements were offset against operating expenses.

At September 28, 2007 and December 29, 2006, the Company had amounts due to and from CTCT.  Receivables and payables to CTCT are settled individually with terms comparable to other non-related parties.  The amounts due to and from CTCT are presented on a gross basis in the Condensed Consolidated Balance Sheets.  At September 28, 2007 and December 29, 2006, the receivables from CTCT were $5.7 million and $4.7 million, respectively, and are included within Accounts receivable, net, on the Condensed Consolidated Balance Sheets.  As of the same dates, the payables due to CTCT were $5.0 million and $4.4 million, respectively, and are included within Accounts payable on the Condensed Consolidated Balance Sheets.

Nikon-Trimble Joint Venture

On March 28, 2003, Nikon-Trimble Co., Ltd (Nikon-Trimble), a joint venture was formed by the Company and Nikon Corporation. The joint venture began operations in July 2003 and is 50% owned by the Company and 50% owned by Nikon, with equal voting rights. It focuses on the design and manufacture of surveying instruments including mechanical total stations and related products.

The joint venture is accounted for under the equity method of accounting. Under the equity method, the Company’s share of profits and losses are included in Income from joint ventures in the Non-operating income, net section of the Condensed Consolidated Statements of Income.  During the three and nine month periods ended September 28, 2007, the Company recorded a profit of $0.4 million and a profit of $0.4 million, respectively, and during the three and nine month periods ended September 29, 2006, the Company recorded a profit of $0.2 million and a profit of $0.4 million, respectively, as its proportionate share of Nikon-Trimble net income (loss).  During the nine months ended September 28, 2007 and September 29, 2006, dividends received from Nikon-Trimble, amounted to $0.6 million and $0.2 million, and were recorded against Other non-current assets on the Condensed Consolidated Balance Sheets.  The carrying amount of the investment in Nikon-Trimble was $13.6 million at September 28, 2007 and $14.0 million at December 29, 2006, and is included in Other non-current assets on the Condensed Consolidated Balance Sheets.

Nikon-Trimble is the distributor in Japan for Nikon and the Company’s products. The Company is the exclusive distributor outside of Japan for Nikon branded survey products. For products sold by the Company to Nikon-Trimble, revenue is recognized by the Company on a sell-through basis from Nikon-Trimble to the end customer. Profits from these inter-company sales are eliminated.

The terms and conditions of the sales of products from the Company to Nikon-Trimble are comparable with those of the standard distribution agreements which the Company maintains with its dealer channel and margins earned are similar to those from third party dealers. Similarly, the purchases of product by the Company from Nikon-Trimble are made on terms comparable with the arrangements which Nikon maintained with its international distribution channel prior to the formation of the joint venture with the Company.  During the three and nine month periods ended September 28, 2007, the Company recorded $2.6 million and $9.4 million of revenue and $1.4 million and $4.8 million of cost of sales for the manufacturing of products sold by the Company to Nikon-Trimble. During the three and nine month periods ended September 29, 2006, the Company recorded $3.2 million and $9.3 million of revenue and $1.7 million and $4.2 million of cost of sales for the manufacturing of products sold by the Company to Nikon-Trimble.

 
At September 28, 2007 and December 29, 2006, the Company had amounts due to and from Nikon-Trimble.  Receivables and payables to Nikon-Trimble are settled individually with terms comparable to other non-related parties.  The amounts due to and from Nikon-Trimble are presented on a gross basis in the Condensed Consolidated Balance Sheet. At September 28, 2007 and December 29, 2006, the amounts due from Nikon-Trimble were $2.5 million and $1.5 million, respectively, and are included within Accounts receivable, net on the Condensed Consolidated Balance Sheets.  During the comparable periods, the amounts due to Nikon-Trimble were $4.7 million and $1.1 million, respectively, and are included within Accounts payable on the Condensed Consolidated Balance Sheets.
 

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

Intangible Assets
 
Intangible Assets consisted of the following:
   
September 28, 2007
 
                   
   
Gross
             
   
Carrying
   
Accumulated
   
Net Carrying
 
(in thousands)
 
Amount
   
Amortization
   
Amount
 
Developed product technology
  $
137,523
    $ (36,624 )   $
100,899
 
Trade names and trademarks
   
7,708
      (1,363 )    
6,345
 
Patents and other intellectual properties
   
109,966
      (21,751 )    
88,215
 
    $
255,197
    $ (59,738 )   $
195,459
 
                         
                         
   
December 29, 2006
 
                         
   
Gross
                 
   
Carrying
   
Accumulated
   
Net Carrying
 
(in thousands)
 
Amount
   
Amortization
   
Amount
 
Developed product technology
  $
92,430
    $ (38,604 )   $
53,826
 
Trade names and trademarks
   
11,845
      (10,687 )    
1,158
 
Patents and other intellectual properties
   
25,845
      (13,657 )    
12,188
 
    $
130,120
    $ (62,948 )   $
67,172
 


The estimated future amortization expense of intangible assets as of September 28, 2007, is as follows (in thousands):

   
Amortization Expense
 
2007 (Remaining)
  $
10,024
 
2008
   
40,313
 
2009
   
36,590
 
2010
   
34,372
 
2011
   
28,755
 
Thereafter
   
45,405
 
Total
  $
195,459
 
 


Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 28, 2007, are as follows (in thousands):

   
Engineering and Construction
   
Field Solutions
   
Mobile Solutions
   
Advanced Devices
   
Total
 
Balance as of December 29, 2006
  $
296,597
    $
1,517
    $
63,430
    $
12,966
    $
374,510
 
Additions due to acquisitions
   
9,857
     
--
     
262,786
     
--
     
272,643
 
Purchase price adjustments
   
4,591
     
39
     
6,994
     
--
     
11,624
 
Foreign currency translation adjustments
   
6,958
     
--
     
1,778
     
2,095
     
10,831
 
Balance as of September 28, 2007
  $
318,003
    $
1,556
    $
334,988
    $
15,061
    $
669,608
 

The purchase price adjustments recorded during the nine months ended September 28, 2007 are for earn-out payments related to previous business acquisitions.


NOTE 7. CERTAIN BALANCE SHEET COMPONENTS

Inventories, net consisted of the following:

   
September 28,
   
December 29,
 
As of
 
2007
   
2006
 
(in thousands)
           
Raw materials
  $
66,850
    $
66,853
 
Work-in-process
   
12,146
     
6,181
 
Finished goods
   
63,162
     
39,518
 
Total inventory, net
  $
142,158
    $
112,552
 

Deferred costs of revenue are included within finished goods and were $11.0 million at September 28, 2007 and $2.9 million at December 29, 2006, of which $8.0 million and none, respectively, are related to products that include services and will be recognized ratably over the term of the subscription period.
 
Other non-current liabilities consisted of the following:

   
September 28,
   
December 29,
 
As of
 
2007
   
2006
 
(in thousands)
           
Deferred compensation
  $
8,568
    $
5,887
 
Unrecognized tax benefits
   
24,069
     
--
 
Other non-current liabilities
   
22,838
     
21,632
 
Total other non-current liabilities
  $
55,475
    $
27,519
 

As of September 28, 2007, the Company has $24.1 million of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods and interest and/or penalties related to income tax matters.  As of December 29, 2006 these balances were included in Income taxes payable on the Condensed Consolidated Balance Sheets.  Pursuant to the requirements of FIN 48, as of September 28, 2007, these liabilities are classified in Other non-current liabilities in the Condensed Consolidated Balance Sheets.


NOTE 8. THE COMPANY AND SEGMENT INFORMATION

The Company is a designer and distributor of positioning products and applications enabled by GPS, optical, laser, and wireless communications technology. The Company provides products for diverse applications in its targeted markets.

To achieve distribution, marketing, production, and technology advantages, the Company manages its operations in the following four segments:

 
·
Engineering and Construction — Consists of products currently used by survey and construction professionals in the field for positioning, data collection, field computing, data management, and machine guidance and control. The applications served include surveying, road, runway, construction, site preparation and building construction.

 
·
Field Solutions — Consists of products that provide solutions in a variety of agriculture and geographic information systems (GIS) applications. In agriculture these include precise land leveling and machine guidance systems. In GIS these include handheld devices and software that enable the collection of data on assets for a variety of governmental and private entities.

 
 
·
Mobile Solutions — Consists of products that enable end users to monitor and manage their mobile assets by communicating location and activity-relevant information from the field to the office. The Company offers a range of products that address a number of sectors of this market including truck fleets, security, and public safety vehicles.

 
·
Advanced Devices — The various operations that comprise this segment were aggregated on the basis that no single operation accounted for more than 10% of the Company’s total revenue, operating income and assets. This segment is comprised of the Component Technologies, Military and Advanced Systems, Applanix and Trimble Outdoors businesses.

The Company evaluates each of its segment's performance and allocates resources based on segment operating income from operations before income taxes, and some corporate allocations. The Company and each of its segments employ consistent accounting policies.

The following table presents revenue, operating income, and identifiable assets for the four segments. Operating income is revenue less cost of sales and operating expenses, excluding general corporate expenses, amortization of purchase intangibles, in-process research and development expenses and restructuring charges. The identifiable assets that the Company's Chief Operating Decision Maker views by segment are accounts receivable and inventory.
 

   
Reporting Segments
     
   
Engineering and Construction
   
Field Solutions
   
Mobile Solutions
   
Advanced Devices
   
Total
 
(In thousands)
                             
                               
Three Months Ended September 28, 2007
 
Segment revenue
  $
182,135
    $
44,763
    $
39,204
    $
29,921
    $
296,023
 
Operating income
   
42,824
     
11,931
     
2,855
     
4,893
     
62,503
 
                                         
Three Months Ended September 29, 2006
 
Segment revenue
  $
162,370
    $
29,236
    $
16,426
    $
26,819
    $
234,851
 
Operating income
   
38,337
     
5,634
     
1,125
     
4,113
     
49,209
 
                                         
Nine months Ended September 28, 2007
 
Segment revenue
  $
556,592
    $
150,998
    $
109,988
    $
91,909
    $
909,487
 
Operating income
   
137,359
     
46,957
     
6,771
     
13,620
     
204,707
 
                                         
Nine months Ended September 29, 2006
 
Segment revenue
  $
477,145
    $
108,599
    $
43,884
    $
76,402
    $
706,030
 
Operating income
   
103,519
     
30,841
     
1,722
     
8,679
     
144,761
 
                                         
As of September 28, 2007
 
Accounts receivable (1)
  $
162,810
    $
33,048
    $
36,836
    $
19,788
    $
252,482
 
Inventories
   
89,846
     
11,872
     
19,993
     
20,447
     
142,158
 
                                         
As of December 29, 2006
 
Accounts receivable (1)
  $
127,567
    $
21,016
    $
15,630
    $
16,474
    $
180,687
 
Inventories
   
82,827
     
10,946
     
1,666
     
17,113
     
112,552
 
 
(1)
As presented, accounts receivable represents trade receivables, gross, which are specified between segments.
 
   
September 28,
   
December 29,
 
As of
 
2007
   
2006
 
(in thousands)
           
Assets:
           
Accounts receivable total for reporting segments
  $
252,482
    $
180,687
 
Unallocated (1)
    (9,893 )     (3,633 )
   Total
  $
242,589
    $
177,054
 

(1)  Includes trade-related accruals, allowances and cash received in advance that are not allocated by segment.

 
The distribution of the Company’s consolidated revenue by segment is summarized in the table below.  Total consolidated revenue presented in the Condensed Consolidated Statements of Income is reported net of eliminations of internal sales between segments, and equals revenue.

   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(In thousands)
                       
                         
Engineering and Construction
  $
184,414
    $
164,387
    $
562,076
    $
480,947
 
Field Solutions
   
44,763
     
29,236
     
150,998
     
108,599
 
Mobile Solutions
   
39,205
     
16,426
     
109,988
     
43,884
 
Advanced Devices
   
29,924
     
26,823
     
91,922
     
76,408
 
Total segment revenue (including internal sales)
   
298,306
     
236,872
     
914,984
     
709,838
 
Eliminations
    (2,283 )     (2,021 )     (5,497 )     (3,808 )
Total consolidated revenue
  $
296,023
    $
234,851
    $
909,487
    $
706,030
 

A reconciliation of our consolidated segment operating income to consolidated income before income taxes is as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 28
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(In thousands)
                       
                         
Consolidated segment operating income
  $
62,503
    $
49,209
    $
204,707
    $
144,761
 
Unallocated corporate expense
    (8,543 )     (9,953 )     (32,065 )     (26,742 )
Amortization of purchased intangible assets
    (10,174 )     (2,875 )     (28,501 )     (8,955 )
In-process research and development expense
   
--
      (50 )     (2,112 )     (1,000 )
Restructuring charges
   
--
     
--
      (3,025 )    
--
 
Consolidated operating income
   
43,786
     
36,331
     
139,004
     
108,064
 
Non-operating income (expense), net
   
1,089
     
2,657
     
4,217
     
7,989
 
Consolidated income before income taxes
  $
44,875
    $
38,988
    $
143,221
    $
116,053
 


NOTE 9. LONG TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term debt consisted of the following:
 
   
September 28,
   
December 29,
 
As of
 
2007
   
2006
 
(In thousands)
           
             
Credit Facilities:
           
Term loan
  $
80,167
    $
-
 
Revolving credit facility
    -      
-
 
Promissory notes and other
   
923
     
481
 
Total debt
   
81,090
     
481
 
                 
Less current portion of long-term debt
   
167
     
-
 
Non-current portion
  $
80,923
    $
481
 
 
Credit Facilities

On February 16, 2007, the Company amended and restated its existing $200 million unsecured revolving credit agreement with a syndicate of 11 banks with The Bank of Nova Scotia as the administrative agent (the 2007 Credit Facility). Under the 2007 Credit Facility, the Company exercised the option in the existing credit agreement to increase the availability under the revolving credit line by $100 million, for an aggregate availability of up to $300 million, and extended the maturity date of the revolving credit line by 18 months, from July 2010 to February 2012.  Up to $25 million of the availability under the revolving credit line may be used to issue letters of credit, and up to $20 million may be used for swing line loans. During the nine months ended September 28, 2007, the Company drew $150 million related to the acquisition of @Road and subsequently paid down the entire revolving credit line.

 
In addition, during the first quarter of fiscal 2007 the Company incurred a five-year term loan under the 2007 Credit Facility in an aggregate principal amount of $100 million, which will mature concurrently with the revolving credit line.  The term loan will be repaid in at least quarterly installments, with the principal amortized at the following annual rates: year 1 at 10%, year 2 at 15%, year 3 at 15%, year 4 at 20%, year 5 at 20%, and the last quarterly payment to be made at maturity, together with a final payment of 20%.  The maximum leverage ratio under the 2007 Credit Facility is 3.00:1.  The funds available under the new 2007 Credit Facility may be used by the Company for acquisitions and general corporate purposes.

At September 28, 2007, the Company did not have an outstanding balance on the revolving credit line and $80.2 million of outstanding term loans, including all other worldwide credit facilities.  The Company was in compliance with all financial debt covenants.
 
The Company may borrow funds under the 2007 Credit Facility in U.S. Dollars or in certain other currencies, and borrowings will bear interest, at the Company's option, at either: (i) a base rate, based on the administrative agent's prime rate, plus a margin of between 0% and 0.125%, depending on the Company's leverage ratio as of its most recently ended fiscal quarter, or (ii) a reserve-adjusted rate based on the London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR), Stockholm Interbank Offered Rate ( STIBOR), or other agreed-upon rate, depending on the currency borrowed, plus a margin of between 0.625% and 1.125%, depending on the Company's leverage ratio as of the most recently ended fiscal quarter. The Company's obligations under the 2007 Credit Facility are guaranteed by certain of the Company's domestic subsidiaries.
 
The 2007 Credit Facility contains customary affirmative, negative and financial covenants including, among other requirements, negative covenants that restrict the Company's ability to dispose of assets, create liens, incur indebtedness, repurchase stock, pay dividends, make acquisitions, make investments, enter into mergers and consolidations and make capital expenditures, and financial covenants that require the maintenance of leverage and fixed charge coverage ratios. The 2007 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 the Company's obligations under the 2007 Credit Facility, however that acceleration will be automatic in the case of bankruptcy and insolvency events of default.
 
Leases

The estimated future minimum operating lease commitments as of September 28, 2007, is as follows (in thousands):

       
2007 (Remaining)
  $
4,586
 
2008
   
14,689
 
2009
   
11,638
 
2010
   
9,222
 
2011
   
6,310
 
Thereafter
   
5,560
 
Total
  $
52,005
 
 
Additionally, as of September 28, 2007, the Company had acquisition earn-outs of $11.7 million and holdbacks of $6.3 million recorded in “Other current liabilities” and “Other non-current liabilities.”  The maximum remaining payments, including the $11.7 million and $6.3 million recorded, will not exceed $66.2 million.  The remaining earn-outs and holdbacks are payable through 2009.

 
NOTE 10. PRODUCT WARRANTIES
 
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, technical support labor costs, and costs incurred by third parties performing work on the Company's behalf.  The Company’s expected future costs are primarily estimated based upon historical trends in the volume of product returns within the warranty period and the costs to repair or replace the equipment. The products sold are generally covered by a warranty for periods ranging from 90 days to three years, and in some instances up to 5.5 years.
 
 
While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its 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 the estimates, revisions to the estimated warranty accrual and related costs may be required.
 
Changes in the Company’s product warranty liability during the nine months ended September 28, 2007 are as follows:

(In thousands)
     
Balance as of December 29, 2006
  $
8,607
 
Accruals for warranties issued
   
11,355
 
Changes in estimates
   
--
 
Warranty settlements (in cash or in kind)
    (9,669 )
Balance as of September 28, 2007
  $
10,293
 

The product warranty liability is classified in Other current liabilities in the accompanying Condensed Consolidated Balance Sheets.


NOTE 11. EARNINGS PER SHARE

The following data was used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive common stock.

   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(In thousands, except per share amounts)
                       
                         
Numerator:
                       
Income available to common shareholders:
                       
Used in basic and diluted earnings per share
  $
27,374
    $
25,342
    $
91,083
    $
79,673
 
                                 
Denominator:
                               
Weighted average number of common shares used in basic earnings per share
   
120,591
     
110,678
     
118,553
     
109,618
 
Effect of dilutive securities (using treasury stock method):
                               
Common stock options
   
5,025
     
4,990
     
4,848
     
5,146
 
Common stock warrants
   
71
     
1,318
     
290
     
1,090
 
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per share
   
125,687
     
116,986
     
123,691
     
115,854
 
                                 
Basic earnings per share
  $
0.23
    $
0.23
    $
0.77
    $
0.73
 
Diluted earnings per share
  $
0.22
    $
0.22
    $
0.74
    $
0.69
 


NOTE 12: RESTRUCTURING CHARGES:

In conjunction with the Company’s acquisition of @Road, it accrued $3.6 million for severance and benefits.  These restructuring costs were recorded in accordance with EITF 95-3 as part of the purchase price with no impact on the Company’s Condensed Consolidated Statements of Income.  During the nine months ended September 28, 2007, the Company paid $2.3 million against this restructuring accrual.  The remaining restructuring accrual of $1.3 million as of September 28, 2007 is included in Accrued liabilities in the Company’s Condensed Consolidated Balance Sheet and is expected to be settled by the first quarter of fiscal 2008.

 
The Company also recorded restructuring costs of $3.0 million during the nine months ended September 28, 2007  for charges associated with the acceleration of vesting of employee stock options for certain terminated @Road employees, of which $1.4 million was settled in cash and $1.6 million was recorded as Shareholder’s Equity.  These amounts were recorded in the Company’s Condensed Consolidated Statements of Income for the nine months ended September 28, 2007 under “Restructuring charges.”


NOTE 13: INCOME TAXES

The Company adopted FIN 48 on December 30, 2006, and as a result of the implementation,  the Company had no change to its estimated liability for uncertain tax positions (compared to amounts under SFAS 5, represented in the financial statements for the 2006 year).  A total (net of the federal benefit on state issues) of $21.2 million and $19.1 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods, at September 28, 2007 and December 29, 2006, respectively.   The unrecognized tax benefits are recorded in Other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets. Furthermore, the Company believes the total amount of unrecognized income tax benefits (under FIN 48) could significantly increase or decrease within the next 12 months of the reporting date, resulting primarily from operational strategies. The amount of the change is not quantifiable at this time.

The Company and its U.S. subsidiaries are subject to U.S. federal and state income tax.  The Company has substantially concluded all U.S. federal and state income tax matters for years through 1992.  Non-U.S. income tax matters have been concluded for years through 2000.
 
The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company’s liability includes interest and penalties at September 28, 2007 and December 30, 2006, of $2.9 and $2.2 million, respectively, recorded in Other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets.
 
 
NOTE 14: COMPREHENSIVE INCOME:

The components of comprehensive income, net of related tax, are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(In thousands)
                       
                         
Net income
  $
27,374
    $
25,342
    $
91,083
    $
79,673
 
Foreign currency translation adjustments, net of tax
   
12,662
     
3,716
     
18,761
     
13,455
 
Net unrealized actuarial losses
    (12 )    
-
      (20 )    
-
 
Net unrealized gain (loss) on investments
    (15 )    
20
     
20
     
6
 
Comprehensive income
  $
40,009
    $
29,078
    $
109,844
    $
93,134
 
 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Actual results could differ materially from those indicated in the forward-looking statements due to a number of factors including, but not limited to, the risk factors discussed in “Risks and Uncertainties” below and elsewhere in this report as well as in the Company's Annual Report on Form 10-K for fiscal year 2006 and other reports and documents that the Company files from time to time with the Securities and Exchange Commission. The Company has attempted to identify forward-looking statements in this report by placing an asterisk (*) before paragraphs. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. In some cases, forward-looking statements can be identified by terminology such as “may,” ”will,” “should,” “could,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the Company disclaims any obligation to update these statements or to explain the reasons why actual results may differ.`


ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, doubtful accounts, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring costs and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the amount and timing of revenue and expenses and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Recent Accounting Pronouncements
 
There have been no changes to our significant accounting policies during the nine months ended September 28, 2007 from those disclosed in our 2006 Form 10-K. However, we are providing updated disclosures surrounding certain accounting policies, as provided below.
 
In June 2006, the Financial Accounting Standards Board (FASB) reached a consensus on Emerging Issues Task Force (EITF) Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision that should be disclosed. On December 30, 2006, we adopted EITF 06-3 and the adoption had no effect on our financial position, results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 applies to all tax positions related to income taxes subject to Statement of Financial Accounting Standard (SFAS) 109, “Accounting for Income Taxes.”  Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits.   FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet.   On December 30, 2006, we adopted FIN 48 and, as a result of the implementation, no change to liabilities for uncertain tax positions were recorded (compared to amounts under SFAS 5, “Accounting for Contingencies,” represented in the financial statements for the 2006 year).

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 is effective for us beginning in our first quarter of fiscal 2008, although earlier adoption is encouraged. We do not expect the adoption of SFAS 157 to have a material impact on our financial position, results of operations or cash flows.
 
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.”  SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. If we elected to adopt SFAS 159, it would be effective for us beginning in our first quarter of fiscal 2008, with early adoption permitted provided that we also adopt SFAS 157. We do not expect the adoption of SFAS 159 to have a material impact on our financial position, results of operations or cash flows.


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 analysis, as well as the customer’s payment history.

Revenue for orders are 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, we may choose within the place or range stipulated where the carrier will take the goods into carrier’s charge. 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 the cost of goods sold.

Revenue 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 support agreements is deferred and recognized ratably over the term of the warranty/support period.

The Company presents revenue net of sales taxes and any similar assessments.

We apply Statement of Position (SOP) No. 97-2, “Software Revenue Recognition” to products where the embedded software is more than incidental to the functionality of the hardware. This determination requires significant judgment including a consideration of factors such as marketing, research and development efforts and any post contract customer support (PCS) relating to the embedded software.

Our software arrangements generally consist of a perpetual license fee and PCS. We 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, which revenue is primarily recognized when the software has been delivered and there are no remaining obligations. Revenue from PCS is recognized ratably over the term of the PCS agreement.

We apply EITF Issue 00-3, "Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware" for hosted arrangements which the customer 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. Subscription revenue related to our hosted arrangements is recognized ratably over the contract period. Upfront fees for our hosted solution primarily consist of amounts for the in-vehicle enabling hardware device and peripherals, if any. For upfront fees relating to propriety hardware where the firmware is more than incidental to the functionality of the hardware in accordance with SOP No. 97-2, “Software Revenue Recognition,” we defer the upfront fees at installation and recognizes them ratably over the minimum service contract period, generally one to five years. Product costs are also deferred and amortized over such period.

In accordance with EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” when a non-software sale involves multiple elements the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element is met.

Allowance for Doubtful Accounts and Sales Returns

We evaluate the 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.

A reserve for sales returns is established based on historical trends in product return rates experienced in the ordinary course of business and is recorded as a reduction of our accounts receivable and revenue. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.

Inventory Valuation

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, obsolescence or impaired balances. Factors influencing these adjustments include decline in demand, technological changes, product life cycle 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 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. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

Our valuation allowance is primarily attributable to  acquisition net operating loss carryforwards.  Valuation allowance amounts are offsets to related deferred tax assets. 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 established for such amounts. When the tax benefits are utilized and the valuation allowance is released, the benefit of the release of the valuation allowance will be accounted for as a credit to goodwill rather than as a reduction of the income tax provision.
 
Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets

The process of evaluating the potential impairment of goodwill, intangible assets and other long-lived assets is subjective and requires significant assumptions.

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. We perform our annual goodwill impairment testing in the fourth fiscal quarter of each year. Goodwill is reviewed for impairment utilizing a two-step process.  First, impairment of goodwill is tested 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.

Depreciation and amortization of our 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 differing from initial estimates. In those cases where we determine that the useful life of an asset should be revised, we will depreciate the net book value in excess of the estimated residual value 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. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash 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 in the period in which the determination is made.

Warranty Costs

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 costs are primarily estimated based upon historical trends in the volume of product returns within the warranty period and the costs to repair or replace the equipment. The products sold are generally covered by a warranty for periods ranging from 90 days to three years, and in some instances up 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 Compensation

We account for our employee stock options and rights to purchase shares under our stock participation plans at fair value, in accordance with SFAS 123(R), “Share-Based Payment.” 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.

 
Beginning in fiscal 2006, our expected stock price volatility for stock purchase rights is based 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 was 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 used a combination of our historical stock price volatility commensurate with the expected life of our stock options and implied volatility of traded options.

We estimated 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.

Because stock-based compensation expense recognized in the Consolidated Statements of Income for fiscal 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) 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 in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) 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, value 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.

As of September 28, 2007, the total future stock option expense is estimated at $25.1 million with a weighted-average recognition period of 1.4 years.


EXECUTIVE LEVEL OVERVIEW

Trimble’s focus is on combining positioning technology with wireless communication and software capabilities to create system-level solutions that enhance productivity and accuracy for our customers.  The majority of our markets are end-user markets, including engineering and construction firms, governmental organizations, public safety workers, farmers and companies who must manage fleets of mobile workers and assets.  In our Advanced Devices segment, we also provide components to original equipment manufacturers to incorporate into their products.  In the end user markets, we provide a system that includes a hardware platform that may contain software and customer support. Some examples of our solutions include products that automate and simplify the process of surveying land, products that automate the utilization of equipment such as tractors and bulldozers, products that enable a company to manage its mobile workforce and assets, and products that allow municipalities to manage their fixed assets.

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 how location-based technology can enable that end user to work faster, more efficiently and more accurately.  We use this knowledge to create highly innovative products that change the way work is done by the end-user.   With the exception of our Trimble Mobile Solutions (TMS) segment, our products are generally 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 that can be summarized in four categories.

Reinforce our position in existing markets

* We believe that our markets provide us with additional, substantial potential for substituting our technology for traditional methods. In the first three quarters of fiscal 2007 we continued to develop new products and to strengthen our distribution channels in order to expand our market opportunity. A number of new products such as the AgGPS® EZ-Guide® 500 system, Juno™ST handheld computer, Spectra Precision® GL412 and 422 grade lasers, Trimble VX™Spatial Station, and Trimble® CCS900 Compaction Control System, strengthened our competitive position and created new value for the user.

 
Extend our position in existing markets through new product categories

* We are utilizing the strength of the Trimble brand in our markets to expand our revenue by bringing new products to existing users. For example, in January we introduced the Trimble VX™Spatial Station and in April we introduced a suite of interactive product training modules for the engineering and construction industry.

Bring existing technology to new markets

* We continue to reinforce our position in existing markets and position ourselves in newer markets that will serve as important sources of future growth. Our efforts in China, India, Russia, Korea and Eastern Europe all reflected improving financial results, with the promise of more in the future.

Enter new markets

* In the first quarter of fiscal 2007, we acquired @Road, a global provider of solutions designed to automate the management of mobile resources and to optimize the service delivery process for customers across a variety of industries, and INPHO, a leader in photogrammetry and digital surface modeling for aerial surveying, mapping and remote sensing applications.  In addition, we increased our reach with existing products in new markets.


RECENT BUSINESS DEVELOPMENTS

During the last twelve months, we acquired the following companies and the results of their operation have been combined with our operations from the date of acquisition:

Ingenieurbüro Breining GmbH

On September 19, 2007, we acquired Ingenieurbüro Breining GmbH of Kirchheim, Germany, a provider of customized field data collection and office software solutions for the survey market in Germany. Ingenieurbüro Breining’s performance is reported under our Engineering and Construction business segment.

@Road, Inc.

On February 16, 2007, we acquired publicly-held @Road, Inc. of Fremont, California.  @Road, Inc. is a global provider of solutions designed to automate the management of mobile resources and to optimize the service delivery process for customers across a variety of industries. @Road’s performance is reported under our Mobile Solutions business segment.

INPHO GmbH

On February 13, 2007, we acquired privately-held INPHO GmbH of Stuttgart, Germany.  INPHO provides photogrammetry and digital surface modeling for aerial surveying, mapping and remote sensing applications.  INPHO’s performance is reported under our Engineering and Construction business segment.

Spacient Technologies, Inc.

On November 21, 2006, we acquired privately-held Spacient Technologies, Inc. of Long Beach, California.  Spacient is a provider of enterprise field service management and mobile mapping solutions for municipalities and utilities.  Spacient’s performance is reported under our Field Solutions business segment.

Meridian Project Systems, Inc.

On November 7, 2006, we acquired privately-held Meridian Project Systems, Inc. of Folsom, California.  Meridian provides enterprise project management and lifecycle software for optimizing the plan, build and operate lifecycle for real estate, construction and other physical infrastructure projects.  Meridian’s performance is reported under our Engineering and Construction business segment.

XYZ Solutions, Inc.

On October 27, 2006, we acquired privately-held XYZ Solutions, Inc., of Alpharetta, Georgia.  XYZ Solutions provides real-time, interactive 3D intelligence software to manage the spatial aspects of a construction project.  XYZ Solutions’ performance is reported under our Engineering and Construction business segment.

Visual Statement, Inc.

On October 11, 2006, we acquired privately-held Visual Statement, Inc. of Kamloops, British Columbia, Canada. Visual Statement provides desktop software tools for crime and collision incident investigation, analysis, and reconstitution as well as state-wide enterprise solutions for reporting and analysis used by public safety agencies. Visual Statement’s performance is reported under our Mobile Solutions business segment.

 
RESULTS OF OPERATIONS

Overview

The following table is a summary of revenue and operating income for the periods indicated and should be read in conjunction with the narrative descriptions below.

   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
($ in thousands)
                       
Total consolidated revenue
  $
296,023
    $
234,851
    $
909,487
    $
706,030
 
Gross margin
  $
146,940
    $
116,191
    $
457,239
    $
345,309
 
Gross margin %
    49.6%       49.5%       50.3%       48.9%  
Total consolidated operating income
  $
43,786
    $
36,331
    $
139,004
    $
108,064
 
Operating income %
    14.8%       15.5%       15.3%       15.3%  

Revenue

In the three months ended September 28, 2007, total revenue increased by $61.2 million or 26%, as compared to the same corresponding period in fiscal 2006. The increase resulted from strong revenue growth across all segments. Engineering and Construction revenue increased $19.8 million, Field Solutions increased $15.5 million, Mobile Solutions increased $22.8 million, and Advanced Devices increased $3.1 million, compared to the same corresponding period in fiscal 2006. Revenue growth within these segments was driven by new products, a robust agricultural environment, strong international growth, and acquisitions made in the Engineering and Construction and Mobile Solution segments, partially offset by regional pockets of softness in the U.S. markets.  Acquisitions made during the last twelve months contributed $33.0 million to third fiscal quarter revenue.

In the nine months ended September 28, 2007, total revenue increased by $203.5 million or 29%, as compared to the same corresponding period in fiscal 2006. The increase was primarily due to strong revenue performances across all our segments.  Engineering and Construction revenue increased $79.5 million, Field Solutions increased $42.4 million, Mobile Solutions increased $66.1 million, and Advanced Devices increased $15.5 million, compared to the same corresponding period in fiscal 2006.  Revenue growth within these segments was primarily driven by new products, a robust agricultural environment, strong international growth, as well as the impact of acquisitions of $83.8 million, partially offset by regional pockets of softness in the U.S. markets for the nine months ended September 28, 2007.

During the third fiscal quarter of fiscal 2007, sales to customers in North America represented 56%, Europe represented 25%, Asia Pacific represented 13% and other regions represented 6% of our total revenue. During the same corresponding period in fiscal 2006, sales to customers in North America represented 59%, Europe represented 23%, Asia Pacific represented 12% and other regions represented 6% of our total revenue.  

Gross Margin

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.

Gross margin increased by $30.7 million and $111.9 million for the three and nine months ended September 28, 2007 respectively, compared to the corresponding periods in the prior year.  Gross margin as a percentage of total revenue for the three months ended September 28, 2007 was 49.6%, as compared to 49.5% for the three months ended September 29, 2006.  Gross margin as a percentage of total revenue for the nine months ended September 28, 2007 was 50.3%, as compared to 48.9% for the nine months ended September 29, 2006.

The increases in gross margin for the three and nine month periods was driven by an increase in sales of higher-margined products, software and subscription revenue, foreign exchange rate gains, and improved manufacturing utilization, partially offset by higher amortization of purchased intangibles.

Operating Income

Operating income increased by $7.5 million and $30.9 million for the three and nine months ended September 28, 2007 respectively, compared to the corresponding periods in the prior year.  Operating income as a percentage of total revenue was 14.8% for the three months ended September 28, 2007, as compared to 15.5% for the three months ended September 29, 2006. Operating income as a percentage of total revenue was 15.3% for the nine months ended September 28, 2007, as compared to 15.3% for the nine months ended September 29, 2006. The decrease in operating income percentage for the three month period was primarily due to higher amortization of purchased intangibles, partially offset by an increase in revenue and associated gross margin.  The increase in operating income percentage for the nine month periods was due to higher revenue and associated gross margin and software and subscription revenue, offset partially by additional amortization of purchased intangibles.

 
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 (loss) equals net revenue less cost of sales and operating expenses, excluding general corporate expenses, amortization of purchased intangibles, in-process research and development expenses, and restructuring charges.

The following table is a breakdown of revenue and operating income by segment (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Engineering and Construction
                       
   Revenue
  $
182,135
    $
162,370
    $
556,592
    $
477,145
 
   Segment revenue as a percent of total revenue
    62%       69%       61%       68%  
   Operating income
  $
42,824
    $
38,337
    $
137,359
    $
103,519
 
   Operating income as a percent of segment revenue
    24%       24%       25%       22%  
Field Solutions
                               
   Revenue
  $
44,763
    $
29,236
    $
150,998
    $
108,599
 
   Segment revenue as a percent of total revenue
    15%       12%       17%       15%  
   Operating income
  $
11,931
    $
5,634
    $
46,957
    $
30,841
 
   Operating income as a percent of segment revenue
    27%     19%       31%       28%  
Mobile Solutions
                               
   Revenue
  $
39,204
    $
16,426
    $
109,988
    $
43,884
 
   Revenue as a percent of total revenue
    13%       7%       12%       6%  
   Operating income
  $
2,855
    $
1,125
    $
6,771
    $
1,722
 
   Operating income as a percent of segment revenue
    7%       7%       6%       4%  
Advanced Devices
                               
   Revenue
  $
29,921
    $
26,819
    $
91,909
    $
76,402
 
   Segment revenue as a percent of total revenue
    10%       12%       10%       11%  
   Operating income
  $
4,893
    $
4,113
    $
13,620
    $
8,679
 
   Operating income as a percent of segment revenue
    16%       15%       15%       11%  

A reconciliation of our consolidated segment operating income to consolidated income before income taxes follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 28
   
September 29,
   
September 28,
   
September 29,
 
   
2007
   
2006
   
2007
   
2006
 
(In thousands)
                       
                         
Consolidated segment operating income
  $
62,503
    $
49,209
    $
204,707
    $
144,761
 
Unallocated corporate expense
    (8,543 )     (9,953 )     (32,065 )     (26,742 )
Amortization of purchased intangible assets
    (10,174 )     (2,875 )     (28,501 )     (8,955 )
In-process research and development expense
   
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