Trimble Inc.
TRIMBLE NAVIGATION LTD /CA/ (Form: 10-Q, Received: 08/10/2010 16:34:04)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 2, 2010

OR

¨     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: 001-14845

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             x              No             ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes             x              No             ¨

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

 

Large Accelerated Filer

 

x

  

Accelerated Filer

 

¨

Non-accelerated Filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller Reporting company

 

¨

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

Yes             ¨              No             x

As of August 5, 2010, there were 119,160,597 shares of Common Stock (no par value) outstanding.

 

 

 


Table of Contents

TRIMBLE NAVIGATION LIMITED

FORM 10-Q for the Quarter Ended July 2, 2010

TABLE OF CONTENTS

 

PART I.      

  

Financial Information

  

Page

   ITEM 1.   

Financial Statements (Unaudited):

  
     

Condensed Consolidated Balance Sheets — as of July 2, 2010 and January 1, 2010

   3
     

Condensed Consolidated Statements of Income — for the Three and Six Months Ended July 2, 2010 and July 3, 2009

   4
     

Condensed Consolidated Statements of Cash Flows — for the Six Months Ended July 2, 2010 and July 3, 2009

   5
     

Notes to Condensed Consolidated Financial Statements

   6
   ITEM 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   20
   ITEM 3.   

Quantitative and Qualitative Disclosures about Market Risk

   31
   ITEM 4.   

Controls and Procedures

   32

PART II.

  

Other Information

  
   ITEM 1.   

Legal Proceedings

   32
   ITEM 1A.   

Risk Factors

   32
   ITEM 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   32
   ITEM 6.   

Exhibits

   33

SIGNATURES

   34

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TRIMBLE NAVIGATION LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

         July 2,    
2010
       January 1,    
2010

(In thousands)

     
     

ASSETS

     

Current assets :

     

Cash and cash equivalents

   $ 261,660    $ 273,848

Restricted cash

     17,151      -

Accounts receivable, net

     219,583      202,293

Other receivables

     3,916      11,856

Inventories, net

     159,179      144,012

Deferred income taxes

     38,694      39,686

Other current assets

     19,761      18,383
             

Total current assets

     719,944      690,078

Property and equipment, net

     46,058      44,635

Goodwill

     769,438      764,193

Other purchased intangible assets, net

     190,803      202,782

Other non-current assets

     54,290      51,589
             

Total assets

   $ 1,780,533    $ 1,753,277
             
     

LIABILITIES

     

Current liabilities:

     

Current portion of long-term debt

   $ 2,004    $ 445

Accounts payable

     70,756      53,775

Accrued compensation and benefits

     49,958      43,272

Deferred revenue

     68,161      68,968

Accrued warranty expense

     14,266      14,744

Income taxes payable

     43,727      -

Other current liabilities

     44,916      42,041
             

Total current liabilities

     293,788      223,245

Non-current portion of long-term debt

     151,018      151,038

Non-current deferred revenue

     13,636      15,599

Deferred income taxes

     36,261      38,857

Other non-current liabilities

     43,422      59,983
             

Total liabilities

     538,125      488,722
             
     

Commitments and contingencies

     
     

EQUITY

     

Shareholders’ equity:

     

Preferred stock, no par value; 3,000 shares authorized; none outstanding

     -      -

Common stock, no par value; 180,000 shares authorized; 119,307 and 120,450 shares issued and outstanding at July 2, 2010 and January 1, 2010, respectively

     735,861      720,248

Retained earnings

     472,386      491,367

Accumulated other comprehensive income

     20,670      48,297
             

Total Trimble Navigation Ltd. shareholders’ equity

     1,228,917      1,259,912

Noncontrolling interests

     13,491      4,643
             

Total equity

     1,242,408      1,264,555
             
     

Total liabilities and equity

   $ 1,780,533    $ 1,753,277
             

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

3


Table of Contents

TRIMBLE NAVIGATION LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

     Three Months Ended     Six Months Ended  
         July 2,    
2010
        July 3,    
2009
        July 2,    
2010
        July 3,    
2009
 

(In thousands, except per share data)

        
        

Revenue (1)

   $ 333,363      $ 290,063      $ 652,378      $ 579,017   

Cost of sales (1)

     169,937        147,263        329,955        292,259   
                                

Gross margin

     163,426        142,800        322,423        286,758   
        

Operating expenses

        

Research and development

     36,552        33,457        72,442        67,594   

Sales and marketing

     50,522        45,163        100,290        94,098   

General and administrative

     27,290        26,622        55,837        52,664   

Restructuring charges

     375        1,302        1,006        4,925   

Amortization of purchased intangible assets

     8,126        7,530        16,172        14,499   
                                

Total operating expenses

     122,865        114,074        245,747        233,780   
                                

Operating income

     40,561        28,726        76,676        52,978   

Non-operating income, net

        

Interest income

     244        223        643        422   

Interest expense

     (411     (465     (809     (958

Foreign currency transaction loss, net

     (1,869     (216     (1,123     (32

Income from equity method investments, net

     3,147        586        5,621        479   

Other income (expense), net

     (825     927        (511     488   
                                

Total non-operating income, net

     286        1,055        3,821        399   
                                

Income before taxes

     40,847        29,781        80,497        53,377   

Income tax provision

     34,076        8,631        45,574        14,530   
                                

Net income

     6,771        21,150        34,923        38,847   

Less: Net income attributable to noncontrolling

     418        293        672        525   
                                

Net income attributable to Trimble Navigation Ltd.

   $ 6,353      $ 20,857      $ 34,251      $ 38,322   
                                
        

Basic earnings per share

   $ 0.05      $ 0.17      $ 0.28      $ 0.32   
                                

Shares used in calculating basic earnings per share

     120,654        119,551        120,707        119,406   
        

Diluted earnings per share

   $ 0.05      $ 0.17      $ 0.28      $ 0.32   
                                

Shares used in calculating diluted earnings per share

     124,099        121,897        123,964        121,411   

(1) Sales to Caterpillar Trimble Control Technologies Joint Venture (CTCT) and Nikon-Trimble Joint Venture (Nikon-Trimble), were $4.8 million and $3.5 million for the three months ended July 2, 2010 and July 3, 2009, respectively, with associated cost of sales to those related parties of $3.4 million and $2.3 million, respectively. Sales to CTCT and Nikon-Trimble were $10.3 million and $7.9 million for the six months ended July 2, 2010 and July 3, 2009, respectively, with associated cost of sales of $7.1 million and $5.2 million, respectively. In addition, cost of sales associated with related party net inventory purchases were $8.5 million and $6.0 million for the three months ended July 2, 2010 and July 3, 2009, respectively, and $14.6 million and $10.5 million for the six months ended July 2, 2010 and July 3, 2009, respectively. See Note 4 regarding joint ventures for further information about related party transactions.

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4


Table of Contents

TRIMBLE NAVIGATION LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended  
         July 2,    
2010
        July 3,    
2009
 

(In thousands)

    
    

Cash flow from operating activities:

    

Net income

   $ 34,923      $ 38,847   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation expense

     8,736        9,071   

Amortization expense

     27,733        25,348   

Provision for doubtful accounts

     2,596        3,053   

Deferred income taxes

     (4,461     (3,406

Stock-based compensation

     10,625        8,780   

Income from equity method investments

     (5,621     (479

Excess tax benefit for stock-based compensation

     (1,412     (304

Provision for excess and obsolete inventories

     3,173        2,933   

Other non-cash items

     (3,334     (2,674

Add decrease (increase) in assets:

    

Accounts receivable

     (15,398     4,117   

Other receivables

     7,647        5,242   

Inventories

     (19,747     (7,556

Other current and non-current assets

     1,003        2,289   

Add increase (decrease) in liabilities:

    

Accounts payable

     17,315        4,790   

Accrued compensation and benefits

     8,142        2,808   

Accrued liabilities

     (21,680     8,591   

Deferred revenue

     676        7,224   

Income taxes payable

     44,393        -   
                

Net cash provided by operating activities

     95,309        108,674   
                
    

Cash flow from investing activities:

    

Acquisitions of businesses, net of cash acquired

     (33,605     (39,029

Acquisitions of property and equipment

     (11,030     (7,415

Acquisitions of intangible assets

     (297     (26,839

Purchase of equity method investments

     (3,692     -   

Net purchases of debt and equity securities

     -        (6,995

Increase in restricted cash for business acquisition

     (17,151     -   

Dividends received

     5,000        -   

Other

     67        (513
                

Net cash used in investing activities

     (60,708     (80,791
                
    

Cash flow from financing activities:

    

Issuances of common stock

     17,867        5,775   

Repurchase and retirement of common stock

     (60,510     -   

Excess tax benefit for stock-based compensation

     1,412        304   

Payments on long-term debt and revolving credit lines

     (94     (149
                

Net cash provided (used) by financing activities

     (41,325     5,930   
                
    

Effect of exchange rate changes on cash and cash equivalents

     (5,464     1,815   
                
    

Net increase (decrease) in cash and cash equivalents

     (12,188     35,628   

Cash and cash equivalents, beginning of period

     273,848        142,531   
                

Cash and cash equivalents, end of period

   $ 261,660      $ 178,159   
                

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

5


Table of Contents

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 solutions to commercial and government users in a large number of markets. These markets include surveying, agriculture, construction, asset management, mapping, and mobile resource management.

The Company has a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2009 was January 1, 2010. The second quarters of fiscal 2010 and fiscal 2009 ended on July 2, 2010 and July 3, 2009, respectively. Fiscal 2010 and 2009 were both 52-week years. Unless otherwise stated, all dates refer to the Company’s fiscal year and fiscal periods.

The Condensed Consolidated Financial Statements include the results of the Company and its majority-owned subsidiaries. Inter-company accounts and transactions have been eliminated. Noncontrolling interests represent the minority shareholders’ proportionate share of the net assets and results of operations of the Company’s majority-owned subsidiaries.

The accompanying financial data as of July 2, 2010 and for the three and six months ended July 2, 2010 and July 3, 2009 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements, prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of January 1, 2010 is derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K of Trimble Navigation Limited for fiscal year 2009. Certain amounts from prior periods have been reclassified to conform to the current period presentation. The following discussion should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present a fair statement of financial position as of July 2, 2010, results of operations for the three and six months ended July 2, 2010 and July 3, 2009 and cash flows for the six months ended July 2, 2010 and July 3, 2009, as applicable, have been made. The results of operations for the three and six months ended July 2, 2010 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 and general economic conditions. The Company has evaluated all subsequent events through the date that these financial statements have been filed with the SEC.

NOTE 2. UPDATES TO SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Company’s significant accounting polices during the six months ended July 2, 2010 from those disclosed in the Company’s 2009 Form 10-K, with the exception of the Company’s accounting policy for revenue recognition as described below.

Revenue Recognition Accounting Policy

The Company elected to early adopt new revenue accounting guidance at the beginning of its first quarter of fiscal 2010 on a prospective basis for applicable transactions originating or materially modified after January 1, 2010. See “Recent Accounting Pronouncements” below within this footnote.

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 is 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

 

6


Table of Contents

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 Cost of sales.

Revenue to distributors and resellers is recognized upon shipment, assuming all other criteria for revenue recognition have been met. Distributors and resellers do not typically have a right of return.

Revenue from purchased extended warranty and post contract support (PCS) agreements is deferred and recognized ratably over the term of the warranty or support period.

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

The Company’s software arrangements generally consist of a perpetual license fee and PCS. The Company generally 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. License revenue is primarily recognized when the software has been delivered and fair value has been established for all remaining undelivered elements.

The Company’s multiple deliverable product offerings include hardware with embedded firmware, extended warranty and PCS services, which are considered separate units of accounting. For certain of the Company’s products, software and non-software components function together to deliver the tangible product’s essential functionality.

Some of the Company’s subscription product offerings include hardware, subscription services and extended warranty. Under the Company’s hosted arrangements, the customer typically does not have the contractual right to take possession of the software at any time during the hosting period without incurring a significant penalty and it is not feasible for the customer to run the software either on its own hardware or on a third-party’s hardware. Upfront fees related to the Company’s hosted solutions typically consist of amounts for the in-vehicle enabling hardware device and peripherals.

In evaluating the revenue recognition for agreements which contain multiple deliverable arrangements, under the new accounting guidance, the Company determined that in certain instances it was not able to establish VSOE for all deliverables in an arrangement as the Company infrequently sells each element on a standalone basis, does not price products within a narrow range, or has a limited sales history. When VSOE cannot be established, the Company attempts to establish the selling price of each element based on relevant third-party evidence (TPE). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of competitors, and offerings may contain a significant level of proprietary technology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company typically is not able to determine TPE.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses its best estimate of selling price (BESP) in the Company’s allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, market conditions, competitive landscape, internal costs, geographies and gross margin. The determination of BESP is made through consultation with and formal approval by the Company’s management, taking into consideration the Company’s go-to-market strategy.

Total revenue as reported and pro forma total revenues that would have been reported during the three and six months ended July 2, 2010, if the transactions entered into or materially modified after January 1, 2010 were subject to previous accounting guidance, are shown in the following table:

 

  (Dollars in thousands)        As Reported            Pro Forma    

Total revenue for the three months ended July 2, 2010

   $ 333,363    $ 330,959

Total revenue for the six months ended July 2, 2010

   $ 652,378    $ 649,166

The impact of the revised accounting guidance to total revenue during the three and six months ended July 2, 2010 was attributable to the reallocation of discounts to revenue deliverables, the recognition of hardware revenue associated with subscription contracts, which was previously recognized ratably over the contract period, and the ability to assign selling price to undelivered elements, which previously required VSOE.

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 January 1, 2010 are as follows:

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This guidance, which is now codified under the Fair Value Measurements and Disclosures Topic of the FASB Accounting

 

7


Table of Contents

Standards Codification, requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company with the reporting period beginning January 2, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company at the beginning of fiscal 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued accounting guidance which changes the consolidation guidance applicable to a variable interest entity (VIE). The guidance, now codified under the Consolidation Topic of the FASB Accounting Standards Codification, also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, GAAP required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. The Company adopted this guidance in the first quarter of fiscal 2010. The adoption of the guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2009, the FASB issued an amendment which eliminates the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. In addition, the guidance updated whether multiple deliverables exist and how the deliverables in an arrangement should be separated. The amendment also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor specific objective evidence (VSOE) if available; (2) third-party evidence (TPE) if VSOE evidence is not available; and (3) estimated selling (ESP) price if neither VSOE nor TPE is available. In addition, the FASB modified the accounting for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. Both amendments are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company early adopted this guidance in the first quarter of fiscal 2010 on a prospective basis.

NOTE 3. SHAREHOLDERS’ EQUITY

Stock Repurchase Activities

In January 2008, the Company’s Board of Directors authorized a stock repurchase program (“2008 Stock Repurchase Program”), authorizing the Company to repurchase up to $250 million of Trimble’s common stock under this program. After placing the program on hold in late 2008 due to the economic downturn, Trimble resumed purchases under the program, beginning in the second quarter of 2010. During the three and six months ended July 2, 2010, the Company repurchased approximately 2,360,000 shares of common stock in open market purchases at an average price of $28.69 per share, for a total of $67.7 million. No shares of common stock were repurchased during the three and six months ended July 3, 2009. Since January 2008, the Company has repurchased approximately 6,603,000 shares of common stock in open market purchases at an average price of $29.32 per share, for a total of $193.6 million. The purchase price was reflected as a decrease to common stock based on the average stated value per share with the remainder to retained earnings. Common stock repurchases under the program were recorded based upon the trade date for accounting purposes. All common shares repurchased under this program have been retired. As of July 2, 2010, the 2008 Stock Repurchase Program had remaining authorized funds of $56.4 million. The timing and actual number of future shares repurchased will depend on a variety of factors including price, regulatory requirements, capital availability, and other market conditions. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time without public notice.

Stock-Based Compensation

The Company accounts for its employee stock options and rights to purchase shares under its stock participation plans under the fair value method, which 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 Condensed Consolidated Statements of Income for the three and six months ended July 2, 2010 and July 3, 2009.

 

8


Table of Contents
         Three Months Ended              Six Months Ended       
        
     July 2,
2010
    July 3,
2009
    July 2,
2010
    July 3,
2009
 
        
(Dollars in thousands)                         
                          

Cost of sales

   $ 486      $ 477      $ 987      $ 915   
        
        

Research and development

     984        854        1,931        1,638   

Sales and marketing

     1,347        1,062        2,730        2,066   

General and administrative

     2,167        2,161        4,977        4,161   
        

Total operating expenses

     4,498        4,077        9,638        7,865   
        
        

Total stock-based compensation expense

     4,984        4,554        10,625        8,780   

Tax benefit (1)

     (1,419     (726     (2,195     (1,117
        

Total stock-based compensation expense, net of tax

   $ 3,565      $ 3,828      $ 8,430      $ 7,663   
        

(1) Tax benefit related to U.S. non-qualified options, restricted stock units, and disqualified disposition of incentive stock options, applying a Federal statutory and State (Federal effected) tax rate for the respective periods.

Options

Stock option expense recognized during the period is based on the fair value of the portion of the stock option that is expected to vest during the period and is net of estimated forfeitures. 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 during the three and six months ended July 2, 2010 and July 3, 2009, the following weighted average assumptions were used:

 

             Three Months Ended                    Six Months Ended         
    
     July 2,
2010
  July 3,
2009
  July 2,
2010
  July 3,
2009
 
  

Expected dividend yield

   --   --   --   --

Expected stock price volatility

   43.7%   46.7%   43.8%   46.7%

Risk free interest rate

   1.8%   1.8%   1.8%   1.9%

Expected life of option

   4.2 years   4.3 years   4.2 years   4.2 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 is 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 4. 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 equity method investments, net in the Non-operating income, net section of the Condensed Consolidated Statements of Income. During the three and six months ended July 2, 2010, the Company recorded $2.7 million and $4.4 million, respectively, as its proportionate share of CTCT net income. During the comparable period of 2009, the Company recorded $0.9 million and $1.6 million, respectively, as its proportionate share of CTCT net income. During the three and six months ended July 2, 2010, dividends received from CTCT, amounted to

 

9


Table of Contents

$5.0 million, and were recorded against Other non-current assets on the Condensed Consolidated Balance Sheets. During the three and six months ended July 3, 2009, there were no dividends received from CTCT. The carrying amount of the investment in CTCT was $6.5 million at July 2, 2010 and $7.1 million at January 1, 2010, 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. 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 six months ended July 2, 2010, the Company recorded $0.9 million and $1.8 million of revenue, respectively, and $0.8 million and $1.7 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 six months ended July 3, 2009, the Company recorded $0.6 million and $1.5 million of revenue, respectively, and $0.6 million and $1.4 million of cost of sales for the manufacturing of products sold by the Company to CTCT and then sold through the Caterpillar distribution channel. In addition, during the three and six months ended July 2, 2010, the Company recorded $8.5 million and $14.6 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 six months ended July 3, 2009 were $6.0 million and $10.5 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 $2.7 million and $5.6 million for the three and six months ended July 2, 2010, respectively, and totaling $2.6 million and $5.3 million for the three and six months ended July 3, 2009, respectively. The reimbursements were offset against operating expense.

At July 2, 2010 and January 1, 2010, 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 July 2, 2010 and January 1, 2010, the receivables from CTCT were $6.8 million and $3.5 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 $8.5 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 equity method investments, net in the Non-operating income, net section of the Condensed Consolidated Statements of Income. During the three and six months ended July 2, 2010, the Company recorded a profit of $0.5 million and $1.3 million, respectively, and during the three and six months ended July 3, 2009, the Company recorded loss of $0.6 million and $1.1 million, respectively, as its proportionate share of Nikon-Trimble net income. During the three and six months ended July 2, 2010 and July 3, 2009, there were no dividends received from Nikon-Trimble. The carrying amount of the investment in Nikon-Trimble was $12.7 million at July 2, 2010 and $11.4 million at January 1, 2010, 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.

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 six months ended July 2, 2010, the Company recorded $3.9 million and $8.5 million of revenue and $2.6 million and $5.4 million of cost of sales for the manufacturing of products sold by the Company to Nikon-Trimble. During the three and six months ended July 3, 2009, the Company recorded $2.9 million and $6.4 million of revenue and $1.7 million and $3.8 million of cost of sales for the manufacturing of products sold by the Company to Nikon-Trimble. The Company also purchases product from Nikon-Trimble for future sales to third party customers. Purchases of inventory from Nikon-Trimble were $2.9 million and $8.3 million during the three and six months ended July 2, 2010, respectively, and $2.4 million and $4.0 million during the three and six months ended July 3, 2009, respectively.

At July 2, 2010 and January 1, 2010, 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 Sheets. At July 2, 2010 and January 1, 2010, the amounts due from Nikon-Trimble were $3.2 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 amounts due to Nikon-Trimble were $4.1 million and $4.5 million, respectively, and are included within Accounts payable on the Condensed Consolidated Balance Sheets.

 

10


Table of Contents

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Intangible Assets

Intangible Assets consisted of the following:

 

     July 2, 2010
(Dollars in thousands)    Gross
Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount
      

Developed product technology

   $ 213,369    $ (127,495   $ 85,874

Trade names and trademarks

     20,943      (15,638     5,305

Customer relationships

     132,598      (57,212     75,386

Distribution rights and other intellectual properties *

     46,744      (22,506     24,238
      
   $ 413,654    $ (222,851   $ 190,803
      
     January 1, 2010
(Dollars in thousands)    Gross
Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount
      

Developed product technology

   $ 213,696    $ (114,870   $ 98,826

Trade names and trademarks

     20,861      (14,891     5,970

Customer relationships

     120,990      (48,885     72,105

Distribution rights and other intellectual properties *

     46,702      (20,821     25,881
      
   $ 402,249    $ (199,467   $ 202,782
      

(*) Included within Distribution rights and other intellectual properties is a $25.0 million distribution right that the Company purchased from Caterpillar, a related party for accounting purposes, during fiscal 2008. The fair value of the distribution right was estimated using a discounted cash flow analysis. The distribution right is being amortized over its estimated economic life of eight years.

The estimated future amortization expense of intangible assets as of July 2, 2010, is as follows:

 

(Dollars in thousands)

  

2010 (Remaining)

   $ 27,074

2011

     49,774

2012

     42,220

2013

     37,699

2014

     16,377

Thereafter

     17,659
      

Total

   $ 190,803
      

Goodwill

The changes in the carrying amount of goodwill by operating segment for the six months ended July 2, 2010, were as follows:

 

     Engineering
and
Construction
    Field
Solutions
    Mobile
Solutions
    Advanced
Devices
    Total  
        

(Dollars in thousands)

          

Balance as of January 1, 2010

   $ 389,702      $ 26,776      $ 333,265      $ 14,450      $ 764,193   

Additions due to acquisitions

     20,906        1,668        -        -        22,574   

Purchase price adjustments

     469        (1,056     -        -        (587

Foreign currency translation adjustments

     (15,843     (10     (690     (199     (16,742
        

Balance as of July 2, 2010

   $ 395,234      $ 27,378      $ 332,575      $ 14,251      $ 769,438   
        

 

11


Table of Contents

NOTE 6. CERTAIN BALANCE SHEET COMPONENTS

Inventories, net consisted of the following:

 

As of        July 2,    
2010
       January 1,    
2010
 

(Dollars in thousands)

     
     

Raw materials

   $ 62,271    $ 51,489

Work-in-process

     4,820      4,869

Finished goods

     92,088      87,654
      

Total inventories, net

   $ 159,179    $ 144,012
      

Deferred costs of revenue are included within finished goods and were $15.6 million at July 2, 2010 and $16.8 million at January 1, 2010.

Other non-current liabilities consisted of the following:

 

As of        July 2,    
2010
       January 1,    
2010
 

(Dollars in thousands)

     
     

Deferred compensation

   $ 8,205    $ 8,264

Unrecognized tax benefits

     17,404      36,968

Other non-current liabilities

     17,813      14,751
      

Total other non-current liabilities

   $ 43,422    $ 59,983
      

As of July 2, 2010 and January 1, 2010, the Company has $17.4 million and $37.0 million, respectively, of unrecognized tax benefits included in Other non-current liabilities that, if recognized, would favorably affect the effective income tax rate and interest and/or penalties related to income tax matters in future periods.

NOTE 7. SEGMENT INFORMATION

The Company is a designer and distributor of positioning solutions 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.

 

12


Table of Contents
   

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 are aggregated on the basis that no single operation accounts 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 expense, excluding general corporate expense, amortization of purchased intangibles, amortization of acquisition-related inventory step-up, non-recurring acquisition costs, restructuring charges, non-operating income, net, and income tax provision. The identifiable assets that the Company's Chief Operating Decision Maker, its Chief Executive Officer, views by segment are accounts receivable, inventories, and goodwill.

 

     Reporting Segments     
     Engineering
and
Construction
   Field
Solutions
   Mobile
Solutions
   Advanced
Devices
       Total      
 

(Dollars in thousands)

              
              

Three Months Ended July 2, 2010

              

Segment revenue

   $ 188,441    $ 80,158    $ 38,188    $ 26,576    $ 333,363

Operating income

     33,921      28,980      324      5,181      68,406
              

Three Months Ended July 3, 2009

              

Segment revenue

   $ 147,240    $ 79,787    $ 39,065    $ 23,971    $ 290,063

Operating income

     19,160      30,148      3,648      4,833      57,789
              

Six Months Ended July 2, 2010

              

Segment revenue

   $ 346,059    $ 176,059    $ 76,147    $ 54,113    $ 652,378

Operating income

     52,728      68,293      2,223      10,806      134,050
              

Six Months Ended July 3, 2009

              

Segment revenue

   $ 274,891    $ 178,944    $ 77,353    $ 47,829    $ 579,017

Operating income

     21,669      72,351      6,796      9,145      109,961
              

As of July 2, 2010

              

Accounts receivable

   $ 136,689    $ 42,608    $ 23,092    $ 17,194    $ 219,583

Inventories

     102,517      27,070      14,302      15,290      159,179

Goodwill

     395,234      27,378      332,575      14,251      769,438
              

As of January 1, 2010

              

Accounts receivable

   $ 118,033    $ 37,178    $ 29,572    $ 17,510    $ 202,293

Inventories

     91,248      22,025      16,826      13,913      144,012

Goodwill

     389,702      26,776      333,265      14,450      764,193

Unallocated corporate expense includes general corporate expense, amortization of acquisition-related inventory step-up and non-recurring acquisition costs. A reconciliation of the Company’s consolidated segment operating income to consolidated income before income taxes is as follows:

 

     Three Months Ended     Six Months Ended  
         July 2,    
2010
        July 3,    
2009
        July 2,    
2010
        July 3,    
2009
 
   

(Dollars in thousands)

        
        

Consolidated segment operating income

   $ 68,406      $ 57,789      $ 134,050      $ 109,961   

Unallocated corporate expense

     (13,499     (12,513     (28,537     (23,647

Amortization of purchased intangible assets

     (13,916     (13,050     (27,733     (25,348

Restructuring charges

     (430     (3,500     (1,104     (7,988
        

Consolidated operating income

     40,561        28,726        76,676        52,978   

Non-operating income, net

     286        1,055        3,821        399   
        

Consolidated income before taxes

   $ 40,847      $ 29,781      $ 80,497      $ 53,377   
        

 

13


Table of Contents

NOTE 8. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term debt consisted of the following:

 

As of        July 2,    
2010
       January 1,    
2010
 

(Dollars in thousands)

     
     

Credit Facilities:

     

Revolving credit facility

   $ 151,000    $ 151,000

Notes payable and other

     2,022      483
      

Total debt

     153,022      151,483

Less current portion of long-term debt

     2,004      445
      

Non-current portion

   $ 151,018    $ 151,038
      

Credit Facilities

On July 28, 2005, the Company entered into a $200 million unsecured revolving credit agreement (the 2005 Credit Facility) with a syndicate of 10 banks with The Bank of Nova Scotia as the administrative agent. On February 16, 2007, the Company amended 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 to pay off other debts or loans. The maximum leverage ratio under the 2007 Credit Facility is 3.00:1.00. The funds available under the 2007 Credit Facility may be used by the Company for acquisitions, stock repurchases, and general corporate purposes. As of August 20, 2008, the Company amended its 2007 Credit Facility to allow it to redeem, retire or purchase common stock of the Company without limitation so long as no default or unmatured default then existed, and leverage ratio for the two most recently completed periods was less than 2.00:1.00. In addition, the definition of the fixed charge was amended to exclude the impact of redemptions, retirements, or purchases common stock of the Company from the fixed charges coverage ratio.

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 was repaid in full during fiscal 2008. As of July 2, 2010, the Company had an outstanding balance on the revolving credit line of $151.0 million which was drawn down in fiscal 2008.

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

 

14


Table of Contents

acquisitions, make investments, enter into mergers and consolidations and make capital expenditures, within certain limitations, 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. As of July 2, 2010, the Company was in compliance with all financial debt covenants.

Notes Payable

As of July 2, 2010 and January 1, 2010 the Company had notes payable totaling approximately $2.0 million and $0.5 million, respectively. The balance as of July 2, 2010 consists primarily of notes payable to noncontrolling interest holders of one of the Company’s consolidated subsidiaries. The notes bear interest at 6% and have undefined payment terms, but are callable with a six month notification. The note payable balance as of January 1, 2010 consists primarily of government loans to foreign subsidiaries.

Leases and other commitments

The estimated future minimum operating lease commitments as of July 2, 2010, are as follows (dollars in thousands):

 

2010 (Remaining)

   $ 8,901

2011

     13,222

2012

     10,060

2013

     4,274

2014

     2,790

Thereafter

     2,068
      

Total

   $         41,315
      

Additionally, as of July 2, 2010, the Company had acquisition-related earn-outs of $5.7 million and holdbacks of $16.5 million recorded in Other current liabilities and Other non-current liabilities. The maximum remaining payments, including the $5.7 million and $16.5 million recorded, will not exceed $46.6 million. The remaining payments are based upon targets achieved or events occurring over time that would result in amounts paid that may be lower than the maximum remaining payments. The remaining earn-outs and holdbacks are payable through 2013.

At July 2, 2010, the Company had unconditional purchase obligations of approximately $65.3 million. These unconditional purchase obligations primarily represent open non-cancelable purchase orders for material purchases with the Company’s vendors. Purchase obligations exclude agreements that are cancelable without penalty. These unconditional purchase obligations are related primarily to inventory and other items.

NOTE 9. FAIR VALUE MEASUREMENTS

The guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and requires enhanced disclosures about assets and liabilities measured at fair value. Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market, and the instruments’ complexity.

Assets and liabilities, recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by the guidance on fair value measurements are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:

Level I – Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level II – Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level III – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

15


Table of Contents

Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations.

 

     Fair Values as of July 2, 2010
(Dollars in thousands)    Level I    Level II    Level III            Total        

Assets

           

Money market funds(1)

   $ 177,993    $ -    $ -    $ 177,993

Deferred compensation plan assets (2)

     -      8,326      -      8,326

Derivative assets (3)

     -      79      -      79
      

Total

   $     177,993    $     8,405    $ -    $     186,398
      
           

Liabilities

           

Deferred compensation plan liabilities (2)

   $ -    $ 8,204    $ -    $ 8,204

Derivative liabilities (3)

     -      674      -      674

Contingent consideration liability (4)

     -      -      4,218      4,218
      

Total

   $ -    $ 8,878    $ 4,218    $ 13,096
      

 

(1)

These investments are highly liquid investments such as money market funds and U.S. Treasury bills. The fair values are determined using observable quoted prices in active markets. Money market funds are included in Cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets. In prior year filings, the table above incorrectly excluded certain Level I money market funds. These funds however, were correctly included in Cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets.

 

(2)

The Company maintains a self-directed, non-qualified deferred compensation plan for certain executives and other highly compensated employees. The investment assets and liabilities included in Level II are valued using quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Deferred compensation plan assets and liabilities are included in Other non-current assets and Other non-current liabilities on the Company’s Condensed Consolidated Balance Sheets.

 

(3)

Derivative assets and liabilities included in Level II primarily represent forward currency exchange contracts. The Company enters into these contracts to minimize the short-term impact of foreign currency fluctuations on certain trade and inter-company receivables and payables. The derivatives are not designated as hedging instruments. The fair values are determined using inputs based on observable quoted prices. Derivative assets and liabilities are included in Other current assets and Other current liabilities, respectively, on the Company’s Condensed Consolidated Balance Sheets.

 

(4)

The Company has six contingent consideration arrangements that require it to pay the former owners of certain companies it acquired during fiscal 2009 and fiscal 2010. The undiscounted maximum payment under all six arrangements is $8.2 million, based on future revenues or gross margins over a 3 year period. The Company estimated the fair value of these liabilities using the expected cash flow approach with inputs being probability-weighted revenue or gross margin projections, as the case may be, and discount rates ranging from 0.22% to 1.35%. Of the total contingent consideration liability, $1.0 million and $3.2 million were included in Other current liabilities and Other non-current liabilities, respectively, on the Company’s Condensed Consolidated Balance Sheets.

The table below sets forth a summary of changes in the fair value of the Level III contingent consideration liability for the three month ended July 2, 2010.

 

As of   

Level III
    liabilities    
July 2,

2010

 
   

(Dollars in thousands)

  
  

Balance as of January 1, 2010

   $ 2,200   

Acquisitions

     2,208   

Realized gains

     (190
        

Balance as of July 2, 2010

   $ 4,218   
        

 

16


Table of Contents

Additional Fair Value Information

The following table provides additional fair value information relating to the Company’s financial instruments outstanding:

 

         Carrying    
Amount
   Fair Value    Carrying
Amount
       Fair Value    
      
As of    July 2, 2010    January 1, 2010
 

(Dollars in thousands)

           
           

Assets:

           

Cash and cash equivalents

   $ 261,660    $ 261,660    $ 273,848    $ 273,848

Restricted cash

     17,151      17,151      -      -

Forward foreign currency exchange contracts

     79      79      594      594
           

Liabilities:

           

Credit facility

   $ 151,000    $ 148,265    $ 151,000    $ 147,144

Forward foreign currency exchange contracts

     674      674      52      52

Notes payable and other

     2,022      2,004      483      479

The restricted cash balance as of July 2, 2010 represents funds placed in restricted account for a business acquisition and unavailable for operating activities. The fair value of the bank borrowings and notes payable has been calculated using an estimate of the interest rate the Company would have had to pay on the issuance of notes with a similar maturity and discounting the cash flows at that rate. The fair values do not give an indication of the amount that Trimble would currently have to pay to extinguish any of this debt.

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 six months ended July 2, 2010 are as follows:

 

(Dollars in thousands)

  

Balance as of January 1, 2010

   $ 14,744   

Accruals for warranties issued

     9,173   

Changes in estimates

     (912

Warranty settlements (in cash or in kind)

     (8,739
        

Balance as of July 2, 2010

   $         14,266   
        

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.

 

17


Table of Contents
     Three Months Ended    Six Months Ended
         July 2,    
2010
       July 3,    
2009
       July 2,    
2010
       July 3,    
2009

(Dollars in thousands, except per share amounts)

           
           

Numerator:

           
           

Net income attributable to Trimble Navigation Ltd.

   $ 6,353    $ 20,857    $ 34,251    $ 38,322
                           
           

Denominator:

           

Weighted average number of common shares used in basic earnings per share

     120,654      119,551      120,707      119,406

Effect of dilutive securities (using treasury stock method):

           

Common stock options and restricted stock units

     3,445      2,346      3,257      2,005
                           

Weighted average number of common shares and dilutive potential common shares used in diluted earnings per

     124,099      121,897      123,964      121,411
                           

Basic earnings per share

   $ 0.05    $ 0.17    $ 0.28    $ 0.32
                           

Diluted earnings per share

   $ 0.05    $ 0.17    $ 0.28    $ 0.32
                           

For the three months ended July 2, 2010 and July 3, 2009, the Company excluded 2.1 million shares and 4.9 million shares of outstanding stock options, respectively, from the calculation of diluted earnings per share. For the six months ended July 2, 2010 and July 3, 2009, the Company excluded 2.8 million and 5.6 million shares of outstanding stock options, respectively, from the calculation of diluted earnings per share. These shares were excluded from the three and six month periods because the exercise prices of these stock options were greater than or equal to the average market value of the common shares during the respective periods. Inclusion of these shares would be antidilutive. These options could be included in the calculation in the future if the average market value of the common shares increases and is greater than the exercise price of these options.

NOTE 12: RESTRUCTURING CHARGES:

Restructuring expense for the three and six months ended July 2, 2010 and July 3, 2009 was as follows:

 

     Three Months Ended    Six Months Ended
      
(Dollars in thousands)        July 2,    
2010
       July 3,    
2009
       July 2,    
2010
       July 3,    
2009
      
           

Severance and benefits

   $ 430    $ 3,500    $ 1,104    $ 7,988
      

During the three and six months ended July 2, 2010, restructuring expense of $0.4 million and $1.1 million, respectively, was related to decisions to streamline processes and reduce the cost structure of the Company, with approximately 70 positions eliminated year to date. During the three and six months ended July 2, 2010, of the total restructuring expense, $0.3 million and $1.0 million, respectively, was shown as a separate line within Operating expense, and $0.1 million and $0.1 million, respectively, was included within Cost of sales on the Company’s Condensed Consolidated Statements of Income.

During the three and six months ended July 2, 2009, restructuring expense of $3.5 million and $8.0 million, respectively, was related to decisions to streamline processes and reduce the cost structure of the Company, with approximately 250 positions eliminated. During the three and six months ended July 2, 2009, of the total restructuring expense, $1.3 million and $4.9 million, respectively, was shown as a separate line within Operating expense, and $2.2 million and $3.1 million, respectively, was included within Cost of sales on the Company’s Condensed Consolidated Statements of Income.

Restructuring liability:

The following table summarizes the restructuring activity for the six months ended July 2, 2010:

 

(Dollars in thousands)

  

Balance as of January 1, 2010

   $ 2,628   

Charges

     1,104   

Payments

     (2,455

Adjustments

     (180
        

Balance as of July 2, 2010

   $         1,097   
        

 

18


Table of Contents

The $1.1 million restructuring accrual consists of severance and benefits. Of the $1.1 million restructuring accrual, $1.0 million is included in Other current liabilities and is expected to be settled in the first quarter of fiscal 2011.

NOTE 13: INCOME TAXES

The Company’s effective income tax rate for the three months and six months ended July 2, 2010 was 83.4% and 56.6%, respectively, as compared to 29.0% and 27.2% for the three months and six months ended July 3, 2009. The 2010 second quarter effective tax rate is higher than the statutory federal income tax rate primarily due to the net impact of the U.S. Internal Revenue Service (IRS) audit settlement of the Company’s 2005 through 2007 tax years, offset by geographical mix of the Company’s pre-tax income. The audit settlement includes IRS, state tax, and interest charges totaling $52.4 million, offset by the reversal of related unrecognized tax benefits and other items of $24.9 million, which amounts to a net charge of $27.5 million. The 2009 second quarter effective tax rate is lower than the statutory federal income tax rate of 35% primarily due to the geographical mix of the Company’s pre-tax income.

The Company and its U.S. subsidiaries are subject to U.S. federal and state income tax. The Company has concluded all U.S. federal income tax matters for the years through 2007 and state income tax matters for years through 1992. Generally, non-U.S. income tax matters have been concluded for years through 2000. The Company is currently in various stages of multiple year examinations by Federal, State, and foreign taxing authorities. It is reasonably possible that the total amount of unrecognized tax benefits will change in the next twelve months. The amount of change cannot be reasonably estimated at this time. Such changes could occur based on the normal expiration of various statutes of limitations or the possible conclusion of ongoing tax audits in various jurisdictions around the world.

In May 2010, the IRS closed its examination of our income tax returns for the years 2005 through 2007. As part of the audit, the IRS examined and adjusted the valuation and payment arrangement for the 2006 non-exclusive license of specified Trimble intellectual property rights to a foreign-based Trimble subsidiary. The consideration for this license was to be paid over time and was established based on the Company's estimate of the ongoing royalties that would have been received in a similar license arrangement to an unrelated third-party licensee. Pursuant to the audit settlement, Trimble agreed to revise the valuation and to accelerate the payments under the existing royalty arrangement resulting in a one-time charge. The resolution of the 2005 through 2007 audit resulted in a tax assessment to the Company of $42.5 million and interest of $7.2 million for a total of $49.7 million that the Company paid on July 15, 2010. Additionally, as a result of the settlement, the Company will incur state income taxes and interest of approximately $2.5 million.

The amount of liabilities for unrecognized tax benefits (net of the federal benefit on state issues) that, if recognized, would favorably affect the effective income tax rate in any future period are $23.7 million and $43.3 million at July 2, 2010 and January 1, 2010, respectively. The primary component of the net change is a $21.6 million realization of unrecognized tax benefits due to the effective settlement of the IRS 2005 through 2007 income tax audit. Unrecognized tax benefits are recorded in Other non-current liabilities and in the deferred tax accounts in the accompanying Condensed Consolidated Balance Sheets.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company’s unrecognized tax benefit liabilities include interest and penalties at July 2, 2010 and January 1, 2010, of $3.3 million and $5.0 million, respectively, which were recorded in Other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets.

On September 30, 2008, the State of California enacted Assembly Bill 1452 into law which among other provisions, suspends net operating loss deductions for 2008 and 2009 and extends the carryforward period of any net operating losses not utilized due to such suspension, adopts the federal 20-year net operating loss carryforward period, phases-in the federal two-year net operating loss carryback periods beginning in 2011, and limits the utilization of tax credits to the extent of 50 percent of a taxpayer’s tax liability before tax credits.

NOTE 14: COMPREHENSIVE INCOME (LOSS):

The components of comprehensive income (loss), net of related tax, were as follows:

 

     Three Months Ended    Six Months Ended
          July 2,    
2010
         July 3,    
2009
       July 2,    
2010
        July 3,    
2009
(Dollars in thousands)                      
                       

Net income

   $ 6,771      $ 21,150    $ 34,923      $ 38,847

Foreign currency translation adjustments

     (20,153     23,631      (27,652     9,175

Net unrealized gain on investments/actuarial gain

     31        60      25        110
                             

Comprehensive income (loss)

     (13,351     44,841      7,296        48,132

Less: Comprehensive income attributable to the noncontrolling interests

     418        293      672        525
                             

Comprehensive income (loss) attributable to Trimble Navigation Ltd.

   $ (13,769   $ 44,548    $ 6,624      $ 47,607
                             

 

19


Table of Contents

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 “Risk Factors” below and elsewhere in this report as well as in the Company’s Annual Report on Form 10-K for fiscal year 2009 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 U. S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, 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, 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 expense 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

There have been no material changes to our significant accounting polices during the six months ended July 2, 2010 from those disclosed in our 2009 Form 10-K, with the exception of our accounting policy for revenue recognition as described in Note 2 of the Notes to the Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

Updates to recent accounting standards as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 1, 2010 are as follows:

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This guidance, which is now codified under the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, requires new disclosures on the transfers of assets and liabilities between Level I (quoted prices in active market for identical assets or liabilities) and Level II (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level III fair value measurements). The guidance became effective for us with the reporting period beginning January 2, 2010, except for the disclosure on the roll forward activities for Level III fair value measurements, which will become effective for us at the beginning of fiscal 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued accounting guidance which changes the consolidation guidance applicable to a variable interest entity (VIE). The guidance, now codified under the Consolidation Topic of the FASB Accounting Standards Codification, also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, GAAP required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. The Company adopted this guidance in the first quarter of fiscal 2010. The adoption of the guidance did not have a material impact on our financial position, results of operations or cash flows.

In October 2009, the FASB issued an amendment which eliminates the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. In addition, the guidance updated whether multiple deliverables exist and how the deliverables in an arrangement should be separated. The amendment also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor specific objective evidence (VSOE) if available; (2) third-party evidence (TPE) if VSOE evidence is not available; and (3) estimated selling (ESP) price if neither VSOE nor TPE is available. In addition, the FASB modified the accounting for revenue arrangements that include

 

20


Table of Contents

both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. Both amendments are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We early adopted this guidance in the first quarter of fiscal 2010 on a prospective basis. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for a more detailed discussion.

EXECUTIVE LEVEL OVERVIEW

Trimble’s focus is on combining positioning technology with wireless communication and application 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. In addition, we also provide software applications on a stand-alone basis. For example, we provide software for project management on construction sites.

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 Mobile Solutions and Advanced Devices segments, our products are generally sold through a dealer channel, and it is crucial that we maintain a proficient, global, third-party distribution channel.

We continued to execute our strategy with a series of actions that can be summarized in three categories.

Reinforcing our position in existing markets

* We believe these markets provide us with additional, substantial potential for substituting our technology for traditional methods. In the first half of fiscal 2010, we are continuing to develop new products and to strengthen our distribution channels in order to expand our market.

In our Engineering and Construction segment, we introduced new and enhanced systems for our Optical Total Station portfolio. These new S8, S6, S3, M3 Mechanical Total Station, and VS Spatial Station products provide better accuracy and improve surveyor productivity. We also grew our portfolio of Site Positioning System for Total Stations with the introduction of the new SPS620 and SPS720 robotic total stations which feature advanced measurement capabilities at a competitive price point and are ideal for work on smaller site operations. The next generation of fleet and asset management solutions for construction was also introduced through the web based VisionLink solution where owners of mixed fleets can monitor equipment health and fleet utilization with near real-time speed. The VisionLink solution is an integral part of the Cat ® Product Link fleet-management solution and replaces their current user interface with powerful tools and features for processing and conveying information to users and dealers.

In our Advanced Devices segment, we introduced the Condor family of GPS modules which feature major advancements in signal tracking for applications working in poor signal environments.

All of these products strengthened our competitive position and created new value for the user.

Extending our position in new and 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 new and existing users. In the first half of fiscal 2010, new acquisitions continued to strengthen our product portfolio. Our acquisition of Definiens’ Earth Sciences eCognition Software Assets expanded Trimble’s GeoSpatial product offerings. Also, our acquisition of LET Systems strengthen Trimble’s Utilities Field Solutions product portfolio by adding comprehensive, scalable incident, and outage management capabilities. Another acquisition, Pondera Engineers LLC will enable Trimble to provide additional capabilities for creating infrastructure models that leverage design information across the complete utility asset lifecycle. Also in our Field Solutions segment, we introduced the EZ-Surface and the EZ-Sync software. EZ-Surface allows farmers and drainage contractors to analyze fields surveyed by viewing 3D field models. The EZ-Sync solutions provide wireless data transfer capabilities that enhance information management for growers and agribusinesses.

Bringing 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. New initiatives are focused in emerging markets in Africa, China, India, the Middle-East and Russia. We formed a joint venture in Russia with the Russian Space Systems which will be responsible for selling commercial Global Navigation Satellite System (GNSS) geodetic network infrastructure systems localized for Russia and the Commonwealth of Independent States (CIS). We also formed a joint venture in China with the China Railway Eryuan Engineering Group Co. Ltd. (CREEC) which will leverage Trimble’s commercial positioning, communications and software technologies and CREEC’s expertise in rail design and construction to develop and provide digital railway solutions that address the design, construction and maintenance for the Chinese railway industry.

 

21


Table of Contents

RECENT BUSINESS DEVELOPMENTS

The following companies and joint ventures were acquired or formed during twelve months ended July 2, 2010 and are combined in our results of operations since the date of acquisition or formation:

Zhongtie Trimble Digital Engineering and Construction Limited Company

On June 28, 2010, we and the China Railway Eryuan Engineering Group Co. Ltd. (CREEC) formed a joint venture, Zhongtie Trimble Digital Engineering and Construction Limited Company (ZTD). We and CREEC both maintain a 50 percent ownership of ZTD. ZTD will leverage Trimble’s commercial positioning, communications and software technologies, as well as CREEC’s expertise in rail design and construction, to develop and provide digital railway solutions that address the design, construction and maintenance for the Chinese railway industry.

Definiens

On June 10, 2010, we acquired Definiens’ Earth Sciences business assets and licensing of its software technology platform. Definiens is a Germany-based company specializing in image analysis solutions. Definiens’ performance is reported under our Engineering and Construction business segment.

Rusnavgeoset Limited Liability Company

On May 14, 2010, we and Russian Space Systems formed a joint venture, Rusnavgeoset Limited Liability Company (Rusnavgeoset). We and Russian Space Systems both maintain a 50 percent ownership of Rusnavgeoset. Rusnavgeoset will be responsible for selling commercial Global Navigation Satellite System (GNSS) geodetic network infrastructure systems localized for Russia and the Commonwealth of Independent States.

LET Systems

On March 4, 2010, we acquired privately-held LET Systems based in Cork, Ireland. LET Systems is an internationally recognized leader in incident and outage management system solutions for utilities. LET Systems’ performance is reported under our Engineering and Construction business segment.

Pondera Engineers

On January 27, 2010, we acquired the assets of privately-held Pondera Engineers LLC based in Post Falls, Idaho. Pondera is an engineering and development company offering services and software tools for siting, designing, optimizing, and maintaining high-voltage power transmission and distribution lines. Pondera’s performance is reported under our Field Solutions business segment.

Farm Works

On July 16, 2009, we acquired the assets of privately-held CTN Data Service, LLC, creator of Farm Works software, located in Hamilton, Indiana. Farm Works provides integrated office and mobile software solutions for both the farmer and agriculture service professional. Farm Works’ performance is reported under our Field Solutions business segment.

Seasonality of Business

* Our individual segment revenue may be affected by seasonal buying patterns. Typically, the second fiscal quarter has been the strongest quarter for the Company driven by the construction buying season. However during the recent past, this pattern has been disrupted by the global economic downturn.

RESULTS OF OPERATIONS

Overview

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

 

22


Table of Contents
     Three Months Ended     Six Months Ended  
         July 2,    
2010
        July 3,    
2009
        July 2,    
2010
        July 3,    
2009
 
           
(Dollars in thousands)                         

Total consolidated revenue

   $ 333,363      $ 290,063      $ 652,378      $ 579,017   

Gross margin

   $ 163,426      $ 142,800      $ 322,423      $ 286,758   

Gross margin %

     49.0     49.2     49.4     49.5

Total consolidated operating income

   $ 40,561      $ 28,726      $ 76,676      $ 52,978   

Operating income %

     12.2     9.9     11.8     9.1

Revenue

In the three months ended July 2, 2010, total revenue increased by $43.3 million or 15%, as compared to the same corresponding period in fiscal 2009. Of the increase, Engineering and Construction revenue increased $41.2 million, Advanced Devices increased $2.6 million, and Field Solutions increased $0.4 million, which was slightly offset by a decrease in Mobile Solutions of $0.9 million. The revenue increase was primarily due to a return to growth in the U.S. and rest of the world markets in Engineering and Construction.

In the six months ended July 2, 2010, total revenue increased by $73.4 million or 13%, as compared to the same corresponding period in fiscal 2009. Of the increase, Engineering and Construction revenue increased $71.2 million, and Advanced Devices increased $6.3 million, partially offset by a decrease in Field Solutions of $2.9 million and Mobile Solutions of $1.2 million. The revenue increase was primarily due to the economic recovery in the U.S. and rest of the world markets in Engineering and Construction.

Gross Margin

Gross margin varies due to a number of factors including product mix, pricing, distribution channel, production volumes, and foreign currency translations.

Gross margin increased by $20.6 million and $35.7 million for the three and six months ended July 2, 2010, respectively, as compared to the corresponding periods in the prior year, primarily due to increased sales in Engineering and Construction. Gross margin as a percentage of total revenue for the three months ended July 2, 2010 was 49.0%, as compared to 49.2% for the three months ended July 3, 2009. Gross margin as a percentage of total revenue for the six months ended July 2, 2010 was 49.4%, as compared to 49.5% for the six months ended July 3, 2009. The slight decrease in gross margin percentage for the three and six month periods ended July 2, 2010 was primarily driven by product mix in Mobile Solutions attributable to a customer loss.

Operating Income

Operating income increased by $11.8 million and $23.7 million for the three and six months ended July 2, 2010, respectively, as compared to the corresponding periods in the prior year, primarily due to higher revenue. Operating income as a percentage of total revenue was 12.2% for the three months ended July 2, 2010, as compared to 9.9% for the three months ended July 3, 2009. Operating income as a percentage of total revenue was 11.8% for the six months ended July 2, 2010, as compared to 9.1% for the six months ended July 3, 2009. The increase in operating income percentage for both the three and six month periods was primarily due to higher revenue and increased operating leverage in Engineering and Construction.

Results by Segment

To achieve distribution, marketing, production, and technology advantages in our targeted markets, we manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices. Operating income equals net revenue less cost of sales and operating expense, excluding general corporate expense, amortization of purchased intangibles, amortization of inventory step-up, non-recurring acquisition costs, restructuring charges, non-operating income, net, and income tax provision.

 

23


Table of Contents

The following table is a summary of revenue and operating income by segment:

 

     Three Months Ended     Six Months Ended  
         July 2,             July 3,             July 2,             July 3,      
     2010     2009     2010     2009  
           
(Dollars in thousands)                         

Engineering and Construction

        

Revenue

   $ 188,441      $ 147,240      $ 346,059      $ 274,891   

Segment revenue as a percent of total revenue

     57     51     53     48

Operating income

   $ 33,921      $ 19,160      $ 52,728      $ 21,669   

Operating income as a percent of segment revenue

     18     13     15     8

Field Solutions

        

Revenue

   $ 80,158      $ 79,787      $ 176,059      $ 178,944   

Segment revenue as a percent of total revenue

     24     28     27     31

Operating income

   $ 28,980      $ 30,148      $ 68,293      $ 72,351   

Operating income as a percent of segment revenue

     36     38     39     40

Mobile Solutions

        

Revenue

   $ 38,188      $ 39,065      $ 76,147      $ 77,353   

Segment revenue as a percent of total revenue

     11     13     12     13

Operating income

   $ 324      $ 3,648      $ 2,223      $ 6,796   

Operating income as a percent of segment revenue

     1     9     3     9

Advanced Devices

        

Revenue

   $ 26,576      $ 23,971      $ 54,113      $ 47,829   

Segment revenue as a percent of total revenue

     8     8     8     8

Operating income

   $ 5,181      $ 4,833      $ 10,806      $ 9,145   

Operating income as a percent of segment revenue

     19     20     20     19

Unallocated corporate expense includes general corporate expense, amortization of inventory step-up, and non-recurring acquisition costs. A reconciliation of our consolidated segment operating income to consolidated income before income taxes follows:

 

     Three Months Ended     Six Months Ended  
         July 2,             July 3,             July 2,             July 3,      
     2010     2009     2010     2009  
           
(Dollars in thousands)                         

Consolidated segment operating income

   $ 68,406      $ 57,789      $ 134,050      $ 109,961   

Unallocated corporate expense

     (13,499     (12,513     (28,537     (23,647

Amortization of purchased intangible assets

     (13,916     (13,050     (27,733     (25,348

Restructuring charges

     (430     (3,500     (1,104     (7,988
                                

Consolidated operating income

     40,561        28,726        76,676        52,978   

Non-operating income, net

     286        1,055        3,821        399   
                                

Consolidated income before taxes

   $ 40,847      $ 29,781      $ 80,497      $ 53,377   
                                

Engineering and Construction

Engineering and Construction revenue increased by $41.2 million or 28% and $71.2 million or 26% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009. Segment operating income increased $14.8 million or 77% and $31.1 million or 143% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009.

The revenue growth for both the three months and six month periods was primarily driven by a return to growth in the U.S. and rest of the world markets. Segment operating income for both the three and six month periods increased primarily due to higher revenue and increased operating leverage, slightly offset by unfavorable foreign currency exchange rates.

Field Solutions

Field Solutions revenue increased by $0.4 million or 1% and decreased by $2.9 million or 2% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009. Segment operating income decreased by $1.2 million or 4% and $4.1 million or 6% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009.

 

24


Table of Contents

The revenue was relatively flat for the three month period, primarily due to lower sales in Europe for our agricultural products, offset by a return to growth in sales of our geographic information systems business. The revenue decrease for the six month period was primarily due to lower sales in Europe for our agricultural products. Operating income for the three and six month periods decreased primarily due to lower revenue in our agricultural business, partially offset by an increase in revenue in our geographic information systems business.

Mobile Solutions

Mobile Solutions revenue decreased by $0.9 million or 2% and $1.2 million or 2% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding period in fiscal 2009. Segment operating income decreased by $3.3 million or 91% and $4.6 million or 67% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009.

The revenue decline for both the three and six month periods were primarily due to the impact of lower subscription service revenue, largely offset by a one-time acceleration of recognition of hardware revenue, associated with the loss of a large customer contract. The decrease in operating income for both the three and six month periods were primarily due to a reduction in higher margin subscription service revenue, slightly offset by an increase in lower margin hardware revenue, associated with the loss of a large customer contract.

Advanced Devices

Advanced Devices revenue increased by $2.6 million or 11% and $6.3 million or 13% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009. Segment operating income increased by $0.3 million or 7% and $1.7 million or 18% for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009.

The increase in revenue for both the three and six month periods was driven by a return to growth in both our component and GNSS position and orientation systems. Operating income was slightly up for both the three and six month periods due to the increase in revenue, partially offset by increased expenses, primarily due to foreign exchange.

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

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

 

     Three Months Ended     Six Months Ended  
        
         July 2,             July 3,             July 2,             July 3,      
     2010     2009     2010     2009  
        
(Dollars in thousands)                         

Research and development

   $ 36,552      $ 33,457      $ 72,442      $ 67,594   

Percentage of revenue

     11     11     11     12

Sales and marketing

     50,522        45,163        100,290        94,098   

Percentage of revenue

     15     16     15     16

General and administrative

     27,290        26,622        55,837        52,664   

Percentage of revenue

     8     9     9     9
        

Total

   $ 114,364      $ 105,242      $ 228,569      $ 214,356   
        

Percentage of revenue

     34     36     35     37
        

Overall, R&D, S&M, and G&A expense increased by approximately $9.1 million and $14.2 million for the three and six months ended July 2, 2010, respectively, as compared to the corresponding periods in fiscal 2009.

Research and development expense increased by $3.1 million and $4.8 million for the three and six month periods ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009, primarily due to increased outside engineering service and prototype expense, increased compensation related expense, the inclusion of expense from acquisitions not included in the prior year, and unfavorable foreign currency exchange rates. All of our R&D costs have been expensed as incurred. Costs of software developed for external sale subsequent to reaching technical feasibility were not considered material and were expensed as incurred. Spending overall was at approximately 11% of revenue in the three and six months ended July 2, 2010, as compared to 11% and 12% in the corresponding periods in fiscal 2009.

* We believe that the development and introduction of new products are critical to our future success and we expect to continue active development of new products.

Sales and marketing expense increased by $5.4 million and $6.2 million for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009. The increase was primarily due to increased compensation related expense, the inclusion of expense from acquisitions not applicable in the prior year, and travel and trade show expense. Spending overall was at approximately 15% of revenue in the three and six months ended July 2, 2010, as compared to 16% in the same corresponding periods in fiscal 2009.

 

25


Table of Contents

* Our future growth will depend in part on the timely development and continued viability of the markets in which we currently compete, as well as our ability to continue to identify and develop new markets for our products.

General and administrative expense increased by $0.7 million and $3.2 million for the three and six months ended July 2, 2010, respectively, as compared to the same corresponding periods in fiscal 2009 primarily due to the inclusion of expense from acquisitions not applicable in the prior year, partially offset by decreased compensation related costs associated with changes in deferred compensation plan benefits. Spending overall was at approximately 8% and 9% of revenue in the three and six months ended July 2, 2010, as compared to 9% in the same corresponding period in fiscal 2009.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets was $13.9 million in the second quarter of fiscal 2010, as compared to $13.1 million in the second quarter of fiscal 2009. Of the total $13.9 million in the second quarter of fiscal 2010, $8.1 million is presented as a separate line within Operating expense and $5.8 million is included within Cost of sales on our Condensed Consolidated Statements of Income. The increase was due primarily to business acquisitions and asset purchases not included in the corresponding period of fiscal 2009. As of July 2, 2010, future amortization of intangible assets is expected to be $27.1 million during the remaining two quarters of fiscal 2010, $49.8 million during 2011, $42.2 million during 2012, $37.7 million during 2013, $16.4 million during 2014, and $17.6 million thereafter.

Restructuring Charges

Restructuring expense for the three and six months ended July 2, 2010 and July 3, 2009 was as follows:

 

     Three Months Ended    Six Months Ended
      
         July 2,            July 3,            July 2,            July 3,    
(Dollars in thousands)    2010    2009    2010    2009
      

Severance and benefits

   $ 430    $ 3,500    $ 1,104    $ 7,988
      

During the three and six months ended July 2, 2010, restructuring expense of $0.4 million and $1.1 million, respectively, was related to decisions to streamline processes and reduce the cost structure of the Company, with approximately 70 positions eliminated year to date. During the three and six months ended July 2, 2010, of the total restructuring expense, $0.3 million and $1.0 million, respectively, was shown as a separate line within Operating expense, and $0.1 million and $0.1 million, respectively, was included within Cost of sales on the Company’s Condensed Consolidated Statements of Income.

During the three and six months ended July 2, 2009, restructuring expense of $3.5 million and $8.0 million, respectively, was related to decisions to streamline processes and reduce the cost structure of the Company, with approximately 250 positions eliminated. During the three and six months ended July 2, 2009, of the total restructuring expense, $1.3 million and $4.9 million, respectively, was shown as a separate line within Operating expense, and $2.2 million and $3.1 million, respectively, was included within Cost of sales on the Company’s Condensed Consolidated Statements of Income.

Restructuring liability:

The following table summarizes the restructuring activity for the six months ended July 2, 2010:

 

(Dollars in thousands)       

Balance as of January 1, 2010

   $         2,628   

Charges

     1,104   

Payments

     (2,455

Adjustments

     (180
        

Balance as of July 2, 2010

   $ 1,097   
        

The $1.1 million restructuring accrual consists of severance and benefits. Of the $1.1 million restructuring accrual, $1.0 million is included in Other current liabilities and is expected to be settled in the first quarter of fiscal 2011.

 

26


Table of Contents

Non-operating Income, Net

The components of non-operating income, net, were as follows:

 

     Three Months Ended     Six Months Ended  
         July 2,             July 3,             July 2,             July 3,      
     2010     2009     2010     2009  
           
(Dollars in thousands)                         

Interest income

   $ 244      $ 223      $ 643      $ 422   

Interest expense

     (411     (465     (809     (958

Foreign currency transaction loss

     (1,869     (216     (1,123     (32

Income from equity method investments, net

     3,147        586        5,621        479   

Other income (expense), net

     (825     927        (511     488   
                                

Total non-operating income, net

   $ 286      $ 1,055      $ 3,821      $ 399   
                                

Non-operating income, net decreased $0.8 million and increased $3.4 million for the three and six months of fiscal 2010, respectively, as compared to the same corresponding period in fiscal 2009. The decrease in the three months is primarily due to an increase in foreign currency losses, changes in deferred compensation plan asset gains and losses included in Other income (expense), net, offset by an increase in joint ventures profitability. The increase for six month periods was primarily due to higher income from joint ventures, partially offset by changes in deferred compensation plan asset gains and losses included in Other income (expense), net, and an increase in foreign currency losses.

Income Tax Provision

Our effective income tax rate for the three and six months ended July 2, 2010 was 83.4% and 56.6%, respectively, as compared to 29.0% and 27.2% for the three months and six months ended July 3, 2009. The 2010 second quarter effective tax rate is higher than the statutory federal income tax rate primarily due to the net impact of the U.S. IRS audit settlement of our 2005 through 2007 tax years, offset by geographical mix of our pre-tax income. The audit settlement includes the IRS and state tax and interest charges of $52.4 million, offset by the release of related unrecognized tax benefits and other items of $24.9 million, for a net charge of $27.5 million. The 2009 second quarter effective tax rate is lower than the statutory federal income tax rate of 35% primarily due to the geographical mix of our pre-tax income.

The resolution of the 2005 through 2007 audit resulted in a tax assessment to us of $42.5 million and interest of $7.2 million for a total of $49.7 million that we paid on July 15, 2010. Additionally, as a result of the settlement, we will incur state income taxes and interest of approximately $2.5 million.

* As of result of the IRS settlement, we believe that our ongoing tax rate for the foreseeable future beyond 2010 will be reduced.

OFF-BALANCE SHEET FINANCINGS AND LIABILITIES

Other than lease commitments incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the condensed consolidated financial statements. Additionally, we do not have any interest in, or relationship with, any special purpose entities.

In the normal course of business to facilitate sales of its products, we indemnify other parties, including customers, lessors, and parties to other transactions with us, with respect to certain matters. We have agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements were not material and no liabilities have been recorded for these obligations on the Condensed Consolidated Balance Sheets as of July 2, 2010 and January 2, 2009.

 

27


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

 

As of   

July 2,    

2010    

   

January 1,    

2010    

 

(Dollars in thousands)

    

Cash and cash equivalents

   $ 261,660      $ 273,848   

Total debt

     153,022        151,483   
Six Months Ended   

July 2,    

2010    

   

July 3,    

2009    

 

(Dollars in thousands)

    

Cash provided by operating activities

   $ 95,309      $ 108,674   

Cash used in investing activities

     (60,708     (80,791

Cash provided (used) by financing activities

     (41,325     5,930   

Effect of exchange rate changes on cash and cash equivalents

     (5,464     1,815   
                

Net increase (decrease) in cash and cash equivalents

   $ (12,188   $ 35,628   

Cash and Cash Equivalents

As of July 2, 2010, cash and cash equivalents totaled $261.7 million as compared to $273.8 million at January 1, 2010. Debt was $153.0 million as of July 2, 2010, as compared to $151.5 million at January 1, 2010.

* Our ability to continue to generate cash from operations will depend in large part on profitability, the rate of collections of accounts receivable, our inventory turns, and our ability to manage other areas of working capital.

* We believe that our cash and cash equivalents, together with our revolving credit facilities will be sufficient to meet our anticipated operating cash needs and stock purchases under the stock repurchase program for at least the next twelve months.

* We anticipate that planned capital expenditures primarily for computer equipment, software, manufacturing tools and test equipment, and leasehold improvements associated with business expansion, will constitute a partial use of our cash resources. Decisions related to how much cash is used for investing are influenced by the expected amount of cash to be provided by operations.

Operating Activities

Cash provided by operating activities was $95.3 million for the six months ended July 2, 2010, as compared to $108.7 million for the six months ended July 3, 2009. This decrease of $13.4 million was primarily driven by an increase in accounts receivable due to higher revenue and an increase in inventory spending, offset by a net increase in Income taxes payable and Accrued liabilities associated with the IRS tax settlement.

Investing Activities

Cash used in investing activities was $60.7 million for the six months ended July 2, 2010, as compared to $80.8 million for the six months ended July 3, 2009. The decrease of $20.1 million was due to lower cash requirement for business and intangible asset acquisitions.

Financing Activities

Cash used by financing activities was $41.3 million for the six months ended July 2, 2010, as compared to cash provided of $5.9 million for the six months ended July 3, 2009. The decrease of $47.2 million was primarily due to the stock repurchase during the second quarter of fiscal 2010.

Accounts Receivable and Inventory Metrics

 

As of   

July 2,    

2010    

  

January 1,    

2010    

Accounts receivable days sales outstanding

   60    66

Inventory turns per year

   3.8    3.4

 

28


Table of Contents

Accounts receivable days sales outstanding were 60 days as of July 2, 2010, as compared to 66 days as January 2, 2009. Our accounts receivable days sales outstanding is calculated based on ending accounts receivable, net, divided by revenue for the corresponding fiscal quarter, times a quarterly average of 91 days. Our inventory turns were 3.8 as of July 2, 2010, as compared to 3.4 as of January 1, 2010. Our inventory turnover is calculated based on total cost of sales for the most recent twelve months divided by average ending inventory, net, for this same twelve month period.

Debt

As of July 2, 2010, our total debt was comprised primarily of our revolving credit line in the amount of $151.0 million, which was drawn down in the third and the fourth quarters of fiscal 2008. As of July 2, 2010 and January 1, 2010 we had notes payable totaling approximately $2.0 million and $0.5 million, respectively. The balance as of July 2, 2010 consists primarily of notes payable to noncontrolling interest holders of one of our consolidated subsidiaries. The notes bear interest at 6% and have undefined payment terms, but are callable with a six month notification. The note payable balance as of January 1, 2010 consists primarily of government loans to foreign subsidiaries.

On July 28, 2005, we entered into a $200 million unsecured revolving credit agreement (the 2005 Credit Facility) with a syndicate of 10 banks with The Bank of Nova Scotia as the administrative agent. On February 16, 2007, we amended our 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, we 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 paying off other debts or loans. The maximum leverage ratio under the 2007 Credit Facility is 3.00:1.00. The funds available under the new 2007 Credit Facility may be used by us for acquisitions, stock repurchases, and general corporate purposes. As of August 20, 2008, we amended the 2007 Credit Facility to allow us to redeem, retire or purchase Trimble common stock without limitation so long as no default or unmatured default then existed, and leverage ratio for the two most recently completed periods was less than 2.00:1.00. In addition, the definition of the fixed charge was amended to exclude the impact of redemptions, retirements, or purchases of Trimble common stock from the fixed charges coverage ratio. For additional discussion of our debt, see Note 8 of Notes to the Condensed Consolidated Financial Statements.

In addition, during the first quarter of fiscal 2007 we incurred a five-year term loan under the 2007 Credit Facility in an aggregate principal amount of $100 million, which was repaid in full during fiscal 2008.

We may borrow funds under the 2007 Credit Facility in U.S. Dollars or in certain other currencies, and borrowings will bear interest, at our 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 our leverage ratio as of our 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 our leverage ratio as of the most recently ended fiscal quarter. Our obligations under the 2007 Credit Facility are guaranteed by certain of our domestic subsidiaries.

The 2007 Credit Facility contains customary affirmative, negative and financial covenants including, among other requirements, negative covenants that restrict our ability to dispose of assets, create liens, incur indebtedness, repurchase stock, pay dividends, make acquisitions, make investments, enter into mergers and consolidations, and make capital expenditures, within certain limitations, 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 our obligations under the 2007 Credit Facility, however that acceleration will be automatic in the case of bankruptcy and insolvency events of default. As of July 2, 2010 we were in compliance with all financial debt covenants.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

The following presentation includes non-GAAP measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. The non-GAAP financial measures included in the below tables are non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, non-GAAP diluted net income per share and operating leverage, and non-GAAP segment operating income before corporate allocations. These non-GAAP measures can be used to evaluate our historical and prospective financial performance, as well as our performance relative to competitors. We believe some of its investors track our “core operating performance” as a means of evaluating our performance in the ordinary, ongoing, and customary course of our operations. Management also believes that looking at our core operating performance provides a supplemental way to provide consistency in period to period comparisons. Accordingly, management excludes from non-GAAP those items relating to restructuring, amortization of purchased intangibles, stock based compensation, amortization of acquisition-related inventory step-up and non-recurring acquisition costs, which we believe are not indicative of our core operating performance. For a detailed explanations of the adjustments made to comparable GAAP measures, see items (A) – (G) below.

 

29


Table of Contents
          Three Months Ended     Six Months Ended  
         

Jul-2,

2010

   

Jul-3,

2009

   

Jul-2,

2010

   

Jul-03,

2009

 
                           
(Dollars in thousands, except per
share data) (Unaudited)
        Dollar
Amount
    % of
Revenue
    Dollar
Amount
    % of
Revenue
    Dollar
Amount
    % of
Revenue
    Dollar
Amount
    % of
Revenue
 
                                   

GROSS MARGIN:

                   

GAAP gross margin:

      $ 163,426      49.0   $ 142,800      49.2   $ 322,423      49.4   $ 286,758      49.5

Restructuring

   ( A )      55      0.0     2,198      0.7     98      0.0     3,063      0.5

Amortization of purchased intangibles

   ( B )      5,790      1.7     5,475      1.9     11,559      1.8     10,760      1.9

Stock-based compensation

   ( C )      486      0.2     477      0.2     987      0.2     915      0.2

Amortization of acquisition-related inventory step-up

   ( D )      —        0.0     247      0.1     71      0.0     470      0.1
                                   

Non-GAAP gross margin:

      $ 169,757      50.9   $ 151,197      52.1   $ 335,138      51.4   $ 301,966      52.2
                                   

OPERATING EXPENSES:

                   

GAAP operating expenses:

      $ 122,865        $ 114,074        $ 245,747        $ 233,780     

Restructuring

   ( A )      (375       (1,302       (1,006       (4,925  

Amortization of purchased intangibles

   ( B )      (8,126       (7,530       (16,172       (14,499  

Stock-based compensation

   ( C )      (4,498       (4,077       (9,638       (7,865  

Non-recurring acquisition costs

   ( E )      (1,764       (2,340       (2,502       (2,805  
                                           

Non-GAAP operating expenses:

      $ 108,102        $ 98,825        $ 216,429        $ 203,686     
                                           

OPERATING INCOME:

                   

GAAP operating income:

      $ 40,561      12.2   $ 28,726      9.9   $ 76,676      11.7   $ 52,978      9.1

Restructuring

   ( A )      430      0.1     3,500      1.2     1,104      0.2     7,988      1.4

Amortization of purchased intangibles

   ( B )      13,916      4.2     13,005      4.5     27,731      4.3     25,259      4.4

Stock-based compensation

   ( C )      4,984      1.5     4,554      1.6     10,625      1.6     8,780      1.5

Amortization of acquisition-related inventory step-up

   ( D )      —        0.0     247      0.1     71      0.0     470      0.1

Non-recurring acquisition costs

   ( E )      1,764      0.5     2,340      0.8     2,502      0.4     2,805      0.5
                                   

Non-GAAP operating income:

      $ 61,655      18.5   $ 52,372      18.1   $ 118,709      18.2   $ 98,280      17.0
                                   

NET INCOME:

                   

GAAP net income attributable to Trimble Navigation Ltd.

      $ 6,353        $ 20,857        $ 34,251        $ 38,322     

Restructuring

   ( A )      430          3,500          1,104          7,988     

Amortization of purchased intangibles

   ( B )      13,916          13,005          27,731          25,259     

Stock-based compensation

   ( C )      4,984          4,554          10,625          8,780     

Amortization of acquisition-related inventory step-up

   ( D )      —            247          71          470     

Non-recurring acquisition costs

   ( E )      1,774          1,954          2,312          2,419     

Income tax effect

   ( F )      24,165          (6,741       18,151          (12,155  
                                           

Non-GAAP net income attributable to Trimble Navigation Ltd.

      $ 51,622        $ 37,376        $ 94,245        $ 71,083     
                                           

DILUTED NET INCOME PER SHARE:

                   

GAAP diluted net income per share attributable to Trimble Navigation Ltd.

      $ 0.05        $ 0.17        $ 0.28        $ 0.32     

Restructuring

   ( A )      —            0.03          0.01          0.07     

Amortization of purchased intangibles

   ( B )      0.11          0.11          0.22          0.21     

Stock-based compensation

   ( C )      0.04          0.04          0.09          0.07     

Amortization of acquisition-related inventory step-up

   ( D )      —            —            —            —       

Non-recurring acquisition costs

   ( E )      0.02          0.02          0.02          0.02     

Income tax effect

   ( F )      0.20          (0.06       0.14          (0.10  
                                           

Non-GAAP diluted net income per share attributable to Trimble Navigation Ltd.

      $ 0.42        $ 0.31        $ 0.76        $ 0.59     
                                           

OPERATING LEVERAGE:

                   

Increase in non-GAAP operating income

      $ 9,283            $ 20,429         

Increase in revenue

      $ 43,300            $ 73,361         

Operating leverage (increase in non-GAAP operating income as a % of increase in revenue)

        21.4           27.8      
SEGMENT OPERATING
INCOME:
              % of
Segment
Revenue
          % of
Segment
Revenue
          % of
Segment
Revenue
          % of
Segment
Revenue
 

Engineering and Construction

                   

GAAP operating income before corporate allocations:

      $ 33,921      18.0   $ 19,160      13.0   $ 52,728      15.2   $ 21,669      7.9

Stock-based compensation

   ( G )      1,878      1.0     1,431      1.0     3,603      1.1     2,739      1.0
                                   

Non-GAAP operating income before corporate allocations:

      $ 35,799      19.0   $ 20,591      14.0   $ 56,331      16.3   $ 24,408      8.9
                                   

Field Solutions

                   

GAAP operating income before corporate allocations:

      $ 28,980      36.2   $ 30,148      37.8   $ 68,293      38.8   $ 72,351      40.4

Stock-based compensation

   ( G )      477      0.5     260      0.3     933      0.5     482      0.3
                                   

Non-GAAP operating income before corporate allocations:

      $ 29,457      36.7   $ 30,408      38.1   $ 69,226      39.3   $ 72,833      40.7
                                   

Mobile Solutions

                   

GAAP operating income before corporate allocations:

      $ 324      0.8   $ 3,648      9.3   $ 2,223      2.9   $ 6,796      8.8

Stock-based compensation

   ( G )      217      0.6     1,103      2.9     1,419      1.9     2,247      2.9
                                   

Non-GAAP operating income before corporate allocations:

      $ 541      1.4   $ 4,751      12.2   $ 3,642      4.8   $ 9,043      11.7
                                   

Advanced Devices

                   

GAAP operating income before corporate allocations:

      $ 5,181      19.5   $ 4,833      20.2   $ 10,806      20.0   $ 9,145      19.1

Stock-based compensation

   ( G )      457      1.7     346      1.4     900      1.6     671      1.4
                                   

Non-GAAP operating income before corporate allocations:

      $ 5,638      21.2   $ 5,179      21.6   $ 11,706      21.6   $ 9,816      20.5
                                   

 

A.

Restructuring . Included in our GAAP presentation of cost of sales and operating expenses, restructuring costs recorded are primarily for employee compensation resulting from reductions in employee headcount in connection with our company restructurings. We exclude restructuring costs from our non-GAAP measures because we believe they are not indicative of our core operating performance.

 

B.

Amortization of purchased intangibles. Included in our GAAP presentation of cost of sales and operating expenses, amortization of purchased intangibles recorded arises from prior acquisitions and are non-cash in nature. We exclude these expenses from our non-GAAP measures because we believe they are not indicative of our core operating performance.

 

30


Table of Contents
C.

Stock-based compensation . Included in our GAAP presentation of cost of sales and operating expenses, stock-based compensation consists of expenses for employee stock options and awards and purchase rights under our employee stock purchase plan. We exclude stock-based compensation expense from our non-GAAP measures because some investors may view it as not reflective of our core operating performance as it is a non-cash expense. For the three months ended July 2, 2010 and July 3, 2009, stock-based compensation was allocated as follows:

 

     Three Months Ended    Six Months Ended
     July 2,
2010
   July 3,
2009
   July 2,
2010
   July 3,
2009
             

(Dollars in thousands)

           

Cost of sales

   $ 486    $ 477    $ 987    $ 915

Research and development

     984      854      1,931      1,638

Sales and Marketing

     1,347      1,062      2,730      2,066

General and administrative

     2,167      2,161      4,977      4,161
                           
   $ 4,984    $ 4,554    $ 10,625    $ 8,780
                           

 

D.

Amortization of acquisition-related inventory step-up . The purchase accounting entries associated with our business acquisitions require us to record inventory at its fair value, which is sometimes greater than the previous book value of the inventory. Included in our GAAP presentation of cost of sales, the increase in inventory value is amortized to cost of sales over the period that the related product is sold. We exclude inventory step-up amortization from our non-GAAP measures because we do not believe it is indicative of our core operating performance.

 

E.

Non-recurring acquisition costs . Included in our GAAP presentation of operating expenses and non-operating income, net, non-recurring acquisition costs consist of external and incremental costs resulting directly from merger and acquisition activities such as legal, due diligence and integration costs. Also included are unusual acquisition related items such as adjustments to the fair value of earnout liabilities and payments made to settle earnout and holdback disputes. We exclude these items because they are non-recurring and unique to specific acquisitions and are not indicative of our core operating performance.

 

F.

Income tax effect. This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP net income. In addition, the three and six months ended July 2, 2010 include the net impact of the $27.5 million associated with the IRS audit settlement.

 

G.

Stock-based Compensation . The amounts consist of expenses for employee stock options and awards and purchase rights under our employee stock purchase plan. As referred to above we exclude stock-based compensation here because investors may view it as not reflective of our core operating performance. However, management does include stock-based compensation for budgeting and incentive plans as well as for reviewing internal financial reporting. We discuss our operating results by segment with and without stock-based compensation expense, as we believe it is useful to investors. Stock-based compensation not allocated to the reportable segments was approximately $2.0 million and $1.4 million for the three months ended July 2, 2010 and July 3, 2009, respectively and $3.8 million and $2.6 million for the six months ended July 2, 2010 and July 3, 2009, respectively.

Non-GAAP Operating Income

Non-GAAP operating income increased by $9.3 million for the three months ended July 2, 2010, as compared to the corresponding period in the prior year. Non-GAAP Operating income as a percentage of total revenue was 18.5% for the three months ended July 2, 2010, as compared to 18.1% for the three months ended July 3, 2009. Non-GAAP operating income increased by $20.4 million for the six months ended July 2, 2010, as compared to the corresponding period in the prior year. Non-GAAP Operating income as a percentage of total revenue was 18.2% for the six months ended July 2, 2010, as compared to 17.0% for the six months ended July 3, 2009. The increase in operating income for both the three and six month periods was primarily driven by higher revenue in Engineering and Construction. The increase in operating income percentage for both the three and six month periods was primarily due to increased operating leverage in Engineering and Construction.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We use certain derivative financial instruments to manage these risks. We do not use derivative financial instruments for speculative purposes. All financial instruments are used in accordance with policies approved by our Board of Directors.

Market Interest Rate Risk

There have been no significant changes to our market interest rate risk assessment. Refer to our 2009 Annual Report on Form 10-K.

Foreign Currency Exchange Rate Risk

There have been no significant changes to our foreign currency exchange rate risk assessment. Refer to our 2009 Annual Report on Form 10-K.

 

31


Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

The management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

(b) Internal Control Over Financial Reporting.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in litigation arising out of the ordinary course of our business. There are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or of which any of our or their property is subject.

ITEM 1A. RISK FACTORS

A description of factors that could materially affect our business, financial condition, or operating results is included under “Risk and Uncertainties” in Item 1A of Part I of our 2009 Annual Report on Form 10-K and is incorporated herein by reference. There have been no material changes to the risk factor disclosure since our 2009 Annual Report on Form 10-K. The risk factors described in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)

None

 

(b)

None

(c) The following table provides information relating to our purchases of equity securities for the second quarter of fiscal 2010.

 

     Total Number
of Shares
Purchased
   Average
Price Paid
per Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Program
   Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Program (1)
    

April 3, 2010 – May 7, 2010

   —      —      —      —  

May 8, 2010 – June 4, 2010

   1,164,376    29.07    1,164,376    90,258,998

May 31, 2008 – June 27, 2008

   1,195,163    28.33    1,195,163    56,405,197
    

Total

   2,359,539    28.69    2,359,539   
    

 

(1)

In January 2008, the Company announced that its board of directors had authorized a stock repurchase program for up to $250 million, effective February 1, 2008. The timing and actual number of shares repurchased will depend on a variety of factors including price, regulatory requirements, capital availability, and other market conditions. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time without public notice.

 

32


Table of Contents

ITEM 6. EXHIBITS

 

3.1   Restated Articles of Incorporation of the Company filed June 25, 1986. (2)
3.2   Certificate of Amendment of Articles of Incorporation of the Company filed October 6, 1988. (2)
3.3   Certificate of Amendment of Articles of Incorporation of the Company filed July 18, 1990. (2)
3.4   Certificate of Amendment of Articles of Incorporation of the Company filed May 29, 2003. (3)
3.5   Certificate of Amendment of Articles of Incorporation of the Company filed March 4, 2004. (4)
3.6   Certificate of Amendment of Articles of Incorporation of the Company filed February 21, 2007. (6)
3.7   Bylaws of the Company, amended and restated through February 24, 2010. (5)
4.1   Specimen copy of certificate for shares of Common Stock of the Company. (1)
10.1   Trimble Navigation Limited Board of Directors Compensation Plan, effective April 27, 2010. (8)
10.2   Trimble Navigation Limited Amended and Restated 2002 Stock Plan, with forms of option agreements. (8)
10.3   Trimble Navigation Limited Amended and Restated Employee Stock Purchase Plan, with forms of subscription agreements. (8)
10.4   Trimble Navigation Limited Annual Management Incentive Plan. (7)
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
101.INS   XBRL Instance Document. (9)
101.SCH   XBRL Taxonomy Extension Schema Document. (9)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document. (9)
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document. (9)
101.LAB   XBRL Taxonomy Extension Label Linkbase Document. (9)
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document. (9)
(1)   Incorporated by reference to exhibit number 4.1 to the registrant’s Registration Statement on Form S-1, as amended (File No. 33-35333), which became effective July 19, 1990.

(2)

  Incorporated by reference to identically numbered exhibits to the registrant’s Annual Report on Form 10-K for the fiscal year ended January 1, 1999.

(3)

 

Incorporated by reference to exhibit number 3.5 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2003.

(4)

 

Incorporated by reference to exhibit number 3.6 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2004.

(5)

 

Incorporated by reference to exhibit number 3.1 to the Company’s Current Report on Form 8-K, filed March 2, 2010.

(6)

 

Incorporated by reference to exhibit number 3.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2007.

(7)

 

Incorporated by reference to exhibit number 10.1 to the Company’s Current Report on Form 8-K filed on May 3, 2010.

(8)

 

Filed herewith.

(9)

 

Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

33


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TRIMBLE NAVIGATION LIMITED
(Registrant)

By:

 

/s/ Rajat Bahri                                

  Rajat Bahri
  Chief Financial Officer
  (Authorized Officer and Principal
  Financial Officer)

DATE: August 10, 2010

 

34


Table of Contents

EXHIBIT INDEX

 

3.1   Restated Articles of Incorporation of the Company filed June 25, 1986. (2)
3.2   Certificate of Amendment of Articles of Incorporation of the Company filed October 6, 1988. (2)
3.3   Certificate of Amendment of Articles of Incorporation of the Company filed July 18, 1990. (2)
3.4   Certificate of Amendment of Articles of Incorporation of the Company filed May 29, 2003. (3)
3.5   Certificate of Amendment of Articles of Incorporation of the Company filed March 4, 2004. (4)
3.6   Certificate of Amendment of Articles of Incorporation of the Company filed February 21, 2007. (6)
3.7   Bylaws of the Company, amended and restated through February 24, 2010. (5)
4.1   Specimen copy of certificate for shares of Common Stock of the Company. (1)
10.1   Trimble Navigation Limited Board of Directors Compensation Plan, effective April 27, 2010. (8)
10.2   Trimble Navigation Limited Amended and Restated 2002 Stock Plan, with forms of option agreements. (8)
10.3   Trimble Navigation Limited Amended and Restated Employee Stock Purchase Plan, with forms of subscription agreements. (8)
10.4   Trimble Navigation Limited Annual Management Incentive Plan. (7)
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 dated August 10, 2010. (8)
101.INS   XBRL Instance Document. (9)
101.SCH   XBRL Taxonomy Extension Schema Document. (9)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document. (9)
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document. (9)
101.LAB   XBRL Taxonomy Extension Label Linkbase Document. (9)
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document. (9)
(1)   Incorporated by reference to exhibit number 4.1 to the registrant's Registration Statement on Form S-1, as amended (File No. 33-35333), which became effective July 19, 1990.
(2)   Incorporated by reference to identically numbered exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1999.
(3)   Incorporated by reference to exhibit number 3.5 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2003.
(4)   Incorporated by reference to exhibit number 3.6 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2004.
(5)   Incorporated by reference to exhibit number 3.1 to the Company’s Current Report on Form 8-K, filed March 2, 2010.
(6)   Incorporated by reference to exhibit number 3.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2007.
(7)   Incorporated by reference to exhibit number 10.1 to the Company’s Current Report on Form 8-K filed on May 3, 2010.
(8)   Filed herewith.
(9)   Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

35

Exhibit 10.1

Trimble Navigation Limited

Board of Directors Compensation Policy

The following is a schedule of the elements of compensation and expense reimbursement for nonemployee members of the board of directors. This policy is effective April 27, 2010.

 

 

A stock option grant of 15,000 shares under the Trimble 2002 Stock Option Plan upon the initial appointment or election to the board.

 

 

An additional annual grant of 15,000 shares to be granted to each director upon re-election by the shareholders at Trimble’s Annual Shareholders’ Meeting.

 

 

Options granted to directors are at fair market value on the date of grant and will have a term of seven years, vesting monthly, on a pro-rated basis, over one year. The options will terminate 90 days after the individual ceases to be a member of the board.

 

 

An annual cash retainer of $44,000, payable quarterly, commencing with the company’s third fiscal quarter of 2010.

 

 

A payment of $2,000 for each day in attendance at a board meeting. .

 

 

A payment of $500 for participation in a telephonic board meeting.

 

 

A payment of $1,000 for each board committee meeting attended, that is not held within a day of a board meeting.

 

 

A payment of $500 for participation in a telephonic board committee meeting.

 

 

A director will be paid a travel and transportation allowance, in lieu of reimbursement for expenses, in accordance with the following schedule:

$4,000 for travel to a meeting held between 1,000 miles and 3,000 miles from the director’s place of residence.

$10,000 for travel to a meeting held more than 3,000 miles from the director’s place of residence.

 

  Note: Miles are one-way and will be measured by air miles between airports. Nickolas W. Vande Steeg will be paid a travel and transportation allowance of $1,500.

 

 

Reimbursement of travel expenses consistent with Trimble policy for travel to a meeting held less than 1,000 miles from the director’s place of residence and all necessary travel on Trimble business, other than to attend a board meeting.

Exhibit 10.2

TRIMBLE NAVIGATION LIMITED

AMENDED AND RESTATED 2002 STOCK PLAN

(as amended March 6, 2009)

1. Purposes of the Plan . The purposes of this Amended and Restated 2002 Stock Plan are:

 

   

to attract and retain the best available personnel for positions of substantial responsibility,

 

   

to provide additional incentive to Employees, Directors and Consultants, and

 

   

to promote the success of the Company’s business.

Grants under the Plan may be Awards, Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Administrator ” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b) “ Affiliate ” means any “parent” or “subsidiary” as such terms are defined in Rule 405 of the U.S. Securities Act of 1933, as amended. The Board shall have the authority to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.

(c) “ Applicable Laws ” means the requirements relating to the administration of stock incentive plans under U.S. state corporate laws, U.S. federal, state and foreign securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Awards are, or will be, granted under the Plan.

(d) “ Award ” means a grant of Shares, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance-Based Awards, or of any other right to receive Shares or cash pursuant to Section 12 of the Plan.

(e) “ Award Agreement ” means a written or electronic form of notice or agreement between the Company and an Awardee evidencing the terms and conditions of an individual Award. The Award Agreement is subject to the terms and conditions of the Plan.

(f) “ Awarded Stock ” means the Common Stock subject to an Award.

(g) “ Awardee ” means the holder of an outstanding Award.

(h) “ Board ” means the board of directors of the Company.

(i) “ Change in Control ” means the occurrence of any of the following events:

 

-1-


(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or

(ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; or

(iii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the Directors are Incumbent Directors. “Incumbent Directors” means Directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

(iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

(j) “ Code ” means the Internal Revenue Code of 1986, as amended.

(k) “ Committee ” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

(l) “ Common Stock ” means the common stock of the Company.

(m) “ Company ” means Trimble Navigation Limited, a California corporation.

(n) “ Consultant ” means any natural person, including an advisor, engaged by the Company or a Parent or Subsidiary or Affiliate to render services to such entity and the services rendered by the consultant or advisor are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities.

(o) “ Covered Employee ” means an Employee who is, or could be, a “covered employee” within the meaning of Section 162(m) of the Code.

(p) “ Director ” means a member of the Board.

(q) “ Disability ” means that the Awardee or Optionee would qualify to receive benefit payments under the long-term disability policy, as it may be amended from time to time, of the Company or the Subsidiary or Affiliate to which the Awardee or Optionee provides services regardless of whether the Awardee or Optionee is covered by such policy. If the Company or Subsidiary or Affiliate to which the Awardee or Optionee provides service does not have a long-term disability plan in place, “Disability” means that an Awardee or Optionee is unable to carry out the responsibilities and functions of the position held by the Awardee or Optionee by reason of any medically determined physical or mental impairment for a period of not less than ninety (90) consecutive days. An Awardee or Optionee

 

-2-


shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Board in its discretion. Notwithstanding the foregoing, for purposes of Incentive Stock Options granted under the Plan, “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

(r) “ Dividend Equivalents ” means rights granted to an Awardee related to the Award of Restricted Stock Units or other Awards for which Shares have not been issued yet, which is a right to receive the equivalent value of dividends paid on the Shares prior to vesting of the Award. Such Dividend Equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Administrator.

(s) “ Employee ” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary or Affiliate of the Company, but shall exclude individuals who are classified by the Company or any Parent or Subsidiary or Affiliate as (a) leased from or otherwise employed by a third party, (b) independent contractors or (c) intermittent or temporary, even if any such classification is changed retroactively as a result of an audit, litigation or otherwise. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or protected under applicable local laws, as interpreted by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary or Affiliate, or any successor. For purposes of Incentive Stock Options, no such leave may exceed three months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the last day of the three month period of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(t) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(u) “ Fair Market Value ” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or if no sales occurred on such date, then on the date immediately prior to such date on which sales prices are reported;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.

(v) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

 

-3-


(w) “ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(x) “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(y) “ Option ” means a stock option granted pursuant to the Plan.

(z) “ Option Agreement ” means a written or electronic form of notice or agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(aa) “ Optioned Stock ” means the Common Stock subject to an Option.

(bb) “ Optionee ” means the holder of an outstanding Option.

(cc) “ Parent ” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(dd) “ Performance-Based Award ” means an Award granted pursuant to Section 11.

(ee) “ Performance Criteria ” means the criteria that the Administrator selects for purposes of establishing the Performance Goal or Performance Goals for an Awardee for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: earnings or net earnings (either before or after interest, taxes, depreciation and amortization), economic value-added, sales or revenue, income, net income (either before or after taxes), operating earnings, cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on capital, return on assets or net assets, return on stockholders’ equity, return on capital, stockholder returns, return on sales, gross or net profit margin, productivity, expense, margins, operating efficiency, customer satisfaction, working capital, earnings per Share, price per Share, market share, new products, customer penetration, technology and risk management, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group. The Adminstrator shall define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Awardee.

(ff) “ Performance Goals ” means, for a Performance Period, the goals established in writing by the Administrator for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance, the performance of a Subsidiary or Affiliate, the performance of a division or a business unit of the Company or a Subsidiary or Affiliate, or the performance of an individual. The Administrator, in its discretion, may, to the extent consistent with, and within the time prescribed by, Section 162(m) of the Code, appropriately adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Awardees (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.

 

-4-


(gg) “ Performance Period ” means the one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining an Awardee’s right to, and the payment of, a Performance-Based Award.

(hh) “ Plan ” means this Amended and Restated 2002 Stock Plan, as amended from time to time.

(ii) “ Qualified Performance-Based Compensation ” means any compensation that is intended to qualify as “qualified performance-based compensation” as described in Section 162(m)(4)(C) of the Code.

(jj) “ Restricted Stock ” means Shares subject to certain restrictions, granted pursuant to Section 8 of the Plan.

(kk) “ Restricted Stock Unit ” means the right to receive a Share, or the Fair Market Value of a Share in cash, granted pursuant to Section 9 of the Plan.

(ll) “ Rule 16b-3 ” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(mm) “ Section 16(b) ” means Section 16(b) of the Exchange Act.

(nn) “ Service Provider ” means an Employee, Director or Consultant.

(oo) “ Share ” means a share of Common Stock, as adjusted in accordance with Section 14 of the Plan.

(pp) “ Subsidiary ” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

(qq) “ Stock Appreciation Right ” means the right, granted pursuant to Section 10, to receive a payment, equal to the excess of the Fair Market Value of a specified number of Shares on the date the Stock Appreciation Right is exercised, over the grant price of the Shares.

3. Stock Subject to the Plan . Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares that may be awarded or optioned and delivered under the Plan is 20,000,000 Shares, plus (a) any Shares which were reserved but not issued under the Company’s 1993 Stock Option Plan (the “1993 Plan”), and (b) any Shares returned to the 1993 Plan as a result of termination of options granted under the 1993 Plan; provided, however, that the maximum aggregate number of Shares that may be issued pursuant to the exercise of Incentive Stock Options shall in no event exceed 20,000,000 Shares. Any Shares that are subject to Options or Stock Appreciation Rights shall be counted against this limit as one (1) Share for every one (1) Share granted. Any Shares that are subject to any Awards other than Options or Stock Appreciation Rights or other Awards which Awardees pay full value for (as determined on the date of the grant) shall be counted against this limit as one and one half (1.5) Shares for every one (1) Share granted. The Shares issued hereunder may be authorized, but unissued, or reacquired Common Stock.

 

-5-


If an Award or Option expires, is cancelled, forfeited or becomes unexercisable without having been exercised in full or otherwise settled in full, or is settled in cash, the undelivered Shares which were subject thereto shall, unless the Plan has terminated, become available for future Awards or Options under the Plan. To the extent permitted by applicable law or any exchange rule, Shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Subsidiary shall not be counted against Shares available for grant pursuant to this Plan. The payment of Dividend Equivalent rights in cash in conjunction with any outstanding Awards shall not be counted against the Shares available for issuance under the Plan. Notwithstanding the provisions of this Section 3, no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code.

4. Administration of the Plan .

(a) Procedure .

(i) Multiple Administrative Bodies . Different Committees with respect to different groups of Service Providers may administer the Plan.

(ii) Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Awards or Options granted hereunder as “qualified performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

(iii) Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) Other Administration . Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

(b) Powers of the Administrator . Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i) to select the Service Providers to whom Awards or Options may be granted hereunder;

(ii) to determine the number of shares of Common Stock or other amounts to be covered by each Award or Option granted hereunder and to determine the amount, if any, of cash payment to be made to an Awardee;

(iii) to approve forms of agreements for use under the Plan;

(iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award or Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), the time or times when Awards vest (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

 

-6-


(v) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;

(vi) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;

(vii) to modify or amend each Award or Option (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; provided, however, that except in connection with a corporate transaction involving the company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), the terms of outstanding awards may not be amended to reduce the exercise price of outstanding Options or Stock Appreciation Rights or cancel outstanding Options or Stock Appreciation Rights in exchange for other Awards or Options or Stock Appreciation Rights with an exercise price that is less than the exercise price of the original Options or Stock Appreciation Rights, without the approval of the Company’s shareholders; provided further, however, that the Administrator shall not have the discretionary authority to accelerate or delay issuance of Shares under an Option or Award that constitutes a deferral of compensation within the meaning of Section 409A of the Code, except to the extent that such acceleration or delay may, in the discretion of the Administrator, be effected in a manner that will not cause any person to incur taxes, interest or penalties under Section 409A of the Code;

(viii) to allow Awardees or Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or vesting of an Award that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Awardee or Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(ix) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award or Option previously granted by the Administrator; and

(x) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision . The Administrator’s decisions, determinations and interpretations shall be final and binding on all Awardees and Optionees and any other holders of Awards or Options.

5. Eligibility . Nonstatutory Stock Options and Awards may be granted to Service Providers. Incentive Stock Options may be granted only to Employees of the Company or a Parent or Subsidiary of the Company.

 

-7-


6. Limitations .

(a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

(b) Neither the Plan nor any Award or Option shall confer upon an Awardee or Optionee any right with respect to continuing that individual’s relationship as a Service Provider with the Company, nor shall they interfere in any way with the Awardee’s or Optionee’s right or the Company’s right to terminate such relationship at any time, with or without cause.

(c) The following limitations shall apply to grants of Awards and Options:

(i) No Service Provider shall be granted, in any fiscal year of the Company, Options and Awards covering more than 600,000 Shares.

(ii) In connection with his or her initial service, a Service Provider may be granted Options and Awards covering an additional 900,000 Shares, which shall not count against the limit set forth in subsection (i) above.

(iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 14.

(iv) If an Award or Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 14), the cancelled Option or Award will be counted against the limits set forth in subsections (i) and (ii) above.

7. Stock Options . The Administrator is authorized to make grants of Options to any Service Provider on the terms stated below.

(a) Term . The term of each Option shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

(b) Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

 

-8-


(B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or consolidation of or by the Company with or into another corporation, the purchase or acquisition of property or stock by the Company of another corporation, any spin-off or other distribution of stock or property by the Company or another corporation, any reorganization of the Company, or any partial or complete liquidation of the Company, if such action by the Company or other corporation results in a significant number of Employees being transferred to a new employer or discharged, or in the creation or severance of the Parent-Subsidiary relationship.

(c) Waiting Period and Exercise Dates . At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised.

(d) Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:

(i) cash;

(ii) check;

(iii) promissory note;

(iv) other Shares which, in the case of Shares acquired directly or indirectly from the Company, have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

(v) consideration received by the Company under a cashless exercise program approved by the Company;

(vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee’s participation in any Company-sponsored deferred compensation program or arrangement;

(vii) any combination of the foregoing methods of payment; or

(viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

(e) Procedure for Exercise; Rights as a Shareholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Awards and Options granted hereunder shall be suspended during any unpaid leave of absence to the extent permitted under Applicable Laws. An Option may not be exercised for a fraction of a Share.

 

-9-


An Option shall be deemed exercised when the Company (or its designated agent) receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option or such person’s authorized agent, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for delivery under the Option, by the number of Shares as to which the Option is exercised.

(f) Termination of Relationship as a Service Provider . If an Optionee ceases to be a Service Provider, other than upon the Optionee’s death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee’s termination. If an Optionee ceases to be a Service Provider, for any reason, all unvested Shares covered by his or her Option shall be forfeited. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(g) Disability of Optionee . If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(h) Death of Optionee . If an Optionee dies while a Service Provider or within thirty (30) days (or such longer period of time not exceeding three (3) months as is determined by the Administrator), the Option may be exercised following the Optionee’s death within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Option Agreement), by the personal representative of the Optionee’s estate or by the person(s) to whom the Option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Option Agreement, the Option shall remain

 

-10-


exercisable for twelve (12) months following the Optionee’s death. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

8. Grant of Restricted Stock . The Administrator is authorized to make Awards of Restricted Stock to any Service Provider selected by the Administrator in such amounts and subject to such terms and conditions as determined by the Administrator.

(a) Purchase Price . At the time of the grant of an Award of Restricted Stock, the Administrator shall determine the price, if any, to be paid by the Awardee for each Share subject to the Award of Restricted Stock. To the extent required by Applicable Laws, the price to be paid by the Awardee for each Share subject to the Award of Restricted Stock shall not be less than the amount required by Applicable Laws (if any). The purchase price of Shares (if any) acquired pursuant to the Award of Restricted Stock shall be paid either: (i) in cash at the time of purchase; (ii) at the sole discretion of the Administrator, by services rendered or to be rendered to the Company or a Subsidiary or Affiliate; or (iii) in any other form of legal consideration that may be acceptable to the Administrator in its sole discretion and in compliance with Applicable Laws.

(b) Issuance and Restrictions . Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Administrator may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Administrator determines at the time of the grant of the Award or thereafter.

(c) Certificates for Restricted Stock . Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Administrator shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Awardee, certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.

9. Restricted Stock Units . The Administrator is authorized to make Awards of Restricted Stock Units to any Service Provider selected by the Committee in such amounts and subject to such terms and conditions as determined by the Administrator. At the time of grant, the Administrator shall specify the date or dates on which the Restricted Stock Units shall vest and become nonforfeitable, and may specify such conditions to vesting as it deems appropriate. On the vesting date, the Company shall transfer to the Awardee one unrestricted, fully transferable Share for each Restricted Stock Unit scheduled to be paid out on such date and not previously forfeited. Alternatively, settlement of a Restricted Stock Unit may be made in cash (in an amount reflecting the Fair Market Value of Shares that would have been issued) or any combination of cash and Shares, as determined by the Administrator, in its sole discretion. The Administrator may authorize Dividend Equivalents to be paid on outstanding Restricted Stock Units. If Dividend Equivalents are authorized to be paid, they may be paid at the time dividends are declared on the Shares or at the time the awards vest and they may be paid in either cash or Shares, in the discretion of the Administrator.

10. Stock Appreciation Rights . The Administrator is authorized to make Awards of Stock Appreciation Rights to any Service Provider selected by the Administrator in such amounts and subject to such terms and conditions as determined by the Administrator.

 

-11-


(a) Description . A Stock Appreciation Right shall entitle the Awardee (or other person entitled to exercise the Stock Appreciation Right pursuant to the Plan) to exercise all or a specified portion of the Stock Appreciation Right (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount equal to the product of (i) the excess of (A) the Fair Market Value of the Shares on the date the Stock Appreciation Right is exercised over (B) the grant price of the Stock Appreciation Right and (ii) the number of Shares with respect to which the Stock Appreciation Right is exercised, subject to any limitations the Administrator may impose.

(b) Grant Price . The grant price per Share subject to a Stock Appreciation Right shall be determined by the Administrator and set forth in the Award Agreement; provided that, the per Share grant price for any Stock Appreciation Right shall not be less than 100% of the Fair Market Value of a Share on the date of grant.

(c) Payment and Limitations on Exercise .

(i) Payment of the amounts determined under Section 10(c) hereof shall be in cash, in Shares (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Administrator.

(ii) To the extent any payment under Section 10(a) is effected in Shares, it shall be made subject to satisfaction of all applicable provisions of Section 7 pertaining to Options.

(d) Term.  The term of any Stock Appreciation Right shall be no longer than ten (10) years from the date of grant.

11. Performance-Based Awards for Covered Employees .

(a) Purpose . The purpose of this Section 11 is to provide the Administrator the ability to qualify Awards other than Options and Stock Appreciation Rights as Qualified Performance-Based Compensation as determined under Code Section 162(m). If the Administrator, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Section 11 shall control over any contrary provision contained in this Plan; provided, however , that the Administrator may in its discretion grant Awards to Covered Employees that are based on Performance Criteria or Performance Goals but that do not satisfy the requirements of this Section 11.

(b) Applicability . This Section 11 shall apply only to those Covered Employees selected by the Administrator to receive Performance-Based Awards that are intended to qualify as Qualified Performance-Based Compensation. The designation of a Covered Employee as an Awardee for a Performance Period shall not in any manner entitle the Awardee to receive an Award for the period. Moreover, designation of a Covered Employee as an for a particular Performance Period shall not require designation of such Covered Employee as an Awardee in any subsequent Performance Period and designation of one Covered Employee as an Awardee shall not require designation of any other Covered Employees as an Awardee in such period or in any other period.

(c) Procedures with Respect to Performance-Based Awards . To the extent necessary to comply with the Qualified Performance-Based Compensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under this Plan which may be granted to one or more Covered Employees, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Administrator shall, in writing, (a) designate one or

 

-12-


more Covered Employees, (b) select the Performance Criteria applicable to the Performance Period, (c) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (d) specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned by a Covered Employee, the Administrator shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period.

(d) Payment of Performance-Based Awards . Unless otherwise provided in the applicable Award Agreement, an Awardee must be employed by the Company or a Subsidiary or Affiliate on the day a Performance-Based Award for the appropriate Performance Period is paid to the Awardee. Furthermore, an Awardee shall be eligible to receive payment pursuant to a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved.

(e) Additional Limitations . Notwithstanding any other provision of the Plan, any Award which is granted to a Covered Employee shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as qualified performance-based compensation as described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements.

12. Other Awards . The Administrator is authorized under the Plan to make any other Award to a Service Provider that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) a right with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other right with the value derived from the value of the Shares. The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Awardees on such terms and conditions as determined by the Administrator from time to time.

13. General Provisions Applicable to All Awards .

(a) Transferability of Awards and Options . Incentive Stock Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and, may be exercised, during the lifetime of the Optionee, only by the Optionee. Unless determined otherwise by the Administrator, an Award or Nonstatutory Stock Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised (if applicable), during the lifetime of the Optionee or Awardee, only by the Optionee or Awardee. If the Administrator makes an Award or Nonstatutory Stock Option transferable, such Award or Nonstatutory Stock Option shall contain such additional terms and conditions as the Administrator deems appropriate.

(b) Term . Except as otherwise provided herein, the term of any Award or Option (to the extent applicable) shall be no longer than ten (10) years from the date of grant.

(c) Exercise and Vesting upon Termination of Employment or Service . Unless otherwise set forth in the Award Agreement, all unvested Awards will terminate effective upon termination of employment or service for any reason. Unless otherwise set forth in the Award

 

-13-


Agreement, in the case of Awards that have an exercise period ( e.g. , Stock Appreciation Rights), if the Awardee ceases to be a Service Provider as a result of his or her death or Disability, he or she (or his or her heirs or personal representative of his or her estate in the case of death) will have twelve (12) months after the date of termination to exercise outstanding vested Awards or shorter period if the expiration date for the Award is earlier. All Shares subject to unvested Awards that terminate upon termination of service and all unexercised Awards after expiration of the post termination will revert to the Plan.

(d) Form of Payment . Payments with respect to any Awards granted under the Plan shall be made in cash, in Shares, or a combination of both, as determined by the Administrator.

(e) Award Agreement . All Awards under this Plan shall be subject to such additional terms and conditions as determined by the Administrator and shall be evidenced by an Award Agreement.

(f) Date of Grant . The date of grant of an Award or Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Award or Option, or such other later date as is determined by the Administrator in accordance with Applicable Laws. Notice of the determination shall be provided to each Awardee and Optionee within a reasonable time after the date of such grant.

(g) Timing of Settlement . At the time of grant, the Administrator shall specify the settlement date applicable to an Award, which shall be no earlier than the vesting date(s) applicable to the relevant Award and may be later than the vesting date(s) to the extent and under the terms determined by the Administrator.

(h) Exercise or Purchase Price . The Administrator may establish the exercise or purchase price (if any) of any Award provided however that such price shall not be less than required by Applicable Law.

(i) Vesting Conditions . The Administrator has the discretion to provide for vesting conditions for Awards tied to performance conditions which do not satisfy the requirements for Qualified Performance-Based Compensation as determined under Code Section 162(m).

(j) Dividend Equivalents . The Administrator may determine at the time of grant whether Awards (other than those Awards pursuant to which Shares are issued at grant) will provide for Dividend Equivalent rights.

14. Adjustments; Dissolution; Merger or Change in Control .

(a) Adjustments . In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, may (in its sole discretion) adjust the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award and Option and the numerical limits of Section 6. The adjustments provided under this Section 14(a) shall be final and binding on the affected Optionee or Awardee and the Company.

 

-14-


(b) Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Awardee and Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee or Awardee to have the right to exercise his or her Option or Award (if exercisable) until ten (10) days prior to such transaction as to all of the Optioned/Awarded Stock covered thereby, including Shares as to which the Option or Award would not otherwise be exercisable. The Administrator in its discretion may provide that the vesting of an Award or Option accelerate at any time prior to such transaction. To the extent it has not been previously exercised, an Option or Award (if exercisable) will terminate immediately prior to the consummation of such proposed action, and unvested Awards will be forfeited immediately prior to the consummation of such proposed action.

(c) Merger or Change in Control . In the event of a merger of the Company with or into another corporation, or a Change in Control, each outstanding Award and Option shall be assumed or an equivalent award, option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event the successor corporation does not agree to assume the Award or Option, or substitute an equivalent option or right, the Administrator shall, in lieu of such assumption or substitution, provide for the Awardee or Optionee to have the right to vest in and exercise the Option or Award (if exercisable) as to all of the Optioned/Awarded Stock, including Shares as to which the Option or Award) would not otherwise be vested or exercisable, and in the case of an unvested Award, to vest in the entire Award. If the Administrator makes an Option or Award (if exercisable) fully vested and exercisable in lieu of assumption or substitution in the event of a merger or Change in Control, the Administrator shall notify the Optionee or Awardee that the Option or Award shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Award (if exercisable) will terminate upon the expiration of such period. If, in such a merger or Change in Control, the Award or Option is assumed or an equivalent award or option or right is substituted by such successor corporation or a Parent or Subsidiary of such successor corporation, and if during a one-year period after the effective date of such merger or Change in Control, the Awardee’s or Optionee’s status as a Service Provider is terminated for any reason other than the Awardee’s or Optionee’s voluntary termination of such relationship, then (i) in the case of an Option or an Award (if exercisable), the Optionee or Awardee shall have the right within three (3) months thereafter to exercise the Option or Award (if exercisable) as to all of the Optioned/Awarded Stock, including Shares as to which the Option or Award (if exercisable) would not be otherwise exercisable, effective as of the date of such termination and (ii) in the case of an unvested Award, the Award shall be fully vested on the date of such termination.

For the purposes of this subsection (c), the Award or Option shall be considered assumed if, following the merger or Change in Control, the option or right confers the right to purchase or receive, for each Share of Awarded Stock subject to the Award or each Share of Optioned Stock subject to the Option, in each case, immediately prior to the merger or Change in Control, the consideration (whether stock, cash, or other securities or property) received in the merger or Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or an Award (if exercisable), for each Share of Optioned Stock subject to the Option and each Share of Awarded Stock subject to the Award, and upon the vesting of an Award, for each Share of Awarded Stock to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or Change in Control.

 

-15-


15. Amendment and Termination of the Plan .

(a) Amendment and Termination . The Board may at any time amend, alter, suspend or terminate the Plan. The Board may not materially alter the Plan without shareholder approval, including by increasing the benefits accrued to Awardees or Optionees under the Plan; increasing the number of securities which may be issued under the Plan; modifying the requirements for participation in the Plan; or including a provision allowing the Board to lapse or waive restrictions at its discretion.

(b) Shareholder Approval . The Company shall obtain shareholder approval of this Plan amendment to the extent necessary and desirable to comply with Applicable Laws and paragraph (c) below.

(c) Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan or any Award or Option shall (i) impair the rights of any Awardee or Optionee, unless mutually agreed otherwise between the Awardee or Optionee and the Administrator, which agreement must be in writing and signed by the Awardee or Optionee and the Company or (ii) permit the reduction of the exercise price of an Option or Stock Appreciation Right after it has been granted (except for adjustments made pursuant to Section 14 of the Plan), unless approved by the Company’s shareholders. Neither may the Administrator, without the approval of the Company’s shareholders, cancel any outstanding Option or Stock Appreciation Right and replace it with a new Option or Stock Appreciation Right with a lower exercise price, where the economic effect would be the same as reducing the exercise price of the cancelled Option or Stock Appreciation Right. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards and Options granted under the Plan prior to the date of such termination. Any increase in the number of Shares subject to the Plan, other than pursuant to Section 14 hereof, shall be approved by the Company’s shareholders.

16. Conditions Upon Issuance of Shares .

(a) Legal Compliance . Shares shall not be issued pursuant to the exercise of an Option or Award (if exercisable) or the vesting of an Award unless the exercise of such Option or Award and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations . As a condition to the exercise of an Option or Award (if exercisable), the Company may require the person exercising such Option or Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

17. Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

 

-16-


19. Shareholder Approval; Effective Date; Plan Term for ISO Grants . The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. The Plan shall be effective as of the date the Plan is approved by the Company’s shareholders (the “Effective Date”). No Incentive Stock Options may be granted under the Plan after the earlier or the tenth (10 th ) anniversary of (a) the date the Plan is approved by the Board or (b) the Effective Date.

20. Governing Law . The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of California.

21. Section 409A . To the extent that the Administrator determines that any Award or Option granted under the Plan is subject to Section 409A of the Code, the Award Agreement or Option Agreement evidencing such Award or Option shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan and Award Agreements and Option Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Administrator determines that any Award or Option may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Administrator may, without consent of the Awardee or Optionee, adopt such amendments to the Plan and the applicable Award Agreement or Option Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Administrator determines are necessary or appropriate to (a) exempt the Award or Option from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award or Option, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance and thereby avoid the application of any penalty taxes under such Section.

22. Tax Withholding . The Company or any Subsidiary or Affiliate, as appropriate, shall have the authority and the right to deduct or withhold, or require an to remit to the Company, an amount sufficient to satisfy U.S. federal, state, and local taxes and taxes imposed by jurisdictions outside of the United States (including income tax, social insurance contributions, payment on account and any other taxes that may be due) required by law to be withheld with respect to any taxable event concerning an Optionee or Awardee arising as a result of this Plan or to take such other action as may be necessary in the opinion of the Company or a Subsidiary or Affiliate, as appropriate, to satisfy withholding obligations for the payment of taxes. The Administrator may in its discretion and in satisfaction of the foregoing requirement allow a participant to elect to have the Company withhold Shares otherwise issuable under an Option or Award (or allow the return of Shares) having a Fair Market Value equal to the sums required to be withheld. No Shares shall be delivered hereunder to any Optionee or Awardee or other person until the Optionee or Awardee, or such other person has made arrangements acceptable to the Administrator for the satisfaction of these tax obligations with respect to any taxable event concerning the Optionee or Awardee, or such other person arising as a result of the Options or Awards made under this Plan.

23. No Right to Employment or Services . Nothing in the Plan or any Award Agreement or Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary or Affiliate to terminate any Awardee’s or Optionee’s employment or services at any time, nor confer upon any Awardee or Optionee any right to continue in the employ or service of the Company or any Subsidiary or Affiliate.

 

-17-


24. Unfunded Status of Awards . The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any payments not yet made to an Awardee pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Awardee any rights that are greater than those of a general creditor of the Company or any Subsidiary or Affiliate.

25. No Representations or Covenants with respect to Tax Qualification . Although the Company may endeavor to (1) qualify an Award for favorable tax treatment under the laws of the United States or jurisdictions outside of the United States ( e.g. , incentive stock options under Section 422 of the Code or French-qualified stock options) or (2) avoid adverse tax treatment ( e.g. , under Sections 280G, 409A or 457A of the Code), the Company makes no representation to that effect and expressly disavows any covenant to maintain favorable or avoid unfavorable tax treatment and any liability to any Optionee or Awardee for failure to maintain favorable or avoid unfavorable tax result. The Company shall be unconstrained in its corporate activities without regard to the potential negative tax impact on Awardees or Optionees under the Plan.

 

-18-


TRIMBLE NAVIGATION LIMITED

AMENDED AND RESTATED 2002 STOCK PLAN

STOCK OPTION AGREEMENT

(Outside Director Option – U.S. Version)

Unless otherwise defined herein, the capitalized terms used in this Stock Option Agreement shall have the same defined meanings as set forth in the Trimble Navigation Limited Amended and Restated 2002 Stock Plan (the “Plan”).

I. NOTICE OF STOCK OPTION GRANT

Name:

Address:

You have been granted an option to purchase shares of the Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement (the “Option Agreement”), as follows:

 

Grant Number  

 

 
Date of Grant  

 

 
Vesting Commencement Date  

 

 
Exercise Price per Share   $  

 

 
Total Number of Shares Granted  

 

 
Total Exercise Price   $  

 

 
Type of Option:   Nonstatutory Stock Option  
Term/Expiration Date:   Seventh (7 th ) Anniversary of the Date of Grant  

Vesting Schedule :

This Option shall be exercisable, in whole or in part, in accordance with the following schedule:

This Option shall vest and become exercisable cumulatively, to the extent of 1/12 th of the Shares subject to the Option for each complete calendar month after the Date of Grant of the Option.

 

-19-


Termination Period :

This Option may be exercised for three (3) months after the Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for twelve months after the Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above.

II. AGREEMENT

A. Grant of Option .

The Administrator hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the “Optionee”) an option (the “Option”) to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.

B. Exercise of Option .

(a) Right to Exercise . This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement.

(b) Method of Exercise . This Option is exercisable by (i) electronic exercise in accordance with an approved automated exercise program or (ii) delivery of an exercise notice, in the form designated by the Company from time to time, which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of the Exercise Price.

No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

C. Method of Payment .

Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: