Trimble Inc.
TRIMBLE NAVIGATION LTD /CA/ (Form: 10-Q, Received: 08/05/2013 06:12:19)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________ 
FORM 10-Q
___________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 28, 2013
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
 
(I.R.S. Employer Identification Number)
incorporation or organization)
 
 
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   ý     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   ý     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
ý
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   ý
As of July 29, 2013, there were 256,721,284 shares of Common Stock (no par value) outstanding.


Table of Contents

TRIMBLE NAVIGATION LIMITED
FORM 10-Q for the Quarter Ended June 28, 2013
TABLE OF CONTENTS
 
PART I.
Page
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 6.
 
 

2

Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
Second Quarter of
 
Fiscal Year End
As of
2013
 
2012
(In thousands)
 
 
 
ASSETS
 
 
 
Current assets :
 
 
 
Cash and cash equivalents
$
129,072

 
$
157,771

Accounts receivable, net
356,264

 
323,477

Other receivables
20,162

 
17,327

Inventories, net
258,709

 
240,529

Deferred income taxes
41,865

 
43,473

Other current assets
40,568

 
33,396

Total current assets
846,640

 
815,973

Property and equipment, net
123,795

 
96,890

Goodwill
1,911,578

 
1,815,699

Other purchased intangible assets, net
648,610

 
644,419

Other non-current assets
103,137

 
96,123

Total assets
$
3,633,760

 
$
3,469,104

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
109,561

 
$
38,092

Accounts payable
108,864

 
124,532

Accrued compensation and benefits
81,938

 
86,064

Deferred revenue
189,915

 
138,920

Accrued warranty expense
16,921

 
17,066

Other current liabilities
74,554

 
63,996

Total current liabilities
581,753

 
468,670

Non-current portion of long-term debt
789,626

 
873,066

Non-current deferred revenue
13,207

 
7,262

Deferred income taxes
141,057

 
148,260

Other non-current liabilities
66,828

 
58,322

Total liabilities
1,592,471

 
1,555,580

Commitments and contingencies

 

EQUITY
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, no par value; 3,000 shares authorized; none outstanding

 

Common stock, no par value; 360,000 shares authorized; 256,566 and 254,486 shares issued and outstanding as of the second quarter of fiscal 2013 and fiscal year end 2012, respectively
1,057,927

 
1,006,818

Retained earnings
970,657

 
868,026

Accumulated other comprehensive income (loss)
(4,711
)
 
22,611

Total Trimble Navigation Ltd. shareholders’ equity
2,023,873

 
1,897,455

Noncontrolling interests
17,416

 
16,069

Total equity
2,041,289

 
1,913,524

Total liabilities and equity
$
3,633,760

 
$
3,469,104

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

Table of Contents

TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
   
Second Quarter of
 
First Two Quarters of
(In thousands, except per share data)
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
Product
$
425,880

 
$
402,198

 
$
838,667

 
$
800,736

Service
84,511

 
63,595

 
166,107

 
121,025

Subscription
65,902

 
51,767

 
127,630

 
98,066

Total revenue
576,293

 
517,560

 
$
1,132,404

 
$
1,019,827

Cost of sales:
 
 
 
 
 
 
 
Product
200,493

 
199,135

 
399,194

 
392,179

Service
32,549

 
21,455

 
63,392

 
43,976

Subscription
20,995

 
15,978

 
40,967

 
30,409

Amortization of purchased intangible assets
19,855

 
13,296

 
39,536

 
26,417

Total cost of sales
273,892

 
249,864

 
543,089

 
492,981

Gross margin
302,401

 
267,696

 
589,315

 
526,846

Operating expense
 
 
 
 
 
 
 
Research and development
76,555

 
64,305

 
150,163

 
124,540

Sales and marketing
85,307

 
77,589

 
168,930

 
153,613

General and administrative
52,760

 
49,987

 
104,730

 
96,873

Restructuring charges
2,966

 
1,112

 
4,571

 
1,593

Amortization of purchased intangible assets
19,908

 
15,782

 
39,559

 
31,458

Total operating expense
237,496

 
208,775

 
467,953

 
408,077

Operating income
64,905

 
58,921

 
121,362

 
118,769

Non-operating income, net
 
 
 
 
 
 
 
Interest expense, net
(4,255
)
 
(3,773
)
 
(9,326
)
 
(7,636
)
Foreign currency transaction gain (loss)
600

 
196

 
(969
)
 
(2,017
)
Income from equity method investments
7,157

 
7,063

 
11,414

 
13,255

Other income, net
284

 
884

 
579

 
1,247

Total non-operating income, net
3,786

 
4,370

 
1,698

 
4,849

Income before taxes
68,691

 
63,291

 
123,060

 
123,618

Income tax provision
13,738

 
10,126

 
19,175

 
20,381

Net income
54,953

 
53,165

 
103,885

 
103,237

Less: Net gain (loss) attributable to noncontrolling interests
372

 
(527
)
 
(504
)
 
(1,273
)
Net income attributable to Trimble Navigation Ltd.
$
54,581

 
$
53,692

 
$
104,389

 
$
104,510

Basic earnings per share
$
0.21

 
$
0.21

 
$
0.41

 
$
0.42

Shares used in calculating basic earnings per share
256,186

 
250,732

 
255,683

 
249,736

Diluted earnings per share
$
0.21

 
$
0.21

 
$
0.40

 
$
0.41

Shares used in calculating diluted earnings per share
260,533

 
256,586

 
260,416

 
256,052

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

Table of Contents

TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Net income
$
54,953

 
$
53,165

 
$
103,885

 
$
103,237

Foreign currency translation adjustments
(1,603
)
 
(51,291
)
 
(27,286
)
 
(27,571
)
Net unrealized actuarial gain (loss)
35

 
94

 
(35
)
 
56

Comprehensive income
53,385

 
1,968

 
76,564

 
75,722

Less: Comprehensive gain (loss) attributable to the noncontrolling interests
372

 
(527
)
 
(504
)
 
(1,273
)
Comprehensive income attributable to Trimble Navigation Ltd.
$
53,013

 
$
2,495

 
$
77,068

 
$
76,995

See accompanying Notes to the Condensed Consolidated Financial Statements.

5

Table of Contents

TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
First Two Quarters of
(Dollars in thousands)
2013
 
2012
Cash flow from operating activities:
 
 
 
Net income
$
103,885

 
$
103,237

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
12,854

 
11,300

Amortization expense
79,095

 
57,875

Provision for doubtful accounts
261

 
1,486

Deferred income taxes
(13,732
)
 
381

Stock-based compensation
17,253

 
15,944

Income from equity method investments
(11,414
)
 
(13,255
)
Excess tax benefit for stock-based compensation
(7,616
)
 
(15,254
)
Provision for excess and obsolete inventories
569

 
4,993

Other non-cash items
(494
)
 
(1,851
)
Add decrease (increase) in assets:
 
 
 
Accounts receivable
(24,071
)
 
(38,589
)
Other receivables
(1,558
)
 
(6,638
)
Inventories
(14,725
)
 
594

Other current and non-current assets
(12,165
)
 
(8,904
)
Add increase (decrease) in liabilities:
 
 
 
Accounts payable
(18,936
)
 
4,148

Accrued compensation and benefits
(7,166
)
 
2,270

Deferred revenue
55,994

 
32,117

Accrued warranty expense
(154
)
 
(1,814
)
Other current and non-current liabilities
14,163

 
7,054

Net cash provided by operating activities
172,043

 
155,094

Cash flow from investing activities:
 
 
 
Acquisitions of businesses, net of cash acquired
(178,953
)
 
(337,676
)
Acquisitions of property and equipment
(39,431
)
 
(21,308
)
Dividends received from equity method investments
2,526

 
221

Other
730

 
(706
)
Net cash used in investing activities
(215,128
)
 
(359,469
)
Cash flow from financing activities:
 
 
 
Issuances of common stock, net
23,954

 
27,162

Excess tax benefit for stock-based compensation
7,616

 
15,254

Proceeds from debt and revolving credit lines
239,613

 
436,500

Payments on debt and revolving credit lines
(252,780
)
 
(304,013
)
Net cash provided by financing activities
18,403

 
174,903

Effect of exchange rate changes on cash and cash equivalents
(4,017
)
 
(3,212
)
Net decrease in cash and cash equivalents
(28,699
)
 
(32,684
)
Cash and cash equivalents, beginning of period
157,771

 
154,621

Cash and cash equivalents, end of period
$
129,072

 
$
121,937

See accompanying Notes to the Condensed Consolidated Financial Statements.

6

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 2012 was December 28, 2012 . The second quarter of fiscal 2013 and 2012 ended on June 28, 2013 and June 29, 2012 , respectively. Fiscal 2013 is a 53-week year and 2012 is a 52-week year. 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 consolidated subsidiaries. Inter-company accounts and transactions have been eliminated. Noncontrolling interests represent the noncontrolling shareholders’ proportionate share of the net assets and results of operations of the Company’s consolidated subsidiaries.
The accompanying financial data as of the second quarter of fiscal 2013 and for the second quarter and the first two quarters of fiscal 2013 and 2012 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 fiscal year end 2012 is derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K of Trimble Navigation Limited for fiscal year 2012 . The following discussion should be read in conjunction with the Company’s 2012 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 necessary have been made to present a fair statement of results for the interim periods presented. The results of operations for the second quarter and the first two quarters of fiscal 2013 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 Securities and Exchange Commission.
The Company has presented revenue and cost of sales separately for products, service and subscriptions. Product revenue includes primarily hardware, software licenses, parts and accessories; service revenue includes primarily hardware and software maintenance and support, training and professional services; subscription revenue includes software as a service (SaaS).
On February 11, 2013, Trimble's Board of Directors approved a 2 -for-1 split of all outstanding shares of the Company's Common Stock, payable March 20, 2013 to shareholders of record on March 6, 2013. All shares and per share information presented has been adjusted to reflect the stock split on a retroactive basis for all periods presented.
NOTE 2. UPDATES TO SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company’s significant accounting polices during the first two quarters of fiscal 2013 from those disclosed in the Company’s 2012 Form 10-K.
NOTE 3. SHAREHOLDERS’ EQUITY
Stock Repurchase Activities
In October 2011, the Company’s Board of Directors approved a stock repurchase program (“2011 Stock Repurchase Program”), authorizing the Company to repurchase up to $100.0 million of Trimble’s common stock. No shares of common stock were repurchased during the first two quarters of fiscal 2013 or 2012 . 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 Expense

7


The Company accounts for its employee stock options, restricted stock units and employee stock purchase plan (ESPP) 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 related to employee stock-based compensation (for all plans) included in the unaudited Condensed Consolidated Statements of Income for the second quarter and first two quarters of fiscal 2013 and 2012 .
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Cost of sales
$
607

 
$
458

 
$
1,207

 
$
978

Research and development
1,232

 
1,477

 
2,379

 
2,706

Sales and marketing
1,761

 
1,837

 
3,525

 
3,628

General and administrative
4,835

 
4,383

 
10,142

 
8,632

Total operating expenses
7,828

 
7,697

 
16,046

 
14,966

Total stock-based compensation expense
$
8,435

 
$
8,155

 
$
17,253

 
$
15,944

Fair value of Trimble Options
Stock option expense recognized in the unaudited Condensed Consolidated Statements of Income is based on the fair value of the portion of share-based payment awards that is expected to vest during the period and is net of estimated forfeitures. The Company’s compensation expense for stock options is recognized using the straight-line single option method. The fair values for stock options are estimated on the date of grant using the binomial valuation model. The binomial model takes into account variables such as volatility, dividend yield rate and risk free interest rate. In addition, the binomial model incorporates actual option-pricing behavior and changes in volatility over the option’s contractual term. For options granted during the second quarter and first two quarters of fiscal 2013 and 2012 , the following weighted average assumptions were used:
 
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
Expected dividend yield
 
 
 
Expected stock price volatility
34.8%
 
41.2%
 
34.8%
 
41.2%
Risk free interest rate
0.5%
 
0.7%
 
0.5%
 
0.7%
Expected life of options
4.0 years
 
4.2 years
 
4.0 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 Options – 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.
Fair value of Restricted Stock Units
Restricted stock units are converted into shares of Trimble common stock upon vesting on a one-for-one basis. Vesting of restricted stock units is subject to the employee’s continuing service to the Company. The compensation expense related to these awards was determined using the fair value of Trimble’s common stock on the date of grant, and the expense is recognized on a straight-line basis over the vesting period. Restricted stock units typically vest at the end of three years.
Fair value of Employee Stock Purchase Plan

8


Under the Employee Stock Purchase Plan, rights to purchase shares are generally granted during the second and fourth quarter of each year. The fair value of rights granted under the Employee Stock Purchase Plan was estimated at the date of grant using the Black-Scholes option-pricing model.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
Intangible Assets
Intangible Assets consisted of the following:
 
   
Second Quarter of Fiscal 2013
 
Fiscal Year End 2012
 
Gross
 
 
 
 
 
Gross
 
 
 
 
As of
Carrying
 
Accumulated
 
Net Carrying
 
Carrying
 
Accumulated
 
Net Carrying
(Dollars in thousands)
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Developed product technology
$
656,328

 
$
(310,847
)
 
$
345,481

 
$
610,643

 
$
(267,952
)
 
$
342,691

Trade names and trademarks
45,137

 
(25,798
)
 
19,339

 
42,512

 
(23,241
)
 
19,271

Customer relationships
410,295

 
(160,526
)
 
249,769

 
385,269

 
(135,571
)
 
249,698

Distribution rights and other intellectual properties
78,208

 
(44,187
)
 
34,021

 
72,510

 
(39,751
)
 
32,759

 
$
1,189,968

 
$
(541,358
)
 
$
648,610

 
$
1,110,934

 
$
(466,515
)
 
$
644,419

The estimated future amortization expense of purchased intangible assets as of the second quarter of fiscal 2013 was as follows:
 
(Dollars in thousands)

2013 (Remaining)
$
82,082

2014
141,182

2015
129,038

2016
109,682

2017
87,978

Thereafter
98,648

Total
$
648,610

Goodwill
The changes in the carrying amount of goodwill by operating segment for the first two quarters of fiscal 2013 were as follows:
 
 
Engineering
and
Construction
 
Field
Solutions
 
Mobile
Solutions
 
Advanced
Devices
 
Total
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Balance as of fiscal year end 2012
$
958,103

 
$
68,684

 
$
763,386

 
$
25,526

 
$
1,815,699

Additions due to acquisitions
76,894

 

 
32,770

 

 
109,664

Purchase price adjustments
324

 

 
(818
)
 
35

 
(459
)
Foreign currency translation adjustments
(9,586
)
 
(390
)
 
(2,473
)
 
(877
)
 
(13,326
)
Balance as of the second quarter of fiscal 2013
$
1,025,735

 
$
68,294

 
$
792,865

 
$
24,684

 
$
1,911,578

The Company determined the total consideration paid for each of its acquisitions as well as the fair value of the assets acquired and liabilities assumed as of the date of acquisition. For certain acquisitions completed in fiscal 2012 and the first two quarters of fiscal 2013 , the fair value of the assets acquired and liabilities assumed are preliminary and may be adjusted as the Company obtains additional information, primarily related to adjustments for the true up of acquired net working capital in accordance with certain purchase agreements, and estimated values of certain net tangible assets and liabilities including tax balances, pending the completion of final studies and analyses. If there are adjustments made for these items, the fair value of intangible asset and goodwill could be impacted. Thus the provisional measurements of fair value are subject to change. Such changes could be significant. The Company expects to finalize the valuation of the net tangible and intangible assets as soon as practicable, but not later than one-year from the acquisition date.

9


NOTE 5. INVENTORIES
Inventories, net, consisted of the following:
 
 
Second Quarter of
 
Fiscal Year End
As of
2013
 
2012
(Dollars in thousands)
 
 
 
Raw materials
$
92,344

 
$
89,016

Work-in-process
5,732

 
6,658

Finished goods
160,633

 
144,855

Total inventories, net
$
258,709

 
$
240,529

Deferred costs of sales for the short-term deferral of hardware and related products are included within finished goods and were $16.2 million as of the second quarter of fiscal 2013 and fiscal year end 2012 .
NOTE 6 . 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 hardware and software solutions for a variety of applications including:  survey; heavy civil and building construction; infrastructure; geospatial; railway; mining and utilities.
Field Solutions — Consists of hardware and software solutions for applications including agriculture, mapping and geographic information systems (GIS), utilities, and energy distribution.
Mobile Solutions — Consists of hardware and software solutions that enable end-users to monitor and manage their mobile work, mobile workers and mobile assets.
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, Trimble Outdoors, and ThingMagic businesses.
The Company evaluates each of its segment’s performance and allocates resources based on segment operating income 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, depreciation expense 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 intangible assets, amortization of acquisition-related inventory step-up, acquisition costs and restructuring costs. The identifiable assets that the Company’s Chief Operating Decision Maker, its Chief Executive Officer, views by segment are accounts receivable, inventories and goodwill.


10


 
Reporting Segments
 
Engineering
and
Construction
 
Field
Solutions
 
Mobile
Solutions
 
Advanced
Devices
 
Total
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Second Quarter of Fiscal 2013
 
 
 
 
 
 
 
 
 
Segment revenue
$
313,446

 
$
115,864

 
$
115,524

 
$
31,459

 
$
576,293

Operating income
66,840

 
43,372

 
15,435

 
6,514

 
132,161

       Depreciation expense
2,880

 
153

 
1,358

 
190

 
4,581

Second Quarter of Fiscal 2012
 
 
 
 
 
 
 
 
 
Segment revenue
$
284,175

 
$
123,371

 
$
81,402

 
$
28,612

 
$
517,560

Operating income
59,473

 
46,623

 
5,624

 
3,913

 
115,633

       Depreciation expense
2,578

 
123

 
803

 
217

 
3,721

First Two Quarters of Fiscal 2013
 
 
 
 
 
 
 
 
 
Segment revenue
$
580,317

 
$
263,345

 
$
225,688

 
$
63,054

 
$
1,132,404

Operating income
109,813

 
102,898

 
27,008

 
12,999

 
252,718

       Depreciation expense
5,848

 
287

 
2,337

 
387

 
8,859

First Two Quarters of Fiscal 2012
 
 
 
 
 
 
 
 
 
Segment revenue
$
533,060

 
$
270,870

 
$
159,785

 
$
56,112

 
$
1,019,827

Operating income
99,550

 
108,984

 
12,982

 
7,252

 
228,768

       Depreciation expense
5,078

 
256

 
1,510

 
444

 
7,288

As of the Second Quarter of Fiscal 2013
 
 
 
 
 
 
 
 
 
Accounts receivable
$
201,541

 
$
68,074

 
$
67,580

 
$
19,069

 
$
356,264

Inventories
171,891

 
43,521

 
26,444

 
16,853

 
258,709

Goodwill
1,025,735

 
68,294

 
792,865

 
24,684

 
1,911,578

As of Fiscal Year End 2012
 
 
 
 
 
 
 
 
 
Accounts receivable
$
171,580

 
$
71,465

 
$
59,720

 
$
20,712

 
$
323,477

Inventories
148,241

 
44,738

 
30,598

 
16,952

 
240,529

Goodwill
958,103

 
68,684

 
763,386

 
25,526

 
1,815,699

A reconciliation of the Company’s consolidated segment operating income to consolidated income before income taxes is as follows:
 
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Consolidated segment operating income
$
132,161

 
$
115,633

 
$
252,718

 
$
228,768

Unallocated corporate expense
(24,517
)
 
(19,819
)
 
(45,867
)
 
(39,543
)
Amortization of purchased intangible assets
(39,763
)
 
(29,078
)
 
(79,095
)
 
(57,875
)
Acquisition costs
(2,976
)
 
(7,815
)
 
(6,394
)
 
(12,581
)
Consolidated operating income
64,905

 
58,921

 
121,362

 
118,769

Non-operating income, net
3,786

 
4,370

 
1,698

 
4,849

Consolidated income before taxes
$
68,691

 
$
63,291

 
$
123,060

 
$
123,618

Unallocated corporate expense includes general corporate expense, amortization of acquisition-related inventory step-up and restructuring costs.
NOTE 7. DEBT, COMMITMENTS AND CONTINGENCIES
Debt consisted of the following:
 

11


 
Second Quarter of
 
Fiscal Year End
As of
2013
 
2012
(Dollars in thousands)
 
 
 
Credit Facilities:
 
 
 
Term loan
$
682,500

 
$
700,000

Revolving credit facility
212,000

 
208,000

Promissory notes and other debt
4,687

 
3,158

Total debt
899,187

 
911,158

Less current portion of long-term debt
109,561

 
38,092

Non-current portion
$
789,626

 
$
873,066

Credit Facilities
On November 21, 2012 , the Company entered into an amended and restated credit agreement with a group of lenders (the “2012 Credit Facility”). This credit facility provides for unsecured credit facilities in the aggregate principal amount of $1.4 billion , comprised of a five -year revolving loan facility of $700.0 million and a five -year $700.0 million term loan facility. Subject to the terms of the 2012 Credit Facility, the revolving loan facility and the term loan facility may be increased by $300.0 million in the aggregate. The Company also has a $75 million uncommitted revolving loan facility (the “2011 Uncommitted Facility”), which is callable by the bank at any time and has no covenants. The interest rate on the 2011 Uncommitted Facility is 1.00% plus either LIBOR or the bank’s cost of funds or as otherwise agreed upon by the bank and the Company. On May 16, 2013 , the Company set up a second $75 million uncommitted revolving loan facility with another bank (the “2013 Uncommitted Facility”), which is callable by the bank at any time and also has no covenants. At the time a request to borrow is made, the initial interest rate on the 2013 Uncommitted Facility is 0.9% plus either LIBOR or the bank's cost of funds or as otherwise agreed upon by the bank and the Company.
As of the second quarter of fiscal 2013 , total debt was comprised primarily of a term loan of $682.5 million and a revolving credit line of $142.0 million under the 2012 Credit Facility and a revolving credit line of $70.0 million under the 2013 Uncommitted Facility. Of the total outstanding balance, $647.5 million of the term loan and the $142.0 million revolving credit line are classified as long-term in the Condensed Consolidated Balance Sheet.
The funds available under the 2012 Credit Facility may be used for general corporate purposes, the financing of certain acquisitions and the payment of transaction fees and expenses related to such acquisitions. Under the 2012 Credit Facility, the Company may borrow, repay and reborrow funds under the revolving loan facility until its maturity on November 21, 2017 , at which time the revolving facility will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolving facility will be subject to a commitment fee, to be paid in arrears on the last day of each fiscal quarter, ranging from 0.15% to 0.35%  per annum depending on the Company's leverage ratio as of the most recently ended fiscal quarter. The term loan will be repaid in quarterly installments, with the last quarterly payment to be made on September 29, 2017, with the remaining outstanding balance being due and payable at maturity on November 21, 2017. On an annualized basis, the amortization of the term loan is as follows: 5% , 5% , 10% , 10% and 70% for years one through five respectively. The term loan may be prepaid in whole or in part, subject to certain minimum thresholds, without penalty or premium. Amounts repaid or prepaid with respect to the term loan facility may not be reborrowed.
The Company may borrow funds under the 2012 Credit Facility in U.S. Dollars, Euros or in certain other agreed currencies, and borrowings will bear interest, at the Company’s option, at either: (i) a floating per annum base rate based on the administrative agent’s prime rate or other agreed-upon rate, depending on the currency borrowed, plus a margin of between 0.00% and 1.00% , depending on the Company's leverage ratio as of the most recently ended fiscal quarter, or (ii) a reserve-adjusted fixed per annum rate based on LIBOR, EURIBOR, or other agreed-upon rate, depending on the currency borrowed, plus a margin of between 1.00% and 2.00% , depending on the Company's leverage ratio as of the most recently ended fiscal quarter. Interest will be paid on the last day of each fiscal quarter with respect to borrowings bearing interest based on a floating rate, or on the last day of an interest period, but at least every three months, with respect to borrowings bearing interest at a fixed rate. The Company's obligations under the 2012 Credit Facility are guaranteed by several of the Company's domestic subsidiaries.
The 2012 Credit Facility contains various customary representations and warranties by the Company, which include customary use of materiality, material adverse effect and knowledge qualifiers. The 2012 Credit Facility also contains customary affirmative and negative covenants including, among other requirements, negative covenants that restrict the Company's ability to dispose of assets, create liens, incur indebtedness, repurchase stock, pay dividends, make acquisitions and make investments. Further, the 2012 Credit Facility contains financial covenants that require the maintenance of minimum interest coverage and maximum leverage ratios. Specifically, the Company must maintain as of the end of each fiscal quarter a ratio of (a) EBITDA (as defined in

12


the 2012 Credit Facility) to (b) interest expenses for the most recently ended period of four fiscal quarters of not less than 3.25 to 1. The Company must also maintain, at the end of each fiscal quarter, a ratio of (x) total indebtedness to (y) EBITDA (as defined in the 2012 Credit Facility) for the most recently ended period of four fiscal quarters of not greater than the applicable ratio set forth in the table below; provided, that on the completion of a material acquisition, the Company may increase the applicable ratio in the table below by 0.25 for the fiscal quarter during which such acquisition occurred and each of the three subsequent fiscal quarters.
Fiscal Quarter Ending
 
Maximum Leverage Ratio
On and after June 28, 2013 and prior to September 27, 2013
 
3.25 to 1
On and after September 27, 2013
 
3 to 1
The Company was in compliance with these restrictive covenants as of the second quarter of fiscal 2013 .
The 2012 Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, material judgments and events constituting a change of control. Upon the occurrence and during the continuance of an event of default, interest on the obligations will accrue at an increased rate and the lenders may accelerate the Company's obligations under the 2012 Credit Facility, however that acceleration will be automatic in the case of bankruptcy and insolvency events of default.
The weighted average interest rate on the current portion of the long-term debt outstanding under the 2012 Credit Facility and uncommitted facilities was 1.33% and 1.96% at the end of the second quarter of fiscal 2013 and fiscal year end 2012 , respectively. The interest rate on the non-current debt outstanding under the 2012 Credit Facility was 1.70% and 1.96% at the end of the second quarter of fiscal 2013 and fiscal year end 2012 , respectively.
Promissory Notes and Other Debt
As of the second quarter of fiscal 2013 and fiscal year end 2012 , the Company had promissory notes and other debt totaling approximately $4.7 million and $3.2 million , respectively, of which $0.1 million for both periods was classified as long-term in the Condensed Consolidated Balance Sheet.
Leases and Other Commitments
The estimated future minimum operating lease commitments as of the second quarter of fiscal 2013 are as follows (dollars in thousands):
 
 
 
2013 (Remaining)
$
14,211

2014
22,663

2015
19,388

2016
13,403

2017
10,283

Thereafter
13,686

Total
$
93,634

As of the second quarter of fiscal 2013 , the Company had unconditional purchase obligations of approximately $99.4 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.
NOTE 8. FAIR VALUE MEASUREMENTS
The Company determines fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Where available, fair value is based on observable market prices or parameters. Where observable prices or inputs are not available, valuation models are applied. 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.

13


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.
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 the Second Quarter of 2013
 
Fair Values as of Fiscal Year End 2012
(Dollars in thousands)
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds(1)
$
2

 
$

 
$

 
$
2

 
$
2

 
$

 
$

 
$
2

Deferred compensation plan assets (2)
14,921

 

 

 
14,921

 
12,875

 

 

 
12,875

Derivative assets (3)

 
1,105

 

 
1,105

 

 
343

 

 
343

Total
$
14,923

 
$
1,105

 
$

 
$
16,028

 
$
12,877

 
$
343

 
$

 
$
13,220

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan liabilities (2)
$
14,945

 
$

 
$

 
$
14,945

 
$
12,875

 
$

 
$

 
$
12,875

Derivative liabilities (3)

 
689

 

 
689

 

 
420

 

 
420

Contingent consideration liabilities (4)

 

 
1,971

 
1,971

 

 

 
2,235

 
2,235

Total
$
14,945

 
$
689

 
$
1,971

 
$
17,605

 
$
12,875

 
$
420

 
$
2,235

 
$
15,530

 

(1)
The money market funds are highly liquid investments. 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.
(2)
The Company maintains a self-directed, non-qualified deferred compensation plan for certain executives and other highly compensated employees. The plan assets and liabilities are invested in actively traded mutual funds and individual stocks valued using observable quoted prices in active markets. 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 primarily represent forward currency exchange contracts. The Company typically enters into these contracts to minimize the short-term impact of foreign currency exchange rates on certain trade and inter-company receivables and payables. Derivative assets and liabilities are included in Other current assets and Other current liabilities on the Company's Condensed Consolidated Balance Sheets.
(4)
Contingent consideration liabilities represents arrangements to pay the former owners of certain companies the Company acquired. The undiscounted maximum payment under the arrangements is $6.3 million at the end of the second quarter of fiscal 2013 , based on estimated future revenues or gross margins. Contingent consideration liabilities are included in Other current liabilities and Other non-current liabilities on the Company's Condensed Consolidated Balance Sheets.
Additional Fair Value Information
The following table provides additional fair value information relating to the Company’s financial instruments outstanding:
 

14


 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
As of
Second Quarter of Fiscal 2013
 
Fiscal Year End 2012
(Dollars in thousands)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
129,072

 
$
129,072

 
$
157,771

 
$
157,771

Forward foreign currency exchange contracts
1,105

 
1,105

 
343

 
343

Liabilities:
 
 
 
 
 
 
 
Credit facilities
$
894,500

 
$
894,500

 
$
908,000

 
$
908,000

Forward foreign currency exchange contracts
689

 
689

 
420

 
420

Promissory notes and other debt
4,687

 
4,687

 
3,158

 
3,158


The fair value of the bank borrowings and promissory notes 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 the Company would currently have to pay to extinguish any of this debt.
NOTE 9. 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 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 first two quarters of fiscal 2013 are as follows:
 
(Dollars in thousands)
 
Balance as of fiscal year end 2012
$
17,066

Acquired warranties
83

Accruals for warranties issued
9,687

Changes in estimates
232

Warranty settlements (in cash or in kind)
(10,147
)
Balance as of the second quarter of fiscal 2013
$
16,921

NOTE 10. 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.
 

15


 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Trimble Navigation Ltd.
$
54,581

 
$
53,692

 
$
104,389

 
$
104,510

Denominator:
 
 
 
 
 
 
 
Weighted average number of common shares used in basic earnings per share
256,186

 
250,732

 
255,683

 
249,736

Effect of dilutive securities (using treasury stock method):
 
 
 
 
 
 
 
Common stock options and restricted stock units
4,347

 
5,854


4,733


6,316

Weighted average number of common shares and dilutive potential common shares used in diluted earnings per share
260,533

 
256,586

 
260,416

 
256,052

Basic earnings per share
$
0.21

 
$
0.21

 
$
0.41

 
$
0.42

Diluted earnings per share
$
0.21

 
$
0.21

 
$
0.40

 
$
0.41

For the second quarter of fiscal 2013 and 2012 , the Company excluded 3.2 million and 4.6 million shares of outstanding stock options, respectively, from the calculation of diluted earnings per share. For the first two quarters of fiscal 2013 and 2012 the Company excluded 2.8 million and 4.2 million shares of outstanding stock options, respectively, from the calculation of diluted earnings per share. These shares were excluded 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 11. INCOME TAXES
In the second quarter of fiscal 2013 , the Company’s effective income tax rate was 20% as compared to 16% in the corresponding period in 2012 , primarily due to differences in the geographic mix of pretax income. In the first two quarters of fiscal 2013 , the Company’s effective income tax rate was 16% as compared to 16% in the corresponding period in 2012 due to differences in the geographic mix of pretax income, offset by the favorable impact of the retroactive research and development credit.
The Company's effective tax rates for the second quarter of fiscal years 2013 and 2012 are lower than the U.S. federal statutory rate of 35% due to the discrete benefits from the reinstatement of the 2012 R&D tax in 2013 and favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions. The Company has not provided U.S. taxes for all of such earnings due to the indefinite reinvestment of some of those earnings outside the U.S.
The Company and its subsidiaries are subject to U.S. federal and state, and foreign income tax. The Company is currently in different stages of multiple year examinations by the Internal Revenue Service as well as various state and foreign taxing authorities. Although timing of the resolution of audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits as of June 28, 2013 will materially change in the next twelve months.
The unrecognized tax benefits of $41.8 million and $35.2 million as of the second quarter of fiscal 2013 and fiscal year end 2012 , respectively, if recognized, would favorably affect the effective income tax rate in future periods. 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 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 as of the second quarter of fiscal 2013 and fiscal year end 2012 , of $3.4 million and $2.9 million , respectively, which were recorded in Other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets.


16


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 2012 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, stock-based compensation, 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 the Company’s significant accounting polices during the first two quarters of fiscal 2013 from those disclosed in the Company’s 2012 Form 10-K.
EXECUTIVE LEVEL OVERVIEW
Trimble's focus is on integrating its broad technological and application capabilities to create system-level solutions that transform how work is done within the industries we serve, enhancing productivity, accuracy, safety and regulatory compliance for our customers. The majority of our markets are end-user markets, including engineering and construction firms, surveyors, farmers, governmental organizations, energy and utility companies and organizations that must manage fleets of mobile workers and assets. We also provide components to original equipment manufacturers to incorporate into their products. In the end-user markets, we provide stand-alone systems which may consist of software, hardware or some combination of the two, as well as integrated enterprise or workflow solutions which address the entire work process. Some examples of our solutions include products that automate and simplify the process of surveying land, products that automate the control, management and utilization of equipment such as tractors and bulldozers, products for engineering or building design, construction and operations management, products that enable a company to manage its mobile workforce and assets, and products that allow municipalities or utilities to manage their fixed assets and operations. To achieve distribution, marketing, production, and technology advantages in our targeted markets, we manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices.
Solutions targeted at the end-user make up a significant majority of our revenue. To create compelling products, we must attain an understanding of the end-users' needs and work flow, and of how our broad based technological capabilities can be deployed and integrated to enable that end-user to work faster, more efficiently, more accurately and more safely. We use this knowledge to create highly innovative solutions that change the way work is done by the end-user. With the exception of our Mobile Solutions and Advanced Devices segments, our products are primarily sold through a dealer channel, and it is crucial that we maintain a proficient, global, third-party distribution channel.
We continue to execute our strategy with a series of actions across new and existing markets:
Reinforcing our position in new and existing markets


17

Table of Contents

Within our Engineering and Construction segment, the Trimble portfolio of solutions across the entire Design-Build-Operate (DBO) lifecycle was further expanded during the second quarter with the acquisition of Trade Service LLC, a company focused on content acquisition, aggregation, management, publishing and distribution of product specification and pricing information. The launch of SketchUp Pro 2013 also enhances the Trimble DBO platform by providing professional users with more powerful tools to easily explore, modify and share design ideas in 3D, including the launch of the SketchUp Extension Warehouse, designed to streamline the sharing of software extensions made by the developer community with users worldwide.
We also acquired Actronic Technologies, a provider of weighing technology and payload information systems for construction, aggregates, mining and waste markets. This acquisition extends Trimble's Connected Site® portfolio by adding accurate payload weight as an element of information collected at the machine. This extended capability will better enable contractors to use the Trimble Connected Site to achieve improved comprehensive real-time intelligence on asset and site productivity for the contractor's mixed fleet. Additionally, a new upgrade path was announced between the entry-level GCSFlex Grade Control System and the more advanced Trimble GCS900 Grade Control Solution, enabling small- to medium-sized contractors to lower their risk when adopting construction machine control for the first time, together with ease of upgradeability to more complex 3D functionality in the future.
In our Field Solutions segment, we announced the release of the Trimble® eRespond® version 2013 outage management solution for water and wastewater utilities, a solution for utilities to manage their network operations and related field work to meet management, regulatory, and customer requirements. The solution is specifically designed to aid water utilities in reducing leakage and non-revenue water (NRW) and improving field and office worker productivity by identifying incidents on the network and shortening the repair time. We also introduced Trimble TerraFlex™, a new software and services platform that enables users across a broad base of industries including environmental management, utilities and government agencies to centralize their data collection activities and provide field and mobile workers access to online positional and geospatial information via their smartphones or Trimble devices. Offering a cloud services and mobile component compatible with Apple iOS, Android or Windows Mobile, this platform enables organizations to deploy a common workflow to collect spatial data or inspect their assets.

Within our Mobile Solutions segment, through a new agreement with Easy Manifest, PeopleNet customers can now reduce wait time and delays when crossing the US-Canada border by submitting data to the respective border agency electronically and prior to the vehicle arriving at the border. Additionally, ALK Technologies released the latest version of its PC*MILER truck routing, mileage and mapping software with features and enhancements which include a redesigned graphical user interface for maximum efficiency and Hours-of-Service compliance tools for more precise arrival and delivery time estimates.

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. We continue to focus on expansion initiatives in Africa, China, India, The Middle-East, Russia, South America, and South East Asia. During the second quarter, we announced that the Russian High-Speed Rail Authority will use the Trimble Quantm system to help find the optimal alignment for two major high-speed rail projects connecting Moscow to Yekaterinburg and Sochi, each approximately 1,000 miles long. We also announced that the Abu Dhabi Government General Services Company (Musanada) will implement the Proliance software from the Trimble Buildings Group to improve the management of design, construction and infrastructure projects throughout the Emirate of Abu Dhabi. Additionally, PEBSAL, a large pre-engineering buildings company in Bangladesh, chose the Tekla open BIM software to gain competitive advantage in the Indian sub-continent through increased productivity and automation in design and drawing production.
RECENT BUSINESS DEVELOPMENTS
The following companies or business assets were acquired during the twelve months ended June 28, 2013 and are combined in our results of operations since the date of acquisition:
Actronic Holdings Limited
On June 5, 2013, we acquired privately-held Actronic Holdings Limited of Auckland, New Zealand. Actronic Technologies is a provider of weighing technology and payload information systems for construction, aggregates, mining and waste markets. Actronic Holdings' performance is reported under our Engineering and Construction business segment.
Trade Service Company, LLC
On May 31, 2013, we acquired privately-held Trade Service Company, LLC based in San Diego, California. Trade Service is a provider in content acquisition, aggregation, management, publishing and distribution of product and pricing information used by manufacturers, distributors and contractors in the Architecture, Engineering, and Construction (AEC) industry. Trade Service’s performance is reported under our Engineering and Construction business segment.

18

Table of Contents

Penmap Software
On January 11, 2013, we acquired a suite of software solutions from Penmap.com Ltd. of Bradford, United Kingdom. Penmap Software’s performance is reported under our Engineering and Construction business segment.
ALK Technologies
On December 31, 2012, we acquired privately-held ALK Technologies Inc. of of Princeton, NJ, a provider of routing, mapping, mileage and navigation technologies. ALK’s performance is reported under our Mobile Solutions business segment.
Vico Software, Inc.
On October 31, 2012, we acquired the assets of privately-held Vico Software, Inc. (Vico) of Boulder, Colorado, a provider of 5D virtual construction software and consulting services. The Vico business performance is reported under our Engineering and Construction business segment.
Refraction Technology, Inc.
On October 4, 2012, we acquired the assets of privately-held Refraction Technology, Inc. (REF TEK) of Plano, Texas, a provider of seismic sensors and high-frequency data logging systems. The REF TEK business performance is reported under our Engineering and Construction business segment.
TMW Systems, Inc.
On October 2, 2012, we acquired privately-held TMW Systems Holding LLC, including its operating subsidiary, TMW Systems, Inc. (TMW) of Beachwood, Ohio, a provider of enterprise software to transportation and logistics companies. TMW’s performance is reported under our Mobile Solutions business segment.
Logicway
On September 6, 2012, we acquired privately-held Logicway of Oldenzaal, Netherlands, a provider of software for automating payroll and expenses with a specific focus on the transportation and logistics industry. Logicway’s performance is reported under our Mobile Solutions business segment.
WinEstimator
On August 6, 2012, we acquired privately-held WinEstimator, Inc., a provider of construction cost estimating and cost-modeling software. WinEstimator’s performance is reported under our Engineering and Construction business segment.
Seasonality of Business
* Our individual segment revenue may be affected by seasonal buying patterns. Historically, the second fiscal quarter has been the strongest quarter for the Company driven by the construction buying season. However, as a result of recent acquisitions, we may experience less seasonality in the future.
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.
 

19


 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Product
$
425,880

 
$
402,198

 
$
838,667

 
$
800,736

Service
84,511

 
63,595

 
166,107

 
121,025

Subscription
65,902

 
51,767

 
127,630

 
98,066

Total revenue
576,293

 
517,560

 
1,132,404

 
1,019,827

Gross margin
$
302,401

 
$
267,696

 
$
589,315

 
$
526,846

Gross margin %
52.5
%
 
51.7
%
 
52.0
%
 
51.7
%
Operating income
$
64,905

 
$
58,921

 
$
121,362

 
$
118,769

Operating income %
11.3
%
 
11.4
%

10.7
%

11.6
%
Revenue
In the second quarter of fiscal 2013 , total revenue increased by $58.7 million or 11% , as compared to the second quarter of fiscal 2012 . Of this increase, product revenue increased $23.7 million, or 6% , service revenue increased $20.9 million or 33% , and subscription revenue increased $14.1 million or 27% . In the first two quarters of fiscal 2013 , total revenue increased by $112.6 million or 11% , as compared to the first two quarters of fiscal 2012 . Of this increase, product revenue increased $37.9 million or 5% , service revenue increased $45.1 million or 37% , and subscription revenue increased $29.6 million or 30% .
The product, service, and subscription revenue increases were driven primarily by growth across Engineering and Construction and Mobile Solutions, which included organic growth as well as the impact of the TMW acquisition which was not applicable in the prior period. The product revenue growth was partially offset by a decrease in Field Solutions revenue primarily due to softness in GIS markets. We consider organic growth to include all revenue except for revenue associated with acquisitions made within the last four quarters.
On a segment basis, Engineering and Construction revenue for the second quarter of fiscal 2013 increased $29.3 million, or 10% , Mobile Solutions increased $34.1 million or 42% , Advanced Devices increased $2.8 million or 10% , and Field Solutions decreased $7.5 million or 6% , as compared to the second quarter of fiscal 2012 . Engineering and Construction revenue for the first two quarters of fiscal 2013 increased $47.3 million or 9% , Mobile Solutions increased $65.9 million or 41% , Advanced Devices increased $6.9 million or 12% , and Field Solutions decreased $7.5 million or 3% , as compared to the corresponding period of fiscal 2012 .
Revenue growth within Engineering and Construction was driven by organic growth due to global sales of building construction products and heavy highway products, primarily in the U.S. Mobile Solutions increased due to the acquisition of TMW which was not applicable in the prior period, as well as strong organic growth in the transportation and logistics market. Advanced Devices revenue increased primarily due to stronger sales of RFID product solutions. Field Solutions revenue decreased primarily due to softness in GIS markets due to economic uncertainties in the U.S.
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 $34.7 million for the second quarter of fiscal 2013 , as compared to the second quarter of fiscal 2012 , and increased by $62.5 million for the first two quarters of fiscal 2013 , as compared to the first two quarters of fiscal 2012. The increase was primarily due to increased sales in Engineering and Construction and Mobile Solutions. Gross margin as a percentage of total revenue for the second quarter of fiscal 2013 was 52.5% , as compared to 51.7% for the second quarter of fiscal 2012 , and was 52.0% for the first two quarters of fiscal 2013 , as compared to 51.7% for the first two quarters of fiscal 2012 . The increase was primarily due to an increase in sales of higher margin products, primarily software and subscription revenue, which were partially offset by higher amortization of purchased intangible assets.
Operating Income
Operating income increased by $6.0 million for the second quarter of fiscal 2013 , as compared to the second quarter of fiscal 2012 , and increased by $2.6 million for the first two quarters of fiscal 2013 , as compared to the first two quarters of fiscal 2012 . Operating income as a percentage of total revenue was 11.3% for the second quarter of fiscal 2013 , as compared to 11.4% for the

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second quarter of fiscal 2012 , and was 10.7% for the first two quarters of fiscal 2013 , as compared to 11.6% for the first two quarters of fiscal 2012 .
The increase in operating income in both periods was primarily driven by higher revenue and gross margin expansion, partially offset by higher amortization of purchased intangible assets. The decrease in operating income percentage was primarily driven by higher amortization of purchased intangible assets, offset by higher revenue and product mix, primarily due to higher margin software and subscription revenue.
Results by Segment
To achieve distribution, marketing, production and technology advantages in our targeted markets, we manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions and Advanced Devices. Operating income equals net revenue less cost of sales and operating expense, excluding general corporate expense, amortization of purchased intangible assets, amortization of inventory step-up charges, acquisition costs and restructuring costs. Operating leverage is defined as an increase in operating income as a percentage of the increase in revenue.
The following table is a summary of revenue and operating income by segment:
 
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Engineering and Construction
 
 
 
 
 
 
 
Revenue
$
313,446

 
$
284,175

 
$
580,317

 
$
533,060

Segment revenue as a percent of total revenue
54
%
 
55
%
 
51
%
 
51
%
Operating income
$
66,840

 
$
59,473

 
$
109,813

 
$
99,550

Operating income as a percent of segment revenue
21
%
 
21
%
 
19
%
 
19
%
Field Solutions
 
 
 
 
 
 
 
Revenue
$
115,864

 
$
123,371

 
$
263,345

 
$
270,870

Segment revenue as a percent of total revenue
20
%
 
24
%
 
23
%
 
27
%
Operating income
$
43,372

 
$
46,623

 
$
102,898

 
$
108,984

Operating income as a percent of segment revenue
37
%
 
38
%
 
39
%
 
40
%
Mobile Solutions
 
 
 
 
 
 
 
Revenue
$
115,524

 
$
81,402

 
$
225,688

 
$
159,785

Segment revenue as a percent of total revenue
20
%
 
16
%
 
20
%
 
16
%
Operating income
$
15,435

 
5,624

 
$
27,008

 
12,982

Operating income as a percent of segment revenue
13
%
 
7
%
 
12
%
 
8
%
Advanced Devices
 
 
 
 
 
 
 
Revenue
$
31,459

 
$
28,612

 
$
63,054

 
$
56,112

Segment revenue as a percent of total revenue
6
%
 
5
%
 
6
%
 
6
%
Operating income
$
6,514

 
$
3,913

 
$
12,999

 
$
7,252

Operating income as a percent of segment revenue
21
%
 
14
%
 
21
%
 
13
%
A reconciliation of our consolidated segment operating income to consolidated income before taxes follows:
 

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Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Consolidated segment operating income
$
132,161

 
$
115,633

 
$
252,718

 
$
228,768

Unallocated corporate expense
(24,517
)
 
(19,819
)
 
(45,867
)
 
(39,543
)
Amortization of purchased intangible assets
(39,763
)
 
(29,078
)
 
(79,095
)
 
(57,875
)
Acquisition costs
(2,976
)
 
(7,815
)
 
(6,394
)
 
(12,581
)
Consolidated operating income
64,905

 
58,921

 
121,362

 
118,769

Non-operating income, net
3,786

 
4,370

 
1,698

 
4,849

Consolidated income before taxes
$
68,691

 
$
63,291

 
$
123,060

 
$
123,618

Unallocated corporate expense includes general corporate expense, amortization of inventory step-up charges and restructuring costs.
Engineering and Construction
Engineering and Construction revenue increased by $29.3 million or 10% and $47.3 million or 9% for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods in fiscal 2012 . Segment operating income increased $7.4 million or 12% and $10.3 million or 10% for the second quarter and the first two quarters of fiscal 2013 , as compared to the corresponding periods in fiscal 2012 .
Revenue growth for the second quarter and the first two quarters of fiscal 2013 was driven by organic growth due to global sales of building construction products and heavy highway products, primarily in the U.S. and Europe. The growth was offset partially by lower sales in Asia Pacific due to an economic slowdown in Australia. Survey sales were up slightly for the second quarter, but relatively flat for the first two quarters, as North America survey sales were limited by direct and indirect sequester related constraints on federal, state, and local spending. Segment operating income increased primarily due to higher revenue and product mix, including higher software revenue.
Field Solutions
Field Solutions revenue decreased by $7.5 million or 6% and $7.5 million or 3% for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods in fiscal 2012 . Segment operating income decreased $3.3 million or 7% and $6.1 million or 6% for the second quarter and the first two quarters of fiscal 2013 , as compared to the corresponding periods in fiscal 2012 .
Field Solution revenue decreased for the second quarter and first two quarters of fiscal 2013 , primarily due to a decline in GIS markets which continued to be impacted by the pullback of government funding sources. There were significant GIS declines, in the U.S., China, and Europe. Agriculture was relatively flat. Weather conditions, particularly in the U.S. resulted in slower than anticipated agriculture sales. Segment operating income decreased due to reduced operating leverage in GIS.
Mobile Solutions
Mobile Solutions revenue increased by $34.1 million or 42% and $65.9 million or 41% for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods in fiscal 2012 . Segment operating income increased by $9.8 million or 174% and $14.0 million or 108% for the second quarter and the first two quarters of fiscal 2013 , as compared to the corresponding periods in fiscal 2012 .
Mobile Solutions revenue increased for the second quarter and the first two quarters of fiscal 2013 , primarily due to the acquisition of TMW which was not applicable in the prior period, as well as continued organic growth in the transportation and logistics market. Operating income increased due to increased revenue and product mix, including higher software and subscription revenue.
Advanced Devices
Advanced Devices revenue increased by $2.8 million or 10% and $6.9 million or 12% for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods in fiscal 2012 . Segment operating income increased by $2.6 million or 66% and $5.7 million or 79% for the second quarter and the first two quarters of fiscal 2013 , as compared to the corresponding periods in fiscal 2012 .

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The increase in revenue and operating income for the second quarter and the first two quarters of fiscal 2013 was due to increased sales of high margin RFID and military components and subsystems.
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:
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Research and development
76,555

 
64,305

 
150,163

 
124,540

Percentage of revenue
13
%
 
12
%
 
13
%
 
12
%
Sales and marketing
85,307

 
77,589

 
168,930

 
153,613

Percentage of revenue
15
%
 
15
%
 
15
%
 
15
%
General and administrative
52,760

 
49,987

 
104,730

 
96,873

Percentage of revenue
9
%
 
10
%
 
9
%
 
10
%
Total
214,622

 
191,881

 
423,823

 
375,026

Percentage of revenue
37
%
 
37
%
 
37
%
 
37
%
Overall, R&D, S&M and G&A expense increased by approximately $22.7 million and $48.8 million for the second quarter and the first two quarters of fiscal 2013 , as compared to the corresponding periods in fiscal 2012 .
Research and development expense increased by $12.3 million and $25.6 million for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods of fiscal 2012 . The cost of software developed for external sale subsequent to reaching technical feasibility was not considered material and was expensed as incurred. Research and development spending overall was at approximately 13% of revenue in both the second quarter and the first two quarters of fiscal 2013 , as compared to 12% of revenue in the corresponding periods of fiscal 2012 .
The increase in R&D expense in the second quarter of fiscal 2013 , as compared to the corresponding period of fiscal 2012 was primarily due to the inclusion of expense of $8.4 million from acquisitions not applicable in the prior corresponding period, a $2.8 million increase in compensation related expense due to headcount increases, a $0.5 million increase due to unfavorable foreign currency exchange rates and a $0.6 million increase in other expense.
The increase in R&D expense in the first two quarters of fiscal 2013 , as compared to the corresponding period in fiscal 2012 was primarily due to the inclusion of expense of $19.0 million from acquisitions not applicable in the prior corresponding period, a $5.5 million increase in compensation related expense, a $0.8 million increase due to unfavorable foreign currency exchange rates and a $0.3 million increase in other expense.
* 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 $7.7 million and $15.3 million for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods of fiscal 2012 . Sales and marketing spending overall was at approximately 15% of revenue in both the second quarter and the first two quarters of fiscal 2013 and 2012 .
The increase in Sales and marketing expense in the second quarter of fiscal 2013 , as compared to the corresponding period of fiscal 2012 was primarily due to the inclusion of expense of $6.2 million from acquisitions not applicable in the prior period and a $1.5 million increase in compensation related expense.
The increase in Sales and marketing expense in the first two quarters of fiscal 2013 , as compared to the corresponding period in fiscal 2012 was primarily due to the inclusion of expense of $13.8 million from acquisitions not applicable in the prior corresponding period, a $2.3 million increase in compensation related expense, and a $0.3 million increase due to unfavorable foreign currency exchange rates, partially offset by a $1.1 million decrease in other expense.
* 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.

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General and administrative expense increased by $2.8 million and $7.9 million for the second quarter and the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods of fiscal 2012 . General and administrative spending overall was at approximately 9% of revenue in both the second quarter and the first two quarters of fiscal 2013 , as compared to 10% of revenue in both the second quarter and the first two quarters of fiscal 2012 .
The increase in G&A expenses in the second quarter of fiscal 2013 , as compared to the second quarter of fiscal 2012 was primarily due to the inclusion of expense of $6.5 million from acquisitions not applicable in the second quarter of fiscal 2012 , and a $1.6 million increase in other expense, offset by a decrease of $4.8 million in merger and acquisition costs and a $0.5 million decrease in bad debt expense.
The increase in G&A expenses in the first two quarters of fiscal 2013 , as compared to the corresponding period in fiscal 2012 was primarily due to the inclusion of expense of $13.5 million from acquisitions not applicable in the prior corresponding period, a $0.4 million increase in compensation related expense, a $0.2 million increase due to unfavorable foreign currency exchange rates, and a $1.1 million increase in other expense, offset by a decrease of $6.2 million in merger and acquisition costs and a $1.1 million decrease in bad debt expense.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets was $39.8 million in the second quarter of fiscal 2013 , as compared to $29.1 million in the second quarter of fiscal 2012 . Of the total $39.8 million in the second quarter of fiscal 2013 , $19.9 million is presented as a separate line within Operating expense and $19.9 million is presented as a separate line within Cost of sales on our Condensed Consolidated Statements of Income. The increase was due to acquisitions not included in the second quarter of fiscal 2012 . As of the second quarter of fiscal 2013 , future amortization of intangible assets is expected to be $82.1 million during the remaining two quarters of fiscal 2013 , $141.2 million during 2014 , $129.0 million during 2015 , $109.7 million during 2016 , $88.0 million during 2017 and $98.6 million thereafter.
Non-operating Income, Net
The components of non-operating income, net, were as follows:
 
 
Second Quarter of
 
First Two Quarters of
 
2013
 
2012
 
2013
 
2012
(Dollars in thousands)
 
 
 
 
 
 
 
Interest expense, net
(4,255
)
 
(3,773
)
 
(9,326
)
 
(7,636
)
Foreign currency transaction loss
600

 
196

 
(969
)
 
(2,017
)
Income from equity method investments, net
7,157

 
7,063

 
11,414

 
13,255

Other income, net
284

 
884

 
579

 
1,247

Total non-operating income, net
$
3,786

 
$
4,370

 
$
1,698

 
$
4,849

Non-operating income, net decrease d $0.6 million for the second quarter and decreased $3.2 million for the first two quarters of fiscal 2013 , respectively, as compared to the corresponding periods in fiscal 2012 . The decrease for the second quarter of fiscal 2013 was primarily due to a decrease in other income resulting from fair value adjustments to some earn-out liabilities as well as an increase in interest expense from an increase in debt associated with acquisitions, partially offset by foreign currency fluctuations associated with hedging. The decrease for the first two quarters of fiscal 2013 was primarily due to an increase in interest expense from an increase in debt associated with acquisi