TRIMBLE INC. (TRMB) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under “Risks Factors.” This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K, for the year ended January 1, 2021.

EXECUTIVE LEVEL OVERVIEW

We are a leading provider of technology solutions that enable professionals and field mobile workers to improve or transform their work processes. Our comprehensive work process solutions are used across a range of industries including architecture, building construction, civil engineering, geospatial, survey and mapping, agriculture, natural resources, utilities, transportation, and government. Our representative customers include construction owners, contractors, engineering and construction firms, surveying companies, farmers and agricultural companies, energy and utility companies, trucking companies, and state, federal, and municipal governments. Further information on our business is presented in Part I, Item 1, “Business”.

Our growth strategy is centered on multiple elements:

•Executing on our Connect and Scale strategy;

•Increasing focus on software and services;

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

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

•Geographic expansion with localization strategy;

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

•Strategic acquisitions;

•Venture fund investments; and

•Sustainability.

Our focus on these growth drivers has led over time to growth in revenue and profitability and an increasingly diversified business model. We continue to experience a shift toward a more significant mix of recurring revenue contracts, as demonstrated by our success in driving annualized recurring revenue (“ARR”) growth of 9% year-over-year at the end of 2021. Excluding the impact of foreign currency and acquisitions and divestitures, ARR organic growth was 12%. This shift has positively impacted our revenue mix and growth over time and is leading to improved visibility in our businesses. Our software, recurring revenue, and services represented 55% of total revenue for 2021. As our solutions have expanded, our go-to-market model has also evolved with a balanced mix between direct, distribution, and OEM customers as well as an increasing number of enterprise level customer relationships. Additionally, in August 2021, we announced a newly formed strategic venture fund. Through this fund, we expect to invest up to $200 million in early- to growth-stage companies that can accelerate innovation and effectively bring new solutions to our customers and industry.

For a full definition of ARR as used in this discussion and analysis, refer to the “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue” later in this item 7.

Impact of COVID-19 and supply chain constraints on our business

COVID-19 and variant impacts, especially related to global supply chain disruptions and parts and labor shortages, and increased worldwide demand for certain components, continued to impact our business and operations. We are experiencing extended delivery times for certain components of our hardware products and increased freight costs. As a result, we are making binding commitments with longer lead times and procuring components at higher prices, which may impact our flexibility to adapt to changing market conditions and product demand. Currently, we expect these challenging supply chain conditions to persist in the near term. Therefore, we will continue to experience delays in shipping our products and increased costs, which may reduce our revenue and gross margin and continue to increase our backlog. Our 2021 results of operations reflect significant revenue improvement as the overall impact of COVID-19 was less pronounced. As a result of COVID-19, the year-to-year comparison of 2020 to 2021 reflects significant distortions in growth rates as our business rebounded in 2021.

See “1A. Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic and its resulting effects on our business.

32

Table of Contents

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenue, costs of sales, operating expenses, and related disclosures. We consider the accounting polices described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the consolidated financial statements, and actual results could differ materially from the amounts reported based on these policies. Our accounting policies are more fully described in Note 1 of this Annual Report on Form 10-K.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products or services. Revenue is recognized net of allowance for returns and any taxes collected from customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations; however, determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may sometimes require significant judgment.

Judgment is required to determine stand-alone selling price (“SSP”) for each distinct performance obligation. We use a range of amounts to estimate SSP when products and services are sold separately and determine whether there is a discount to be allocated based on the relative SSP of the various products and services.  In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs.

Income Taxes

We are a U.S. based multinational company operating in multiple U.S. and foreign jurisdictions. Judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately forecast actual tax audit outcomes. Determining whether an uncertain tax position is effectively settled requires judgment. Changes in recognition or measurement of our uncertain tax positions would result in the recognition of a tax benefit or an additional charge to the tax provision.

Income taxes are accounted for under the liability method, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if we believe it is more likely than not such assets will not be realized.

We are subject to the periodic examination of our domestic and foreign tax returns by the IRS, state, local, and foreign tax authorities who may challenge our tax positions. We regularly assess the likelihood of adverse outcomes from these examinations in determining the adequacy of our provision for income taxes.

Business Combinations and Valuation of Goodwill and Purchased Intangible Assets

We account for business combinations using the acquisition method of accounting whereby certain identifiable assets and liabilities of the acquired business and any noncontrolling interest in the acquiree are recorded at their estimated fair values as of the acquisition date. Any purchase consideration in excess of the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.

When determining the fair values of certain assets acquired, liabilities assumed, and noncontrolling interests in the acquiree, we make significant estimates and assumptions, especially concerning intangible assets. Critical estimates when valuing intangible assets include expected future cash flows based on consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates.

We evaluate goodwill on an annual basis or more frequently if indicators of potential impairment exist. We utilize either a qualitative or quantitative approach to assess the likelihood of impairment on the first day of the fourth quarter. When performing the qualitative approach, we consider macroeconomic conditions, industry and market considerations, overall financial performance, and other relevant events and factors that may impact the reporting units. When performing the quantitative approach, we compare the reporting unit’s carrying amount, including goodwill, to the reporting unit's fair value. The estimation of a reporting unit's fair value involves using estimates and assumptions, including expected future operating performance using risk-adjusted discount rates. If the reporting unit's carrying amount exceeds its fair value, an impairment loss is recognized.

33

Table of Contents

Intangible assets acquired individually, with a group of other assets, or in a business combination are recorded at fair value. Our intangible assets are amortized over the period of estimated benefit using the straight-line method over the estimated useful life, which ranges from three to ten years and has a weighted-average useful life of approximately seven years. We write off fully amortized intangible assets when those assets are no longer used.

We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable based on their future cash flows. The estimated future cash flows are primarily based on assumptions about expected future operating performance.

RESULTS OF OPERATIONS

Overview

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

(1)    Refer to “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue” of this Annual Report on Form 10-K for definitions.

Basis of Presentation

We use a 52–53 week fiscal year ending on the Friday nearest to December 31, which for 2021 was December 31, 2021. Both 2021 and 2020 were 52–week years.

Year 2021 Compared with Year 2020

Revenue

Despite supply constraints and increases in our backlog, revenue increased due to strong demand for our hardware and related software, as compared with reduced demand due to the impacts of COVID-19 lockdowns in the prior year, and strong recovery in 2021 in markets across major regions. Growth in subscription sales in many of our software businesses continued to remain strong. Price increases, which went into effect in the second half of the year, and reduced discounting had a slighter impact on revenue growth for the year.

Product revenue increased due to strong hardware and related software sales in Geospatial, Resources and Utilities, and Buildings and Infrastructure. To a lesser extent, Transportation sales also contributed to growth. Service revenue was relatively flat, and subscription revenue increased primarily due to strong growth in Buildings and Infrastructure, and to a lesser extent, Resources and Utilities and Geospatial, slightly offset by a decrease in Transportation.

34

Table of Contents

During 2021, sales to customers in North America represented 51%; Europe represented 31%; Asia Pacific represented 12%; and the rest of world represented 6% of our total revenue.

No single customer accounted for 10% or more of our total revenue in 2021 and 2020. No single customer accounted for 10% or more of our accounts receivable at the end of 2021 and 2020.

Gross Margin

Gross margins varied due to several factors including product mix, customer pricing, distribution channel, and product costs.

Gross margin increased primarily due to strong revenue growth. Gross margin as a percentage of total revenue shows a slight decrease mainly due to increased mix of hardware sales and increased supply chain costs, offset by price increases and reduced discounting as well as lower intangibles amortization.

Operating Income

Operating income and operating income as a percentage of total revenue increased primarily due to strong revenue growth in Buildings and Infrastructure, Geospatial, and Resources and Utilities, partially offset by a decrease in Transportation, as well as relative operating expense containment in all segments.

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

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

As a result of COVID-19 impacts, the year-to-year comparison of 2020 to 2021 reflects distortions in expense growth rates as our expenses normalized in 2021, with the biggest impact due to higher incentive compensation, including bonuses and stock-based compensation, particularly in G&A.

R&D expense increased primarily due to higher compensation expense, including incentive compensation.

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.

S&M expense increased primarily due to higher compensation expense, including incentive compensation and commissions.

G&A expense increased primarily due to higher compensation expense, including incentive compensation, and to a lesser extent, higher consulting and legal fees.

Amortization of Purchased Intangible Assets

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

35

Table of Contents

In 2021, total amortization of purchased intangibles decreased primarily due to the expiration of prior year acquisitions' amortization.

Non-Operating Income (Expense), Net

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

In 2021, non-operating income increased primarily due to recognition of gains from the sale of businesses included in Other income, net, and to a lesser extent, lower interest costs associated with a decrease in our outstanding debt.

Income Tax Provision

In December 2021, due to a change in the Netherlands tax law, the statutory tax rate was further increased from 25.0% to 25.8% effective January 1, 2022. As a result, we recorded a one-time tax benefit of $14.4 million in 2021 due to the revaluation of the Netherlands deferred tax assets.

Previously in December 2020, also as a result of a Netherlands tax law change that increased Netherlands statutory tax rate from 21.7% to 25.0%, effective January 1, 2021, we recorded a one-time tax benefit of $64.0 million in 2020 due to the revaluation of the Netherlands deferred tax assets.

Our effective income tax rates for 2021 and 2020 were 14.2% and 1.1%, respectively. The effective income tax rate in 2021 increased compared to 2020 primarily due to the smaller one-time tax benefit recorded in 2021 relating to the revaluation of the Netherlands deferred tax assets mentioned above.

Results by Segment

We report our financial performance, including revenue and operating income, based on four reportable segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation.

Our Chief Executive Officer and Chief Operating Decision Maker views and evaluates operations based on the results of our reportable operating segments under our management reporting system. These results are not necessarily in conformance with U.S. GAAP. For additional discussion of our segments, refer to Note 5 of this Annual Report on Form 10-K.

36

Table of Contents

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

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

Buildings and Infrastructure

Revenue increased primarily due to strong demand for our civil construction hardware and related software and from strong recovery in markets across major regions, including strong residential construction and infrastructure spend. Additionally, higher subscription revenue in our software businesses benefited from the continued cumulative effect of conversions from perpetual licenses to subscription offerings for existing and new customers, as well as improvements in our customer churn rate.

Segment operating income and operating income as a percentage of revenue increased primarily due to higher revenue, consistent gross margin, and operating cost containment. Increased supply chain costs for hardware products were wholly mitigated by reduced discounting and customer price increases.

37

Table of Contents

Geospatial

Revenue increased primarily due to strong demand for geospatial survey products, with strong recovery in markets across major regions, including strong residential construction, infrastructure, and utilities spend. Competitive products, including the R12i, helped win business.

Segment operating income and operating income as a percentage of revenue increased primarily due to higher revenue and operating cost containment, partially offset by lower gross margin. Gross margin was down primarily due to product mix and increased supply chain costs for hardware products, partially offset by reduced discounting and customer price increases.

Resources and Utilities

Revenue increased primarily due to continued agriculture business strength in the reseller and OEM channels in markets across major regions. Strong market fundamentals, including favorable commodity prices, continued to fuel growth.

Segment operating income increased primarily due to higher revenue and operating expense containment. Gross margin was down due to product mix and higher supply chain costs for hardware products, partially offset by reduced discounting and customer price increases. Operating income as a percentage of revenue was down due to lower gross margin.

Transportation

Revenue decreased slightly due to the impact of a divestiture, largely offset by continued growth in enterprise software sales. Enterprise revenue continued to experience subscription revenue growth as the business transitions from a perpetual software license model. Mobility sales were down due to reduced subscriber counts, partially offset by higher hardware shipments for the year.

Segment operating income and operating income as a percentage of revenue decreased slightly, primarily due to the revenue decline and a slight increase in operating expense.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

The increase in cash provided by operating activities was primarily driven by higher net income adjusted for non-cash items, and higher account payables, partially offset by higher inventory purchases.

Investing Activities

The decrease in cash used in investing activities was primarily due to higher net proceeds from the sale of businesses and sale of property and equipment during 2021, partially offset by slightly higher acquisition spending in 2021. The current year included the AgileAssets acquisition compared to the prior year, which included the Kuebix acquisition.

Financing Activities

The increase in cash used in financing activities was primarily driven by an increase in repurchases of common stock, partially offset by a decrease in debt repayments, net of debt proceeds.

38

Table of Contents

Cash and Cash Equivalents

We believe that our cash and cash equivalents and borrowings, along with cash provided by operations will be sufficient in the foreseeable future to meet our anticipated operating cash needs, expenditures related to our Connect and Scale strategy, debt service, and any stock repurchases under the stock repurchase program. For debt refinancing, we anticipate we will have readily accessible capital markets in order to secure appropriate funding.

Our material cash requirements include the following contractual and other obligations and cash needs:

Leases

We have operating leases primarily for certain of our major facilities including corporate offices, research and development facilities, and manufacturing facilities. Operating leases represent undiscounted lease payments and include short-term leases. At the end of 2021, we had fixed lease payment obligations of $190.7 million, with $50.5 million payable within the next 12 months. Refer to Note 7 of this Annual Report on Form 10-K for additional information regarding our leases.

Tax Payable

At the end of 2021, we had income taxes payable of $101.6 million, with $47.1 million payable within the next 12 months. The amount payable within the next 12 months includes $6.7 million representing a one-time transition tax liability as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).

In addition, we have unrecognized tax benefits of $63.3 million included in Other non-current liabilities, including interest and penalties. At this time, we cannot make a reasonably reliable estimate of the period of cash settlement with tax authorities regarding this liability, and therefore, such amounts are not included in the contractual obligations table above. Refer to Note 11 of this Annual Report on Form 10-K for additional information regarding our taxes.

Other Purchase Obligations and Commitments

Purchase obligations and commitments primarily relate to investments in our platform associated with our Connect and Scale strategy and non-cancellable inventory commitments, which increased due to the extension of lead times and the growth of our hardware business. At the end of 2021, we had operating purchase obligations and commitments of $710.8 million, with $446.6 million payable within the next 12 months. Refer to Note 8 of this Annual Report on Form 10-K for additional information regarding our purchase obligations and commitments. Other than the items discussed above, we do not have any off-balance sheet financing arrangements or liabilities.

Debt

At the end of 2021, we had outstanding floating and fixed-rate senior notes with varying maturities for an aggregate principal amount of approximately $1.3 billion. Future interest payments total $264.2 million, with $60.8 million payable within the next 12 months.

During 2021, we repaid $251.0 million of debt, including the full repayment of our term loan, net of borrowings. Refer to Note 6 of this Annual Report on Form 10-K for additional information regarding our debt.

Stock Repurchase Program

We have a 2021 Stock Repurchase Program authorized by our Board of Directors, that allows us to repurchase shares from time to time, subject to business and market conditions and other investment opportunities, through open market transactions, privately-negotiated transactions, accelerated stock repurchase plans, or by other means for up to $750 million. The 2021 Stock Repurchase Program does not obligate us to acquire any specific number of shares. Refer to Note 13 of this Annual Report on Form 10-K for additional information regarding our 2021 Stock Repurchase Program.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

The impact of recent accounting pronouncements is disclosed in Note 1 of this Annual Report on Form 10-K.

39

Table of Contents

SUPPLEMENTAL DISCLOSURE OF NON-GAAP FINANCIAL MEASURES AND ANNUALIZED RECURRING REVENUE

To supplement our consolidated financial information, we included non-GAAP financial measures, which are not meant to be considered in isolation or as a substitute for comparable GAAP because we believe non-GAAP financial measures provide useful information to investors and others in understanding our “core operating performance”, which excludes the effect of non-cash items and certain variable charges not expected to recur, not meaningful in comparison to our past operating performance or not reflective of ongoing financial results. Lastly, we believe that our core operating performance offers a supplemental measure for period-to-period comparisons and can be used to evaluate our historical and prospective financial performance, as well as our performance relative to competitors. In addition to providing non-GAAP financial measures, we disclose Annualized Recurring Revenue (“ARR”) to give the investors supplementary indicators of the value of our current recurring revenue contracts.

ARR represents the estimated annualized value of recurring revenue, including subscription, maintenance and support revenue, and term license contracts for the quarter. ARR is calculated by adding the portion of the contract value of all of our term licenses attributable to the current quarter to our non-GAAP recurring revenue for the current quarter and dividing that sum by the number of days in the quarter and then multiplying that quotient by 365. ARR should be viewed independently of revenue and deferred revenue as it is a performance measure and is not intended to be combined with or to replace either of those items.

The non-GAAP financial measures, definitions, and explanations to the adjustments to comparable GAAP measures are included below:

40

Table of Contents

41

Table of Contents

Non-GAAP Definitions

Non-GAAP revenue

We define Non-GAAP revenue as GAAP revenue, excluding the effects of purchase accounting adjustments. We believe this measure helps investors understand the performance of our business including acquisitions, as non-GAAP revenue excludes the effects of certain acquired deferred revenue that was written down to fair value in purchase accounting. Management believes that excluding fair value purchase accounting adjustments more closely correlates with the ordinary and ongoing course of the acquired company’s operations and facilitates analysis of revenue growth and trends.

Non-GAAP gross margin

We define Non-GAAP gross margin as GAAP gross margin, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs. We believe our investors benefit by understanding our non-GAAP gross margin as a way of understanding how product mix, pricing decisions, and manufacturing costs influence our business.

Non-GAAP operating expenses

We define Non-GAAP operating expenses as GAAP operating expenses, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs.

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

Non-GAAP operating income

We define Non-GAAP operating income as GAAP operating income, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring, and other costs. We believe our investors benefit by understanding our non-GAAP operating income trends, which are driven by revenue, gross margin, and spending.

Non-GAAP non-operating expense, net

We define Non-GAAP non-operating expenses, net as GAAP non-operating expenses, net, excluding acquisition/divestiture items and deferred compensation. We believe this measure helps investors evaluate our non-operating expense trends.

Non-GAAP income tax provision

We define Non-GAAP income tax provision as GAAP income tax provision, excluding charges and benefits such as net deferred tax impacts resulting from the non-U.S. intercompany transfer of intellectual property, tax law changes, and significant one-time reserve releases upon the statute of limitations expirations. We believe this measure helps investors because it provides for consistent treatment of excluded items in our non-GAAP presentation and a difference in the GAAP and non-GAAP tax rates.

Non-GAAP net income

We define Non-GAAP net income as GAAP net income, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, restructuring and other costs, and non-GAAP tax adjustments. This measure provides a supplemental view of net income trends, which are driven by non-GAAP income before taxes and our non-GAAP tax rate.

Non-GAAP diluted net income per share

We defined Non-GAAP diluted net income per share as GAAP diluted net income per share, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, restructuring and other costs, and non-GAAP tax adjustments. We believe our investors benefit by understanding our non-GAAP operating performance as reflected in a per share calculation as a way of measuring non-GAAP operating performance by ownership in the company.

Adjusted EBITDA

We define Adjusted EBITDA as non-GAAP operating income plus depreciation expense and income from equity method investments, net. Other companies may define Adjusted EBITDA differently. Adjusted EBITDA is not intended to purport to be an alternative to net income or operating income as a measure of operating performance or cash flow from operating activities as a measure of liquidity. Adjusted EBITDA is a performance measure that we believe offers a useful view of the overall operations of our business because it facilitates operating performance comparisons by removing potential differences

42

Table of Contents

caused by variations unrelated to operating performance, such as capital structures (interest expense), income taxes, depreciation and amortization expenses.

Explanations of Non-GAAP adjustments

(A)Purchase accounting adjustments. Purchase accounting adjustments consist of the following:

(i)Acquired deferred revenue adjustment. We adopted ASU 2021-08 in the fourth quarter of 2021 for all acquisitions occurring in 2021, which requires the application of ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities on the acquisition date. For acquisitions occurring prior to 2021, non-GAAP revenue excludes the adjustment to our revenue as a result of measuring the contract liability at fair value on the acquisition date.

(ii)Amortization of acquired capitalized commissions. Purchase accounting generally requires entities to eliminate capitalized sales commissions balances as of the acquisition date. Non-GAAP operating expenses exclude the adjustments that eliminate the capitalized sales commissions. For acquisitions occurring prior to 2021, non-GAAP operating expenses exclude the adjustment of acquired capitalized commissions amortization.

(iii)Amortization of purchased intangible assets. Non-GAAP gross margin and operating expenses exclude the amortization of purchased intangible assets, which primarily represents technology and/or customer relationships already developed.

(B)Acquisition / divestiture items. Non-GAAP gross margin and operating expenses exclude acquisition costs consisting of external and incremental costs resulting directly from merger and acquisition and strategic investment activities such as legal, due diligence, integration, and other closing costs, including the acceleration of acquisition stock options and adjustments to the fair value of earn-out liabilities. Non- GAAP non-operating expense, net, exclude unusual one-time acquisition/divestiture charges and/or divestiture gains/losses. The costs that have been excluded from the non-GAAP measures are costs specific to particular acquisitions. As a result, these are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance.

(C)Stock-based compensation / deferred compensation. Non-GAAP gross margin and operating expenses exclude stock-based compensation and income or expense associated with movement in our non-qualified deferred compensation plan liabilities. Changes in non-qualified deferred compensation plan assets, included in non-operating expense, net, offset the income or expense in the plan liabilities.

(D)Restructuring and other costs. Non- GAAP gross margin and operating expenses exclude restructuring and other exit costs comprised of termination benefits related to reductions in employee headcount, including executive severance agreements, the closure or exit of facilities, and cancellation of certain contracts. In addition, other costs include COVID-19 expenses incurred as a direct impact from the COVID-19 virus pandemic, such as cancellation fees of trade shows due to public safety issues, additional charges for disinfecting facilities, and personal protective equipment.

(E)Non-GAAP items tax effected. This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (D) on non-GAAP net income. This amount excludes the GAAP tax rate impact resulting from the non-U.S. intercompany transfer of intellectual property, which is separately disclosed in item (G).

(F)Difference in GAAP and Non-GAAP tax rate. This amount represents the difference between the GAAP and non-GAAP tax rates applied to the non-GAAP operating income plus the non-GAAP non-operating expense, net. The GAAP tax rate used for this calculation excludes the net deferred tax impacts resulting from the non-U.S. intercompany transfer of intellectual property, which is separately disclosed in item (G). The non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property and significant one-time reserve releases upon statute of limitations expirations.

(G)IP restructuring and tax law change impacts. These amounts represent net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property, consistent with tax law changes, including tax rates changes, and our international business operations.

(H)GAAP and non-GAAP tax rate percentages. These percentages are defined as GAAP income tax provision as a percentage of GAAP income before taxes and non-GAAP income tax provision as a percentage of non-GAAP income before taxes.

43

Table of Contents