TRIMBLE INC. (TRMB) FY 2023 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 report generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this report 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 December 30, 2022.

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” of this report.

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 benefits a diverse customer base;

•Geographic expansion with a localization strategy;

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

•Strategic and targeted acquisitions, joint ventures, and 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 as demonstrated by our success in driving annualized recurring revenue (“ARR”) of $1,982.3 million, which represents growth of 24% year-over-year at the end of 2023. Excluding the impact of foreign currency, acquisitions, and divestitures, ARR organic growth was 13%. This shift toward recurring revenue has positively impacted our revenue mix and growth over time and is leading to improved visibility in our businesses. Our software, services, and recurring revenue represented 67% and 59% of total revenue for 2023 and 2022. Additionally, we continue to maintain focus on new product introductions and transitions to recurring revenue as evidenced by the Transporeon business and the pending Trimble Ag JV Transaction (as described below).

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 enterprise-level customer relationships.

Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we refer to organic revenue growth, which is a non-GAAP measure. For a full definition of ARR, organic ARR, and organic revenue growth as used in this discussion and analysis, refer to the “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue” found later in this Item 7.

Impact of Recent Events on Our Business

Acquisitions and Divestitures

We acquire businesses that align with our long-term growth strategies including our strategic product roadmap and, conversely, we divest certain businesses that no longer fit those strategies.

On September 28, 2023, we executed a definitive agreement with AGCO that provides for the formation of a JV with AGCO in the mixed fleet precision agriculture market. Under the terms of the agreement, we will contribute the Trimble Ag business, excluding certain GNSS and guidance technologies, and AGCO will contribute its JCA Technologies business to the JV. We will sell an interest in the JV to AGCO for $2.0 billion in pre-tax cash proceeds, subject to working capital adjustments. Immediately following the closing of this proposed transaction, we will own 15% of the JV and AGCO will own 85% of the JV.

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Additionally, we plan to enter into the following agreements with AGCO as part of the overall proposed transaction:

•a seven-year, renewable Supply Agreement through which we will provide key GNSS and guidance technologies to the JV for use in professional agriculture machines sold by AGCO, on an exclusive basis with limited exceptions;

•a Technology Transfer and License Agreement to govern the licensing of certain non-divested intellectual property and technology for use by the JV in the agriculture field and, upon expiration of the Supply Agreement, to govern fixed and variable royalty payments made to us by the JV;

•a Trademark License Agreement to govern the licensing of certain Trimble trademarks for use by the JV in the agriculture field;

•a Positioning Services Agreement through which the JV will serve as our channel partner for the positioning services in the agriculture market; and

•a Transition Services Agreement to provide contract manufacturing services for the divested products for two years following closing of the proposed transaction.

The formation of the JV is expected to better serve farmers with factory fit and aftermarket applications in the mixed fleet precision agriculture market to help farmers drive productivity, efficiency, and sustainability. Additionally, the proposed transaction is expected to (i) simplify our Connect and Scale strategy, (ii) reduce risk of channel transition in the agriculture market, and (iii) enhance our financial profile and flexibility with a resulting higher mix of software, services, and recurring revenue, as well allowing us to repurchase stock and repay $1.1 billion of our debt through use of the net proceeds.

The proposed transaction is expected to close in the first half of 2024 and is subject to customary closing conditions, including regulatory approvals. Trimble Ag is reported as a part of our Resources and Utilities segment.

The assets and liabilities of Trimble Ag that are subject to the proposed transaction were classified as held for sale at the end of 2023. See Note 4 “Divestitures” of this report.

On April 3, 2023, we acquired all of the outstanding shares of Transporeon in an all-cash transaction valued at €1.9 billion or $2.1 billion. Transporeon is a Germany-based company and leading cloud-based transportation management software platform that connects key stakeholders across the industry lifecycle to positively impact the optimization of global supply chains, which aligns with our Connect and Scale strategy. By combining Transporeon’s operations with ours, we expect economies of scale, growth, such as acceleration of recurring revenue, expansion of the addressable market, cross-sell opportunities, and enhanced productivity and sustainability solutions for our customers. Transporeon is reported in our Transportation segment. We have included the financial results of Transporeon in our Consolidated Financial Statements starting in the second quarter of 2023.

Macroeconomic Conditions

Macroeconomic conditions, including geopolitical tensions, such as the ongoing military conflicts in the Middle East and between Russia and Ukraine and related sanctions, exchange rate and interest rate volatility, and inflationary pressures, will continue to evolve globally. Global inflation rates rose in 2022 and continued into early 2023. As a result, interest rates increased over 2022 and 2023 in an effort to curb inflation. These macroeconomic conditions have had and are expected to have a negative impact on our results of operations.

We may experience higher borrowing costs on our variable-rate debt. At the end of 2023, our outstanding balance of variable-rate debt was $1.3 billion. See Note 8 “Debt” of this report for additional information regarding our debt.

In 2023, as compared to the prior year, our organic hardware sales declined and bookings moderated as dealers moved toward lower levels of inventories due to improved product lead times and reduced end user demand. Buildings and Infrastructure, Geospatial, and Resources and Utilities all had stronger hardware sales in the prior year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with U.S. 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 “Description of Business and Accounting Policies” of this report.

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,

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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 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 estimate SSP considering multiple factors including but not limited to, our internal cost, pricing practices, sales channel, competitive positioning, and overall market and business environments. As our offerings and markets change, we may be required to reassess our estimated SSP and, as a result, the timing and classification of our revenue could be affected.

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

For business combinations, we allocate the purchase consideration to the assets acquired, liabilities assumed, and any noncontrolling interest based on their fair values at the acquisition date. When determining the fair values, 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 revenue and revenue growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Any purchase consideration in excess of the fair values of the net assets acquired is recorded as goodwill.

We evaluate goodwill on an annual basis in our fourth quarter or more frequently if indicators of potential impairment exist. To determine whether goodwill is impaired, we first assess qualitative factors. Qualitative factors include but are not limited to macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, or other relevant company-specific events. If it is determined more likely than not that the fair value of a goodwill reporting unit is less than its carrying amount, we perform a quantitative analysis. Alternatively, we may bypass the qualitative assessment and perform a quantitative impairment test.

When performing a 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.

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.

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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 report for definitions.

Basis of Presentation

We use a 52–53 week fiscal year ending on the Friday nearest to December 31, which for 2023 was December 29, 2023. Both 2023 and 2022 were 52–week years. 2024 will be a 53-week year.

Year 2023 Compared with Year 2022

Revenue

Organic total revenue was up 1%. Organic subscription and services revenue was up primarily due to strong growth in subscription and software term licenses in Buildings and Infrastructure, and to a lesser extent, positioning services in Resources and Utilities, and enterprise and MAPS in Transportation. Organic product revenue decreased due to reductions in dealer inventory levels as a result of improved product lead times and reduced end user demand. These decreases impacted sales in Buildings and Infrastructure, Geospatial, and Resources and Utilities.

Gross Margin

Gross margin and gross margin as a percentage of revenue increased due to an increased mix of higher margin software and subscription sales including organic growth and the Transporeon acquisition, and declines in hardware sales, as well as lower supply chain costs.

Operating Income

Operating income decreased slightly primarily due to increased operating expense, partially offset by revenue and gross margin expansion. Operating expense increased due to the Transporeon acquisition, higher research and development, and general and administrative costs, including investments related to our Connect and Scale strategy and increased amortization of purchased intangibles. In addition, we incurred higher acquisition and divestiture transaction costs.

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Operating income as a percentage of revenue decreased primarily due to increased operating expense, partially offset by gross margin expansion as a percentage of revenue. We had cost reductions in 2023 and will continue to focus on further reductions.

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

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:

R&D expense increased primarily due to higher compensation expense, including incentive compensation, and to a lesser extent, the Transporeon acquisition. We believe that the development and introduction of new solutions are critical to our future success, and we expect to continue the active development of new products.

S&M expense increased slightly primarily due to the Transporeon acquisition.

G&A expense increased primarily due to higher acquisition and divestiture transaction costs, the Transporeon acquisition, and to a lesser extent, increased compensation expense, including incentive compensation.

Amortization of Purchased Intangible Assets

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

In 2023, total amortization expense of purchased intangibles increased primarily due to amortization of intangibles acquired from the Transporeon acquisition, which were not applicable in the prior year.

Non-Operating Income (Expense), Net

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

Non-operating expense, net increased primarily due to lower net gains from divestitures and higher interest expense from the new debt associated with the Transporeon acquisition, partially offset by foreign currency hedging gains associated with the Transporeon acquisition and fluctuations in the deferred compensation plan assets, both included in Other income (expense), net.

Income Tax Provision

Our effective income tax rate for 2023 and 2022 were 12.8% and 21.0%. The decrease was primarily due to an increases in tax benefit from U.S. federal R&D credit and foreign-derived intangible income (“FDII”) in 2023, and change in geographic mix of earnings, partially offset by lower stock-based compensation deductions in the current year.

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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, who is our Chief Operating Decision Maker (“CODM”) 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 7 “Segment Information” of this report.

The following table is a summary of revenue and operating income by segment compared for the periods indicated:

The following table is a reconciliation of our consolidated segment operating income to consolidated income before taxes:

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Buildings and Infrastructure

Organic revenue increased due to strong demand for our subscription and term license software. The increases resulted from higher sales to new and existing customers as well as cumulative conversions from perpetual software to recurring offerings. The increase was offset by lower civil construction hardware sales due to reductions in dealer inventory levels as a result of improved lead times and reduced end user demand.

Operating income and operating income as a percentage of revenue increased primarily from gross margin expansion due to increased sales and a higher mix of software and subscription revenue, partially offset by increased operating expense. Operating expense increased due to increased compensation expense and investments, including our Connect and Scale strategy.

Geospatial

Organic revenue decreased due to lower surveying hardware sales due to reductions in dealer inventory levels as a result of improved lead times and reduced end user demand. The declines were partially offset by higher U.S. Federal government sales in the current year; the timing of government sales can fluctuate from period to period.

Operating income decreased due to reduced revenue, partially offset by gross margin expansion driven by product mix and lower hardware supply chain costs. Operating income as a percentage of revenue was relative flat.

Resources and Utilities

Organic revenue decreased due to reductions in channel inventory levels as a result of improved lead times and slowing demand in agriculture markets, as well as impacts related to changes in our distribution network. The decrease was partially offset by higher subscription revenue in positioning services.

Operating income decreased slightly due to reduced revenue and higher operating expense, largely offset by gross margin expansion. Operating income as a percentage of revenue was up primarily due to gross margin expansion driven by a higher mix of software and subscription revenue and lower hardware supply chain costs.

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Transportation

Organic revenue increased primarily driven by enterprise and MAPS subscription revenue growth. Additionally, North American mobility hardware sales increased in 2023.

Operating income and operating income as a percentage of revenue increased primarily due to gross margin expansion, driven by a higher mix of subscription revenue, including the impact of the Transporeon acquisition. We continue to maintain focus on new product introductions and transitions to recurring revenue.

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LIQUIDITY AND CAPITAL RESOURCES

(1) Includes $9.1 million of cash and cash equivalents classified as held for sale as of December 29, 2023.

Operating Activities

The increase in cash provided by operating activities was primarily driven by lower inventory purchases and reduced bonus payouts. The increase was partially offset by a decrease in deferred revenue due to the timing of billings and higher interest payments.

Investing Activities

The increase in cash used in investing activities was primarily due to acquisition activities in the current year, including the Transporeon acquisition, and higher proceeds from divestitures in the prior year.

Financing Activities

The increase in cash provided by financing activities was primarily driven by proceeds from our $800.0 million issuance of 2033 Senior Notes and $1.0 billion term loans in the current year, and higher common stock repurchases in the prior year. The increase was partially offset by the repayment of the 2023 Senior Notes that matured in the current year.

Cash and Cash Equivalents

We believe that our cash and cash equivalents and available borrowing capacity under our existing lines of credit, along with cash provided by operations will be sufficient in the foreseeable future to meet our anticipated operating cash needs, including expenditures related to our Connect and Scale strategy, debt service, acquisitions, and any stock repurchases under the stock repurchase program.

Our 2022 Credit Facility allows us to borrow up to $1.25 billion, with an option to increase the borrowings up to $1.75 billion with lender approval. As of December 29, 2023, $150.0 million was outstanding under the 2022 Credit Facility.

Our 2023 Senior Notes totaling $300.0 million matured and were paid in June 2023. Our 2024 Senior Notes totaling $400.0 million are maturing in December 2024. We anticipate using a combination of cash on hand, borrowing from our existing revolvers, or new debt to repay the 2024 Senior Notes.

In the second quarter of 2023, we acquired Transporeon, which was funded through a combination of $1.0 billion of term loans, $225.0 million drawn on the 2022 credit facility, as amended, and the 2033 senior notes, see Note 3 “Acquisitions” of this report.

In the third quarter of 2023, we executed a definitive agreement to contribute our Trimble Ag business to a newly formed JV with AGCO and sell 85% of the stake in the JV to AGCO for $2.0 billion in pre-tax cash proceeds, subject to certain adjustments. See Note 4 “Divestitures” of this report. Although we will continue to evaluate the optimal capital structure for our business following the completion of the pending sale, we expect to use the $1.5 billion of estimated proceeds after tax to repurchase stock and repay approximately $1.1 billion in debt.

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.

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At the end of 2023, we had fixed lease payment obligations of $208.9 million, with $49.3 million payable within the next 12 months. Refer to Note 9 “Leases” of this report for additional information regarding our leases.

Tax Payable

At the end of 2023, we had income taxes payable of $62.4 million, with $39.7 million payable within the next 12 months. The amount payable within the next 12 months includes $18.2 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 $88.3 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. Refer to Note 13 “Income Taxes” of this report 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. At the end of 2023, we had operating purchase obligations and commitments of $618.9 million, with $253.5 million payable within the next 12 months. Refer to Note 10 “Commitments and Contingencies” of this report 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 2023, we had outstanding fixed-rate senior notes and floating credit facilities with varying maturities for an aggregate principal amount of approximately $3.1 billion. Future interest payments total $898.4 million, with $190.7 million payable within the next 12 months. We anticipate repaying $1.1 billion of our debt through the use of the net proceeds from the proposed AGCO JV transaction. Refer to Note 4 “Divestitures” of this report for additional information.

During 2023, we had $1.6 billion of proceeds from debt, net of the payments. Refer to Note 8 “Debt” of this report for additional information regarding our debt.

Stock Repurchase Program

At the end of 2023, we had a 2021 Stock Repurchase Program authorized by our Board of Directors that allowed us to repurchase stocks 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 $750.0 million. On January 28, 2024, our Board of Directors approved a 2024 Stock Repurchase Program that allows us to repurchase stock from time to time, through accelerated stock repurchase plans, open market transactions, privately negotiated transactions, block purchases, tender offers, or by other means for up to $800.0 million. The 2024 Stock Repurchase Program does not obligate us to acquire any specific number of shares. The 2024 Stock Repurchase Program replaced the 2021 Stock Repurchase Program, which was cancelled. Refer to Note 15 “Common Stock Repurchase” of this report for additional information regarding our 2021 Stock Repurchase Program and 2024 Stock Repurchase Program.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

The impact of recent accounting pronouncements is disclosed in Note 1 “Description of Business and Accounting Policies” of this report.

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. We believe non-GAAP financial measures provide useful information to investors and others in understanding our “core operating performance”, which excludes (i) the effect of non-cash items and certain variable charges not expected to recur; and (ii) transactions that are 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.

Organic revenue growth is a non-GAAP measure that refers to revenue excluding the impacts of (i) foreign currency translation, and (ii) acquisitions and divestitures. We believe organic revenue growth provides useful information in evaluating the results of our business because it excludes items that are not indicative of ongoing performance or impact comparability with the prior year. We provide reconciliation tables showing the change in revenue growth to organic revenue growth in the “Results of Operations” section found earlier in this Item 7.

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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. ARR is calculated by taking our subscription, maintenance and support, and recurring transaction revenue for the current quarter and adding the portion of the contract value of all our term licenses attributable to the current quarter, then dividing that sum by the number of days in the quarter and then multiplying that quotient by 365. Organic ARR refers to annualized recurring revenue excluding the impacts of (i) foreign currency translation, and (ii) acquisitions and divestitures. ARR and organic ARR should be viewed independently of revenue and deferred revenue as they are performance measures and are 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:

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Non-GAAP Definitions

Non-GAAP gross margin

We define Non-GAAP gross margin as GAAP gross margin, excluding the effects of amortization of purchased intangible assets, 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 amortization of purchased intangible assets, 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 amortization of purchased intangible assets, 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 expense, net as GAAP non-operating income (expense), net, excluding acquisition/divestiture items, deferred compensation, and restructuring and other costs. 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 amortization of purchased intangible assets, 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.

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Non-GAAP diluted net income per share

We define Non-GAAP diluted net income per share as GAAP diluted net income per share, excluding the effects of amortization of purchased intangible assets, 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, cloud computing amortization, 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 caused by variations unrelated to operating performance, such as capital structures (interest expense), income taxes, depreciation, and amortization of purchased intangibles and cloud computing costs.

Explanations of Non-GAAP adjustments

(A).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 costs consisting of external and incremental costs resulting directly from acquisitions, divestitures, and strategic investment activities such as legal, due diligence, integration, and other closing costs, including the acceleration of acquisition stock awards and adjustments to the fair value of earn-out liabilities. Non-GAAP non-operating expense, net, excludes unusual one-time acquisition/divestiture charges, including foreign currency exchange rate gains/losses related to an acquisition, divestiture gains/losses, and strategic investment impairments. 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 costs comprised of termination benefits related to reductions in employee headcount and closure or exit of facilities, executive severance agreements, business exit costs, as well as a $20 million commitment to donate to the Trimble Foundation that was paid over four quarters ending in the first quarter of 2023.

(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.

(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 non-GAAP tax rate excludes charges and benefits such as (i) deferred tax impacts from tax amortization relating to a non-U.S. intercompany transfer of intellectual property and R&D cost capitalization impact to global intangible low-taxed income ("GILTI"), and (ii) significant one-time reserve releases upon statute of limitations expirations.

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

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