UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended OCTOBER 1, 2004
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: 0-18645
TRIMBLE NAVIGATION LIMITED
(Exact name of registrant as specified in its charter)
California 94-2802192
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
749 North Mary Avenue, Sunnyvale, CA 94085
(Address of principal executive offices) (Zip Code)
Telephone Number (408) 481-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
As of November 4, 2004, there were 51,839,934 shares of Common Stock (no par
value) outstanding.
<page>
TRIMBLE NAVIGATION LIMITED
FORM 10-Q for the Quarter ended October 1, 2004
INDEX
<table>
<c> <c>
PART I. Financial Information Page
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets --
October 1, 2004 and January 2, 2004 ............................. 3
Condensed Consolidated Statements of Income --
Three and Nine Months Ended October 1, 2004 and October 3, 2003..... 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended October 1, 2004 and October 3, 2003............... 5
Notes to Condensed Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.............. 29
ITEM 4. Controls and Procedures................................................. 30
PART II. Other Information
ITEM 1. Legal Proceedings....................................................... 30
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds ............ 30
ITEM 6. Exhibits................................................................ 31
SIGNATURES ........................................................................ 33
</table>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<table>
<Caption>
October 1, January 2,
(in thousands) 2004 2004 (1)
- -------------- ---- --------
<s> <c>
ASSETS
Current assets:
Cash and cash equivalents $ 59,119 $ 45,416
Accounts and other receivables, net 124,134 103,350
Inventories, net 81,751 70,826
Deferred income taxes 4,525 4,380
Other current assets 10,022 8,885
------ -----
Total current assets 279,551 232,857
Property and equipment, net 28,974 27,379
Goodwill and other intangible assets, net 267,866 261,166
Deferred income taxes 4,145 4,173
Other assets 23,403 19,328
------ ------
Total non-current assets 324,388 312,046
------- -------
Total assets $ 603,939 $ 544,903
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12,661 $ 12,885
Accounts payable 44,381 26,019
Accrued compensation and benefits 29,115 25,950
Accrued liabilities 12,412 15,599
Accrued warranty expense 6,370 5,147
Deferred income taxes 1,934 1,136
Income taxes payable 13,728 9,969
------ -----
Total current liabilities 120,601 96,705
Non-current portion of long-term debt 39,610 77,601
Deferred gain on joint venture 9,489 9,845
Deferred income tax 5,088 4,229
Other non-current liabilities 10,820 8,279
------ -----
Total liabilities 185,608 196,659
------- -------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock no par value; 3,000 shares authorized; none
outstanding -- --
Common stock, no par value; 90,000 shares authorized; 51,816
and 49,988 shares issued and outstanding, respectively 322,303 303,015
Retained earnings 66,265 14,990
Accumulated other comprehensive income 29,763 30,239
------ ------
Total shareholders' equity 418,331 348,244
------- -------
Total liabilities and shareholders' equity $ 603,939 $ 544,903
------------- --------------
</table>
(1) Derived from the January 2, 2004 audited Consolidated Financial
Statements included in the Annual Report on Form 10-K of Trimble
Navigation Limited for fiscal year 2003.
See accompanying Notes to the Condensed Consolidated Financial Statements.
<page>
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except per share amounts)
<s> <c> <c> <c> <c>
Revenue (1) $ 170,164 $ 139,569 $ 506,125 $ 405,026
Cost of revenue 86,792 70,457 258,674 203,064
------ ------ ------- -------
Gross margin 83,372 69,112 247,451 201,962
Operating expenses
Research and development 19,177 17,346 57,962 50,463
Sales and marketing 26,576 25,015 80,238 73,572
General and administrative 10,800 10,306 33,138 28,837
Restructuring charges -- 627 327 1,733
Amortization of purchased intangible
assets 2,019 1,870 6,078 5,390
----- ----- ----- -----
Total operating expenses 58,572 55,164 177,743 159,995
------ ------ ------- -------
Operating income 24,800 13,948 69,708 41,967
Non-operating income (expense), net
Interest income 94 129 260 316
Interest expense (937) (1,188) (2,959) (10,764)
Foreign currency transaction gain
(loss), net (317) 166 (446) 649
Expenses for affiliated operations, net (2,284) (1,984) ( 6,336) (5,100)
Other income, net 231 265 1,551 126
--- --- ----- ---
Total non-operating expense, net (3,213) (2,612) (7,930) (14,773)
------ ------ ------ -------
Income before taxes 21,587 11,336 61,778 27,194
Income tax provision 3,670 1,400 10,503 3,800
----- ----- ------ -----
Net income $ 17,917 $ 9,936 $ 51,275 $ 23,394
=========== ========== ========== ===========
Basic earnings per share $ 0.35 $ 0.20 $ 1.01 $ 0.50
=========== ========== ========== ===========
Shares used in calculating basic earnings per 51,412 49,109 50,882 46,764
share
Diluted earnings per share $ 0.33 $ 0.19 $ 0.94 $ 0.48
=========== ========== ========== ===========
Shares used in calculating diluted earnings per 55,056 51,843 54,641 48,926
share
</table>
(1) Sales to related parties for the three months and nine months periods ended
October 1, 2004, were approximately $2.3 million and $6.5 million, respectively,
and $2.3 million for both the three and nine months periods ended October 3,
2003.
See accompanying Notes to the Condensed Consolidated Financial Statements.
TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<table>
<caption>
Nine Months Ended
-----------------
October 1, October 3,
2004 2003
---- ----
(In thousands)
<s> <c> <c>
Cash flow from operating activities:
Net income $ 51,275 $ 23,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 6,249 6,647
Amortization expense 6,216 5,880
Provision for doubtful accounts 909 295
Amortization of debt issuance cost 366 3,389
Deferred income taxes 1,629 1,880
Other (141) 2,002
Changes in assets and liabilities:
Accounts receivable, net (22,158) (18,023)
Inventories, net (10,080) (7,890)
Other current and non-current assets (3,656) (2,586)
Effect of foreign currency translation adjustment 747 4,332
Accounts payable 15,398 (6,040)
Accrued compensation and benefits 3,463 3,900
Deferred gain on joint venture (356) (555)
Accrued liabilities 558 (5,530)
Income taxes payable 3,564 2,063
----- -----
Net cash provided by operating activities 53,983 13,158
------ ------
Cash flow from investing activities:
Acquisition of property and equipment (8,909) (6,383)
Proceeds from sale of assets 562 157
Cost of acquisitions, net of cash acquired (12,165) (6,953)
Costs of capitalized patents (40) (652)
---- ----
Net cash used in investing activities (20,552) (13,831)
-------- -------
Cash flow from financing activities:
Issuance of common stock and warrants 18,389 47,015
Collection of notes receivable 218 495
Proceeds from long-term debt and revolving credit lines 14,000 138,339
Payments on long-term debt and revolving credit lines (52,110) (171,863)
-------- --------
Net cash provided by (used in) financing activities (19,503) 13,986
-------- ------
Effect of exchange rate changes on cash and cash equivalents (225) 1,417
Net increase in cash and cash equivalents 13,703 14,730
Cash and cash equivalents, beginning of period 45,416 28,679
------ ------
Cash and cash equivalents, end of period $ 59,119 $ 43,409
----------- -----------
</table>
See accompanying Notes to the Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE 1. OVERVIEW AND BASIS OF PRESENTATION
Trimble Navigation Limited ("we," "Trimble" or the "Company"), incorporated in
California in 1981, provides positioning product solutions to commercial and
government users in a large number of markets. These markets include surveying,
construction, agriculture, urban and resource management, military,
transportation and telecommunications.
Trimble has a 52-53 week fiscal year, ending on the Friday nearest to December
31, which for fiscal 2003 was January 2, 2004 and for fiscal 2004 is December
31, 2004. Fiscal 2004 and 2003 are 52-week years. Unless otherwise stated, all
dates refer to its fiscal year and fiscal periods.
The accompanying financial data as of October 1, 2004 and for the three and nine
months ended October 1, 2004 and October 3, 2003 has been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the U.S. have been condensed or omitted
pursuant to such rules and regulations. The following discussion should be read
in conjunction with Trimble's 2003 Annual Report on Form 10-K.
In the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of financial position as of
October 1, 2004, results of operations for the three and nine months ended
October 1, 2004 and October 3, 2003 and cash flows for the nine months ended
October 1, 2004 and October 3, 2003, as applicable, have been made. The results
of operations for the three and nine months ended October 1, 2004 are not
necessarily indicative of the operating results for the full fiscal year or any
future periods. Certain reclassifications have been made to prior period
balances in order to conform to the current period's presentation.
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in its condensed consolidated
financial statements and accompanying notes. Management bases its estimates on
historical experience and various other assumptions believed to be reasonable.
Although these estimates are based on management's best knowledge of current
events and actions that may impact the company in the future, actual results may
be different from the estimates. Trimble's critical accounting policies are
those that affect its financial statements materially and involve difficult,
subjective or complex judgments by management.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB issued a proposed Statement, "Share-Based Payment, an
amendment of FASB Statements Nos. 123 and 95," that addresses the accounting for
share-based payment transactions in which a Company receives employee services
in exchange for either equity instruments of the Company or liabilities that are
based on the fair value of the Company's equity instruments or that may be
settled by the issuance of such equity instruments. The proposed statement would
eliminate the ability to account for share-based compensation transactions using
the intrinsic method currently used by the Company and generally would require
that such transactions be accounted for using a fair-value-based method and
recognized as expense in the Company's consolidated statement of income. The
recommended effective date of the proposed standard is currently for fiscal
periods beginning after June 15, 2005. Should this proposed statement be
finalized in its current form, it could have a material impact on the Company's
consolidated statement of income, as the Company would be required to expense
the fair value of its stock option grants and stock purchases under the
Company's employee stock purchase plan.
NOTE 3. STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" and "Statement
of Financial Accounting Standards No. 148" ("SFAS 148"), "Accounting for
Stock-Based Compensation - Transition and Disclosure," Trimble applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its stock
option plans and stock purchase plan. Accordingly, the Company generally does
not recognize compensation cost for stock options granted at fair market value.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period, and the estimated fair
value of purchases under the employee stock purchase plan is expensed in the
year of purchase as well as the stock-based employee compensation cost, net of
related tax effects, that would have been included in the determination of net
<page>
income if the fair value based method had been applied to all awards. The
effects on pro forma disclosure of applying SFAS No. 123 are not likely to be
representative of the effects on pro forma disclosure of future years.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if Trimble had accounted for its
employee stock options and purchases under the employee stock purchase plan
using the fair value method of SFAS No.123. The fair value of options granted
during the quarter was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions at October
1, 2004 and October 3, 2003:
October 1, October 3,
2004 2003
---- ----
Expected dividend yield -- --
Expected stock price volatility 53.58% 59.71%
Risk free interest rate 3.46% 3.09%
Expected life of options after vesting 1.67 1.54
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Trimble's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of its employee stock options.
Trimble's pro forma information is as follows:
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except per share amounts)
<s> <c> <c> <c> <c>
Net income - as reported $ 17,917 $ 9,936 $ 51,275 $ 23,394
Stock-based compensation expense, net of
tax 1,149 2,428 6,107 6,988
----- ----- ----- -----
Net income - pro forma $ 16,768 $ 7,508 $ 45,168 $ 16,406
Basic earnings per share - as reported $ 0.35 $ 0.20 $ 1.01 $ 0.50
----------- ----------- ----------- -----------
Basic earnings per share - pro forma $ 0.33 $ 0.15 $ 0.89 $ 0.35
----------- ----------- ----------- -----------
Diluted earnings per share - as reported $ 0.33 $ 0.19 $ 0.94 $ 0.48
----------- ----------- ----------- -----------
Diluted earnings per share - pro forma $ 0.30 $ 0.14 $ 0.83 $ 0.34
----------- ----------- ----------- -----------
</table>
NOTE 4. JOINT VENTURES:
Caterpillar Trimble Control Technologies Joint Venture
On April 1, 2002, Caterpillar Trimble Control Technologies LLC ("CTCT"), a joint
venture formed by Trimble and Caterpillar began operations, as described in
Trimble's 2003 Annual Report on Form 10-K. The joint venture is equally owned by
Trimble and Caterpillar, with equal voting rights.
During the first quarter of fiscal 2002, Trimble received a special cash
distribution of $11.0 million from CTCT. Trimble has recorded the cash
distribution of $11.0 million as a deferred gain, being amortized to the extent
that losses are attributable from CTCT under the equity method of accounting.
When and if CTCT is profitable on a sustainable basis, and future operating
losses are not anticipated, then Trimble will recognize as a gain, the
un-amortized portion of the $11.0 million. To the extent that it is possible
that the Company will have any future-funding obligation relating to CTCT, then
the relevant amount of the $11.0 million will be deferred until such a time as
the funding obligation no longer exists. Both Trimble's share of profits
(losses) under the equity method and the amortization of the $11.0 million
<page>
deferred gain are recorded under the heading of "Expense for affiliated
operations, net" in Non-operating income (expense). As of October 1, 2004, the
un-amortized portion of the deferred gain was approximately $9.5 million.
The net expenses for affiliated operations at CTCT also includes incremental
costs as a result of purchasing products from CTCT at a higher price than
Trimble's original manufacturing costs, partially offset by contract
manufacturing fees charged to CTCT. In addition, Trimble received reimbursement
of employee-related costs from CTCT for Trimble employees dedicated to CTCT
totaling $2.4 million and $1.9 million for the three months ended October 1,
2004 and October 3, 2003, respectively, and $7.3 million and $5.7 million for
the nine months ended October 1, 2004 and October 3, 2003, respectively. The
reimbursements were offset against operating expenses.
<table>
<Caption>
October 1, October 3,
Three Months Ended 2004 2003
- ------------------ ---- ----
(In millions)
<s> <c> <c>
CTCT incremental pricing effects, net $ 2.6 $ 1.8
Trimble's 50% share of CTCT's reported losses 0.2 0.1
Amortization of deferred gain (0.2) (0.1)
---- -----
Total CTCT expense for affiliated operations, net (1) $ 2.6 $ 1.8
====== ======
October 1, October 3,
Nine Months Ended 2004 2003
- ----------------- ---- ----
(In millions)
CTCT incremental pricing effects, net $ 7.0 $ 4.9
Trimble's 50% share of CTCT's reported losses 0.2 0.6
Amortization of deferred gain (0.4) (0.6)
---- ----
Total CTCT expense for affiliated operations, net (1) $ 6.8 $ 4.9
====== ======
</table>
(1) Due to the nature of the relationship between Trimble and CTCT, a related
party, the impact of these agreements is classified under non-operating income
(expense) under the heading of "Expense for affiliated operations, net".
At October 1, 2004, the net outstanding balance due from CTCT to Trimble was
approximately $0.7 million recorded under the heading of "Accounts and other
receivables, net."
Nikon-Trimble Joint Venture
On March 28, 2003, Trimble and Nikon Corporation entered into an agreement to
form a joint venture in Japan, Nikon-Trimble Co., Ltd., as described in
Trimble's 2003 Annual Report on Form 10-K. Nikon-Trimble began operations in
July, 2003 and is equally owned by Trimble and Nikon, with equal voting rights.
Trimble has adopted the equity method of accounting for its investment in
Nikon-Trimble, with 50% share of profit or loss from this joint venture to be
reported by Trimble in the Non-operating section of the Condensed Consolidated
Statement of Income under the heading of "Expenses for affiliated operations,
net." During the third quarter and first nine months of fiscal 2004,
Nikon-Trimble reported a profit of which Trimble's share was $0.2 million and
$0.4 million, respectively. During the third quarter of fiscal 2003 and the
first quarter of its operations, Nikon-Trimble reported a loss of $0.4 million
of which Trimble's share was $0.2 million. At October 1, 2004, the net payable
by Trimble to Nikon-Trimble related to the purchase and sale of products from
and to Nikon-Trimble is $2.5 million recorded under the heading of "Accounts
Payable" on the Condensed Consolidated Balance Sheets.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS:
Goodwill and purchased intangible assets consisted of the following:
<page>
October 1, January 2,
As of 2004 2004
- ----- ---- ----
(in thousands)
Intangible assets:
Intangible assets with definite life:
Existing technology $ 33,547 $ 32,389
Trade names, trademarks, patents, and
other intellectual property 21,935 20,911
------ ------
Total intangible assets with definite life 55,482 53,300
Less accumulated amortization (39,800) (33,559)
-------- --------
Total net intangible assets $ 15,682 $ 19,741
========== ===========
Total goodwill $ 252,184 $ 241,425
========== ===========
NOTE 6. CERTAIN BALANCE SHEET COMPONENTS:
Inventories consisted of the following:
October 1, January 2,
As of 2004 2004
- ----- ---- ----
(in thousands)
Raw materials $ 24,710 $ 20,927
Work-in-process 3,853 3,876
Finished goods 53,188 46,023
------ ------
$ 81,751 $ 70,826
========== ===========
Property and equipment consisted of the following:
October 1, January 2,
As of 2004 2004
- ----- ---- ----
(in thousands)
Machinery and equipment $ 67,648 $ 66,634
Furniture and fixtures 10,104 9,085
Leasehold improvements 5,215 4,502
Buildings 5,296 5,396
Land 1,231 1,231
89,494 86,848
Less accumulated depreciation (60,520) (59,469)
-------- --------
$ 28,974 $ 27,379
========== ===========
Other current assets consisted of the following:
October 1, January 2,
As of 2004 2004
- ----- ---- ----
(in thousands)
Demonstration equipment, net $ 2,440 $ 3,226
Prepaid expenses 4,986 4,566
Other 2,596 1,093
----- -----
$ 10,022 $ 8,885
========== ===========
<page>
Other non-current assets consisted of the following:
October 1, January 2,
As of 2004 2004
- ----- ---- ----
(in thousands)
Debt issuance costs, net $ 1,325 $ 1,691
Investment in joint venture 12,967 10,717
Other investments 2,007 553
Deposits 1,026 925
Receivables from employees 583 801
Notes receivable -- 663
Other 5,495 3,978
$ 23,403 $ 19,328
========== ===========
NOTE 7. THE COMPANY AND SEGMENT INFORMATION:
Trimble is a designer and distributor of positioning products and applications
enabled by GPS, optical, laser, and wireless communications technology. The
Company designs and markets products, by delivering integrated information
solutions such as collecting, analyzing, and displaying position data to its end
users. Trimble offers an integrated product line for diverse applications in its
targeted markets.
To achieve distribution, marketing, production, and technology advantages in
Trimble's targeted markets, the Company manages its operations in the following
five segments:
o Engineering and Construction -- Consists of products currently used by
survey and construction professionals in the field for positioning,
data collection, field computing, data management, and automated
machine guidance and control. These products provide solutions for
numerous applications including surveying, general, road, runway and
underground construction, site preparation and excavation. Trimble
acquired MENSI in the fourth quarter of fiscal 2003 and MENSI's
performance is reported in this business segment.
o Field Solutions -- Consists of products that provide solutions in a
variety of agriculture and fixed asset applications, primarily in the
areas of precise land leveling, machine guidance, yield monitoring,
variable-rate applications of fertilizers and chemicals, and fixed
asset data collection for a variety of governmental and private
entities.
o Component Technologies -- Consists of products including proprietary
chipsets, printed circuit boards, modules, and licenses of intellectual
property. The applications into which end users currently incorporate
the component products include timing applications for synchronizing
wireless networks, in-vehicle navigation and telematics systems, fleet
management, security systems, data collection networks, and wireless
handheld consumer products.
o Mobile Solutions -- Consists of products that enable end users to
monitor and manage their mobile assets by communicating location and
activity-relevant information from the field to the office. Trimble
offers a range of products that address a number of sectors of this
market including truck fleets, security, telematics, and public safety
vehicles. After its acquisition in the first quarter of fiscal 2004,
TracerNET's performance is reported in this business segment.
o Portfolio Technologies -- The various operations that comprise this
segment were aggregated on the basis that no single operation accounted
for more than 10% of Trimble's total revenue. During the first two
fiscal quarters of 2003, this segment was comprised solely of the
Military and Advanced Systems business. During the third quarter of
fiscal 2003 the Company completed the acquisition of Applanix and its
performance is reported in this business segment.
Trimble evaluates each of its segment's performance and allocates resources
based on profit and loss from operations before income taxes, and some corporate
allocations. Trimble and each of its segments employ the same accounting
policies.
The following table presents revenues, operating income (loss), and identifiable
assets for the five segments. Operating income (loss) is net revenue less
operating expenses, excluding general corporate expenses, amortization,
restructuring charges, non-operating income (expense), and income taxes. The
identifiable assets that Trimble's Chief Operating Decision Maker views by
segment are accounts receivable and inventory.
<page>
<table>
<caption>
Reporting Segments
------------------
Engineering and Field Component Mobile Portfolio
Construction Solutions Technologies Solutions Technologies Total
------------ --------- ------------ --------- ------------ -----
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Three Months Ended October 1, 2004
External net revenues $ 112,994 $ 26,293 $ 14,872 $ 6,353 $ 9,652 $ 170,164
Operating income
(loss) before corporate
allocations 24,002 5,850 2,782 (2,058) 1,462 32,038
Three Months Ended October 3, 2003
External net revenues 93,607 20,160 16,230 2,672 6,900 139,569
Operating income
(loss) before corporate
allocations 14,997 4,111 4,625 (2,118) (271) 21,344
Nine Months Ended October 1, 2004
External net revenues 332,711 81,837 49,903 16,840 24,833 506,124
Operating income
(loss) before corporate
allocations 63,336 20,930 10,759 (5,455) 3,100 92,670
Nine Months Ended October 3, 2003
External net revenues 275,067 60,791 48,916 9,491 10,761 405,026
Operating income
(loss) before corporate
allocations 45,860 10,980 13,038 (4,830) (1,409) 63,639
As of October 1, 2004
Accounts receivable (1) 97,697 20,690 8,921 8,086 8,419 143,813
Inventories 58,052 7,526 5,051 5,170 5,952 81,751
As of January 2, 2004
Accounts receivable (1) 84,897 16,589 10,003 4,103 7,321 122,913
Inventories 56,008 3,398 2,021 3,038 6,361 70,826
</table>
(1) As presented, accounts receivable represents trade receivables, gross,
which are specified between segments.
The following are reconciliations corresponding to totals in the accompanying
condensed consolidated financial statements:
<table>
<caption>
Three Months Ended Nine Months Ended
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c>
Operating income:
Total for reportable segments (1)
$ 32,038 $ 21,344 $ 92,670 $ 63,639
Unallocated corporate expenses (7,238) (7,396) (22,962) (21,672)
------ ------ -------- -------
Operating income $ 24,800 $ 13,948 $ 69,708 $ 41,967
=========== =========== =========== ===========
</table>
<page>
<table>
<caption>
October 1, January 2,
As of 2004 2004
- ----- ---- ----
(In thousands)
<s> <c> <c>
Assets:
Accounts receivable total for reportable segments $ 143,813 $ 122,913
Unallocated (1) (19,679) (19,563)
------- -------
Total $ 124,134 $ 103,350
</table>
(1) Includes cash received in advance, other receivables, and accruals that are
not allocated by segment.
NOTE 8. LONG-TERM DEBT:
Long-term debt consisted of the following:
October 1, January 2,
As of 2004 2004
----- -----
(in thousands)
Credit Facilities:
Term loan $ 34,375 $ 43,750
Revolving credit facility 17,000 44,000
Promissory notes and other 896 2,736
--- -----
52,271 90,486
------ ------
Less current portion of long-term debt (12,661) (12,885)
------- -------
Non-current portion $ 39,610 $ 77,601
=========== ===========
Credit Facilities
On June 25, 2003, Trimble obtained a $175 million secured Credit Facility ("2003
Credit Facility") from a syndicate of nine banks to repay a Subordinated Note
and refinance $200 million of senior, secured credit facilities obtained in July
of 2000. The 2003 Credit Facility is used for ongoing working capital and
general corporate needs.
At October 1, 2004, Trimble had approximately $51.4 million of borrowings under
the 2003 Credit Facility, comprised of a $34.4 million term loan and $17 million
outstanding on a $125 million revolver. The Company has access to an additional
$108 million of cash under the terms of the revolving credit facility. The
Company has commitment fees on the unused portion of 0.5% if the Leverage Ratio
(which is defined as total indebtedness to Earnings before Interest, Taxes,
Depreciation and Amortization (EBITDA), as defined in the related agreement) is
2.0 or greater and 0.375% if the Leverage Ratio is less than 2.0.
Pricing of interest for borrowings under the 2003 Credit Facility as of October
1, 2004 is at LIBOR plus a spread of 1.50%. The spread is tied to a formula
based on the Leverage Ratio.
The 2003 Credit Facility is secured by all of the Company's material assets,
except for assets that are subject to foreign tax considerations. Financial
covenants of the 2003 Credit Facility include leverage, fixed charge, and
minimum net worth tests. At October 1, 2004 and as of the date of this report,
Trimble was in compliance with all financial debt covenants. The amount due
under the revolver loan is payable as the loan matures on June 25, 2006, and the
loan commitment fees are paid on a quarterly basis.
Under the terms of the 2003 Credit Facility, the Company is allowed to pay
dividends and repurchase shares of common stock up to 25% of net income in the
previous fiscal year.
Promissory Note and Others
As of October 1, 2004, the Company had other notes payable totaling
approximately $0.9 million primarily consisting of government loans in its
foreign subsidiaries.
<page>
Weighted Average Cash Interest Rate
Trimble's weighted average cash interest rate of the 2003 Credit Facility for
the third quarter of fiscal 2004 was approximately 3.33%.
NOTE 9. PRODUCT WARRANTIES:
Changes in the Company's product warranty liability during the nine months ended
October 1, 2004 and October 3, 2003 are as follows (in thousands):
Nine Months Ended
-----------------
October 1, October 3,
2004 2003
---- ----
Balance at beginning of period $ 5,147 $ 6,394
Provision for warranties issued 5,713 3,802
Warranty expenses incurred (4,490) (3,708)
Balance at end of period $ 6,370 6,488
The product warranty liability is classified as accrued warranty in the
accompanying condensed consolidated balance sheets.
NOTE 10. SHAREHOLDER'S EQUITY:
3-for-2 Stock Split
Trimble's Board of Directors approved a 3-for-2 split of all outstanding shares
of the Company's Common Stock, payable March 4, 2004 to stockholders of record
on February 17, 2004. Cash was paid in lieu of fractional shares. All share and
per share information has been adjusted to reflect the stock split on a
retroactive basis for all periods presented.
NOTE 11. EARNINGS PER SHARE:
The following data show the amounts used in computing earnings per share and the
effect on the weighted-average number of shares of potentially dilutive Common
Stock.
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October October October October
1, 3, 1, 3,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands, except per share amounts)
<s> <c> <c> <c> <c>
Numerator:
Income available to common
shareholders:
Used in basic and diluted earnings
per share $ 17,917 $ 9,936 $ 51,275 $ 23,394
----------- ----------- ------------ -----------
Denominator:
Weighted average number of common
shares - basic earnings per
share 51,503 49,109 51,013 46,764
Effect of dilutive securities (using
treasury stock method):
Common stock options 2,831 2,238 2,938 1,877
Common stock warrants 722 425 690 261
Denominator for diluted net income per
share 55,056 51,771 54,641 48,902
------ ------ ------ ------
Basic earnings per share $ 0.35 $ 0.20 $ 1.01 $ 0.50
----------- ----------- ------------ -----------
Diluted earnings per share $ 0.33 $ 0.19 $ 0.94 $ 0.48
----------- ----------- ------------ -----------
</table>
<page>
NOTE 12. COMPREHENSIVE INCOME:
The components of comprehensive income, net of related tax as follows:
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c>
Net income $ 17,917 $ 9,936 $ 51,275 $ 23,394
Foreign currency translation
adjustments 5,614 3,099 (431) 19,924
Net gain on hedging
transactions - (14) 2 (7)
Net unrealized gain (loss) on
investments (26) (19) (46) 66
--- --- --- --
Comprehensive income $ 23,505 $ 13,002 $ 50,800 $ 43,377
========== =========== =========== ==========
</table>
The components of accumulated other comprehensive income, net of related tax as
follows:
October 1, January 2,
2004 2004
---- ----
(In thousands)
Cumulative foreign currency translation adjustments $ 29,734 $ 30,166
Net gain on hedging transactions --
2
Net unrealized gain on investments
27 73
-- --
Accumulated other comprehensive income $ 29,763 $ 30,239
========== ==========
NOTE 13. RELATED-PARTY TRANSACTIONS:
Related-Party Lease
Trimble currently leases office space in Ohio from an association of three
individuals, one of whom is an employee of the Company, under a non-cancelable
operating lease arrangement expiring in 2011. The annual rent is subject to
adjustment based on the terms of the lease. The Condensed Consolidated
Statements of Income include expenses from this operating lease of approximately
$86,000 for both of the three months ended October 1, 2004 and October 3, 2003,
and approximately $259,000 for both of the first nine months of fiscal 2004 and
2003.
Related-Party Notes Receivable
Trimble has notes receivable from officers and employees of approximately $0.4
million as of October 1, 2004 and $0.8 million as of January 2, 2004. The notes
bear interest from 4.52% to 6.62% and have an average remaining life of 1.2
years as of October 1, 2004.
<page>
See Note 4 to the Notes to the Condensed Consolidated Financial Statements for
additional information regarding Trimble's related party transactions with joint
venture partners.
NOTE 14. LITIGATION:
From time to time, the Company is involved in litigation arising out of the
ordinary course of its business. There are no known claims or pending litigation
expected to have a material effect on the Company's overall financial position,
results of operations, or liquidity.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
subject to the "safe harbor" created by those sections. Actual results could
differ materially from those indicated in the forward-looking statements due to
a number of factors including, but not limited to, the risk factors discussed in
"Risks and Uncertainties" below and elsewhere in this report as well as in the
Company's Annual Report on Form 10-K for fiscal year 2003 and other reports and
documents that the Company files from time to time with the Securities and
Exchange Commission. The Company has attempted to identify forward-looking
statements in this report by placing an asterisk (*) before paragraphs.
Discussions containing such forward-looking statements may be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. In some cases, forward-looking statements can be identified
by terminology such as "may," "will," "should," "could," "predicts,"
"potential," "continue," "expects," "anticipates," "future," "intends," "plans,"
"believes," "estimates," and similar expressions. These forward-looking
statements are made as of the date of this Quarterly Report on Form 10-Q, and
the Company disclaims any obligation to update these statements or to explain
the reasons why actual results may differ.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to product returns, doubtful accounts, inventories, investments,
intangible assets, income taxes, warranty obligations, restructuring costs, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the amount and timing of revenue and expenses and the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. See
the discussion of our critical accounting policies under the heading
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for fiscal 2003.
RECENT BUSINESS DEVELOPMENTS
Trimble Outdoors
During the fourth quarter of fiscal 2004, we announced our newest business,
Trimble Outdoors. Trimble Outdoors is a consumer business utilizing GPS enabled
cell phones to provide information for outdoor recreational activities. Trimble
Outdoors performance will be reported under our Portfolio segment.
Geo-Nav
During the third quarter of fiscal 2004, we acquired GeoNav GmbH, a small
provider of customized field data collection solutions for the cadastral survey
market in Europe. GeoNav's performance is reported under our Engineering and
Construction segment.
TracerNET Corporation
During the first quarter of fiscal 2004 we acquired TracerNET Corporation which
we expect to augment our current fleet management capabilities, extend our
customer base and provide us with increased sales. TracerNET's performance is
reported under our Mobile Solutions segment.
MENSI S.A.
* During the fourth quarter of fiscal 2003, we acquired MENSI S.A., a French
developer of terrestrial 3D laser scanning technology. The MENSI acquisition
enhances our technology portfolio and expands our product offerings. MENSI's
performance is reported under our Engineering and Construction segment.
<page>
Applanix Corporation
* During the third quarter of fiscal 2003, we acquired Applanix Corporation, a
Canadian developer of systems that integrate inertial navigation and GPS
technologies. We expect the Applanix acquisition to extend our technology
portfolio and enable increased robustness and capabilities in our future
positioning products. Applanix's performance is reported under our Portfolio
Technologies segment.
RESULTS OF OPERATIONS
Results by Segment
To achieve distribution, marketing, production, and technology advantages in our
targeted markets, we manage our operations in the following five segments:
Engineering and Construction, Field Solutions, Component Technologies, Mobile
Solutions, and Portfolio Technologies. Operating income (loss) is net revenue
less operating expenses, excluding general corporate expenses, amortization,
restructuring charges, non-operating income (expense), and income taxes.
The following table is a breakdown of revenue and operating income by segment
(in thousands, except percentages):
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Total consolidated revenue $ 170,164 $ 139,569 $ 506,124 $ 405,026
--------- --------- --------- ---------
Total consolidated segment operating income $ 32,038 $ 21,344 $ 92,670 $ 63,639
--------- --------- --------- ---------
Engineering and Construction
Revenue 112,994 93,607 332,711 275,067
Segment revenue as a percent of total revenue 66% 67% 66% 68%
Operating income 24,002 14,997 63,336 45,860
Operating income as a percent of segment revenue 21% 16% 19% 17%
Field Solutions
Revenue 26,293 20,160 81,837 60,791
Segment revenue as a percent of total revenue 15% 14% 16% 15%
Operating income 5,850 4,111 20,930 10,980
Operating income as a percent of segment revenue 22% 20% 26% 18%
Component Technologies
Revenue 14,872 16,230 49,903 48,916
Segment revenue as a percent of total revenue 9% 12% 10% 12%
Operating income 2,782 4,625 10,759 13,038
Operating income as a percent of segment revenue 19% 28% 22% 27%
Mobile Solutions
Revenue 6,353 2,672 16,840 9,491
Revenue as a percent of total revenue 4% 2% 3% 2%
Operating loss (2,058) (2,118) (5,455) (4,830)
Operating loss as a percent of segment revenue (32%) (79%) (32%) (51%)
Portfolio Technologies
Revenue 9,652 6,900 24,833 10,761
Segment revenue as a percent of total revenue 6% 5% 5% 3%
Operating income (loss) 1,462 (271) 3,100 (1,409)
Operating income (loss) as a percent of segment revenue 15% (4%) 12% (13%)
</table>
<page>
A reconciliation of our consolidated segment operating income to consolidated
income before income taxes follows:
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c>
Consolidated segment operating
income $ 32,038 $ 21,344 $ 92,670 $ 63,639
Unallocated corporate expense
(5,219) (4,899) (16,557) (14,549)
Amortization of purchased
intangible assets (2,019) (1,870) (6,078) (5,390)
Restructuring charges
- (627) (327) (1,733)
Non-operating expense, net
(3,213) (2,612) (7,930) (14,773)
------- ------ ------ -------
Consolidated income before $ 21,587 $ 11,336 $ 61,778 $ 27,194
income taxes ---------- ----------- ---------- ----------
</table>
Engineering and Construction
Engineering and Construction revenues increased by $19.4 million (or 20.7%) and
$57.6 million (or 21.0%) while segment operating income increased $9.0 million
(or 60.0%) and $17.5 million (or 38.1%) for the three and nine months ended
October 1, 2004 as compared to the same corresponding periods in fiscal 2003.
Demand for construction machinery and infrastructure solutions, the addition of
the Nikon-branded product line in October 2003, and a strong construction season
resulted in increased sales across all product categories. Segment operating
income increased as a result of higher revenues.
Field Solutions
Field Solutions revenues increased by $6.1 million (or 30.4%) and $21.0 million
(or 34.6%) while segment operating income increased $1.7 million (or 42.3%) and
$10.0 million (or 90.6%) for the three and nine months ended October 1, 2004 as
compared to the same corresponding periods in fiscal 2003. Revenues increased
primarily as a result of higher demand for both automated and manual guidance
products into the agricultural market. We saw increases in our GIS product lines
due to stronger distribution in the US, Europe, and Latin America. Increases in
segment operating income were primarily due to higher revenues and a more
favorable product mix.
Component Technologies
Component Technologies revenues decreased by $1.4 million (or 8.4%) and
increased by $1.0 million (or 2.0%), while segment operating income decreased by
$1.8 million (or 39.8%) and $2.3 million (or 17.5%) for the three and nine
months ended October 1, 2004 as compared to the same corresponding periods in
fiscal 2003. The decrease in revenues for the three months ended October 1, 2004
as compared to the same period in fiscal 2003 was primarily due to the decline
in demand from wireless infrastructure customers and was partially offset by an
increase in our in-vehicle navigation business. The increase in revenues for the
nine months ended October 1, 2004 as compared to the same period of fiscal 2003
was primarily due to higher demand from vehicle navigation and tracking
customers and partially offset by the decline in demand from wireless
infrastructure customers. The segment operating income decreases were primarily
a result of lower margins due to product mix and an increase in spending for
development of new categories of products, such as TrimTrac and Wireline
products.
Mobile Solutions
Mobile Solutions revenues increased by $3.7 million (or 137.8%) and $7.3 million
(or 77.4%), while segment operating loss decreased by $0.1 million (or 2.8%) and
increased by $0.6 million (or 12.9%) for the three and nine months ended October
1, 2004 as compared to the same corresponding periods in fiscal 2003. Revenues
grew due to an increase in sales into the construction materials vertical,
primarily ready-mix suppliers, as well as increased sales from our dealer
channel as we continue to develop and extend this channel. Losses increased for
the first nine months of fiscal 2004 versus the same period last year due to
additional expenses of our TracerNET integration and expenses recorded at the
beginning of a significant contract, offset by increased revenues.
Portfolio Technologies
Portfolio Technologies revenues increased by $2.8 million (or 39.9%) and $14.1
million (or 130.8%), while operating income increased by $1.7 million (or
639.5%) and $4.5 million (or 320%) for the three and nine months ended October
<page>
1, 2004 as compared to the same corresponding periods in fiscal 2003. The
increases in revenues and operating income were primarily due to the inclusion
of Applanix, acquired in July 2003, and higher sales of defense products.
Gross Margin
Gross margin as a percentage of total revenues was 49.0% and 49.5% for the third
quarter of fiscal 2004 and 2003, respectively, and 48.9% and 49.9% for the nine
months ended fiscal 2004 and 2003, respectively. The decreases were primarily
due to changes in the mix of products sold, principally related to increased
sales of Mobile Solutions, Nikon-branded, and agriculture products combined with
a decline in the higher gross margin timing business.
* Gross margin could be impacted by product mix, changes in unit selling prices,
fluctuations in unit manufacturing costs and foreign currencies, and alternative
sourcing strategies.
Revenues by Geography
* Total revenue outside the United States comprised approximately 50% and 49%
for the nine months ended October 1, 2004 and October 3, 2003, respectively.
During the third quarter of fiscal 2004, North and South America represented
57%, Europe, the Middle East and Africa represented 30%, and Asia/Pacific Rim
represented 13% of total revenues. We anticipate that these proportionate
percentages of sales by geography will continue.
Research and Development, Sales and Marketing, and General and Administrative
Expenses
Research and development ("R&D"), sales and marketing, and general and
administrative ("G&A") expenses are summarized in the following table (in
thousands, except percentages):
<table>
<caption>
Three Months Ended Nine Months Ended
-------------------------------------------------- -------------------------------------------------
October October Variance Variance October October Variance Variance
1, 3, in in 1, 3, in in
2004 2003 Dollars Percent 2004 2003 Dollars Percent
---- ---- ------- ------- ---- ---- ------- -------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Research and development $ 19,177 $ 17,346 $ 1,831 10.6% $ 57,962 $ 50,463 $ 7,499 14.9%
Percentage of revenue 11.3% 12.4% 11.5% 12.5%
Sales and marketing 26,576 25,015 1,561 6.2% 80,238 73,572 6,666 9.1%
Percentage of revenue 15.6% 17.9% 15.9% 18.2%
General and
administrative 10,800 10,306 494 4.8% 33,138 28,837 4,301 14.9%
Percentage of revenue 6.3% 7.4% 6.5% 7.1%
Total 56,553 52,667 3,886 7.4% 171,338 152,872 18,466 12.1%
Percentage of revenue 33.2% 37.7% 33.9% 37.7%
</table>
The increase in R&D expenses in the third quarter of fiscal 2004 compared with
the third quarter of fiscal 2003 was primarily due to the inclusion of expenses
from acquisitions of $1.0 million not applicable in the prior fiscal quarter and
continued investment in next generation technologies. The increase in R&D
expenses in the first nine months of fiscal 2004 compared with the first nine
months of fiscal 2003 was primarily due to the inclusion of R&D expenses from
recent acquisitions of $4.3 million not applicable in the prior nine month
period, continued investment in next generation technologies, and the effect of
foreign currency fluctuations. All of our R&D costs have been expensed as
incurred.
* 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.
The increase in sales and marketing expenses in the third quarter of fiscal 2004
compared with the third quarter of fiscal 2003 was primarily due an increase in
business development and key account management, and the continuing effect of
foreign currency fluctuations. The increase in sales and marketing expenses in
the first nine months of fiscal 2004 compared with the first nine months of
fiscal 2003 was primarily due to the inclusion of expenses from recent
acquisitions of $4.9 million not applicable in the prior nine-month period, and
the continuing effect of foreign currency fluctuations.
<page>
* 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.
The increase in G&A expenses in the first nine months of fiscal 2004 compared
with the first nine months of fiscal 2003 was primarily due to the inclusion of
G&A expenses from acquisitions of $2.5 million not applicable in the prior
fiscal quarter, an increase in the provision for doubtful accounts, and the
continuing effect of foreign currency fluctuations.
Restructuring Charges
There were no restructuring charges for the third quarter of fiscal 2004 and
$0.3 million was recorded during the nine months ended October 1, 2004, which
primarily related to severance costs due to the realignment of Trimble Mobile
Solutions, Inc. Restructuring charges of $0.6 million and $1.7 million were
recorded during the three and nine months ended October 3, 2003, respectively,
which related to severance costs and our Japanese office relocation due to the
Nikon-Trimble joint venture formation. As a result of these actions, our
headcount of the affected operations decreased during the nine months ended
October 1, 2004 by 24 individuals and in the corresponding period of fiscal 2003
by 50 individuals. As of October 1, 2004, the remaining accrual balance of $0.3
million is primarily related to lease payments on facilities exited prior to
fiscal year 2004 and is expected to be paid by the end of fiscal year 2006.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets included in operating expenses was
$2.0 million in the third quarter of fiscal 2004, compared with $1.9 million in
the third quarter of fiscal 2003. Amortization of purchased intangible assets
included in operating expenses was $6.1 million in the first nine months of
fiscal 2004, compared with $5.4 million in the first nine months of fiscal 2003.
The increase in the amortization of purchased intangible assets in the three and
nine months of fiscal 2004 compared with the three and nine months of fiscal
2003, was primarily due to the acquisition of certain technology and patent
intangibles as a result of the TracerNET and MENSI acquisitions not applicable
in the comparable periods of fiscal 2003.
Non-operating Expense, Net
The components of non-operating expense, net, are as follows (in thousands):
<table>
<caption>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Interest income $ 94 $ 129 $ 260 $ 316
Interest expense (937) (1,188) (2,959) (10,764)
Foreign currency transaction gain (loss), net (317) 166 (446) 649
Expenses for affiliated operations, net (2,284) (1,984) (6,336) (5,100)
Other income, net 231 265 1,551 126
--- --- ----- ---
Total non-operating expense, net $ (3,213) $ (2,612) $ (7,930) $ (14,773)
--------- ---------- --------- ----------
</table>
Non-operating expense, net increased by $0.6 million (or 23%) and decreased by
$6.8 million (or 46.3%) during the third quarter and first nine months of fiscal
2004, respectively, as compared with the corresponding periods in fiscal 2003.
The decrease for the nine month period is primarily due to the write off of $2.3
million of debt issuance costs as a result of our debt refinancing in June 2003
and $1.3 million related to the write off of the remaining unamortized portion
of the warrants issued to Spectra Physics Holdings, Inc. upon the full repayment
of the principal balance of the Subordinated Note in June 2003. The remainder of
the decrease is due to continued debt repayment combined with the effect of
lower interest rates. The increases in expense for affiliated operations were
primarily due to our higher construction machine control revenues which led to
increased costs related to the pricing effects of transactions between us and
the Caterpillar joint venture.
Income Tax Provision
Our income tax provisions reflect effective tax rates of 17.0% for the three and
nine months ended October 1, 2004, respectively. The effective tax rates for the
comparable periods in fiscal 2003 were 12.4% and 14.0%. These rates reflect
<page>
benefits from utilizing net operating loss and tax credit carry-forwards. The
2004 third fiscal quarter tax rate of 17% is higher than the 2003 third fiscal
quarter tax rate of 12.4% due to higher levels of profits.
* In future years, we expect the effective tax rate to continue to increase up
to the US statutory rate of 35% because of increased profits and limited
remaining benefits of tax carry-forwards and other deferred tax assets.
OFF-BALANCE SHEET FINANCINGS AND LIABILITIES
Other than lease commitments incurred in the normal course of business, we do
not have any off-balance sheet financing arrangements or liabilities, guarantee
contracts, retained or contingent interests in transferred assets, or any
obligation arising out of a material variable interest in an unconsolidated
entity. We do not have any majority-owned subsidiaries that are not included in
the condensed consolidated financial statements. Additionally, we do not have
any interest in, or relationship with, any special purpose entities.
LIQUIDITY AND CAPITAL RESOURCES
October 1, January 2,
As of 2004 2004
----- ---- ----
(dollars in thousands)
Cash and cash equivalents $ 59,119 $ 45,416
As a percentage of total assets 9.8% 8.3%
Accounts receivable days sales outstanding 56 60
Inventory turns per year 4 4
Total debt $ 52,271 $ 90,486
October 1, October 3,
Nine Months Ended 2004 2003
----------------- ---- ----
(in thousands)
Net cash provided by operating activities $ 53,983 $ 13,158
Net cash used in investing activities (20,552) (13,831)
Net cash provided by (used in) financing activities (19,503) 13,986
Net increase in cash and cash equivalents 13,703 14,730
Cash and Cash Equivalents
Cash and cash equivalents increased by $13.7 million or 30.2% from January 2,
2004.
* For the first nine months of fiscal 2004, cash provided by operating
activities was $54.0 million, compared to $13.2 million cash used in operating
activities during the first nine months of fiscal 2003. This increase was driven
by increased net income of $27.9 million and overall better working capital
management. Our ability to continue to generate cash from operations will depend
in large part on our profitability, the rate of collections of accounts
receivable, inventory turns, and our ability to manage other areas of working
capital. Our accounts receivable days sales outstanding decreased to 56 days
from 60 days at the end of fiscal 2003. Inventory turns were four in both the
third quarter of fiscal 2004 and in the fourth quarter of fiscal 2003.
We used $20.6 million in net cash for investing activities during the first nine
months of fiscal 2004, compared to $13.8 million in the first nine months of
fiscal 2003. We continue to invest in capital expenditures, primarily to upgrade
our information systems as well as add new tools and test equipment to
manufacturing, and we used $12.2 million in net cash for acquisitions in the
first nine months of fiscal 2004 compared to $7.0 million for the same period in
fiscal 2003.
* We expect fiscal 2004 capital expenditures to be approximately $12 million to
$14 million, primarily for computer equipment, software, manufacturing tools and
test equipment, and leasehold improvements associated with business expansion.
Decisions related to how much cash is used for investing are influenced by the
expected amount of cash to be provided by operations.
We used $19.5 million in net cash for financing activities in the first nine
months of fiscal 2004, compared to $14.0 million cash provided by financing
activities in the first nine months of fiscal 2003. During the second quarter of
<page>
fiscal 2003, we sold 3,148,000 shares of its common stock, at a price of $12.17
per share in an offering pursuant to the our shelf registration statement,
resulting in net proceeds to us of approximately $36.6 million. Net debt
repayments were $38.1 million for the first nine months of fiscal 2004 compared
to $33.5 for the comparable period of fiscal 2003. This net debt payment was
funded primarily by proceeds from cash generated from operations and the
issuance of common stock to employees pursuant to our stock option plan of
approximately $8.0 million.
* We believe that our cash and cash equivalents, together with available funds
under our credit facilities ($108 million as of October 1, 2004), will be
sufficient to meet our anticipated operating cash needs for at least the next
twelve months.
Debt
At October 1, 2004, our total debt was approximately $52.3 million as compared
with approximately $90.5 million at the end of fiscal 2003. This balance
primarily consists of $34.4 million outstanding under a term loan and $17.0
million outstanding under a senior secured revolving credit facility.
Our Credit Facility is secured by all material assets of our Company, except for
a portion of assets that are not pledged due to foreign tax considerations.
Financial covenants of the Credit Facility include leverage, fixed charge, and
minimum net worth tests. At October 1, 2004 and as of the date of this report,
we are in compliance with all debt covenants. The amortized principal, interest,
and commitment fees due under the Credit Facility are paid quarterly. Under the
four-year term loan portion of the Credit Facility, we are due to make payments
(excluding interest) of approximately $12.5 million in each of the fiscal years
2004, 2005, and 2006, and $6.3 million in fiscal 2007.
Under the terms of the Credit Facility, we are allowed to pay dividends and
repurchase shares of our common stock up to 25% of net income in the previous
fiscal year. For additional discussion of our debt, see Note 8 of Notes to the
Condensed Consolidated Financial Statements.
New Accounting Standards
In March 2004, the FASB issued a proposed Statement, "Share-Based Payment, an
amendment of FASB Statements Nos. 123 and 95," that addresses the accounting for
share-based payment transactions in which a Company receives employee services
in exchange for either equity instruments of the Company or liabilities that are
based on the fair value of the Company's equity instruments or that may be
settled by the issuance of such equity instruments. The proposed statement would
eliminate the ability to account for share-based compensation transactions using
the intrinsic method currently used by the Company and generally would require
that such transactions be accounted for using a fair-value-based method and
recognized as expense in the Company's consolidated statement of income. The
recommended effective date of the proposed standard is currently for fiscal
years beginning after June 15, 2005. Should this proposed statement be finalized
in its current form, it could have a material impact on the Company's
consolidated statement of income, as the Company would be required to expense
the fair value of its stock option grants and stock purchases under the
Company's employee stock purchase plan. See Note 3 of Notes to the Condensed
Consolidated Financial Statements for the pro forma estimate of the impact.
RISKS AND UNCERTAINTIES
You should carefully consider the following risk factors, in addition to the
other information contained in this Form 10-Q and in any other documents to
which we refer you in this Form 10-Q, before purchasing our securities. The
risks and uncertainties described below are not the only ones we face.
Our Inability to Accurately Predict Orders and Shipments May Affect Our Revenue,
Expenses and Earnings per Share.
We have not been able in the past to consistently predict when our customers
will place orders and request shipments so that we cannot always accurately plan
our manufacturing requirements. As a result, if orders and shipments differ from
what we predict, we may incur additional expenses and build excess inventory,
which may require additional reserves and allowances. Any significant change in
our customers' purchasing patterns could have a material adverse effect on our
operating results and reported earnings per share for a particular quarter.
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Our Operating Results in Each Quarter May Be Affected by Special Conditions,
Such As Seasonality, Late Quarter Purchases, Weather, and Other Potential
Issues.
Due in part to the buying patterns of our customers, a significant portion of
our quarterly revenues occurs from orders received and immediately shipped to
customers in the last few weeks and days of each quarter, although our operating
expenses tend to remain fairly predictable. Engineering and construction
purchases tend to occur in early spring, and governmental agencies tend to
utilize funds available at the end of the government's fiscal year for
additional purchases at the end of our third fiscal quarter in September of each
year. Concentrations of orders sometimes also occur at the end of our other two
fiscal quarters. Additionally, a majority of our sales force earns commissions
on a quarterly basis which may cause concentrations of orders at the end of any
fiscal quarter. If for any reason expected sales are deferred, orders are not
received, or shipments are delayed a few days at the end of a quarter, our
operating results and reported earnings per share for that quarter could be
significantly impacted.
We Are Dependent on a Specific Manufacturer and Assembler for Many of Our
Products and on Specific Suppliers of Critical Parts for Our Products.
We are substantially dependent upon Solectron Corporation in California, China
and Mexico as our preferred manufacturing partner for many of our GPS products
previously manufactured out of our Sunnyvale facilities. Under the agreement
with Solectron, we provide to Solectron a twelve-month product forecast and
place purchase orders with Solectron at least thirty calendar days in advance of
the scheduled delivery of products to our customers depending on production lead
time. Although purchase orders placed with Solectron are cancelable, the terms
of the agreement would require us to purchase from Solectron all inventory not
returnable or usable by other Solectron customers. Accordingly, if we
inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from Solectron to meet customers' delivery
requirements or we may accumulate excess inventories, if such inventories are
not usable by other Solectron customers.
Our current contract with Solectron continues in effect until either party gives
the other ninety days written notice.
Solectron is assembling certain products in China. Although this initiative in
China has brought cost savings over assembling in California, we may experience
quality control issues, shipping delays, or other problems associated with
manufacturing in China.
In addition, we rely on specific suppliers for a number of our critical
components. We have experienced shortages of components in the past. Our current
reliance on specific or a limited group of suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing. Any inability to obtain adequate
deliveries or any other circumstance that would require us to seek alternative
sources of supply or to manufacture such components internally could
significantly delay our ability to ship our products, which could damage
relationships with current and prospective customers and could harm our
reputation and brand, and could have a material adverse effect on our business.
Our Annual and Quarterly Performance May Fluctuate.
Our operating results have fluctuated and can be expected to continue to
fluctuate in the future on a quarterly and annual basis as a result of a number
of factors, many of which are beyond our control. Results in any period could be
affected by:
o changes in market demand,
o competitive market conditions,
o market acceptance of existing or new products,
o fluctuations in foreign currency exchange rates,
o the cost and availability of components,
o our ability to manufacture and ship products,
o the mix of our customer base and sales channels,
o the mix of products sold,
o our ability to expand our sales and marketing organization effectively,
o our ability to attract and retain key technical and managerial employees,
o the timing of shipments of products under contracts and sale of licensing
rights, and
o general global economic conditions.
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In addition, demand for our products in any quarter or year may vary due to the
seasonal buying patterns of our customers in the agricultural and engineering
and construction industries. Due to the foregoing factors, our operating results
in one or more future periods are expected to be subject to significant
fluctuations. The price of our common stock could decline substantially in the
event such fluctuations result in our financial performance being below the
expectations of public market analysts and investors, which are based primarily
on historical models that are not necessarily accurate representations of the
future.
Our Gross Margin Is Subject to Fluctuation.
Our gross margin is affected by a number of factors, including product mix,
product pricing, cost of components, foreign currency exchange rates and
manufacturing costs. For example, sales of Nikon-branded products generally have
lower gross margins as compared to our GPS survey products. Absent other
factors, a shift in sales towards Nikon-branded products would lead to a
reduction in our overall gross margins. A decline in gross margin could
potentially negatively impact our earnings per share.
Failure to achieve and maintain effective internal controls in compliance with
Section 404 of the Sarbanes-Oxley Act could have an adverse effect on our
business and stock price.
Section 404 of the Sarbanes-Oxley Act will require us to include an internal
control report of management in our Annual Report on Form 10-K for fiscal 2004.
We are in the process of documenting and testing our internal control procedures
in order to satisfy the requirements of Section 404, which requires annual
management assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent auditors addressing these
assessments. During the course of our testing we may not complete all necessary
procedures and we may identify deficiencies which we may not be able to
remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404.
A system of controls, however well designed and operated, cannot provide
absolute assurance that the objectives of the system will be met. In addition,
the design of a control system is based in part upon certain assumptions about
the likelihood of future events. Because of the inherent limitations of control
systems, there is only reasonable assurance that our controls will succeed in
achieving their stated goals under all potential future conditions.
If we are unable to assert that our internal control over financial reporting is
effective as of December 31, 2004 (or if our auditors are unable to attest that
our management's report is fairly stated or they are unable to express an
opinion on our management's evaluation or on the effectiveness of the internal
controls), we could lose investor confidence in the accuracy and completeness of
our financial reports, which in turn could have an adverse effect on our stock
price.
Our Business is Subject to Disruptions and Uncertainties Caused by War or
Terrorism.
Acts of war or acts of terrorism could have a material adverse impact on our
business, operating results, and financial condition. The threat of terrorism
and war and heightened security and military response to this threat, or any
future acts of terrorism, may cause further disruption to our economy and create
further uncertainties. To the extent that such disruptions or uncertainties
result in delays or cancellations of orders, or the manufacture or shipment of
our products, our business, operating results, and financial condition could be
materially and adversely affected.
Our Credit Agreement Contains Financial Covenants.
On June 25, 2003, we executed a Credit Agreement with Scotia Capital and certain
other banks which provides for financial commitments totaling up to $175
million. This credit facility contains financial covenants regarding minimum
fixed charge coverage and maximum leverage ratio which are extremely sensitive
to changes in earnings before interest, taxes, depreciation and amortization, or
EBITDA. In turn, EBITDA is highly correlated to revenues and costs. If we
default on one or more covenants, we will have to obtain either negotiated
waivers or amendments to the Credit Agreement. If we were unable to obtain such
waivers or amendments, the banks would have the right to accelerate the payment
of our outstanding obligations under the Credit Agreement which would have a
material adverse effect on our financial condition and viability as an operating
company. In addition, a default under one of our debt instruments may also
trigger cross defaults under our other debt instruments. An event of default
under any debt instrument, if not cured or waived, could have a material adverse
effect on us.
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We Rely on Key Customers.
We generate a portion of our revenue from large original equipment manufacturers
such as Siemens VDO Automotive AG and Nortel. A reduction or loss of business
with these customers could have a material adverse effect on our financial
condition and results of operations. There can be no assurance that we will be
able to continue to realize value from these relationships in the future. No
single customer accounted for 10% or more of Trimble's total revenues in our
first nine months of fiscal 2004 and fiscal 2003.
We Are Dependent on New Products.
Our future revenue stream depends to a large degree on our ability to bring new
products to market on a timely basis. We must continue to make significant
investments in research and development in order to continue to develop new
products, enhance existing products and achieve market acceptance of such
products. We may incur problems in the future in innovating and introducing new
products. Our development stage products may not be successfully completed or,
if developed, may not achieve significant customer acceptance. If we were unable
to successfully define, develop and introduce competitive new products, and
enhance existing products, our future results of operations would be adversely
affected. Development and manufacturing schedules for technology products are
difficult to predict, and we might not achieve timely initial customer shipments
of new products. The timely availability of these products in volume and their
acceptance by customers are important to our future success. A delay in new
product introductions could have a significant impact on our results of
operations.
Our products may contain errors or defects, which could result in damage to our
reputation, lost revenues, diverted development resources and increased service
costs, warranty claims and litigation.
Our devices are complex and must meet stringent requirements. We warrant that
our products will be free of defect for various periods of time, depending on
the product. In addition, certain of our contracts include epidemic failure
clauses. If invoked, these clauses may entitle the customer to return or obtain
credits for products and inventory, or to cancel outstanding purchase orders
even if the products themselves are not defective.
We must develop our products quickly to keep pace with the rapidly changing
market, and we have a history of frequently introducing new products. Products
and services as sophisticated as ours could contain undetected errors or
defects, especially when first introduced or when new models or versions are
released. In general, our products may not be free from errors or defects after
commercial shipments have begun, which could result in damage to our reputation,
lost revenues, diverted development resources, increased customer service and
support costs and warranty claims and litigation which could harm our business,
results of operations and financial condition.
We May Not Be Able to Enter Into or Maintain Important Alliances.
We believe that in certain business opportunities our success will depend on our
ability to form and maintain alliances with industry participants, such as
Caterpillar, Nikon, McNeilus, and CNH Global. Our failure to form and maintain
such alliances, or the pre-emption of such alliances by actions of other
competitors or us, will adversely affect our ability to penetrate emerging
markets. No assurances can be given that we will not experience problems from
current or future alliances or that we will realize value from any such
strategic alliances.
We Are Dependent on the Availability of Allocated Bands Within the Radio
Frequency Spectrum.
Our GPS technology is dependent on the use of the Standard Positioning Service
("SPS") provided by the US Government's GPS. The GPS SPS operates in radio
frequency bands that are globally allocated for radio navigation satellite
services. International allocations of radio frequency are made by the
International Telecommunications Union ("ITU"), a specialized technical agency
of the United Nations. These allocations are further governed by radio
regulations that have treaty status and which may be subject to modification
every two to three years by the World Radio Communication Conference.
Any ITU reallocation of radio frequency bands, including frequency band
segmentation or sharing of spectrum, may materially and adversely affect the
utility and reliability of our products, which would, in turn, cause a material
adverse effect on our operating results. Many of our products use other radio
frequency bands, together with the GPS signal, to provide enhanced GPS
capabilities, such as real-time kinematic precision. The continuing availability
of these non-GPS radio frequencies is essential to provide enhanced GPS products
to our precision survey and construction machine controls markets. Any
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regulatory changes in spectrum allocation or in allowable operating conditions
may materially and adversely affect the utility and reliability of our products,
which would, in turn, cause a material adverse effect on our operating results.
In addition, unwanted emissions from mobile satellite services and other
equipment operating in adjacent frequency bands or in-band from licensed and
unlicensed devices may materially and adversely affect the utility and
reliability of our products, which could result in a material adverse effect on
our operating results. The FCC continually receives proposals for novel
technologies and services, such as ultra-wideband technologies, which may seek
to operate in, or across, the radio frequency bands currently used by the GPS
SPS and other public safety services. Adverse decisions by the FCC that result
in harmful interference to the delivery of the GPS SPS and other radio frequency
spectrum also used in our products may materially and adversely affect the
utility and reliability of our products, which could result in a material
adverse effect on our business and financial condition.
We Are Subject to the Adverse Impact of Radio Frequency Congestion.
We have certain products, such as GPS RTK systems, surveying and mapping
systems, and Robotic Total Stations, that use integrated radio communication
technology requiring access to available radio frequencies allocated by the FCC
(or the NTIA in the case of federal government users of this equipment) for
which the end user is required to obtain a license in order to operate their
equipment. In addition, access to these frequencies by state agencies is under
management by state radio communications coordinators. Some bands are
experiencing congestion that excludes their availability for access by state
agencies in some states, including the State of California. To reduce
congestion, the FCC announced that it will require migration of radio technology
from wideband to narrowband operations in these bands. In December 2003, the FCC
stayed the effectiveness of its new rules until it acts on petitions requesting
a reconsideration of this new requirement. The stay is indefinite at this point
and the outcome of this proceeding is unknown at this time. An inability to
obtain access to these radio frequencies by end users, and for new products to
comply with FCC requirements, could have an adverse effect on our operating
results.
Many of Our Products Rely on the GPS Satellite System.
The GPS satellites and their ground support systems are complex electronic
systems subject to electronic and mechanical failures and possible sabotage. The
satellites were originally designed to have lives of 7.5 years and are subject
to damage by the hostile space environment in which they operate. However, of
the current deployment of 29 satellites in place, some have already been in
operation for 12 years. To repair damaged or malfunctioning satellites is
currently not economically feasible. If a significant number of satellites were
to become inoperable, there could be a substantial delay before they are
replaced with new satellites. A reduction in the number of operating satellites
may impair the current utility of the GPS system and the growth of current and
additional market opportunities.
In addition, there can be no assurance that the US Government will remain
committed to the operation and maintenance of GPS satellites over a long period,
or that the policies of the US Government for the use of GPS without charge will
remain unchanged. However, a 1996 Presidential Decision Directive marks the
first time in the evolution of GPS that access for civilian use free of direct
user fees is specifically recognized and supported by Presidential policy. In
addition, Presidential policy has been complemented by corresponding
legislation, signed into law. Because of ever-increasing commercial applications
of GPS, other US Government agencies may become involved in the administration
or the regulation of the use of GPS signals. Any of the foregoing factors could
affect the willingness of buyers of our products to select GPS-based systems
instead of products based on competing technologies.
Many of our products also use signals from systems that augment GPS, such as the
Wide Area Augmentation System (WAAS) and National Differential GPS System
(NDGPS). Many of these augmentation systems are operated by the federal
government and rely on continued funding and maintenance of these systems. Any
curtailment of the operating capability of these systems could result in
decreased user capability thereby impacting our markets.
The European governments have expressed interest in building an independent
satellite navigation system, known as Galileo. We believe we will have access to
the signal design to develop compatible receivers. However, if access to the
signal structure is delayed it may have a materially adverse effect on our
business and operating results.
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We Face Risks in Investing in and Integrating New Acquisitions.
Acquisitions of companies, divisions of companies, or products entail numerous
risks, including:
o potential inability to successfully integrate acquired operations and
products or to realize cost savings or other anticipated benefits from
integration;
o diversion of management's attention;
o loss of key employees of acquired operations;
o the difficulty of assimilating geographically dispersed operations and
personnel of the acquired companies;
o the potential disruption of our ongoing business;
o unanticipated expenses related to such integration;
o the correct assessment of the relative percentages of in-process research
and development expense that can be immediately written off as compared to
the amount which must be amortized over the appropriate life of the asset;
o the impairment of relationships with employees and customers of either an
acquired company or our own business;
o the potential unknown liabilities associated with acquired business; and o
inability to recover strategic investments in development stage entities.
As a result of such acquisitions, we have significant assets that include
goodwill and other purchased intangibles. The testing of these intangibles under
established accounting guidelines for impairment requires significant use of
judgment and assumptions. Changes in business conditions could require
adjustments to the valuation of these assets. In addition, losses incurred by a
company in which we have an investment may have a direct impact on our financial
statements or could result in our having to write-down the value of such
investment. Any such problems in integration or adjustments to the value of the
assets acquired could harm our growth strategy and have a material adverse
effect on our business, financial condition and compliance with debt covenants.
We Face Competition in Our Markets.
Our markets are highly competitive and we expect that both direct and indirect
competition will increase in the future. Our overall competitive position
depends on a number of factors including the price, quality and performance of
our products, the level of customer service, the development of new technology
and our ability to participate in emerging markets. Within each of our markets,
we encounter direct competition from other GPS, optical and laser suppliers and
competition may intensify from various larger US and non-US competitors and new
market entrants, some of which may be our current customers. The competition in
the future may, in some cases, result in price reductions, reduced margins or
loss of market share, any of which could materially and adversely affect our
business, operating results and financial condition. We believe that our ability
to compete successfully in the future against existing and additional
competitors will depend largely on our ability to execute our strategy to
provide systems and products with significantly differentiated features compared
to currently available products. We may not be able to implement this strategy
successfully, and our products may not be competitive with other technologies or
products that may be developed by our competitors, many of whom have
significantly greater financial, technical, manufacturing, marketing, sales and
other resources than we do.
We Are Dependent on Proprietary Technology.
Our future success and competitive position is dependent upon our proprietary
technology, and we rely on patent, trade secret, trademark and copyright law to
protect our intellectual property. The patents owned or licensed by us may be
invalidated, circumvented, and challenged. The rights granted under these
patents may not provide competitive advantages to us. Any of our pending or
future patent applications may not be issued within the scope of the claims
sought by us, if at all.
Others may develop technologies that are similar or superior to our technology,
duplicate our technology or design around the patents owned by us. In addition,
effective copyright, patent and trade secret protection may be unavailable,
limited or not applied for in certain countries. The steps taken by us to
protect our technology might not prevent the misappropriation of such
technology.
The value of our products relies substantially on our technical innovation in
fields in which there are many current patent filings. We recognize that as new
patents are issued or are brought to our attention by the holders of such
patents, it may be necessary for us to withdraw products from the market, take a
license from such patent holders, or redesign our products. We do not believe
any of our products currently infringe patents or other proprietary rights of
third parties, but we cannot be certain they do not do so. In addition, the
legal costs and engineering time required to safeguard intellectual property or
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to defend against litigation could become a significant expense of operations.
Such events could have a material adverse effect on our revenues or
profitability.
We Must Carefully Manage Our Future Growth.
Growth in our sales or continued expansion in the scope of our operations could
strain our current management, financial, manufacturing and other resources, and
may require us to implement and improve a variety of operating, financial and
other systems, procedures, and controls. Specifically we have experienced strain
in our financial and order management system. We are expanding our sales,
accounting, manufacturing, and other information systems to meet these
challenges. Problems associated with any improvement or expansion of these
systems, procedures or controls may adversely affect our operations and these
systems, procedures or controls may not be designed, implemented or improved in
a cost-effective and timely manner. Any failure to implement, improve and expand
such systems, procedures, and controls in a timely and efficient manner could
harm our growth strategy and adversely affect our financial condition and
ability to achieve our business objectives.
We Are Dependent on Retaining and Attracting Highly Skilled Development and
Managerial Personnel.
Our ability to maintain our competitive technological position will depend, in a
large part, on our ability to attract, motivate, and retain highly qualified
development and managerial personnel. Competition for qualified employees in our
industry and location is intense, and there can be no assurance that we will be
able to attract, motivate, and retain enough qualified employees necessary for
the future continued development of our business and products.
We May Encounter Problems Associated With International Operations and Sales.
Our customers are located throughout the world. Sales to unaffiliated customers
in non-US locations represented approximately 50% and 49% of our revenues in our
first nine months of fiscal 2004 and fiscal 2003, respectively. In addition, we
have significant international operations, including manufacturing facilities,
sales personnel and customer support operations. We have sales offices outside
the US. Our non-US manufacturing facilities are in Sweden and Germany, and we
have a regional fulfillment center in the Netherlands. Our non-US presence
exposes us to risks not faced by wholly US companies.
Specifically, we have experienced issues relating to integration of non-US
operations, greater difficulty in accounts receivable collection, longer payment
cycles, and currency fluctuations. Additionally, we face the following risks,
among others:
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o political, legal and economic instability in non-US markets, particularly
in those markets in which we maintain manufacturing and research
facilities;
o difficulties in staffing and management;
o language and cultural barriers;
o seasonal reductions in business activities in the summer months in Europe
and some other countries;
o war and acts of terrorism; and
o potentially adverse tax consequences.
In certain non-US markets, there may be reluctance to purchase products based on
GPS technology, given the control of GPS by the US Government.
We Are Exposed to Fluctuations in Currency Exchange Rates.
A significant portion of our business is conducted outside the United States,
and as such, we face exposure to adverse movements in non-US currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on our financial results and cash flows. In
the first nine months of fiscal 2004, the US dollar continued to weaken against
several major currencies in which we do business, adversely impacting our
financial results. The weaker US dollar negatively impacts our operating income
due to significant manufacturing, distribution, research and development, and
selling expenses incurred outside of the US, while the weaker US dollar
positively impacts our revenues generated in foreign currencies, primarily the
Euro.
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Currently, we hedge only those currency exposures associated with certain assets
and liabilities denominated in non-functional currencies and periodically will
hedge anticipated foreign currency cash flows. The hedging activities undertaken
by us are intended to offset the impact of currency fluctuations on certain
non-functional currency assets and liabilities. Our attempts to hedge against
these risks may not be successful resulting in an adverse impact on our net
income.
We Are Subject to the Impact of Governmental and Other Similar Certifications.
We market certain products that are subject to governmental and similar
certifications before they can be sold. For example, CE certification for
radiated emissions is required for most GPS receiver and data communications
products sold in the European Union. An inability to obtain such certifications
in a timely manner could have an adverse effect on our operating results. Also,
some of our products that use integrated radio communication technology require
an end user to obtain licensing from the Federal Communications Commission (FCC)
for frequency-band usage. These are secondary licenses that are subject to
certain restrictions. During the fourth quarter of 1998, the FCC temporarily
suspended the issuance of licenses for certain of our real-time kinematic
products because of interference with certain other users of similar radio
frequencies. An inability or delay in obtaining such certifications or changes
to the rules by the FCC could adversely affect our ability to bring our products
to market which could harm our customer relationships and have a material
adverse effect on our business.
The Volatility of Our Stock Price Could Adversely Affect Your Investment in Our
Common Stock.
The market price of our common stock has been, and may continue to be, highly
volatile. During the first nine months of fiscal 2004, our stock price ranged
from $20.64 to $32.09. We believe that a variety of factors could cause the
price of our common stock to fluctuate, perhaps substantially, including:
o announcements and rumors of developments related to our business or the
industry in which we compete;
o quarterly fluctuations in our actual or anticipated operating results and
order levels;
o general conditions in the worldwide economy, including fluctuations in
interest rates;
o announcements of technological innovations;
o new products or product enhancements by us or our competitors;
o developments in patents or other intellectual property rights and
litigation;
o developments in our relationships with our customers and suppliers; and
o any significant acts of terrorism against the United States.
In addition, in recent years the stock market in general and the markets for
shares of "high-tech" companies in particular, have experienced extreme price
fluctuations which have often been unrelated to the operating performance of
affected companies. Any such fluctuations in the future could adversely affect
the market price of our common stock, and the market price of our common stock
may decline.
We are Subject to Environmental Laws and Potential Exposure to Environmental
Liabilities.
We are subject to various federal, state and local environmental laws and
regulations that govern our operations, including the handling and disposal of
non-hazardous and hazardous wastes, and emissions and discharges into the
environment. Failure to comply with such laws and regulations could result in
costs for corrective action, penalties, or the imposition of other liabilities.
We also are subject to laws and regulations that impose liability and clean-up
responsibility for releases of hazardous substances into the environment. Under
certain of these laws and regulations, a current or previous owner or operator
of property may be liable for the costs of remediating hazardous substances or
petroleum products on or from its property, without regard to whether the owner
or operator knew of, or caused, the contamination, as well as incur liability to
third parties impacted by such contamination. The presence of, or failure to
remediate properly, such substances could adversely affect the value and the
ability to transfer or encumber such property. Based on currently available
information, although there can be no assurance, we believe that such
liabilities will not have a material impact on our business.
Provisions in Our Charter Documents and Under California Law Could Prevent or
Delay a Change of Control, which Could Reduce the Market Price of Our Common
Stock.
Certain provisions of our articles of incorporation, as amended and restated,
our bylaws, as amended and restated, and the California General Corporation Law
may be deemed to have an anti-takeover effect and could discourage a third party
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from acquiring, or make it more difficult for a third party to acquire, control
of us without approval of our board of directors. These provisions could also
limit the price that certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow the board of directors to
authorize the issuance of preferred stock with rights superior to those of the
common stock.
We have adopted a Preferred Shares Rights Agreement, commonly known as a "poison
pill." The provisions described above, our poison pill and provisions of the
California General Corporation Law may discourage, delay or prevent a third
party from acquiring us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and foreign
currency exchange rates. We use certain derivative financial instruments to
manage these risks. We do not use derivative financial instruments for
speculative or trading purposes. All financial instruments are used in
accordance with policies approved by our board of directors.
Market Interest Rate Risk
We are exposed to market risk due to the possibility of changing interest rates
under our secured Credit Facility. Our Credit Facility is comprised of a
three-year, US dollar-only revolver that expires on June 25, 2006, and a
four-year term loan that expires on June 25, 2007. Borrowings under the Credit
Facility have interest payments based on a floating rate of LIBOR plus a number
of basis points tied to a formula based on our Leverage Ratio. The revolver
matures on June 25, 2006 and has an outstanding principal balance of $17
million, while the term loan matures on June 25, 2007 and has an outstanding
principal balance of $34.4 million, as of October 1, 2004 (all in US currency
only). The three-month LIBOR effective rate at October 1, 2004 was 1.98%. A
hypothetical 10% increase in three-month LIBOR rates could result in
approximately $101,500 annual increase in interest expense on the existing
principal balances. We have hedged the market risk with an interest rate swap on
50% of our term loan at a fixed rate (LIBOR) of 2.517%.
* The hypothetical changes and assumptions made above will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by our management should the hypothetical
market changes actually occur over time. As a result, actual earnings effects in
the future will differ from those quantified above.
Foreign Currency Exchange Rate Risk
We enter into foreign exchange forward contracts to minimize the short-term
impact of foreign currency fluctuations on certain trade and inter-company
receivables and payables, primarily denominated in Australian, Canadian, New
Zealand, and Swedish currencies, the Euro, and the British pound. These
contracts reduce the exposure to fluctuations in exchange rate movements as the
gains and losses associated with foreign currency balances are generally offset
with the gains and losses on the forward contracts. These instruments are marked
to market through earnings every period and generally range from one to three
months in original maturity. We do not enter into foreign exchange forward
contracts for trading purposes.
Foreign exchange forward contracts outstanding as of October 1, 2004 are
summarized as follows (in thousands):
October 1, 2004
---------------
Nominal Amount Fair Value
-------------- ----------
Forward contracts:
Purchased $ 9,780 $ 224
Sold $ (20,257) $ (257)
* We do not anticipate any material adverse effect on our consolidated financial
position utilizing our current hedging strategy.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
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The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
(b) Internal Control Over Financial Reporting.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation arising out of
the ordinary course of its business. There are no known claims or pending
litigation expected to have a material effect on the Company's overall financial
position, results of operations, or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our merger agreement with LeveLite provides for us to make earn-out payments not
to exceed an aggregate $3.9 million (in common stock and cash payment) based on
certain future revenues and payments received. Upon a hearing before the
California Department of Corporations in which the terms and conditions of the
offer to the LeveLite shareholders were approved, the shares of Common Stock to
be issued in the transaction were exempt from registration by reason of
qualification under Section 3(a)(10) of the Securities Act of 1933, as amended.
On July 28, 2004, pursuant to the merger agreement we issued 15,384 shares of
common stock, valued at $23.65 per share to the former shareholders of Levelite.
ITEM 6. EXHIBITS
3.1 Restated Articles of Incorporation of Trimble Navigation Limited, filed
June 25, 1986. (1)
3.2 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed October 6, 1988. (1)
3.3 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed July 18, 1990. (1)
3.4 Certificate of Determination of Trimble Navigation Limited, filed February
19, 1999. (1)
3.5 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed May 29, 2003. (2)
3.6 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed March 4, 2004. (4)
3.8 Amended and Restated Bylaws of Trimble Navigation Limited. (3)
10.1 Form of Change in Control Agreement (5)
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10.2 Amended and Restated 2002 Stock Plan, including forms of option agreement
(5)
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange
Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated November 5, 2004. (5)
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange
Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated November 5, 2004. (5)
32.1 Certification of Chief Executive Officer pursuant to section 18 U.S.C.
section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 dated November 5, 2004. (5)
32.2 Certification of Chief Financial Officer pursuant to section 18 U.S.C.
section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 dated November 5, 2004. (5)
- -------------------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits" of the registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 1999, as filed with the SEC
on March 29, 1999.
(2) Incorporated by reference to exhibit number 3.5 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended July 4, 2003.
(3) Incorporated by reference to exhibit number 3.8 to the registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 2004.
(4) Incorporated by reference to exhibit number 3.6 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended April 2, 2004.
(5) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRIMBLE NAVIGATION LIMITED
(Registrant)
By: /s/ Mark Harrington
-----------------------
Mark Harrington
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
DATE: November 5, 2004
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Articles of Incorporation of Trimble Navigation Limited, filed
June 25, 1986. (1)
3.2 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed October 6, 1988. (1)
3.3 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed July 18, 1990. (1)
3.4 Certificate of Determination of Trimble Navigation Limited, filed February
19, 1999. (1)
3.5 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed May 29, 2003. (2)
3.6 Certificate of Amendment of Articles of Incorporation of Trimble Navigation
Limited, filed March 4, 2004. (4)
3.8 Amended and Restated Bylaws of Trimble Navigation Limited. (3)
10.1 Form of Change of Control Agreement. (5)
10.2 Amended and Restated 2002 Stock Plan, including forms of option agreement.
(5)
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange
Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated November 5, 2004. (5)
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange
Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated November 5, 2004. (5)
32.1 Certification of Chief Executive Officer pursuant to section 18 U.S.C.
section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 dated November 5, 2004. (5)
32.2 Certification of Chief Financial Officer pursuant to section 18 U.S.C.
section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 dated November 5, 2004. (5)
- -------------------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits" of the registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 1999, as filed with the SEC
on March 29, 1999.
(2) Incorporated by reference to exhibit number 3.5 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended July 4, 2003.
(3) Incorporated by reference to exhibit number 3.8 to the registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 2004.
(4) Incorporated by reference to exhibit number 3.6 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended April 2, 2004.
(5) Filed herewith.