filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under “Risks Factors.”
EXECUTIVE LEVEL OVERVIEW
Trimble Inc. is a leading provider of technology solutions that optimize the work processes of office and mobile field professionals around the world. Our comprehensive work process solutions are used across a range of industries including agriculture, architecture, civil engineering, construction, government, natural resources, transportation, and utilities. Representative Trimble customers include engineering and construction firms, contractors, surveying companies, farmers and agricultural companies, long haul trucking companies, energy, utility companies, and state, federal, and municipal governments.
Trimble focuses on integrating its broad technological and application capabilities to create vertically-focused, system-level solutions that transform how work is done within the industries we serve. The integration of sensors, software, connectivity, and information in our portfolio gives us the unique ability to provide an information model specific to the customer’s workflow. For example, in construction, our strategy is centered on the concept of a “constructible model” which is at the center of our “Connected Site” solutions which provide real-time, connected, and cohesive information environments for the design, build, and operational phases of construction projects. In agriculture, we continue to develop “Connected Farm” solutions to optimize operations across the agriculture workflow. In long haul trucking, our “Connected Fleet” solutions provide transportation companies with tools to enhance fuel efficiency, safety, and transparency through connected vehicles and fleets across the enterprise.
Our growth strategy is centered on multiple elements:
| • | Focus on attractive markets with significant growth and profitability potential - We focus on large markets historically underserved by technology that offer significant potential for long-term revenue growth, profitability and market leadership. Our core industries such as construction, agriculture, and transportation markets are each multi-trillion dollar global industries which operate in increasingly demanding environments with technology adoption in the early phases relative to other industries. With the emergence of mobile computing capabilities, the increasing technological know-how of end users and the compelling return on investment to our customers, we believe many of our markets are attractive for substituting Trimble’s technology and solutions in place of traditional operating methods. |
| • | Domain knowledge and technological innovation that benefit a diverse customer base - We have over time redefined our technological focus from hardware-driven point solutions to integrated work process solutions by developing domain expertise and heavily reinvesting in R&D and acquisitions. We currently have over 1,200 unique patents. We intend to continue to take advantage of our technology portfolio and deep domain knowledge to quickly and cost-effectively deliver specific, targeted solutions to each of the vertical markets we serve. We look for opportunities where the opportunity for technological change is high and which have a requirement for the integration of multiple technologies into complete vertical solutions. |
| • | Increasing focus on software and services - Software and services targeted for the needs of vertical end markets are increasingly important elements of our solutions and are core to our growth strategy. Trimble generally has an open application programming interface philosophy and open vendor environment which leads to increased adoption of our software and analytics offerings. These software and services solutions integrate and optimize additional workflows for our customers, thereby improving their work productivity, and in the case of subscription, maintenance and support services, also provide us with enhanced business visibility over time. Professional services constitute an additional customer offering that helps our customers integrate and optimize the use of our offerings in their environment. |
| • | Geographic expansion with localization strategy - We view international expansion as an important element of our strategy and we continue to position ourselves in geographic markets that will serve as important sources of future growth. We currently have a physical presence in over 40 countries and distribution channels in over 100 countries. In 2018, over 50% of our sales were to customers located in countries outside of the U.S. |
| • | Optimized go-to-market strategies to best access our markets - We utilize vertically focused go-to-market strategies that leverage domain expertise to best serve the needs of individual markets domestically and abroad. These go-to-market capabilities include independent dealers, joint ventures, original equipment manufacturers ("OEM"), and distribution alliances with key partners, such as CNH Global, Caterpillar, and Nikon, as well as direct sales to end-users, that provide us with broad market reach and localization capabilities to effectively serve our markets. |
| • | Strategic acquisitions - Organic growth continues to be our primary focus, while acquisitions serve to enhance our market position. We acquire businesses that bring domain expertise, technology, products, or distribution capabilities that augment our portfolio and allow us to penetrate existing markets more effectively, or to establish a market beachhead. Our success in targeting and effectively integrating acquisitions is an important aspect of our growth strategy. |
During 2018, we acquired e-Builder and Viewpoint to expand our capabilities in construction software solutions. These acquisitions expanded and reinforced our value proposition in the construction software market, bringing enhanced capabilities and offerings in project and program management, extensive relationships with project owners, and an information backbone that enables real-time access to all the information needed to operate a construction enterprise. These additional capabilities are enabling us to strengthen our reach to contractors and owners, as we link detailed construction plans to the delivery and execution of construction projects. e-Builder and Viewpoint’s results of operations post-acquisition are reflected in our Buildings and Infrastructure segment.
Trimble’s focus on these growth drivers has led over time to growth in revenue and profitability as well as an increasingly diversified business model. Software and services growth is driving increased recurring revenue, leading to improved visibility in some of our businesses. As our solutions have expanded, our go to market model has also evolved, with a balanced mix between direct, distribution, and OEM customers, and an increasing number of enterprise level customer relationships.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenue, costs of sales, operating expenses, and related disclosures. We consider the accounting polices described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the consolidated financial statements, and actual results could differ materially from the amounts reported based on these policies. Our accounting policies are more fully described in Note 2 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Revenue Recognition
We adopted the requirements of the new revenue recognition standard starting in the first quarter of fiscal 2018, utilizing the full retrospective method of transition. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products or services. Revenue is generally recognized net of allowance for returns and any taxes collected from customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations; however, determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may sometimes require significant judgment.
Judgment is required to determine stand alone selling price ("SSP") for each distinct performance obligation. We use a range of amounts to estimate SSP when products and services are sold separately and determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs.
Income Taxes
We are a U.S. based multinational company operating in multiple U.S. and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately forecast actual tax audit outcomes. Determining whether an uncertain tax position is effectively settled requires judgment. Changes in recognition or measurement of our uncertain tax positions would result in the recognition of a tax benefit or an additional charge to the tax provision.
Income taxes are accounted for under the liability method, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if we believe it is more likely than not such assets will not be realized.
We are subject to the periodic examination of our domestic and foreign tax returns by the IRS, state, local, and foreign tax authorities who may challenge our tax positions. We regularly assess the likelihood of adverse outcomes from these examinations in determining the adequacy of our provision for income taxes.
Business Combinations and Valuation of Goodwill and Purchased Intangible Assets
We allocate the fair value of purchase consideration to the assets acquired, liabilities assumed, and non-controlling interests in the acquiree based on their fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed, and non-controlling interests in the acquiree is recorded as goodwill.
When determining the fair values of assets acquired, liabilities assumed, and non-controlling interests in the acquiree, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability. Identifiable intangible assets are comprised of distribution channels and distribution rights, patents, licenses, technology, acquired backlog, trademarks, and in-process research and development. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
We evaluate goodwill on an annual basis and whenever events and changes in circumstances indicate that the carrying amount may not be recoverable. The annual goodwill impairment test is performed at the reporting unit level on the first day of the fourth fiscal quarter of each year. We utilize either a qualitative assessment or a quantitative test to determine if it is more likely than not that the fair value of each reporting unit is less than its carrying amount. In performing the qualitative assessment, we consider events and circumstances, including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. When we perform a quantitative test, the estimation of the fair value of a reporting unit involves the use of certain estimates and assumptions including expected future operating performance using risk-adjusted discount rates.
Identifiable intangible assets are being amortized over the period of estimated benefit using the straight-line method. Changes in circumstances such as technological advances, changes to its business model, or changes in the capital strategy could result in the actual useful lives of intangible assets differing from initial estimates. If we determine that the useful life of an asset should be revised, the net book value in excess of the estimated residual value is depreciated over its revised remaining useful life. These assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable based on their future cash flows. The estimated future cash flows are primarily based upon assumptions about expected future operating performance. The assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the estimated undiscounted cash flows is less than the carrying value of the assets, the assets are written down to the estimated fair value.
Inventory Valuation
Our inventories are stated at the lower of cost or net realizable value. Adjustments are also made to reduce the cost of inventory for estimated excess or obsolete balances. Factors influencing these adjustments include declines in demand which impact inventory purchasing forecasts, technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. If our estimates used to reserve for excess and obsolete inventory are different from what we expected, we may be required to recognize additional reserves, which would negatively impact our gross margin.
RESULTS OF OPERATIONS
Overview
The following table is a summary of revenue, gross margin and operating income for the periods indicated and should be read in conjunction with the narrative descriptions below.
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Revenues: | |||||||||||
| Product | $ | 1,999.9 | $ | 1,763.8 | $ | 1,570.6 | |||||
| Service | 588.7 | 475.4 | 436.7 | ||||||||
| Subscription | 519.8 | 407.3 | 354.8 | ||||||||
| Total revenue | $ | 3,108.4 | $ | 2,646.5 | $ | 2,362.1 | |||||
| Gross margin | 1,681.0 | 1,377.6 | 1,234.5 | ||||||||
| Gross margin % | 54.1 | % | 52.1 | % | 52.3 | % | |||||
| Total consolidated operating income | 320.7 | 235.7 | 180.4 | ||||||||
| Operating income as a % of revenue | 10.3 | % | 8.9 | % | 7.6 | % |
- See Note 2 of the Notes to the Consolidated Financial Statements.
Basis of Presentation
We have a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2018 was December 28, 2018. Fiscal 2018, 2017 and 2016 were all 52-week years.
Revenue
In fiscal 2018, total revenue increased by $461.9 million, or 17%, to $3.11 billion from $2.65 billion in fiscal 2017. Overall revenue increased due to organic growth across all segments and most major regions. Acquisitions, including e-Builder and Viewpoint, contributed to growth, particularly in service and subscription revenue. We consider acquisition growth to include acquisition revenue that was not applicable in the prior corresponding periods.
On a segment basis, the increase in fiscal 2018 was primarily due to solid growth across segments, including Buildings and Infrastructure, and to a lesser extent, Resources and Utilities, Transportation and Geospatial. Buildings and Infrastructure revenue increased $257.2 million, or 31%, Resources and Utilities revenue increased $86.1 million, or 18%, Transportation increased $74.8 million, or 11%, and Geospatial revenue increased $64.6 million, or 10%, as compared to fiscal 2017. Buildings and Infrastructure revenue increased due to the e-Builder and Viewpoint acquisitions, which were acquired in the first and third quarters, respectively, and organic growth. Resources and Utilities revenue increased primarily due to continued organic growth in agriculture markets, as well as the impact of the Müller-Elektronik ("Müller") acquisition, Geospatial revenue increased mainly due to surveying organic growth, and Transportation revenue increased due to increased organic subscription growth from new and existing transportation and logistics customers and to a lesser extent, product sales.
By revenue category, overall product revenue increased $236.1 million, or 13%, service revenue increased $113.3 million, or 24%, and subscription revenue increased $112.5 million, or 28%. Product revenue increased primarily due to organic growth in Buildings and Infrastructure due to building construction and civil engineering and construction product sales, in Geospatial due to surveying product sales, and in Resources and Utilities due to agriculture product sales. Transportation contributed to a lesser extent. Service and subscription revenue increases were primarily due to growth in Buildings and Infrastructure, including the impact of the Viewpoint and e-Builder acquisitions, and to a lesser extent, Transportation, and Resources and Utilities.
In fiscal 2017, total revenue increased by $284.4 million, or 12%, to $2.65 billion from $2.36 billion in fiscal 2016. Overall revenue increased primarily due to organic growth across all segments and major regions. To a lesser extent, acquisitions contributed to growth, particularly in product and service revenue.
On a segment basis, the increase in fiscal 2017 was primarily due to Transportation, Buildings and Infrastructure, Resources and Utilities, and to a lesser extent, Geospatial. Transportation increased $90.3 million or 15%, Buildings and Infrastructure revenue increased $87.7 million, or 12%, Resources and Utilities revenue increased $83.8 million, or 21%, and Geospatial revenue increased $22.8 million, or 4%, as compared to fiscal 2017. Transportation revenue increased due to continued organic growth in the transportation and logistics business. Buildings and Infrastructure revenue increased primarily due to strong organic growth in
civil engineering and construction and building construction. Resources and Utilities revenue increased primarily due to acquisitions, in particular the impact of Müller acquisition, and continued organic growth in agriculture, correction services, and forestry. Geospatial revenue increased mainly due to strong geospatial and surveying organic growth.
By revenue category, overall product revenue increased $193.2 million, or 12%, service revenue increased $38.7 million, or 9%, and subscription revenue increased $52.5 million, or 15%. Product, service and subscription revenue increased primarily due to organic growth across all segments. To a lesser extent, acquisitions contributed to growth, particularly in product and service revenue.
During fiscal 2018, sales to customers in North America represented 53%, Europe represented 28%, Asia Pacific represented 13%, and the rest of world represented 6% of our total revenue. During fiscal 2017, sales to customers in North America represented 53%, Europe represented 26%, Asia Pacific represented 14%, and the rest of world represented 7% of our total revenue. During fiscal 2016, sales to customers in North America represented 54%, Europe represented 24%, Asia Pacific represented 15%, and the rest of world represented 7% of our total revenue. We anticipate that sales to international customers will continue to account for a significant portion of our revenue.
No single customer accounted for 10% or more of our total revenue in fiscal 2018, 2017 or 2016. No single customer accounted for 10% or more of our accounts receivable as of fiscal years ended 2018 and 2017.
Gross Margin
Our gross margin varies due to a number of factors including product mix, pricing, distribution channel, production volumes, new product start-up costs, and foreign currency translations.
In fiscal 2018, our gross margin increased by $303.4 million as compared to fiscal 2017, primarily due to increased revenue across all segments - Buildings and Infrastructure, Resources and Utilities, Transportation, and Geospatial. Gross margin as a percentage of total revenue was 54.1% in fiscal 2018 and 52.1% in fiscal 2017. The increase in gross margin percentage was primarily due to improved product mix across all segments, partially offset by increased intangibles amortization and the effects of acquired deferred revenue from the e-Builder and Viewpoint acquisitions that was written down to fair value in purchase accounting.
In fiscal 2017, our gross margin increased by $143.1 million as compared to fiscal 2016, primarily due to increased revenue across all segments - Buildings and Infrastructure, Resources and Utilities, Transportation and to a lesser extent, Geospatial. Gross margin as a percentage of total revenue was 52.1% in fiscal 2017 and 52.3% in fiscal 2016. The slight decrease in the gross margin percentage was primarily due to the impact of acquisitions, particularly Müller.
Operating Income
Operating income increased by $85.0 million for fiscal 2018 as compared to fiscal 2017. Operating income as a percentage of total revenue for fiscal 2018 was 10.3% as compared to 8.9% for fiscal 2017. The increase in operating income was attributable to segment revenue and gross margin expansion and operating expense control, partially offset by higher amortization of purchased intangible assets, acquisition costs associated with the Viewpoint and e-Builder acquisitions and expense related to the acceleration of e-Builder employee stock options in the first quarter.
Operating income increased by $55.3 million for fiscal 2017 as compared to fiscal 2016. Operating income as a percentage of total revenue for fiscal 2017 was 8.9% as compared to 7.6% for fiscal 2016. The increases in operating income and operating income percentage were attributable to revenue expansion and strong operating control in Buildings and Infrastructure, and to a lesser extent Transportation, Resources and Utilities, and Geospatial. Operating income was partially offset by higher corporate expense.
Research and Development, Sales and Marketing, and General and Administrative Expenses
The following table shows research and development (“R&D”), sales and marketing, and general and administrative (“G&A”) expenses in absolute dollars and as a percentage of total revenue for fiscal years 2018, 2017, and 2016 and should be read in conjunction with the narrative descriptions of those operating expenses below.
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Research and development | $ | 446.1 | $ | 370.2 | $ | 349.6 | |||||
| Percentage of revenue | 14 | % | 14 | % | 15 | % | |||||
| Sales and marketing | 479.8 | 400.1 | 374.7 | ||||||||
| Percentage of revenue | 15 | % | 15 | % | 16 | % | |||||
| General and administrative | 349.8 | 301.7 | 256.0 | ||||||||
| Percentage of revenue | 11 | % | 11 | % | 11 | % | |||||
| Total | $ | 1,275.7 | $ | 1,072.0 | $ | 980.3 |
- See Note 2 of the Notes to the Consolidated Financial Statements.
Overall, R&D, sales and marketing, and G&A expenses increased by approximately $203.7 million in fiscal 2018 compared to fiscal 2017.
Research and development expense increased by $75.9 million, or 21%, in fiscal 2018, as compared to fiscal 2017. Overall, research and development spending was 14% of revenue in both fiscal 2018 and 2017. As compared to the prior year, the increase in fiscal 2018 was primarily due to the impact of acquisitions, primarily Viewpoint and e-Builder, not applicable in the prior corresponding periods, and to a lesser extent, an increase in compensation expense associated with increased headcount, particularly in Transportation.
Research and development expense increased by $20.6 million, or 6%, in fiscal 2017, as compared to fiscal 2016. Overall, research and development spending was 14% of revenue in fiscal 2017 compared to 15% in fiscal 2016. As compared to the prior year, the increase in fiscal 2017 research and development expense was primarily due to an increase in compensation expense associated with increased headcount, particularly in Resources and Utilities, and to a lesser extent, expense increase from fiscal 2017 business acquisitions, primarily Müller expenses not applicable in the prior corresponding periods.
We believe that the development and introduction of new products are critical to our future success and we expect to continue active development of new products.
Sales and marketing expense increased by $79.7 million, or 20%, in fiscal 2018, as compared to fiscal 2017. Overall, spending for sales and marketing was 15% of revenue in both fiscal 2018 and 2017. As compared to the prior year, the increase in fiscal 2018 was primarily due to the impact of acquisitions, primarily Viewpoint and e-Builder, not applicable in the prior corresponding periods, and to a lesser extent, increased sales compensation expense.
Sales and marketing expense increased by $25.4 million, or 7%, in fiscal 2017, as compared to fiscal 2016. Overall, spending for sales and marketing was 15% of revenue in fiscal 2017 compared to 16% in fiscal 2016. As compared to the prior year, the increase in fiscal 2017 was primarily due to an increase in compensation expense, and to a lesser extent, expense from fiscal 2017 business acquisitions, not applicable in the prior corresponding periods.
General and administrative expense increased by $48.1 million, or 16%, in fiscal 2018, as compared to fiscal 2017. Overall, general and administrative spending was 11% of revenue in both fiscal 2018 and 2017. As compared to the prior year, the increase in fiscal 2018 was primarily due to the impact of acquisitions, primarily Viewpoint and e-Builder, not applicable in the prior corresponding periods and increased stock-based compensation expense.
General and administrative expense increased by $45.7 million, or 18%, as compared to fiscal 2016. Overall, general and administrative spending was 11% of revenue in both fiscal 2017 and 2016. As compared to the prior year, the increase in fiscal 2017 was primarily due to an increase in compensation expense which included an increase in stock compensation expense, expense from fiscal 2017 business acquisitions, and to a lesser extent, and increase due to higher consulting costs mainly related to the ASC 606 implementation.
Amortization of Purchased Intangible Assets
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| (In millions) | |||||||||||
| Cost of sales | $ | 103.2 | $ | 85.8 | $ | 88.6 | |||||
| Operating expenses | 76.4 | 63.0 | 62.2 | ||||||||
| Total | $ | 179.6 | $ | 148.8 | $ | 150.8 |
Total amortization expense of purchased intangibles increased $30.8 million as compared to fiscal 2017. The increase was primarily due to amortization of new purchased intangibles related to Viewpoint, e-Builder and Stabiplan acquisitions, which were not applicable in the prior year. Total amortization expense of purchased intangibles decreased $2.0 million as compared to fiscal 2016. The decrease was primarily due to the expiration of amortization for prior acquisitions, partially offset by acquisitions not included in fiscal 2016. Overall, total amortization expenses of purchased intangibles represented 6% of revenue in fiscal 2018, 2017, and 2016.
Non-operating Income (Expense), Net
The following table shows non-operating income (expense), net for the periods indicated and should be read in conjunction with the narrative descriptions below:
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Interest expense, net | $ | (73.2 | ) | $ | (25.2 | ) | $ | (25.9 | ) | ||
| Foreign currency transaction gain (loss), net | 0.5 | 3.3 | (1.9 | ) | |||||||
| Income from equity method investments, net | 28.7 | 29.5 | 17.6 | ||||||||
| Other income, net | 1.3 | 4.9 | 5.9 | ||||||||
| Total non-operating income (expense), net | $ | (42.7 | ) | $ | 12.5 | $ | (4.3 | ) |
- See Note 2 of the Notes to the Consolidated Financial Statements.
Total non-operating income (expense), net decreased by $55.2 million during fiscal 2018 compared with fiscal 2017. The decrease was primarily due to higher interest costs associated with increased debt and related costs in connection with fiscal 2018 acquisitions.
Total non-operating income (expense), net increased by $16.8 million during fiscal 2017 compared with fiscal 2016. The increase was primarily due to an increase in joint venture profitability and, to a lesser extent, the favorable impact from foreign currency exchange.
Income Tax Provision
The Tax Act, which reduced U.S. federal tax rate from 35% to 21%, imposed a one-time transition tax on accumulated foreign earnings and created new taxes on certain foreign-sourced earnings (referred to as “GILTI”). We recorded reasonable estimates as provisional amounts arising from the Tax Act during the previous quarters including a provisional net income tax expense of $80.2 million recorded in the fourth quarter of 2017. In the fourth quarter of 2018, we completed the accounting for the tax effects of the Tax Act and made immaterial adjustments to the provisional amounts recorded previously. Additionally, in the fourth quarter of fiscal 2018, we finalized our accounting policy election to recognize deferred taxes in relation to GILTI.
Our effective income tax rates for fiscal 2018, 2017 and 2016 were -2%, 52% and 25%, respectively. The fiscal 2018 rate was lower than the U.S. federal statutory rate of 21%, primarily due to benefits from reserve release due to expiration of the U.S. federal statute of limitations for certain tax years, a one-time benefit from deferred taxes in relation to GILTI, and benefits from stock based compensation. The fiscal 2017 rate was higher than the U.S. federal statutory rate of 35% primarily due to the impact of the Tax Act, partially offset by the geographic mix of pretax income, the U.S. federal R&D credit, and stock-based compensation tax benefits. The fiscal 2016 rate was less than the U.S. federal statutory rate of 35% primarily due to the geographic mix of pre-tax income, a divestiture of a non-strategic business, and the U.S. federal R&D credit.
Results by Segment
We report our financial performance, including revenues and operating income, based on four reportable segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation.
Our Chief Executive Officer (chief operating decision maker) views and evaluates operations based on the results of our reportable operating segments under our management reporting system. These results are not necessarily in conformance with U.S. GAAP. Beginning with the third quarter of fiscal 2018, we presented segment revenue and income excluding the effects of certain acquired deferred revenue that was written down to fair value in purchase accounting. Segment income also excludes the effects of certain acquired capitalized commissions that were eliminated in purchase accounting, along with other adjustments that have historically been excluded in prior periods, as though the acquired companies operated independently in the periods presented. This presentation is consistent with the way the chief operating decision maker evaluates each segment's performance and allocates resources. Comparative period financial information by reportable segment has been recast to conform with the current presentation.
For additional discussion of our segments, see Note 6 of the Notes to the Consolidated Financial Statements.
The following table is a breakdown of revenue and operating income by segment for the periods indicated and should be read in conjunction with the narrative descriptions below:
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Buildings and Infrastructure | |||||||||||
| Segment revenue | $ | 1,087.7 | $ | 830.5 | $ | 742.8 | |||||
| Segment revenue as a percent of total segment revenue | 35 | % | 31 | % | 31 | % | |||||
| Segment operating income | $ | 256.7 | $ | 176.2 | $ | 132.7 | |||||
| Segment operating income as a percent of segment revenue | 24 | % | 21 | % | 18 | % | |||||
| Geospatial | |||||||||||
| Segment revenue | $ | 723.1 | $ | 658.5 | $ | 635.7 | |||||
| Segment revenue as a percent of total segment revenue | 23 | % | 25 | % | 27 | % | |||||
| Segment operating income | $ | 166.4 | $ | 129.4 | $ | 120.6 | |||||
| Segment operating income as a percent of segment revenue | 23 | % | 20 | % | 19 | % | |||||
| Resources and Utilities | |||||||||||
| Segment revenue | $ | 568.1 | $ | 482.0 | $ | 398.2 | |||||
| Segment revenue as a percent of total segment revenue | 18 | % | 18 | % | 17 | % | |||||
| Segment operating income | $ | 168.2 | $ | 137.9 | $ | 119.3 | |||||
| Segment operating income as a percent of segment revenue | 30 | % | 29 | % | 30 | % | |||||
| Transportation | |||||||||||
| Segment revenue | $ | 753.1 | $ | 678.3 | $ | 588.0 | |||||
| Segment revenue as a percent of total segment revenue | 24 | % | 26 | % | 25 | % | |||||
| Segment operating income | $ | 143.3 | $ | 114.8 | $ | 103.8 | |||||
| Segment operating income as a percent of segment revenue | 19 | % | 17 | % | 18 | % |
- See Note 2 of the Notes to the Consolidated Financial Statements.
A reconciliation of our consolidated segment operating income to consolidated income before income taxes follows:
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Consolidated segment operating income | $ | 734.6 | $ | 558.3 | $ | 476.4 | |||||
| Unallocated corporate expense | (90.7 | ) | (86.8 | ) | (70.5 | ) | |||||
| Acquired deferred revenue adjustment | (23.6 | ) | (2.8 | ) | (2.6 | ) | |||||
| Restructuring charges | (8.7 | ) | (10.5 | ) | (13.3 | ) | |||||
| Amortization of purchased intangible assets | (179.6 | ) | (148.8 | ) | (150.8 | ) | |||||
| Stock-based compensation | (76.9 | ) | (64.8 | ) | (52.6 | ) | |||||
| Amortization of acquisition-related inventory step-up | (0.2 | ) | (2.8 | ) | — | ||||||
| Acquisition and divestiture items | (38.9 | ) | (7.4 | ) | (6.8 | ) | |||||
| Executive transition costs | — | — | (1.0 | ) | |||||||
| Amortization of acquired capitalized commissions | 4.7 | 1.3 | 1.6 | ||||||||
| Consolidated operating income | 320.7 | 235.7 | 180.4 | ||||||||
| Non-operating income (expense), net | (42.7 | ) | 12.5 | (4.3 | ) | ||||||
| Consolidated income before taxes | $ | 278.0 | $ | 248.2 | $ | 176.1 |
- See Note 2 of the Notes to the Consolidated Financial Statements.
Buildings and Infrastructure
Buildings and Infrastructure revenue increased by $257.2 million, or 31%, while segment operating income increased by $80.5 million, or 46%, for fiscal 2018 as compared to fiscal 2017. Building construction experienced strong organic growth throughout the year across most markets and regions. Civil engineering and construction, which introduced new products such as Earthworks and SiteWorks, contributed to growth. In the fourth quarter this product family was impacted by lower government demand. In addition to organic growth, the e-Builder and Viewpoint acquisitions, which were acquired in the first and third quarters, respectively, contributed to growth, particularly in service and subscription revenue. Segment operating income increased due to increased revenue and gross margin expansion due to product mix.
Buildings and Infrastructure revenue increased by $87.7 million, or 12%, while segment operating income increased by $43.5 million, or 33%, for fiscal 2017 as compared to fiscal 2016. The revenue increase was primarily due to organic growth in building construction and civil engineering and construction due to continued strength in construction markets throughout the year. Buildings and Infrastructure experienced strong growth in markets such as North America, Europe, and Asia Pacific, particularly in Japan and Australia. Segment operating income increased primarily due to revenue expansion and operating expense control across the segment.
Geospatial
Geospatial revenue increased by $64.6 million, or 10%, while segment operating income increased by $37.0 million, or 29%, for fiscal year 2018 as compared to fiscal 2017. The revenue increase was primarily due to organic growth for optical and GNSS survey products, across most major regions, with North America and Europe particularly strong. New products, end market diversification, and stronger regional economies, and to a lesser extent, autonomy products, contributed to the growth. Segment operating income increased primarily due to increased revenue and gross margin expansion due to the sale of higher margin products and operating expense control.
Geospatial revenue increased by $22.8 million, or 4%, while segment operating income increased by $8.8 million, or 7%, for fiscal year 2017 as compared to fiscal 2016. The revenue increase was primarily due to geospatial organic growth for optical and Global Navigation Satellite Systems products, including the new SX 10, our scanning total station, and end market diversification. Geospatial experienced growth, with Europe particularly strong. Segment operating income increased primarily due to revenue and gross margin expansion, partially offset by higher operating expense.
Resources and Utilities
Resources and Utilities revenue increased by $86.1 million, or 18%, while segment operating income increased by $30.3 million, or 22%, for fiscal year 2018 as compared to fiscal 2017. The revenue increase was primarily due to continued growth in agriculture, including the impact of the Müller acquisition, which was acquired in the third quarter of fiscal 2017. Growth in Europe was up due to the Müller acquisition and to a lesser extent, agriculture organic growth. Growth in North America was up due to organic growth. Demand in Asia Pacific was weaker for agricultural products due to droughts in Australia. Resources and Utilities revenue
declined slightly, for the fourth quarter of 2018 as compared to the fourth quarter of 2017 as a result of uncertainty surrounding demand for agricultural products arising from the U.S.-Chinese trade dispute, which may also impact the first half of fiscal 2019. Segment operating income increased due to increased revenue, gross margin expansion due to product mix and operating expense control.
Resources and Utilities revenue increased by $83.8 million, or 21%, while segment operating income increased by $18.6 million, or 16%, for fiscal year 2017 as compared to fiscal 2016. The revenue increase was due to acquisitions, including the impact of the Müller acquisition, and continued organic growth in agriculture and correction services. Agriculture continued to experience growth in North America in our aftermarket and OEM sales. Europe and Brazil were also up and continued to reflect penetration-related growth opportunities. Growth in Europe was also impacted positively by the Müller acquisition. Segment operating income increased due to increased revenue, partially impacted by lower operating margin acquisitions, including Müller.
Transportation
Transportation revenue increased by $74.8 million, or 11%, and segment operating income increased by $28.5 million, or 25%, for fiscal 2018 as compared to fiscal 2017. Revenue increased primarily due to continued organic subscription growth from new and existing transportation and logistics customers and to a lesser extent, product sales, including enterprise software licenses and hardware. Segment operating income and operating income percentage increased primarily due to revenue and gross margin expansion, due to higher margin subscription revenue, partially offset by selected research and development investments.
Transportation revenue increased by $90.3 million, or 15%, and segment operating income increased by $11.0 million, or 11%, for fiscal 2017 as compared to fiscal 2016. Revenue increased primarily due to continued organic growth in the transportation and logistics business, particularly in North America due to the Electronic Logging Device ("ELD") government mandate. The continued technology deployment due to the ELD mandate as well as routing and navigation management products resulted in continued SaaS subscription revenue growth. Segment operating income increased due to revenue expansion in the transportation and logistics business, partially offset by selected growth related investments.
OFF-BALANCE SHEET ARRANGEMENTS
Other than operating leases, inventory purchases, and other commitments incurred in the normal course of business (see Contractual Obligations table below), 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 consolidated financial statements. Additionally, we do not have any interest in, or relationship with, any special purpose entities.
In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers, lessors and parties to other transactions with us, with respect to certain matters. We have agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. From time to time, in connection with divesting some of our businesses or assets, we may also indemnify purchasers for certain matters in the normal course of business, such as breaches of representations, covenants or excluded liabilities. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.
It is not possible to determine the maximum potential exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not been material and no liabilities have been recorded for these obligations on the Consolidated Balance Sheets at the end of fiscal 2018 and 2017.
LIQUIDITY AND CAPITAL RESOURCES
| At the End of Fiscal Year | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Cash and cash equivalents and short-term investments | $ | 172.5 | $ | 537.4 | $ | 327.2 | |||||
| As a percentage of total assets | 3.0 | % | 12.5 | % | 8.9 | % | |||||
| Principal balance of outstanding debt | $ | 1,981.9 | $ | 918.2 | $ | 624.8 | |||||
| Fiscal Years | 2018 | 2017 | 2016 | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| (In millions) | |||||||||||
| Cash provided by operating activities | $ | 486.7 | $ | 429.7 | $ | 431.1 | |||||
| Cash used in investing activities | (1,649.6 | ) | (371.2 | ) | (146.9 | ) | |||||
| Cash provided by (used in) financing activities | 989.4 | 66.5 | (177.3 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (12.5 | ) | 17.4 | (6.8 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | (186.0 | ) | $ | 142.4 | $ | 100.1 |
- See Note 2 of the Notes to the Consolidated Financial Statements.
Cash and Cash Equivalents and Short-Term Investments
At the end of fiscal 2018, cash and cash equivalents and short-term investments totaled $172.5 million compared to $537.4 million at the end of fiscal 2017. We had a principal balance of outstanding debt of $1,981.9 million at the end of fiscal 2018 compared to $918.2 million at the end of fiscal 2017. As a result of the Tax Act, we can repatriate our foreign earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the transition tax and GILTI. We have reinvested a large portion of our undistributed foreign earnings in acquisitions and other investments and we intend to bring back a portion of foreign cash which was subject to the transition tax and GILTI. During fiscal 2018, we repatriated $609.3 million of our foreign earnings to the U.S as a result of the Tax Act. For further information on income taxes, refer to Note 13 to the Consolidated Financial Statements.
Our ability to continue to generate cash from operations will depend in large part on profitability, the rate of collections of accounts receivable, our inventory turns, and our ability to manage other areas of working capital. Our cash, cash equivalents, and short-term investments are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions considered to be of reputable credit and to present little credit risk. Our investment policy requires the portfolio to include only securities with high credit quality and a weighted average maturity not to exceed six months, with the main objective of preserving capital and maintaining liquidity. We maintain an investment portfolio of various holdings, types, and maturities. We classify our investments as short-term investments based on their nature and their availability for use in current operations. We believe that our cash and cash equivalents, short-term investments and borrowings, as described below under the heading "Debt", will be sufficient to meet our anticipated operating cash needs, debt service, stock repurchases under the stock repurchase program, and planned capital expenditures.
Operating Activities
Cash provided by operating activities was $486.7 million for fiscal 2018, as compared to $429.7 million for fiscal 2017. The increase of $57.0 million was primarily driven by an increase in net income, net of non-cash items, and an increase in deferred revenue associated with revenue growth, partially offset by a decrease in other liabilities for income taxes paid.
Cash provided by operating activities was $429.7 million for fiscal 2017, as compared to $431.1 million for fiscal 2016. The decrease of $1.4 million was primarily driven by an increase in inventory requirements and accounts receivable, associated with revenue growth, largely offset by an increase in other liabilities for income taxes accrued due to the impact of the Tax Act.
Investing Activities
Cash used in investing activities was $1,649.6 million for fiscal 2018, as compared to $371.2 million for fiscal 2017. The increase of $1,278.4 million used in investing activities of was primarily due to increased spending for business acquisitions, including the $1,211.3 million purchase of Viewpoint and $485.2 million purchase of e-Builder, partially offset by proceeds from the sale of short-term investments.
Cash used in investing activities was $371.2 million for fiscal 2017, as compared to $146.9 million for fiscal 2016. The increase of $224.3 million used in investing activities was primarily due to increased spending for business acquisitions and purchases of short-term investments, partially offset by proceeds from maturities and sales of short-term investments and proceeds from sales of businesses.
Financing Activities
Cash provided by financing activities was $989.4 million for fiscal 2018, as compared to $66.5 million during fiscal 2017. The increase of cash provided by financing activities of $922.9 million was primarily driven by the net proceeds from our debt facilities and our senior notes offering.
Cash provided by financing activities was $66.5 million for fiscal 2017, as compared to cash used of $177.3 million during fiscal 2016. The increase of cash provided by financing activities of $243.8 million was primarily driven by an increase in debt proceeds, net of repayments, partially offset by stock repurchases.
Accounts Receivable and Inventory Metrics
| At the End of Fiscal Year | 2018 | 2017 | |||
| *As Adjusted | |||||
| Accounts receivable days sales outstanding | 59 | 56 | |||
| Inventory turns per year | 4.9 | 5.4 |
- See Note 2 of the Notes to the Consolidated Financial Statements.
Accounts receivable days sales outstanding were at 59 days at the end of fiscal 2018, as compared to 56 days at the end of fiscal 2017. Our accounts receivable days sales outstanding are calculated based on ending accounts receivable, net, divided by revenue for the fourth fiscal quarter, times a quarterly average of 91 days. Our inventory turns were 4.9 at the end of fiscal 2018, as compared to 5.4 at the end of fiscal 2017. Our inventory turnover is calculated based on total cost of sales for the most recent twelve months divided by average ending inventory, net, for this same twelve month period.
Debt
Each of our debt agreements requires us to maintain compliance with certain debt covenants, all of which we were in compliance with at the end of fiscal 2018.
Senior Notes:
2023 Senior Notes
In June 2018, we issued an aggregate principal amount of $300.0 million in senior notes (the "2023 Senior Notes") that will mature in June 2023 and bear interest at a fixed rate of 4.15 percent per annum. The interest is payable semi-annually in June and December of each year, commencing in December 2018. The interest rate is subject to adjustment from time to time if Moody’s or S&P (or, if applicable, a substitute rating agency) downgrades (or subsequently upgrades) its rating assigned to the 2023 Senior Notes, as set of forth in the applicable indenture. The 2023 Senior Notes were sold at 99.964 percent of the aggregate principal amount. We incurred issuance costs of $0.9 million in connection with the 2023 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the 2023 Senior Notes. The 2023 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.
2028 Senior Notes
In June 2018, we issued an aggregate principal amount of $600.0 million in senior notes (the "2028 Senior Notes") that will mature in June 2028 and bear interest at a fixed rate of 4.90 percent per annum. The interest is payable semi-annually in June and December of each year, commencing in December 2018. The interest rate is subject to adjustment from time to time if Moody’s or S&P (or, if applicable, a substitute rating agency) downgrades (or subsequently upgrades) its rating assigned to the 2028 Senior Notes, as set of forth in the applicable indenture. The 2028 Senior Notes were sold at 99.867 percent of the aggregate principal amount. We incurred issuance costs of $1.8 million in connection with the 2028 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the 2028 Senior Notes. The 2028 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.
2024 Senior Notes
In November 2014, we issued an aggregate principal amount of $400.0 million in senior notes (the "2024 Senior Notes") that will mature in December 2024 and bear interest at a fixed rate of 4.75 percent per annum. The interest is payable semi-annually in December and June of each year. We incurred issuance costs of $3.0 million in connection with the 2024 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the senior notes. The 2024 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.
The 2023 Senior Notes, the 2028 Senior Notes and the 2024 Senior Notes are collectively referred to herein as the “Senior Notes.” We may redeem the notes of each series of Senior Notes at its option in whole or in part at any time, in accordance with the terms and conditions set forth in the indenture governing such series. Such indenture also contains covenants limiting our ability to create certain liens, enter into sale and lease-back transactions and consolidate or merge with or into, or convey, transfer or lease all, or substantially all of our properties and assets, each subject to certain exceptions.
The Senior Notes are classified as long-term debt in the Consolidated Balance Sheets.
Credit facilities:
Bridge Facility
In April 2018, we entered into a bridge loan commitment letter with a group of lenders (the “Bridge Facility”) that was subsequently terminated in June 2018 upon the issuance of the 2023 Senior Notes, the 2028 Senior Notes and after entering into the 2018 Credit Facility (as defined below). We incurred costs in connection with the Bridge Facility of $5.8 million that were recorded to Interest expense, net.
2018 Credit Facility
In May 2018, we entered into a new credit agreement (the “2018 Credit Facility”), with JPMorgan Chase Bank, N.A. and certain other institutional lenders that provides for $1.75 billion of unsecured credit facilities comprised of a $1.25 billion revolving loan facility maturing May 2023 (the “Revolving Credit Facility”) and a $500.0 million delayed draw term loan facility that matures on the third anniversary of the funding date (the “Term Loan”). Subject to the terms of the 2018 Credit Facility, we may request an additional loan facility up to $500.0 million. At the end of fiscal 2018, $425.0 million was outstanding under the Term Loan and no amounts were outstanding under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are available for working capital and general corporate purposes, including permitted acquisitions.
The 2018 Credit Facility also contains customary affirmative and negative covenants including, among other requirements, negative covenants that restrict us and our subsidiaries’ ability to create liens and enter into sale and leaseback transactions and that restrict its subsidiaries’ ability to incur indebtedness. Further, the 2018 Credit Facility contains financial covenants that require us to maintain a minimum interest coverage of not less than 3.50 to 1.00 and a maximum leverage ratio of not greater than 3.50:1.00 (or 4.25:1.00 for the four fiscal quarters beginning in the third quarter of fiscal 2018 and 3.75:1.00 for the subsequent two fiscal quarter or for four fiscal quarters in connection with certain material acquisitions).
Uncommitted Facilities
We also have two $75.0 million and one €100.0 million revolving credit facilities which are uncommitted (the "Uncommitted Facilities") at the end of fiscal 2018. The $255.9 million outstanding under the Uncommitted Facilities at the end of fiscal 2018 and $128.0 million outstanding at the end of fiscal 2017 are classified as short-term debt in the Consolidated Balance Sheet. The weighted average interest rate was 2.16% and 2.24% at the end of fiscal 2018 and 2017, respectively.
Promissory Notes and Other Debt
At the end of fiscal 2018 and 2017, we had promissory notes and other notes payable totaling approximately $1.0 million and $1.2 million, respectively, of which $0.7 million and $0.8 million, respectively, was classified as long-term in the Consolidated Balance Sheet.
For additional discussion of our debt, see Note 7 of the Notes to Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at the end of fiscal 2018:
| Payments Due By Period | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Principal payments on debt (1) | $ | 1,981.9 | $ | 256.2 | $ | 425.7 | $ | 300.0 | $ | 1,000.0 | |||||||||
| Interest payments on debt (2) | 494.0 | 82.1 | 146.7 | 115.5 | 149.7 | ||||||||||||||
| Operating leases obligations | 167.1 | 42.7 | 58.4 | 39.1 | 26.9 | ||||||||||||||
| Other purchase obligations and commitments (3) | 274.6 | 243.2 | 29.0 | 1.6 | 0.8 | ||||||||||||||
| Income taxes payable (4) | 86.9 | 7.6 | 15.1 | 21.7 | 42.5 | ||||||||||||||
| Total | $ | 3,004.5 | $ | 631.8 | $ | 674.9 | $ | 477.9 | $ | 1,219.9 |
| (1) | Amount represents principal payments over the life of the debt obligations. (See Note 7 to the Consolidated Financial Statements for further financial information regarding debt.) |
| (2) | Amount represents the expected interest payments relating to our debt. On November 24, 2014, we issued $400.0 million of 4.75% Senior Notes due December 1, 2024. On June 15, 2018, we issued $300.0 million of 4.15% Senior Notes due June 15, 2023 and $600.0 million of 4.90% Senior Notes due June 15, 2028. The interest on our Senior Notes are payable semi-annually. Interest on our Term Loan and Uncommitted Facilities was estimated to be 3.89% and 2.16% per annum, respectively, based upon recent trends and is payable at least quarterly. |
| (3) | Other purchase obligations and commitments primarily represent open non-cancelable purchase orders for material purchases with our vendors, and also include estimated payments due for acquisition related earn-outs. Purchase obligations exclude agreements that are cancelable without penalty. |
| (4) | Income taxes payable represents a one-time transition tax liability related to known amounts of cash taxes payable in future years as a result of the Tax Act. For further information, see Note 13 to the Consolidated Financial Statements. |
Excluded from the table above are unrecognized tax benefits of $65.8 million included in Other non-current liabilities, including interest and penalties. At this time, we cannot make a reasonably reliable estimate of the period of cash settlement with tax authorities regarding this liability, and therefore, such amounts are not included in the contractual obligations table above.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The impact of recent accounting pronouncements is disclosed in Note 2 of our accompanying Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. The non-GAAP financial measures included in the following tables as well as detailed explanations to the adjustments to comparable GAAP measures, are set forth below:
Non-GAAP revenue
We believe this measure helps investors understand the performance of our business as non-GAAP revenue excludes the effects of certain acquired deferred revenue that was written down to fair value in purchase accounting. Management believes that excluding fair value purchase accounting adjustments more closely correlates with the ordinary and ongoing course of the acquired company’s operations and facilitates analysis of revenue growth and business trends.
Non-GAAP gross margin
We believe our investors benefit by understanding our non-GAAP gross margin as a way of understanding how product mix, pricing decisions and manufacturing costs influence our business. Non-GAAP gross margin excludes the effects of certain acquired deferred revenue that was written down to fair value in purchase accounting, restructuring charges, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up and acquisition/divestiture items from GAAP gross margin. We believe that these adjustments offer investors additional information that may be useful to view trends in our gross margin performance.
Non-GAAP operating expenses
We believe this measure is important to investors evaluating our non-GAAP spending in relation to revenue. Non-GAAP operating expenses exclude restructuring charges, amortization of purchased intangible assets, stock-based compensation, acquisition/divestiture items associated with external and incremental costs resulting directly from merger and acquisition activities such as legal, due diligence, integration and other costs including the acceleration of acquisition stock options, as well as adjustment to the fair value of earn-out liabilities, executive transition costs, and the effects of certain acquired capitalized commissions that were eliminated in purchase accounting from GAAP operating expenses. We believe that these adjustments offer investors supplemental information to facilitate comparison of our operating expenses to our prior results.
Non-GAAP operating income
We believe our investors benefit by understanding our non-GAAP operating income trends which are driven by revenue, gross margin and spending. Non-GAAP operating income excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, and executive transition costs from GAAP operating income. We believe that these adjustments offer an alternative means for our investors to evaluate current operating performance compared to results of other periods.
Non-GAAP non-operating income (expense), net
We believe this measure helps investors evaluate our non-operating income trends. Non-GAAP non-operating income (expense), net excludes acquisition/divestiture gains/losses associated with unusual acquisition related items such as intangible asset impairment charges and gains or losses related to the acquisition or sale of certain businesses and investments and debt issuance costs. We believe that these exclusions provide investors with a supplemental view of our ongoing financial results.
Non-GAAP income tax provision
We believe that providing investors with the non-GAAP income tax provision is beneficial because it provides for consistent treatment of the excluded items in our non-GAAP presentation.
Non-GAAP net income
This measure provides a supplemental view of net income trends which are driven by non-GAAP income before taxes and our non-GAAP tax rate. Non-GAAP net income excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, executive transition costs, debt issuance costs and non-GAAP tax adjustments from GAAP net income. We believe our investors benefit from understanding these adjustments and from an alternative view of our net income performance compared to our past net income performance.
Non-GAAP diluted net income per share
We believe our investors benefit by understanding our non-GAAP operating performance as reflected in a per share calculation as a way of measuring non-GAAP operating performance by ownership in the company. Non-GAAP diluted net income per share excludes the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, executive transition costs, debt issuance costs and non-GAAP tax adjustments from GAAP diluted net income per share. We believe that these adjustments offer investors a useful view of our diluted net income per share compared to our past diluted net income per share.
Adjusted EBITDA
We believe that adjusted EBITDA assists investors in comparing our performance over various reporting periods on a consistent basis. Adjusted EBITDA refers to non-GAAP operating income plus depreciation and income from equity method investments. We also believe the measure provides useful information to investors in understanding and evaluating our operating results in the same manner as our management and board of directors.
These non-GAAP measures can be used to evaluate our historical and prospective financial performance, as well as our performance relative to competitors. We believe some of our investors track our ""core operating performance"" as a means of evaluating our performance in the ordinary, ongoing and customary course of our operations. Core operating performance excludes items that are non-cash, not expected to recur or not reflective of ongoing financial results. Management also believes that looking at our core operating performance provides a supplemental way to provide consistency in period to period comparisons. Accordingly, management excludes from non-GAAP those items relating to the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, restructuring charges, amortization of purchased intangible assets, stock-based compensation, amortization of acquisition-related inventory step-up, acquisition/divestiture items, executive transition costs, debt issuance costs and non-GAAP tax adjustments. For detailed explanations of the adjustments made to comparable GAAP measures, see items ( A ) - ( N ) below.
| Fiscal Years | |||||||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||
| * As Adjusted | * As Adjusted | ||||||||||||||||||||
| (In millions, except per share data) | Dollar Amount | % of Revenue | Dollar Amount | % of Revenue | Dollar Amount | % of Revenue | |||||||||||||||
| REVENUE: | |||||||||||||||||||||
| GAAP revenue: | $ | 3,108.4 | $ | 2,646.5 | $ | 2,362.1 | |||||||||||||||
| Acquired deferred revenue adjustment | ( A ) | 23.6 | 2.8 | 2.6 | |||||||||||||||||
| Non-GAAP Revenue: | $ | 3,132.0 | $ | 2,649.3 | $ | 2,364.7 | |||||||||||||||
| GROSS MARGIN: | |||||||||||||||||||||
| GAAP gross margin: | $ | 1,681.0 | 54.1 | % | $ | 1,377.6 | 52.1 | % | $ | 1,234.5 | 52.3 | % | |||||||||
| Acquired deferred revenue adjustment | ( A ) | 23.6 | 2.8 | 2.6 | |||||||||||||||||
| Restructuring charges | ( B ) | 0.5 | 3.6 | 1.7 | |||||||||||||||||
| Amortization of purchased intangible assets | ( C ) | 103.2 | 85.8 | 88.6 | |||||||||||||||||
| Stock-based compensation | ( D ) | 4.5 | 3.9 | 3.8 | |||||||||||||||||
| Amortization of acquisition-related inventory step-up | ( E ) | 0.2 | 2.8 | — | |||||||||||||||||
| Acquisition / divestiture items | ( F ) | 2.0 | — | — | |||||||||||||||||
| Non-GAAP gross margin: | $ | 1,815.0 | 58.0 | % | $ | 1,476.5 | 55.7 | % | $ | 1,331.2 | 56.3 | % | |||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||
| GAAP operating expenses: | $ | 1,360.3 | 43.8 | % | $ | 1,141.9 | 43.1 | % | $ | 1,054.1 | 44.6 | % |
| Restructuring charges | ( B ) | (8.2 | ) | (6.9 | ) | (11.6 | ) | ||||||||||||||
| Amortization of purchased intangible assets | ( C ) | (76.4 | ) | (63.0 | ) | (62.2 | ) | ||||||||||||||
| Stock-based compensation | ( D ) | (72.4 | ) | (60.9 | ) | (48.8 | ) | ||||||||||||||
| Acquisition / divestiture items | ( F ) | (36.9 | ) | (7.4 | ) | (6.8 | ) | ||||||||||||||
| Executive transition costs | ( G ) | — | — | (1.0 | ) | ||||||||||||||||
| Amortization of acquired capitalized commissions | ( H ) | 4.7 | 1.3 | 1.6 | |||||||||||||||||
| Non-GAAP operating expenses: | $ | 1,171.1 | 37.4 | % | $ | 1,005.0 | 37.9 | % | $ | 925.3 | 39.1 | % | |||||||||
| OPERATING INCOME: | |||||||||||||||||||||
| GAAP operating income: | $ | 320.7 | 10.3 | % | $ | 235.7 | 8.9 | % | $ | 180.4 | 7.6 | % | |||||||||
| Acquired deferred revenue adjustment | ( A ) | 23.6 | 2.8 | 2.6 | |||||||||||||||||
| Restructuring charges | ( B ) | 8.7 | 10.5 | 13.3 | |||||||||||||||||
| Amortization of purchased intangible assets | ( C ) | 179.6 | 148.8 | 150.8 | |||||||||||||||||
| Stock-based compensation | ( D ) | 76.9 | 64.8 | 52.6 | |||||||||||||||||
| Amortization of acquisition-related inventory step-up | ( E ) | 0.2 | 2.8 | — | |||||||||||||||||
| Acquisition / divestiture items | ( F ) | 38.9 | 7.4 | 6.8 | |||||||||||||||||
| Executive transition costs | ( G ) | — | — | 1.0 | |||||||||||||||||
| Amortization of acquired capitalized commissions | ( H ) | (4.7 | ) | (1.3 | ) | (1.6 | ) | ||||||||||||||
| Non-GAAP operating income: | $ | 643.9 | 20.6 | % | $ | 471.5 | 17.8 | % | $ | 405.9 | 17.2 | % | |||||||||
| NON-OPERATING INCOME (EXPENSE), NET: | |||||||||||||||||||||
| GAAP non-operating income (expense), net: | $ | (42.7 | ) | $ | 12.5 | $ | (4.3 | ) | |||||||||||||
| Acquisition / divestiture items | ( F ) | (0.3 | ) | (0.3 | ) | (3.5 | ) | ||||||||||||||
| Debt issuance costs | ( I ) | 6.7 | — | — | |||||||||||||||||
| Non-GAAP non-operating income (expense), net: | $ | (36.3 | ) | $ | 12.2 | $ | (7.8 | ) | |||||||||||||
| GAAP and Non-GAAP Tax Rate % (N) | GAAP and Non-GAAP Tax Rate % (N) | GAAP and Non-GAAP Tax Rate % (N) | |||||||||||||||||||
| INCOME TAX PROVISION (BENEFIT): | |||||||||||||||||||||
| GAAP income tax provision (benefit): | $ | (5.3 | ) | (2 | )% | $ | 129.7 | 52 | % | $ | 43.9 | 25 | % | ||||||||
| Non-GAAP items tax effected: | ( J ) | 47.8 | 46.9 | 55.5 | |||||||||||||||||
| Difference in GAAP and Non-GAAP tax | ( K ) | 27.3 | 14.8 | (3.8 | ) | ||||||||||||||||
| Tax reform impacts | ( L ) | 21.3 | (80.2 | ) | — | ||||||||||||||||
| Reserve release upon statute of limitations expiration | ( M ) | $ | 24.3 | — | $ | — | |||||||||||||||
| Non-GAAP income tax provision: | $ | 115.4 | 19 | % | $ | 111.2 | 23 | % | $ | 95.6 | 24 | % | |||||||||
| NET INCOME: | |||||||||||||||||||||
| GAAP net income attributable to Trimble Inc. | $ | 282.8 | $ | 118.4 | $ | 132.4 | |||||||||||||||
| Acquired deferred revenue adjustment | ( A ) | 23.6 | 2.8 | 2.6 | |||||||||||||||||
| Restructuring charges | ( B ) | 8.7 | 10.5 | 13.3 | |||||||||||||||||
| Amortization of purchased intangible assets | ( C ) | 179.6 | 148.8 | 150.8 | |||||||||||||||||
| Stock-based compensation | ( D ) | 76.9 | 64.8 | 52.6 | |||||||||||||||||
| Amortization of acquisition-related inventory step-up | ( E ) | 0.2 | 2.8 | — | |||||||||||||||||
| Acquisition / divestiture items | ( F ) | 38.6 | 7.1 | 3.3 | |||||||||||||||||
| Executive transition costs | ( G ) | — | — | 1.0 | |||||||||||||||||
| Amortization of acquired capitalized commissions | ( H ) | (4.7 | ) | (1.3 | ) | (1.6 | ) | ||||||||||||||
| Debt issuance costs | ( I ) | 6.7 | — | — |
| Non-GAAP tax adjustments | ( J ) - ( M ) | (120.7 | ) | 18.5 | (51.7 | ) | |||||||||||||||
| Non-GAAP net income attributable to Trimble Inc. | $ | 491.7 | $ | 372.4 | $ | 302.7 | |||||||||||||||
| DILUTED NET INCOME PER SHARE: | |||||||||||||||||||||
| GAAP diluted net income per share attributable to Trimble Inc. | $ | 1.12 | $ | 0.46 | $ | 0.52 | |||||||||||||||
| Acquired deferred revenue adjustment | ( A ) | 0.09 | 0.01 | 0.01 | |||||||||||||||||
| Restructuring charges | ( B ) | 0.04 | 0.04 | 0.06 | |||||||||||||||||
| Amortization of purchased intangible assets | ( C ) | 0.71 | 0.58 | 0.59 | |||||||||||||||||
| Stock-based compensation | ( D ) | 0.30 | 0.25 | 0.20 | |||||||||||||||||
| Amortization of acquisition-related inventory step-up | ( E ) | — | 0.01 | — | |||||||||||||||||
| Acquisition / divestiture items | ( F ) | 0.15 | 0.03 | 0.01 | |||||||||||||||||
| Executive transition costs | ( G ) | — | — | — | |||||||||||||||||
| Amortization of acquired capitalized commissions | ( H ) | (0.02 | ) | — | (0.01 | ) | |||||||||||||||
| Debt issuance costs | ( I ) | 0.03 | — | — | |||||||||||||||||
| Non-GAAP tax adjustments | ( J ) - ( M ) | (0.48 | ) | 0.07 | (0.19 | ) | |||||||||||||||
| Non-GAAP diluted net income per share attributable to Trimble Inc. | $ | 1.94 | $ | 1.45 | $ | 1.19 | |||||||||||||||
| ADJUSTED EBITDA: | |||||||||||||||||||||
| Non-GAAP operating income: | $ | 643.9 | $ | 471.5 | $ | 405.9 | |||||||||||||||
| Depreciation expense | 35.6 | 34.6 | 37.0 | ||||||||||||||||||
| Income from equity method investments, net | 28.7 | 29.5 | 17.6 | ||||||||||||||||||
| Adjusted EBITDA | $ | 708.2 | $ | 535.6 | $ | 460.5 |
- See Note 2 of the Notes to the Consolidated Financial Statements for a summary of adjustments
| (A) | Acquired deferred revenue adjustment. Purchase accounting generally requires us to write-down acquired deferred revenue to fair value. Our GAAP revenue includes the fair value impact from purchase accounting for post contract support and subscriptions contracts assumed in connection with our acquisitions. The non-GAAP adjustment to our revenue is intended to reflect the full amount of such revenue. We believe this adjustment is useful to investors as a measure of the ongoing performance of our business and facilitates analysis of revenue growth and business trends. |
| (B) | Restructuring charges. Included in our GAAP presentation of cost of sales and operating expenses, restructuring charges recorded are primarily for employee compensation resulting from reductions in employee headcount in connection with our company restructurings. We exclude restructuring charges from our non-GAAP measures because we believe they do not reflect expected future operating expenses, they are not indicative of our core operating performance, and they are not meaningful in comparisons to our past operating performance. We have incurred restructuring expense in each of the periods presented. However the amount incurred can vary significantly based on whether a restructuring has occurred in the period and the timing of headcount reductions. |
| (C) | Amortization of purchased intangible assets. Included in our GAAP presentation of gross margin and operating expenses is amortization of purchased intangible assets. U.S. GAAP accounting requires that intangible assets are recorded at fair value and amortized over their useful lives. Consequently, the timing and size of our acquisitions will cause our operating results to vary from period to period, making a comparison to past performance difficult for investors. This accounting treatment may cause differences when comparing our results to companies that grow internally because the fair value assigned to the intangible assets acquired through acquisition may significantly exceed the equivalent expenses that a company may incur for similar efforts when performed internally. Furthermore, the useful life that we use to amortize our intangible assets over may be substantially different from the time period that an internal growth company incurs and recognizes such expenses. We believe that by excluding the amortization of purchased intangible assets, which primarily represents technology and/or customer relationships already developed, it provides an alternative way for investors to compare our operations pre-acquisition to those post-acquisition and to those of our competitors that have pursued internal |
growth strategies. However, we note that companies that grow internally will incur costs to develop intangible assets that will be expensed in the period incurred, which may make a direct comparison more difficult.
| (D) | Stock-based compensation. Included in our GAAP presentation of cost of sales and operating expenses, stock-based compensation consists of expenses for employee stock options and awards and purchase rights under our employee stock purchase plan. We exclude stock-based compensation expense from our non-GAAP measures because some investors may view it as not reflective of our core operating performance as it is a non-cash expense. For fiscal years 2018, 2017 and 2016, stock-based compensation was allocated as follows: |
| Fiscal Years | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Cost of sales | $ | 4.5 | $ | 3.9 | $ | 3.8 | |||||
| Research and development | 15.0 | 10.4 | 9.1 | ||||||||
| Sales and Marketing | 10.0 | 9.3 | 8.3 | ||||||||
| General and administrative | 47.4 | 41.2 | 31.4 | ||||||||
| Total stock-based compensation expense | $ | 76.9 | $ | 64.8 | $ | 52.6 |
| (E) | Amortization of acquisition-related inventory step-up. The purchase accounting entries associated with our business acquisitions require us to record inventory at its fair value, which is sometimes greater than the previous book value of the inventory. Included in our GAAP presentation, the increase in inventory value is amortized to cost of sales over the period that the related product is sold. We exclude inventory step-up amortization from our non-GAAP measures because it is a non-cash expense that we do not believe is indicative of our ongoing operating results. We further believe that excluding this item from our non-GAAP results is useful to investors in that it allows for period-over-period comparability. |
| (F) | Acquisition / divestiture items. Included in our GAAP presentation of cost of sales and operating expenses, acquisition costs consist of external and incremental costs resulting directly from merger and acquisition and strategic investment activities such as legal, due diligence, integration and other closing costs, including the acceleration of acquisition stock options, as well as adjustments to the fair value of earn-out liabilities. Included in our GAAP presentation of non-operating income (expense), net, acquisition/divestiture items includes unusual acquisition, investment and/or divestiture gains/losses. Although we do numerous acquisitions, the costs that have been excluded from the non-GAAP measures are costs specific to particular acquisitions. These are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance. |
| (G) | Executive transition costs. Included in our GAAP presentation of operating expenses are amounts paid to the Company's former CFO upon his departure under the terms of his executive severance agreement. We excluded these payments from our non-GAAP measures because they represent non-recurring expenses and are not indicative of our ongoing operating expenses. We further believe that excluding the executive transition costs from our non-GAAP results is useful to investors in that it allows for period-over-period comparability. |
| (H) | Amortization of acquired capitalized commissions. Purchase accounting generally requires us to eliminate capitalized sales commissions balances as of the acquisition date. Our GAAP sales and marketing expenses generally do not reflect the amortization of these capitalized sales commissions balances. The non-GAAP adjustment to increase our sales and marketing expenses is intended to reflect the full amount of amortization related to such balances as though the acquired companies operated independently in the periods presented. We believe this adjustment to sales and marketing expenses is useful to investors as a measure of the ongoing performance of our business. |
| (I) | Debt issuance costs. Included in our non-operating income (loss), net this amount represents incurred costs in connection with the Bridge Facility, costs associated with the issuance of new credit facilities and Senior Notes that were not capitalized as debt issuance costs and a write-off of debt issuance costs for terminated and/or modified credit facilities. We excluded the debt issuance cost write-off from our non-GAAP measures. We believe that investors benefit from excluding this item from our non-operating income to facilitate an evaluation of our non-operating income trends. |
| (J) | Non-GAAP items tax effected. This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items ( A ) - ( I ) on non-GAAP net income. We believe this information is useful to investors because it provides for consistent treatment of the excluded items in this non-GAAP presentation. |
| (K) | Difference in GAAP and Non-GAAP tax. This amount represents the difference between the GAAP and non-GAAP tax rates applied to the Non-GAAP operating income plus the Non-GAAP non-operating income (expense), net. We believe that investors benefit from excluding this item from our non-GAAP income tax provision because it facilitates a comparison of the non-GAAP tax provision in the current and prior periods. |
| (L) | Tax reform impacts. This amount represents the provision for income taxes recorded as a result of the Tax Act enacted in December 22, 2017. For fiscal 2018, this amount primarily represents a one-time tax benefit from the policy election to establish deferred taxes in relation to GILTI as created by the Tax Act. For fiscal 2017, the provision primarily includes a one-time transition tax on accumulated foreign earnings and related adjustments to deferred taxes and reserves, and revaluation of deferred taxes due to the reduction of U.S. income tax rate. We are required to recognize the effect of the tax law changes in the period of enactment. We excluded this item as it is a non-recurring expense. We believe that investors benefit from excluding this item from our non-GAAP income tax provision because it allows for period-over-period comparability. |
| (M) | Reserve release upon statute of limitations expiration. This amount represents a one-time benefit totaling $24.3 million in fiscal 2018 resulting from a reserve release due to the expiration of year 2010, 2013, and 2014 statute of limitations. We excluded this because it is non-recurring and is not indicative of our core operating performance. |
| (N) | GAAP and non-GAAP tax rate percentages. These percentages are defined as GAAP income tax provision as a percentage of GAAP income before taxes and non-GAAP income tax provision as a percentage of non-GAAP income before taxes. We believe that investors benefit from a presentation of non-GAAP tax rate percentage as a way of facilitating a comparison to non-GAAP tax rates in prior periods. |
Non-GAAP Operating Income
Non-GAAP operating income increased by $172.4 million for fiscal 2018 as compared to fiscal 2017, and increased by $65.6 million for fiscal 2017 as compared to fiscal 2016. Non-GAAP operating income as a percentage of total revenue was 20.6%, 17.8%, and 17.2% for fiscal years 2018, 2017, and 2016, respectively.
The Non-GAAP operating income and Non-GAAP operating income percentage for fiscal 2018 increased primarily due to revenue and operating income expansion across all segments.
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