Item 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.” This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K, as amended, for the fiscal year ended January 3, 2020.

EXECUTIVE LEVEL OVERVIEW

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

Our growth strategy is centered on multiple elements:

Executing on our Connect and Scale 2025 strategy;
Focus on attractive markets with significant growth and profitability potential;
Domain knowledge and technological innovation that benefit a diverse customer base;
Increasing focus on software and services;
Geographic expansion with localization strategy;
Optimized go-to-market strategies to best access our markets; and
Strategic acquisitions

Our focus on these growth drivers has led over time to growth in revenue and profitability and an increasingly diversified business model. We continue to experience a shift in revenue towards a more significant mix of software, recurring revenue, and services, which represented 58% of total revenue for fiscal 2020, and is leading to improved visibility in our businesses. Additionally, our success in driving annualized recurring revenue (“ARR”)(1) growth of 9% year-over-year for fiscal 2020 has positively impacted our revenue mix and growth over time. As our solutions have expanded, our go-to-market model has also evolved with a balanced mix between direct, distribution, and OEM customers as well as an increasing number of enterprise level customer relationships.

(1) See Supplemental Disclosure of Annualized Recurring Revenue and Non-GAAP Financial Measures for definition.

COVID-19 UPDATE

In early March 2020, the World Health Organization characterized COVID-19 as a pandemic. As the COVID-19 pandemic unfolded globally, we implemented protocols to safeguard our employees, customers, suppliers, third-party business partners and communities, and ensure business continuity.

The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors outside of our control, such as its continued and future overall impact on the global economy and in the industries where we operate. We experienced an overall revenue decline in fiscal 2020, due to economic disruptions related to COVID-19 that began in the last weeks of March, primarily in hardware and professional services for the first two quarters. Overall revenue increased in the third and fourth quarters. Despite the revenue shortfall, operating income increased due to improved mix of higher margin sales and reduced spending due to cost containment measures as well as natural reductions in spending resulting from COVID-19 restrictions.

As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration, and the nature and extent of its impact on our business, financial condition, and results of operations. To the extent that regions where we do business or source our products experience additional closures or restrictions on business activity, our results of operations could be harmed.

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

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

Income Taxes

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

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

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

Business Combinations and Valuation of Goodwill and Purchased Intangible Assets

We 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 at 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. Identifiable intangible assets are comprised of distribution channels and distribution rights, patents, licenses, technology, acquired backlog, trademarks, and in-process research and development.

We evaluate goodwill on an annual basis or more frequently if indicators of potential impairment exist. We utilize either a qualitative assessment or a quantitative test to assess the likelihood of an impairment. In performing the qualitative assessment, we consider macroeconomic conditions, industry and market considerations, overall financial performance, and other relevant events and factors that may impact the reporting units. 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.

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We amortize identifiable intangible assets over their estimated useful lives on a straight-line basis. Changes in circumstances such as technological advances, changes to business models, or changes in the capital strategy could result in a revised useful life. If the useful life of an asset is revised, the net book value of the estimated residual value is amortized over its revised remaining useful life. Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable based on their future cash flows. The estimated future cash flows are primarily based upon assumptions about expected future operating performance.

RESULTS OF OPERATIONS

Overview

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


Fiscal Years	2020			2019			2018
(In millions)
Revenue:
Product	$	1,828.0		$	1,934.8		$	1,999.9
Service	644.8			686.2			588.7
Subscription	674.9			643.3			519.8
Total revenue	$	3,147.7		$	3,264.3		$	3,108.4
Gross margin	1,754.9			1,780.9			1,681.0
Gross margin %	55.8		%	54.6		%	54.1		%
Operating income	419.8			375.9			320.7
Operating income as a % of revenue	13.3		%	11.5		%	10.3		%
Diluted earnings per share	$	1.55		$	2.03		$	1.12

Non-GAAP revenue (1)	$	3,152.0		$	3,271.3		$	3,132.0
Non-GAAP operating income (1)	719.6			674.0			642.7
Non-GAAP operating income as a % of Non-GAAP Revenue (1)	22.8		%	20.6		%	20.5		%
Non-GAAP diluted earnings per share (1)	$	2.23		$	1.99		$	1.94

Annualized Recurring Revenue (“ARR”) (1)	$	1,295.8		$	1,193.2		$	1,106.7

(1) See Supplemental Disclosure of Annualized Recurring Revenue and Non-GAAP Financial Measures for definitions.

Basis of Presentation

We have a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2020 was January 1, 2021. Fiscal 2020 and 2018 were both 52-week years. Fiscal 2019 was a 53-week year.

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Fiscal Year 2020 Compared with Fiscal Year 2019

Revenue

In fiscal 2020, total revenue decreased by $116.6 million or 4%. Overall revenue decreased due to weakness in Transportation, and to a lesser extent, Buildings and Infrastructure and Geospatial, which were impacted in the first two quarters by COVID-19. The decrease was partially offset by organic and acquisitions growth in Resources and Utilities, as well as recovery in Buildings and Infrastructure and Geospatial in the third and fourth quarters. We consider acquisition growth to include acquisition revenue that was not applicable in the prior corresponding periods.

By revenue category, overall product revenue decreased $106.8 million or 6%, service revenue decreased $41.4 million or 6%, and subscription revenue increased $31.6 million or 5%. Product revenue decreased primarily due to weakness in our hardware sales in Transportation, and to a lesser extent, Buildings and Infrastructure, partially offset by growth in Resources and Utilities. Geospatial was relatively flat. The decrease in Geospatial hardware sales in the first two quarters was largely offset by increased hardware sales in the third and fourth quarters. Service revenue decreased due to lower professional services associated with customer installations. Subscription revenue increased primarily due to strong organic growth in Buildings and Infrastructure, and to a lesser extent, acquisition revenue from Resources and Utilities, partially offset by weakness in Transportation.

During fiscal 2020, sales to customers in North America represented 52%; Europe represented 29%; Asia Pacific represented 13%; and the rest of world represented 6% of our total revenue.

No single customer accounted for 10% or more of our total revenue in fiscal 2020 and 2019. No single customer accounted for 10% or more of our accounts receivable at the end of fiscal 2020 and 2019.

Gross Margin

Gross margin varies due to several factors including product mix, pricing, distribution channel, production volumes, new product start-up costs, and foreign currency translations.

In fiscal 2020, gross margin decreased by $26.0 million or 1% primarily due to revenue declines as noted above, partially offset by improved product mix. Gross margin as a percentage of total revenue was 55.8% in fiscal 2020 compared to 54.6% in fiscal 2019. This growth in gross margin percentage was driven by improved revenue mix, including increased higher margin software and subscription sales in Buildings and Infrastructure and Resources and Utilities, as well as new product introductions and less discounting in Geospatial, partially offset by product mix and pricing pressures in Transportation.

Operating Income

In fiscal 2020, operating income increased by $43.9 million or 12%. Operating income as a percentage of total revenue for fiscal 2020 was 13.3% compared to 11.5% in fiscal 2019. Despite the revenue shortfall, operating income and operating income as a percentage of total revenue increased due to strong results in Buildings and Infrastructure, Geospatial, and Resources and Utilities including improved mix of higher margin sales, as well as operating expense reductions across all segments, partially offset by weaker sales and gross margin compression in Transportation.

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

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


Fiscal Years	2020			2019			2018
(In millions)
Research and development	$	475.9		$	469.7		$	446.1
Percentage of revenue	15.1		%	14.4		%	14.4		%
Sales and marketing	467.0			504.2			479.8
Percentage of revenue	14.8		%	15.4		%	15.4		%
General and administrative	300.9			330.6			349.8
Percentage of revenue	9.6		%	10.1		%	11.3		%
Total	$	1,243.8		$	1,304.5		$	1,275.7

Fiscal Year 2020 Compared with Fiscal Year 2019

In fiscal 2020, overall, R&D, S&M, and G&A expenses decreased by $60.7 million or 5%.

R&D expense increased by $6.2 million or 1%. The increase in R&D expense was primarily due to higher compensation expense, including incentive compensation, and increased R&D expenses from acquired businesses not included in the prior corresponding period, partially offset by lower consulting and outside services and travel reductions.

We believe that the development and introduction of new products are critical to our future success, and we expect to continue active development of new products.

S&M expense decreased by $37.2 million or 7%. The decrease in S&M expenses was primarily due to travel reductions, lower advertising costs, and lower compensation expense, partially offset by higher S&M expenses from acquired businesses not included in the prior corresponding period.

G&A expense decreased by $29.7 million or 9%. The decrease in G&A expense was primarily due to lower compensation expense, lower tax and legal costs, and travel reductions, partially offset by increased G&A expenses from acquired businesses not included in the prior corresponding period.

Amortization of Purchased Intangible Assets

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


Fiscal Years	2020		2019		2018
(In millions)
Cost of sales	$	92.3	$	94.1	$	103.2
Operating expenses	65.5		73.7		76.4
Total	$	157.8	$	167.8	$	179.6

In fiscal 2020, total amortization of purchased intangibles decreased $10.0 million or 6% primarily due to the expiration of prior year acquisitions' amortization.

Non-operating expense, net

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


Fiscal Years	2020		2019		2018
(In millions)
Interest expense, net	$	(77.6)	$	(82.4)	$	(73.2)

Income from equity method investments, net	39.4		35.8		28.7
Other income, net	13.4		15.5		1.8
Total non-operating expense, net	$	(24.8)	$	(31.1)	$	(42.7)

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In fiscal 2020, total non-operating expense, net decreased by $6.3 million or 20% primarily due to lower interest costs and increased joint venture profitability, partially offset by unfavorable impacts from foreign currency exchange included in Other income, net.

Income Tax Provision

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), enacted on March 27, 2020, provides tax relief to individuals and businesses in light of the impacts of COVID-19. It did not result in material adjustments to our income tax provision or to our net deferred tax assets as of the end of the fourth quarter of fiscal 2020.

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

In December 2019, to align with our international business operations, we completed a non-U.S. intercompany transfer of our intellectual property to a subsidiary in the Netherlands. The transaction resulted in deferred tax assets in the Netherlands and global intangible low-taxed income (“GILTI”) deferred tax liabilities in the U.S., recorded at the applicable statutory tax rates, resulting in a one-time income tax benefit of approximately $206.3 million in the fourth quarter of fiscal 2019.

Our effective income tax rates for fiscal 2020 and 2019 were 1.1% and -49.2%, respectively. The effective income tax rates in fiscal 2020 increased compared to 2019 primarily due to the one-time tax benefit from the non-U.S. intercompany transfer of intellectual property in the fourth quarter of fiscal 2019.

Results by Segment

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

Our Chief Executive Officer and Chief Operating Decision Maker views and evaluates operations based on the results of our reportable operating segments under our management reporting system. These results are not necessarily in conformance with U.S. GAAP. For additional discussion of our segments, see Note 5 of the Notes to the Consolidated Financial Statements.

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


Fiscal Years	2020			2019			2018
(In millions)
Buildings and Infrastructure
Segment revenue	$	1,231.0		$	1,258.2		$	1,087.7
Segment revenue as a percent of total revenue	39		%	38		%	35		%
Segment operating income	$	338.1		$	319.9		$	256.7
Segment operating income as a percent of segment revenue	27.5		%	25.4		%	23.6		%
Geospatial
Segment revenue	$	650.5		$	649.4		$	723.1
Segment revenue as a percent of total revenue	21		%	20		%	23		%
Segment operating income	$	184.4		$	132.2		$	166.4
Segment operating income as a percent of segment revenue	28.3		%	20.4		%	23.0		%
Resources and Utilities
Segment revenue	$	630.0		$	571.4		$	568.1
Segment revenue as a percent of total revenue	20		%	18		%	18		%
Segment operating income	$	221.0		$	169.1		$	168.2
Segment operating income as a percent of segment revenue	35.1		%	29.6		%	29.6		%
Transportation
Segment revenue	$	640.5		$	792.3		$	753.1
Segment revenue as a percent of total revenue	20		%	24		%	24		%
Segment operating income	$	50.1		$	125.9		$	143.3
Segment operating income as a percent of segment revenue	7.8		%	15.9		%	19.0		%

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


Fiscal Years	2020		2019		2018
(In millions)
Consolidated segment operating income	$	793.6	$	747.1	$	734.6
Unallocated corporate expense	(74.0)		(73.1)		(91.9)
Acquired deferred revenue adjustment	(4.3)		(7.0)		(23.6)
Amortization of acquired capitalized commissions	5.5		6.3		4.7
Amortization of purchased intangible assets	(157.8)		(167.8)		(179.6)
Amortization of acquisition-related inventory step-up	—		—		(0.2)
Acquisition / divestiture items	(21.4)		(20.5)		(38.9)
Stock-based compensation / deferred compensation	(90.4)		(81.2)		(75.7)
Restructuring charges / executive transition costs	(28.2)		(27.9)		(8.7)
COVID-19 expenses	(3.2)		—		—
Consolidated operating income	419.8		375.9		320.7
Total non-operating expense, net	(24.8)		(31.1)		(42.7)
Consolidated income before taxes	$	395.0	$	344.8	$	278.0

Fiscal Year 2020 Compared with Fiscal Year 2019

Buildings and Infrastructure

Buildings and Infrastructure revenue decreased by $27.2 million or 2%, and segment operating income increased by $18.2 million or 6%. Revenue decreased primarily due to a decline in civil engineering and construction hardware sales in the first two quarters of fiscal 2020 and lower revenue from professional services due to the economic impacts of COVID-19, partially offset by higher software maintenance and subscription revenue. Hardware sales recovered in the third and fourth quarters due to improved market conditions including pent up demand and government stimulus programs. Segment operating income and

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operating income as a percentage of segment revenue increased due to gross margin improvements from higher mix of software maintenance and subscription revenue as well as cost reductions.

Geospatial

Geospatial revenue increased by $1.1 million or less than 1%, and segment operating income increased by $52.2 million or 39%. Revenue was relatively flat for the year; while survey sales recovered in the third and fourth quarters due to improved market conditions, including pent up demand, government stimulus programs, and new product introductions, there was a decline in the first two quarters due to the economic impacts of COVID-19. Segment operating income and operating income as a percentage of segment revenue increased primarily due to gross margin improvements resulting from new higher margin product introductions and less discounting as well as cost reductions.

Resources and Utilities

Resources and Utilities revenue increased by $58.6 million or 10%, and segment operating income increased by $51.9 million or 31%. Revenue increased due to strength in agriculture reseller and OEM channels resulting from improved market conditions, including stabilization of commodity prices, government stimulus programs, and weather conditions. Acquisition revenue, primarily Cityworks, also contributed to growth. Segment operating income and operating income as a percentage of segment revenue increased due to revenue expansion and gross margin improvements resulting from higher margin software maintenance and subscription sales, as well as cost reductions.

Transportation

Transportation revenue decreased by $151.8 million or 19%, and segment operating income decreased by $75.8 million or 60%. Revenue decreased primarily due to reduced hardware upgrades and subscriber declines, attributable in part to challenges with the electronic logging device transition in the trucking industry, as well as the economic impacts of COVID-19. Conversion of customers from perpetual software to subscription products also reduced revenue. Segment operating income and operating income as a percentage of segment revenue decreased primarily due to the revenue declines, discrete inventory charges, and higher operating expense due to the Kuebix acquisition, partially offset by cost reductions.

OFF-BALANCE SHEET ARRANGEMENTS

Other than 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.

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 may agree 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. 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 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 amount 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 were not material and no liabilities have been recorded for these obligations on the Consolidated Balance Sheets at the end of fiscal 2020 and 2019.

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LIQUIDITY AND CAPITAL RESOURCES


At the End of Fiscal Year	2020			2019			2018
(In millions)
Cash and cash equivalents	$	237.7		$	189.2		$	172.5
As a percentage of total assets	3.5		%	2.8		%	3.0		%
Principal balance of outstanding debt	$	1,555.9		$	1,854.0		$	1,981.9
Fiscal Years	2020			2019			2018
(In millions)
Cash provided by operating activities	$	672.0		$	585.0		$	486.7
Cash used in investing activities	(231.8)			(275.3)			(1,649.6)
Cash provided by (used in) financing activities	(400.3)			(292.6)			989.4
Effect of exchange rate changes on cash and cash equivalents	8.6			(0.4)			(12.5)
Net increase (decrease) in cash and cash equivalents	$	48.5		$	16.7		$	(186.0)

Cash and Cash Equivalents

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 and cash equivalents 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. We believe that our cash and cash equivalents, and borrowings, as described below under the heading “Debt”, along with cash provided by operations, will be sufficient to meet our anticipated operating cash needs, debt service, stock repurchases under our 2017 Stock Repurchase Program, and planned capital expenditures.

Operating Activities

Cash provided by operating activities was $672.0 million for fiscal 2020, compared to $585.0 million for fiscal 2019. The increase of $87.0 million was primarily driven by an increase in net income, net of non-cash items, and favorable working capital changes, including positive accounts receivable impact, due to improved sales linearity and higher accrued compensation, partially offset by deferred revenue and accrued liabilities changes.

Investing Activities

Cash used in investing activities was $231.8 million for fiscal 2020, compared to $275.3 million for fiscal 2019. The decrease of $43.5 million was primarily due to decreased spending for business acquisitions, and to a lessor extent, reduced spending on property and equipment. The current year included Kuebix acquisition compared to the prior year, which included the Cityworks acquisition.

Financing Activities

Cash used in financing activities was $400.3 million for fiscal 2020, compared to $292.6 million during fiscal 2019. The increase of $107.7 million was primarily driven by the increase in debt repayments, net of proceeds, partially offset by a decrease in the repurchase of common stock.

Debt

During fiscal 2020, we repaid $312.2 million of debt, including the full repayment of our term loan, net of borrowings. 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 2020. Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information regarding our debt.

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CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at the end of fiscal 2020:


	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)	$	1,555.9	$	255.8	$	300.1	$	400.0	$	600.0
Interest payments on debt (2)	326.6		63.1		115.0		76.2		72.3
Operating leases (3)	210.5		50.9		61.4		35.9		62.3
Other purchase obligations and commitments (4)	241.1		200.6		40.1		0.4		—
Income taxes payable (5)	69.1		7.3		20.9		40.9		—
Total	$	2,403.2	$	577.7	$	537.5	$	553.4	$	734.6

(1)Amount represents principal payments over the life of our debt obligations. Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information regarding our debt.

(2)Amount represents the expected interest payments relating to our debt, calculated using rates in effect at the end of fiscal 2020. Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information regarding our debt.

(3)Operating leases represent undiscounted lease payments and include short-term leases and leases that were signed, but have not yet commenced at the end of fiscal 2020. Refer to Note 7 in the Notes to Consolidated Financial Statements for additional information regarding our leases.

(4)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.

(5)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.

Excluded from the table above are unrecognized tax benefits of $55.4 million included in Other non-current liabilities, including interest and penalties. At this time, we cannot make a reasonably, reliable estimate of the period of cash settlement with tax authorities regarding this liability, and therefore, such amounts are not included in the contractual obligations table above. Refer to Note 12 in the Notes to Consolidated Financial Statements for additional information regarding our taxes.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

The impact of recent accounting pronouncements is disclosed in Note 1 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.

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

To supplement our consolidated financial information, we believe that the following information is helpful to an overall understanding of our past financial performance and prospects for the future. 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 and detailed explanations to the adjustments to comparable GAAP measures are below.


		Fiscal Years
		2020			2019			2018
(In millions, except per share data)		Dollar Amount		% of Revenue	Dollar Amount		% of Revenue	Dollar Amount		% of Revenue
REVENUE:
GAAP revenue:		$	3,147.7		$	3,264.3		$	3,108.4
Acquired deferred revenue adjustment	(A)	4.3			7.0			23.6
Non-GAAP revenue:		$	3,152.0		$	3,271.3		$	3,132.0

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GROSS MARGIN:
GAAP gross margin:		$	1,754.9	55.8	%	$	1,780.9	54.6	%	$	1,681.0	54.1	%
Acquired deferred revenue adjustment	(A)	4.3				7.0				23.6
Amortization of purchased intangible assets	(C)	92.3				94.1				103.2
Amortization of acquisition-related inventory step-up	(D)	—				—				0.2
Acquisition / divestiture items	(E)	1.7				—				2.0
Stock-based compensation / deferred compensation	(F)	7.2				5.9				4.5
Restructuring charges	(G)	0.8				1.1				0.5
COVID-19 expenses	(H)	0.4				—				—
Non-GAAP gross margin:		$	1,861.6	59.1	%	$	1,889.0	57.7	%	$	1,815.0	58.0	%
OPERATING EXPENSES:
GAAP operating expenses:		$	1,335.1	42.4	%	$	1,405.0	43.0	%	$	1,360.3	43.8	%
Amortization of acquired capitalized commissions	(B)	5.5				6.3				4.7
Amortization of purchased intangible assets	(C)	(65.5)				(73.7)				(76.4)
Acquisition / divestiture items	(E)	(19.7)				(20.5)				(36.9)
Stock-based compensation / deferred compensation	(F)	(83.2)				(75.3)				(71.2)
Restructuring charges / executive transition costs	(G)	(27.4)				(26.8)				(8.2)
COVID-19 expenses	(H)	(2.8)				—				—
Non-GAAP operating expenses:		$	1,142.0	36.2	%	$	1,215.0	37.1	%	$	1,172.3	37.4	%
OPERATING INCOME:
GAAP operating income:		$	419.8	13.3	%	$	375.9	11.5	%	$	320.7	10.3	%
Acquired deferred revenue adjustment	(A)	4.3				7.0				23.6
Amortization of acquired capitalized commissions	(B)	(5.5)				(6.3)				(4.7)
Amortization of purchased intangible assets	(C)	157.8				167.8				179.6
Amortization of acquisition-related inventory step-up	(D)	—				—				0.2
Acquisition / divestiture items	(E)	21.4				20.5				38.9
Stock-based compensation / deferred compensation	(F)	90.4				81.2				75.7
Restructuring charges / executive transition costs	(G)	28.2				27.9				8.7
COVID-19 expenses	(H)	3.2				—				—
Non-GAAP operating income:		$	719.6	22.8	%	$	674.0	20.6	%	$	642.7	20.5	%

NON-OPERATING INCOME (EXPENSE), NET:
GAAP non-operating income (expense), net:		$	(24.8)			$	(31.1)			$	(42.7)
Acquisition / divestiture items	(E)	(12.2)				(12.1)				(0.3)
Deferred compensation	(F)	(7.5)				(6.3)				1.2
Debt issuance costs	(I)	—				—				6.7
Non-GAAP non-operating expense, net:		$	(44.5)			$	(49.5)			$	(35.1)

				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 (benefit) provision:		$	4.4	1.1	%	$	(169.7)	(49.2)	%	$	(5.3)	(1.9)	%
Non-GAAP items tax effected	(J)	48.5				29.6				19.1
Difference in GAAP and Non-GAAP tax rate	(K)	(4.9)				55.6				80.3
Tax reform impacts	(L)	—				—				21.3

IP restructuring and tax law change impacts	(M)	$	64.0			206.3				—
Non-GAAP income tax provision:		$	112.0	16.6	%	$	121.8	19.5	%	$	115.4	19.0	%
NET INCOME:

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GAAP net income attributable to Trimble Inc.:		$	389.9	$	514.3	$	282.8
Acquired deferred revenue adjustment	(A)	4.3		7.0		23.6
Amortization of acquired capitalized commissions	(B)	(5.5)		(6.3)		(4.7)
Amortization of purchased intangible assets	(C)	157.8		167.8		179.6
Amortization of acquisition-related inventory step-up	(D)	—		—		0.2
Acquisition / divestiture items	(E)	9.2		8.4		38.6
Stock-based compensation / deferred compensation	(F)	82.9		74.9		76.9
Restructuring charges / executive transition costs	(G)	28.2		27.9		8.7
COVID-19 expenses	(H)	3.2		—		—
Debt issuance costs	(I)	—		—		6.7
Non-GAAP tax adjustments	(J) - (M)	(107.6)		(291.5)		(120.7)
Non-GAAP net income attributable to Trimble Inc.:		$	562.4	$	502.5	$	491.7
DILUTED NET INCOME PER SHARE:
GAAP diluted net income per share attributable to Trimble Inc.:		$	1.55	$	2.03	$	1.12
Acquired deferred revenue adjustment	(A)	0.02		0.03		0.09
Amortization of acquired capitalized commissions	(B)	(0.02)		(0.02)		(0.02)
Amortization of purchased intangible assets	(C)	0.62		0.66		0.71
Amortization of acquisition-related inventory step-up	(D)	—		—		—
Acquisition / divestiture items	(E)	0.04		0.03		0.15
Stock-based compensation / deferred compensation	(F)	0.33		0.30		0.30
Restructuring charges / executive transition costs	(G)	0.11		0.11		0.04
COVID-19 expenses	(H)	0.01		—		—
Debt issuance costs	(I)	—		—		0.03
Non-GAAP tax adjustments	(J) - (M)	(0.43)		(1.15)		(0.48)
Non-GAAP diluted net income per share attributable to Trimble Inc.:		$	2.23	$	1.99	$	1.94
ADJUSTED EBITDA:
OPERATING INCOME:
GAAP net income attributable to Trimble Inc.:		$	389.9	$	514.3	$	282.8
Non-operating income (expense), net, income tax provision (benefit), and net gain attributable to noncontrolling interests		29.9		(138.4)		37.9
GAAP operating income:		419.8		375.9		320.7
Acquired deferred revenue adjustment	(A)	4.3		7.0		23.6
Amortization of acquired capitalized commissions	(B)	(5.5)		(6.3)		(4.7)
Amortization of purchased intangible assets	(C)	157.8		167.8		179.6
Amortization of acquisition-related inventory step-up	(D)	—		—		0.2
Acquisition / divestiture items	(E)	21.4		20.5		38.9
Stock-based compensation / deferred compensation	(F)	90.4		81.2		75.7
Restructuring charges / executive transition costs	(G)	28.2		27.9		8.7
COVID-19 expenses	(H)	3.2		—		—
Non-GAAP operating income:		$	719.6	$	674.0	$	642.7
Depreciation expense		39.7		39.4		35.6
Income from equity method investments, net		39.4		35.8		28.7

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Adjusted EBITDA:						$	798.7											$	749.2											$	707.0

Annualized Recurring Revenue Explanation

In addition to providing non-GAAP financial measures, we disclose ARR to provide investors with supplementary indicators of the value of our current recurring revenue contracts.

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

Non-GAAP Explanations

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 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, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, and COVID-19 expenses. 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 the effects of certain acquired capitalized commissions that were eliminated in purchase accounting, amortization of purchased intangible assets, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, executive transition costs, and COVID-19 expenses. We believe that these adjustments offer investors supplemental information to facilitate comparison of our operating expenses to our prior results and trends.

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, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, executive transition costs, and COVID-19 expenses. We believe that these adjustments offer a supplemental means for our investors to evaluate current operating performance compared to prior results and trends.

Non-GAAP non-operating expense, net

We believe this measure helps investors evaluate our non-operating income trends. Non-GAAP non-operating expense, net, excludes acquisition/divestiture items, deferred compensation, 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 this measure helps investors because it provides for consistent treatment of excluded items in our non-GAAP presentation and a difference in the GAAP and non-GAAP tax rates. The non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts results from the non-U.S. intercompany transfer of intellectual property, tax law changes, net deferred tax impacts resulting from the U.S. 2017 Tax Act, and significant one-time reserve releases upon statute of limitations expirations. We believe our non-GAAP tax rate facilitates a comparison of our period-to-period results, excluding the above items which can introduce volatility to our tax rate.

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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, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, restructuring charges, executive transition costs, COVID-19 expenses, debt issuance costs, and non-GAAP tax adjustments. We believe our investors benefit from understanding these adjustments and from an alternative view of our net income performance as compared to prior periods and trends.

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, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, restructuring charges, executive transition costs, COVID-19 expenses, debt issuance costs, and non-GAAP tax adjustments. We believe that these adjustments offer investors a useful view of our diluted net income per share as compared to prior periods and trends.

Adjusted EBITDA

Adjusted EBITDA is a performance measure that we believe offers a useful view of the overall operations of our business. We believe it is useful because it facilitates company-to-company operating performance comparisons by removing potential differences caused by variations unrelated to operating performance, such as capital structures (interest expense), income taxes, depreciation and amortization expenses. We define Adjusted EBITDA as non-GAAP operating income plus depreciation expense and income from equity method investments, net. Other companies define Adjusted EBITDA differently and so our measure may not be directly comparable to similarly titled measures. Our investors should consider the limitations of using Adjusted EBITDA, including the fact that this measure does not provide a complete measure of our operating performance. Adjusted EBITDA is not intended to purport to be an alternative to net income or operating income as a measure of operating performance or to cash flow from operating activities as a measure of liquidity. In particular, Adjusted EBITDA is not intended to be a measure of cash flow available for our discretionary expenditures, as this measure does not consider certain cash requirements, such as restructuring charges, executive transition costs, acquisition and divestiture items, interest payments, tax payments and other debt service requirements.

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 the effects of purchase accounting adjustments to certain acquired deferred revenue and acquired capitalized commissions, amortization of purchased intangible assets, amortization of acquisition related inventory step-up, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring charges, executive transition costs, COVID-19 expenses, debt issuance costs, and non-GAAP tax 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)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.

(C)Amortization of purchased intangible assets. Included in our GAAP presentation of cost of sales and operating expenses is amortization of purchased intangible assets. We believe that by excluding the amortization of purchased intangible assets, which primarily represents technology and/or customer relationships already developed, this provides an

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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)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.

(E)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 and adjustments to the fair value of earn-out liabilities. Included in our GAAP presentation of non-operating 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.

(F)Stock-based compensation / deferred compensation. Included in our GAAP presentation of cost of sales and operating expenses are stock-based compensation consists of expenses for employee stock options and awards and purchase rights under our employee stock purchase plan. Additionally included in our GAAP presentation of cost of sales and operating expenses are income or expense associated with movement in our non-qualified deferred compensation plan liabilities. Changes in non-qualified deferred compensation plan assets, included in non-operating expense, net, offset the income or expense in the plan liabilities. We exclude them from our non-GAAP measures because some investors may view it as not reflective of our core operating performance as they are a non-cash item.

(G)Restructuring charges / executive transition costs. 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, and lease and building costs. Additionally, included in our GAAP presentation of operating expenses are amounts paid to former Company executives under the terms of the executive severance agreements. We exclude restructuring charges and executive transition costs 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 expenses 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. Further, we believe that excluding executive transition costs from our non-GAAP results is useful to investors because it allows for period-over-period comparability.

(H)COVID-19 expenses. Included in our GAAP presentation of cost of sales and operating expenses, COVID-19 expenses consist of costs incurred as a direct impact from the COVID-19 virus pandemic, such as cancellation fees of trade shows due to public safety issues, additional costs for disinfecting facilities, and personal protective equipment. We exclude COVID-19 expenses from our non-GAAP measures because we believe they are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance.

(I)Debt issuance costs. Included in our non-operating expense, net this amount represents incurred costs in connection with a bridge facility we put in place for the Viewpoint acquisition, costs associated with the issuance of new credit facilities and our senior notes issued in 2018 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. This amount excludes the GAAP tax rate impact resulting from the tax reform impacts and non-U.S. intercompany transfer of intellectual property, which is separately disclosed in items (L) and (M). We believe this information is useful to investors because it provides for consistent treatment of the excluded items in this non-GAAP presentation.

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(K)Difference in GAAP and Non-GAAP tax rate. This amount represents the difference between the GAAP and non-GAAP tax rates applied to the non-GAAP operating income plus the non-GAAP non-operating expense, net. The GAAP tax rate used for this calculation excludes the net deferred tax impacts resulting from the tax reform impacts and non-U.S. intercompany transfer of intellectual property, which is separately disclosed in items (L) and (M). The non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts results from the non-U.S. intercompany transfer of intellectual property, net deferred tax impacts resulting from the U.S. 2017 Tax Act, and significant one-time reserve releases upon statute of limitations expirations. We believe that investors benefit from excluding this amount 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. The provision primarily includes a one-time tax benefit from the policy election to establish deferred taxes in relation to GILTI as created by the Tax Act. 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)IP restructuring and tax law change impacts. These amounts represent net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property, consistent with tax law changes, including tax rates changes, and our international business operations. We excluded this because it 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.

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