filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates during the first three quarters of 2021. For a complete discussion of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2020 Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, refer to Note 1 “Overview and Accounting Policies” of this Form 10-Q.
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.
Our growth strategy is centered on multiple elements:
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Execute our Connect and Scale 2025 strategy;
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Focus on attractive markets with significant growth and profitability potential;
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Domain knowledge and technological innovation that benefit a diverse customer base;
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Increasing focus on software and services;
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Geographic expansion with localization strategy;
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Optimized go-to-market strategies to best access our markets;
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Strategic acquisitions; and
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Venture fund investments.
Our focus on these growth drivers has led over time to growth in revenue and profitability and an increasingly diversified business model. We continue to experience a shift toward a more significant mix of recurring revenue contracts, as demonstrated by our success in driving annualized recurring revenue (“ARR”)(1) growth of 8% year-over-year at the end of the third quarter of 2021. Excluding the impact of foreign currency and divestitures, organic growth was 11%. This shift has positively impacted our revenue mix and growth over time and is leading to improved visibility in our businesses. Our software, recurring revenue, and services represented 55% of total revenue for the first three quarters of 2021. As our solutions have expanded, our go-to-market model has also evolved with a balanced mix between direct, distribution, and OEM customers as well as an increasing number of enterprise level customer relationships. Additionally, on August 4, 2021, we announced a newly formed strategic venture fund. Our $200 million fund will invest in early- to growth-stage companies that can accelerate innovation and effectively bring new solutions to our customers and industry.
As economic activity continues to recover toward pre-pandemic levels, we continue to experience strong demand for our hardware and associated software offerings. However, due to global supply chain issues caused by impacts of the COVID-19 pandemic and its variant strains and higher demand for our products and services, our operations and the operations of our suppliers have been negatively impacted. Therefore, we have experienced extended delivery times for certain components of our hardware products, increased freight costs, and part and labor shortages. As a result, we are making binding commitments with longer lead times and at higher prices, which may impact our flexibility to adapt to changing market conditions and product demand. We expect these supply chain issues to continue to exist, and we will continue to experience delays in shipping our products and increased costs, which may reduce our revenue and gross margin and continue to increase our backlog.
(1) Refer to “Supplemental Disclosure of Annualized Recurring Revenue and Non-GAAP Financial Measures” section of this Form 10-Q for definition.
COVID-19 UPDATE
For a discussion of the impacts on and risks to our business from COVID-19, refer to “Risk Factors” section of the 2020 Form 10-K.
RESULTS OF OPERATIONS
Overview
The following table shows revenue by category, gross margin and gross margin as a percentage of revenue, operating income and operating income as a percentage of revenue, diluted earnings per share, and annualized recurring revenue compared for the periods indicated:
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Dollar Change | % Change | 2021 | 2020 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 551.2 | $ | 461.4 | $ | 89.8 | 19% | $ | 1,685.5 | $ | 1,337.6 | $ | 347.9 | 26% | |||||||||||||||||||||||||||||||||
| Service | 159.9 | 160.7 | (0.8) | —% | 484.3 | 479.7 | 4.6 | 1% | |||||||||||||||||||||||||||||||||||||||
| Subscription | 190.3 | 170.0 | 20.3 | 12% | 563.3 | 500.7 | 62.6 | 13% | |||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 901.4 | $ | 792.1 | $ | 109.3 | 14% | $ | 2,733.1 | $ | 2,318.0 | $ | 415.1 | 18% | |||||||||||||||||||||||||||||||||
| Gross margin | $ | 504.5 | $ | 439.7 | $ | 64.8 | 15% | $ | 1,523.2 | $ | 1,286.4 | $ | 236.8 | 18% | |||||||||||||||||||||||||||||||||
| Gross margin as a % of revenue | 56.0 | % | 55.5 | % | 55.7 | % | 55.5 | % | |||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 147.5 | $ | 102.0 | $ | 45.5 | 45% | $ | 433.2 | $ | 297.9 | $ | 135.3 | 45% | |||||||||||||||||||||||||||||||||
| Operating income as a % of revenue | 16.4 | % | 12.9 | % | 15.9 | % | 12.9 | % | |||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.49 | $ | 0.34 | $ | 0.15 | 44% | $ | 1.48 | $ | 0.83 | $ | 0.65 | 78% | |||||||||||||||||||||||||||||||||
| Non-GAAP revenue (1) | $ | 901.4 | $ | 792.8 | $ | 108.6 | 14% | $ | 2,733.4 | $ | 2,322.0 | $ | 411.4 | 18% | |||||||||||||||||||||||||||||||||
| Non-GAAP operating income (1) | $ | 214.7 | $ | 191.8 | $ | 22.9 | 12% | $ | 652.5 | $ | 522.9 | $ | 129.6 | 25% | |||||||||||||||||||||||||||||||||
| Non-GAAP operating income as a % of Non-GAAP Revenue(1) | 23.8 | % | 24.2 | % | 23.9 | % | 22.5 | % | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP diluted earnings per share (1) | $ | 0.66 | $ | 0.60 | $ | 0.06 | 10% | $ | 2.04 | $ | 1.61 | $ | 0.43 | 27% | |||||||||||||||||||||||||||||||||
| Annualized Recurring Revenue (“ARR”) (1) | $ | 1,363.6 | $ | 1,259.1 | $ | 104.5 | 8% | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
(1) Refer to “Supplemental Disclosure of Annualized Recurring Revenue and Non-GAAP Financial Measures” of this Form 10-Q for definitions.
Third Quarter and First Three Quarters of 2021 Compared with Third Quarter and First Three Quarters of 2020
Revenue
Despite supply constraints and increases in our backlog, revenue increased for the third quarter and first three quarters due to strong demand for our hardware and related software, as compared with reduced demand due to the impacts of COVID-19 lockdowns in the prior year, and strong recovery in 2021 in markets across major regions. Growth in subscription sales in many of our software businesses continued to remain strong.
Product revenue increased for the third quarter and first three quarters primarily due to strong hardware and related software sales in Geospatial, Resources and Utilities, and Buildings and Infrastructure. To a lesser extent, Transportation sales also contributed to growth. Service revenue was relatively flat, and subscription revenue increased primarily due to strong growth in Buildings and Infrastructure, and to a lesser extent, Resources and Utilities, slightly offset by a decrease in Transportation.
Gross Margin
Gross margin increased for the third quarter and first three quarters primarily due to strong revenue growth. Gross margin as a percentage of revenue remained relatively flat due to lower intangibles amortization, less product discounting, and favorable product mix, offset by increased supply chain costs for hardware products.
Operating Income
Operating income and operating income as a percentage of revenue increased for the third quarter primarily due to revenue growth in Geospatial, Buildings and Infrastructure, Resources and Utilities, and Transportation as well as overall consistent gross margin.
Operating income and operating income as a percentage of revenue increased for the first three quarters primarily due to strong revenue growth in Geospatial, Buildings and Infrastructure, and Resources and Utilities, partially offset by a decrease in Transportation.
Research and Development, Sales and Marketing, and General and Administrative Expense
The following table shows research and development (“R&D”), sales and marketing (“S&M”), and general and administrative (“G&A”) expense and expense as a percentage of revenue compared for the periods indicated:
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Dollar Change | % Change | 2021 | 2020 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 132.5 | $ | 117.9 | $ | 14.6 | 12% | $ | 400.2 | $ | 350.1 | $ | 50.1 | 14% | |||||||||||||||||||||||||||||||||
| Percentage of revenue | 14.7 | % | 14.9 | % | 14.6 | % | 15.1 | % | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 125.5 | $ | 111.6 | $ | 13.9 | 12% | $ | 373.1 | $ | 346.9 | $ | 26.2 | 8% | |||||||||||||||||||||||||||||||||
| Percentage of revenue | 13.9 | % | 14.1 | % | 13.7 | % | 15.0 | % | |||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 85.2 | $ | 79.4 | $ | 5.8 | 7% | $ | 270.2 | $ | 221.2 | $ | 49.0 | 22% | |||||||||||||||||||||||||||||||||
| Percentage of revenue | 9.5 | % | 10.0 | % | 9.9 | % | 9.5 | % | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 343.2 | $ | 308.9 | $ | 34.3 | 11% | $ | 1,043.5 | $ | 918.2 | $ | 125.3 | 14% | |||||||||||||||||||||||||||||||||
R&D expense increased for the third quarter and first three quarters primarily due to higher compensation expense, including incentive compensation, partially offset by lower consulting and outside services.
We believe that the development and introduction of new solutions are critical to our future success, and we expect to continue the active development of new products.
S&M expense increased for the third quarter and first three quarters primarily due to higher compensation expense, including incentive compensation and commissions.
G&A expense increased for the third quarter and first three quarters primarily due to higher compensation expense, including incentive compensation, and to a lesser extent, higher consulting and legal fees. In addition, increases for the first three quarters were partially offset by the impact of higher bad debt expense in the first quarter of the prior year.
Amortization of Purchased Intangible Assets
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Dollar Change | % Change | 2021 | 2020 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 22.0 | $ | 23.3 | $ | (1.3) | (6)% | $ | 66.1 | $ | 70.0 | $ | (3.9) | (6)% | |||||||||||||||||||||||||||||||||
| Operating expenses | 12.3 | 16.7 | (4.4) | (26)% | 39.0 | 50.2 | (11.2) | (22)% | |||||||||||||||||||||||||||||||||||||||
| Total amortization expense of purchased intangibles | $ | 34.3 | $ | 40.0 | $ | (5.7) | (14)% | $ | 105.1 | $ | 120.2 | $ | (15.1) | (13)% | |||||||||||||||||||||||||||||||||
| Total amortization expense of purchased intangibles as a percentage of revenue | 4 | % | 5 | % | 4 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Total amortization expense of purchased intangibles decreased for the third quarter and first three quarters due to the expiration of prior year acquisitions' amortization.
Non-operating Income (Expense), Net
The components of non-operating income (expense), net, were as follows:
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Dollar Change | % Change | 2021 | 2020 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | $ | (15.9) | $ | (19.6) | $ | 3.7 | (19)% | $ | (49.4) | $ | (59.7) | $ | 10.3 | (17)% | |||||||||||||||||||||||||||||||||
| Income from equity method investments, net | 8.5 | 10.8 | (2.3) | (21)% | 30.3 | 29.9 | 0.4 | 1% | |||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 16.6 | 3.2 | 13.4 | 419% | 42.4 | (1.4) | 43.8 | (3129)% | |||||||||||||||||||||||||||||||||||||||
| Total non-operating income (expense), net | $ | 9.2 | $ | (5.6) | $ | 14.8 | (264)% | $ | 23.3 | $ | (31.2) | $ | 54.5 | (175)% |
Non-operating income increased for the third quarter and first three quarters primarily due to the recognition of gains from the sale of businesses included in Other income (expense), net, and to a lesser extent, lower interest costs associated with a decrease in our outstanding debt.
Income Tax Provision
For the third quarter, our effective income tax rate was 20.9%, as compared to 12.0% in the prior year. The increase was primarily due to a tax benefit from reserve releases related to the expiration of the U.S. federal statute of limitations in the prior year. For the first three quarters, our effective income tax rate was 17.3%, as compared to 21.3% in the prior year. The decrease was primarily due to one-time tax benefits from a foreign deferred tax asset and income tax refund, as well as an increased tax benefit from stock-based compensation deductions.
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 (chief operating decision maker) views and evaluates operations based on the results of our reportable operating segments under our management reporting system. For additional discussion of our segments, refer to Note 5 “Segment Information” of this Form 10-Q.
The following table is a summary of revenue and operating income by segment compared for the periods indicated:
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Dollar Change | % Change | 2021 | 2020 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Buildings and Infrastructure | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 349.7 | $ | 317.4 | $ | 32.3 | 10% | $ | 1,057.6 | $ | 909.6 | $ | 148.0 | 16% | |||||||||||||||||||||||||||||||||
| Segment revenue as a percent of total revenue | 39 | % | 40 | % | 39 | % | 39 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 100.6 | $ | 95.9 | 4.7 | 5% | $ | 301.1 | $ | 242.1 | 59.0 | 24% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a percent of segment revenue | 28.8 | % | 30.2 | % | 28.5 | % | 26.6 | % | |||||||||||||||||||||||||||||||||||||||
| Geospatial | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 205.4 | $ | 165.6 | 39.8 | 24% | $ | 606.8 | $ | 457.0 | 149.8 | 33% | |||||||||||||||||||||||||||||||||||
| Segment revenue as a percent of total revenue | 23 | % | 21 | % | 22 | % | 20 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 64.9 | $ | 51.4 | 13.5 | 26% | $ | 179.7 | $ | 119.3 | 60.4 | 51% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a percent of segment revenue | 31.6 | % | 31.0 | % | 29.6 | % | 26.1 | % | |||||||||||||||||||||||||||||||||||||||
| Resources and Utilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 184.8 | $ | 150.6 | 34.2 | 23% | $ | 587.5 | $ | 474.7 | 112.8 | 24% | |||||||||||||||||||||||||||||||||||
| Segment revenue as a percent of total revenue | 21 | % | 19 | % | 21 | % | 20 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 60.6 | $ | 54.3 | 6.3 | 12% | $ | 211.2 | $ | 170.3 | 40.9 | 24% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a percent of segment revenue | 32.8 | % | 36.1 | % | 35.9 | % | 35.9 | % | |||||||||||||||||||||||||||||||||||||||
| Transportation | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 161.5 | $ | 159.2 | 2.3 | 1% | $ | 481.5 | $ | 480.7 | 0.8 | —% | |||||||||||||||||||||||||||||||||||
| Segment revenue as a percent of total revenue | 18 | % | 20 | % | 18 | % | 21 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 15.3 | $ | 8.6 | 6.7 | 78% | $ | 36.5 | $ | 39.9 | (3.4) | (9)% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a percent of segment revenue | 9.5 | % | 5.4 | % | 7.6 | % | 8.3 | % | |||||||||||||||||||||||||||||||||||||||
The following table is a reconciliation of our consolidated segment operating income to consolidated income before taxes:
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Consolidated segment operating income | $ | 241.4 | $ | 210.2 | $ | 728.5 | $ | 571.6 | |||||||||||||||
| Unallocated general corporate expenses | (26.7) | (18.4) | (76.0) | (48.7) | |||||||||||||||||||
| Acquired deferred revenue adjustment | — | (0.7) | (0.3) | (4.0) | |||||||||||||||||||
| Amortization of acquired capitalized commissions | 1.1 | 1.3 | 3.4 | 4.2 | |||||||||||||||||||
| Amortization of purchased intangible assets | (34.3) | (40.0) | (105.1) | (120.2) | |||||||||||||||||||
| Acquisition / divestiture items | (0.2) | (3.7) | (10.3) | (16.4) | |||||||||||||||||||
| Stock-based compensation / deferred compensation | (32.1) | (32.0) | (99.1) | (61.9) | |||||||||||||||||||
| Restructuring and other costs | (1.7) | (14.7) | (7.9) | (26.7) | |||||||||||||||||||
| Consolidated operating income | 147.5 | 102.0 | 433.2 | 297.9 | |||||||||||||||||||
| Total non-operating income (expense), net | 9.2 | (5.6) | 23.3 | (31.2) | |||||||||||||||||||
| Consolidated income before taxes | $ | 156.7 | $ | 96.4 | $ | 456.5 | $ | 266.7 |
Buildings and Infrastructure
Revenue increased for the third quarter and first three quarters primarily due to strong demand for our civil construction hardware and related software and from strong recovery in markets across major regions, including strong residential construction and infrastructure spend. Additionally, higher subscription revenue in our software businesses benefited from the continued cumulative effect of conversions from perpetual licenses to subscription offerings for existing and new customers.
Operating income increased for the third quarter and first three quarters primarily due to higher revenue and relatively consistent gross margin. Increased supply chain costs for hardware products were largely mitigated by less discounting and favorable product mix. Operating income as a percentage of revenue was slightly down for the third quarter due to increased operating expense.
Geospatial
Revenue increased for the third quarter and first three quarters primarily due to strong demand for geospatial survey products, with strong recovery in markets across major regions, including strong residential construction, infrastructure, and utilities spend. Competitive products, including the R12i, helped win business.
Operating income and operating income as a percentage of revenue increased for the third quarter and first three quarters primarily due to higher revenue, relatively consistent gross margin, and operating cost containment. Increased supply chain costs for hardware products were largely mitigated by less discounting and favorable product mix.
Resources and Utilities
Revenue increased for the third quarter and first three quarters primarily due to continued agriculture business strength in the reseller and OEM channels in markets across major regions. Strong market fundamentals, including favorable commodity prices, continued to fuel growth.
Operating income increased for the third quarter and first three quarters primarily due to higher revenue and operating expense containment; gross margin was down due to product mix and increased supply chain costs for hardware products, partially offset by customer price increases and less discounting. Operating income as a percentage of revenue was down for the third quarter and flat for the first three quarters due to lower gross margin.
Transportation
Revenue increased for the third quarter due to continued growth in enterprise software sales, partially offset by the impact of a divestiture. Enterprise revenue continued to experience subscription revenue growth as the business transitioned from a perpetual software license model. Revenue was relatively flat for the first three quarters due to increased enterprise and mobility sales, partially offset by the impact of a divestiture.
Operating income and operating income as a percentage of revenue increased for the third quarter due to slightly higher revenue, improved gross margin from favorable product mix and a prior year discrete inventory charge, as well as operating expense containment. Operating income and operating income as a percentage of revenue decreased for the first three quarters due to relatively flat revenue and consistent gross margin.
LIQUIDITY AND CAPITAL RESOURCES
| Third Quarter of | Year End | ||||||||||||||||||||||
| As of | 2021 | 2020 | Dollar Change | % Change | |||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 513.2 | $ | 237.7 | $ | 275.5 | 116 | % | |||||||||||||||
| As a percentage of total assets | 7.3 | % | 3.5 | % | |||||||||||||||||||
| Principal balance of outstanding debt | $ | 1,329.2 | $ | 1,555.9 | $ | (226.7) | (15) | % | |||||||||||||||
| First Three Quarters of | |||||||||||||||||||||||
| 2021 | 2020 | Dollar Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 595.2 | $ | 483.7 | $ | 111.5 | 23 | % | |||||||||||||||
| Net cash provided by (used in) investing activities | 51.0 | (244.1) | 295.1 | (121) | % | ||||||||||||||||||
| Net cash used in financing activities | (363.2) | (243.1) | (120.1) | 49 | % | ||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (7.5) | (1.7) | (5.8) | 341 | % | ||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 275.5 | $ | (5.2) |
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, any stock repurchases under the stock repurchase program, and planned expenditures related to our Connect and Scale 2025 strategy in the next twelve months.
Operating Activities
The increase in cash provided by operating activities was primarily driven by higher net income adjusted for non-cash items, and relatively consistent net working capital requirements.
Investing Activities
The increase in cash provided by investing activities was primarily due to the Kuebix acquisition included in the prior year, and net proceeds from the sale of businesses and sale of property and equipment during 2021.
Financing Activities
The increase in cash used in financing activities was primarily driven by an increase in repurchases of common stock, a decrease in debt proceeds, net of debt repayments, and an increase in withholding tax payment on vesting of restricted stock awards.
Debt
During the first three quarters , we repaid $222.8 million of debt, net of debt proceeds. 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 the third quarter of 2021. Refer to Note 6 “Debt” of this Form 10-Q for more information regarding our debt.
Off Balance Sheet Financing and Liabilities
Except for those disclosed in Note 13, “Commitments and Contingencies” in Part I, Item 1 of this Form 10-Q, there have been no material changes outside of the ordinary course of business to our contractual obligations and commitments disclosed in our 2020 Form 10-K.
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 Condensed Consolidated Balance Sheets at the end of the third quarter of 2021 and 2020.
SUPPLEMENTAL DISCLOSURE OF ANNUALIZED RECURRING REVENUE AND NON-GAAP FINANCIAL MEASURES
To supplement our condensed consolidated financial information, we believe that the following information is helpful to gain 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.
| Third Quarter of | First Three Quarters of | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Dollar | % of | Dollar | % of | Dollar | % of | Dollar | % of | ||||||||||||||||||||||||||||||||||
| (In millions, except per share amounts) | Amount | Revenue | Amount | Revenue | Amount | Revenue | Amount | Revenue | |||||||||||||||||||||||||||||||||
| REVENUE: | |||||||||||||||||||||||||||||||||||||||||
| GAAP revenue: | $ | 901.4 | $ | 792.1 | $ | 2,733.1 | $ | 2,318.0 | |||||||||||||||||||||||||||||||||
| Acquired deferred revenue adjustment | (A) | — | 0.7 | 0.3 | 4.0 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP revenue: | $ | 901.4 | $ | 792.8 | $ | 2,733.4 | $ | 2,322.0 | |||||||||||||||||||||||||||||||||
| GROSS MARGIN: | |||||||||||||||||||||||||||||||||||||||||
| GAAP gross margin: | $ | 504.5 | 56.0 | % | $ | 439.7 | 55.5 | % | $ | 1,523.2 | 55.7 | % | $ | 1,286.4 | 55.5 | % | |||||||||||||||||||||||||
| Acquired deferred revenue adjustment | (A) | — | 0.7 | 0.3 | 4.0 | ||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (C) | 22.0 | 23.3 | 66.1 | 70.0 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | — | — | — | 1.7 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (E) | 2.7 | 2.5 | 7.3 | 5.2 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (F) | — | 0.3 | 0.2 | 1.0 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP gross margin: | $ | 529.2 | 58.7 | % | $ | 466.5 | 58.8 | % | $ | 1,597.1 | 58.4 | % | $ | 1,368.3 | 58.9 | % | |||||||||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||||||||||||||||||||
| GAAP operating expenses: | $ | 357.0 | 39.6 | % | $ | 337.7 | 42.6 | % | $ | 1,090.0 | 39.9 | % | $ | 988.5 | 42.6 | % | |||||||||||||||||||||||||
| Amortization of acquired capitalized commissions | (B) | 1.1 | 1.3 | 3.4 | 4.2 | ||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (C) | (12.3) | (16.7) | (39.0) | (50.2) | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | (0.2) | (3.7) | (10.3) | (14.7) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (E) | (29.4) | (29.5) | (91.8) | (56.7) | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (F) | (1.7) | (14.4) | (7.7) | (25.7) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP operating expenses: | $ | 314.5 | 34.9 | % | $ | 274.7 | 34.6 | % | $ | 944.6 | 34.6 | % | $ | 845.4 | 36.4 | % | |||||||||||||||||||||||||
| OPERATING INCOME: | |||||||||||||||||||||||||||||||||||||||||
| GAAP operating income: | $ | 147.5 | 16.4 | % | $ | 102.0 | 12.9 | % | $ | 433.2 | 15.9 | % | $ | 297.9 | 12.9 | % | |||||||||||||||||||||||||
| Acquired deferred revenue adjustment | (A) | — | 0.7 | 0.3 | 4.0 | ||||||||||||||||||||||||||||||||||||
| Amortization of acquired capitalized commissions | (B) | (1.1) | (1.3) | (3.4) | (4.2) | ||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (C) | 34.3 | 40.0 | 105.1 | 120.2 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | 0.2 | 3.7 | 10.3 | 16.4 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (E) | 32.1 | 32.0 | 99.1 | 61.9 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (F) | 1.7 | 14.7 | 7.9 | 26.7 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP operating income: | $ | 214.7 | 23.8 | % | $ | 191.8 | 24.2 | % | $ | 652.5 | 23.9 | % | $ | 522.9 | 22.5 | % | |||||||||||||||||||||||||
| NON-OPERATING INCOME (EXPENSE), NET: | |||||||||||||||||||||||||||||||||||||||||
| GAAP non-operating income (expense), net: | $ | 9.2 | $ | (5.6) | $ | 23.3 | $ | (31.2) | |||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | (19.0) | 0.1 | (41.8) | 2.5 | ||||||||||||||||||||||||||||||||||||
| Deferred compensation | (E) | 0.2 | (4.2) | (4.0) | (4.8) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP non-operating expense, net: | $ | (9.6) | $ | (9.7) | $ | (22.5) | $ | (33.5) | |||||||||||||||||||||||||||||||||
| GAAP and Non-GAAP Tax Rate % | GAAP and Non-GAAP Tax Rate % | GAAP and Non-GAAP Tax Rate % | GAAP and Non-GAAP Tax Rate % | ||||||||||||||||||||||||||||||||||||||
| (I) | (I) | (I) | (I) | ||||||||||||||||||||||||||||||||||||||
| INCOME TAX PROVISION: | |||||||||||||||||||||||||||||||||||||||||
| GAAP income tax provision: | $ | 32.7 | 20.9 | % | $ | 11.6 | 12.0 | % | $ | 79.0 | 17.3 | % | $ | 56.8 | 21.3 | % | |||||||||||||||||||||||||
| Non-GAAP items tax effected | (G) | 10.1 | 10.3 | 29.6 | 46.2 | ||||||||||||||||||||||||||||||||||||
| Difference in GAAP and Non-GAAP tax rate | (H) | (6.3) | 7.3 | 1.9 | (20.7) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP income tax provision: | $ | 36.5 | 17.8 | % | $ | 29.2 | 16.0 | % | $ | 110.5 | 17.5 | % | $ | 82.3 | 16.8 | % | |||||||||||||||||||||||||
| NET INCOME: | |||||||||||||||||||||||||||||||||||||||||
| GAAP net income attributable to Trimble Inc.: | $ | 124.0 | $ | 84.7 | $ | 377.4 | $ | 209.6 | |||||||||||||||||||||||||||||||||
| Acquired deferred revenue adjustment | (A) | — | 0.7 | 0.3 | 4.0 | ||||||||||||||||||||||||||||||||||||
| Amortization of acquired capitalized commissions | (B) | (1.1) | (1.3) | (3.4) | (4.2) | ||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (C) | 34.3 | 40.0 | 105.1 | 120.2 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | (18.8) | 3.8 | (31.5) | 18.9 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (E) | 32.3 | 27.8 | 95.1 | 57.1 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (F) | 1.7 | 14.7 | 7.9 | 26.7 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP tax adjustments | (G) - (H) | (3.8) | (17.6) | (31.5) | (25.5) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP net income attributable to Trimble Inc.: | $ | 168.6 | $ | 152.8 | $ | 519.4 | $ | 406.8 | |||||||||||||||||||||||||||||||||
| DILUTED NET INCOME PER SHARE: | |||||||||||||||||||||||||||||||||||||||||
| GAAP diluted net income per share attributable to Trimble Inc.: | $ | 0.49 | $ | 0.34 | $ | 1.48 | $ | 0.83 | |||||||||||||||||||||||||||||||||
| Acquired deferred revenue adjustment | (A) | — | — | — | 0.02 | ||||||||||||||||||||||||||||||||||||
| Amortization of acquired capitalized commissions | (B) | — | (0.01) | (0.01) | (0.02) | ||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (C) | 0.13 | 0.16 | 0.41 | 0.48 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | (0.07) | 0.02 | (0.12) | 0.07 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (E) | 0.12 | 0.11 | 0.37 | 0.23 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (F) | 0.01 | 0.05 | 0.03 | 0.10 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP tax adjustments | (G) - (H) | (0.02) | (0.07) | (0.12) | (0.10) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP diluted net income per share attributable to Trimble Inc.: | $ | 0.66 | $ | 0.60 | $ | 2.04 | $ | 1.61 | |||||||||||||||||||||||||||||||||
| ADJUSTED EBITDA: | |||||||||||||||||||||||||||||||||||||||||
| GAAP net income attributable to Trimble Inc.: | $ | 124.0 | $ | 84.7 | $ | 377.4 | $ | 209.6 | |||||||||||||||||||||||||||||||||
| Non-operating income (expense), net, income tax provision, and net gain attributable to noncontrolling interests | 23.5 | 17.3 | 55.8 | 88.3 | |||||||||||||||||||||||||||||||||||||
| GAAP operating income: | 147.5 | 102.0 | 433.2 | 297.9 | |||||||||||||||||||||||||||||||||||||
| Acquired deferred revenue adjustment | (A) | — | 0.7 | 0.3 | 4.0 | ||||||||||||||||||||||||||||||||||||
| Amortization of acquired capitalized commissions | (B) | (1.1) | (1.3) | (3.4) | (4.2) | ||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (C) | 34.3 | 40.0 | 105.1 | 120.2 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (D) | 0.2 | 3.7 | 10.3 | 16.4 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (E) | 32.1 | 32.0 | 99.1 | 61.9 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (F) | 1.7 | 14.7 | 7.9 | 26.7 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP operating income: | 214.7 | 191.8 | 652.5 | 522.9 | |||||||||||||||||||||||||||||||||||||
| Depreciation expense | 10.2 | 9.9 | 31.2 | 29.4 | |||||||||||||||||||||||||||||||||||||
| Income from equity method investments, net | 8.5 | 10.8 | 30.3 | 29.9 | |||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 233.4 | 25.9 | % | $ | 212.5 | 26.8 | % | $ | 714.0 | 26.1 | % | $ | 582.2 | 25.1 | % |
Annualized Recurring Revenue Explanation
In addition to providing non-GAAP financial measures, we provide an annualized recurring revenue (“ARR”) performance measure in order to provide investors with a supplementary indicator of the value of the Company's current recurring revenue contracts. ARR represents the estimated annualized value of recurring revenue, including subscription, maintenance and support revenue, and term license contracts for the quarter. ARR is calculated by adding the portion of the contract value of all of our term licenses attributable to the current quarter to our non-GAAP recurring revenue for the current quarter and dividing that sum by the number of days in the quarter and then multiplying that quotient by 365. ARR should be viewed independently of revenue and deferred revenue as it is a performance measure and is not intended to be combined with or to replace either of those items.
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 purchase accounting adjustments to certain acquired deferred revenue, amortization of purchased intangible assets, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs. 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 purchase accounting adjustments to certain acquired capitalized commissions that were eliminated in purchase accounting, amortization of purchased intangible assets, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs. 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, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs. 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 and deferred compensation. 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, and significant one-time reserve releases upon statute of limitations expirations.
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, acquisition/divestiture items, stock-based compensation, restructuring and other 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, acquisition/divestiture items, stock-based compensation, restructuring and other 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 our 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 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 may define Adjusted EBITDA differently. Adjusted EBITDA is not intended to purport to be an alternative to net income or operating income as a measure of operating performance or to cash flow from operating activities as a measure of liquidity.
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, acquisition/divestiture items, stock-based compensation, deferred compensation, restructuring and other 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 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).Acquisition / divestiture items. Included in our GAAP presentation of cost of sales and operating expenses are acquisition costs comprised 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.
(E).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.
(F).Restructuring and other costs. Included in our GAAP presentation of cost of sales and operating expenses are restructuring and other exit costs comprised of termination benefits related to reductions in employee headcount, including executive severance agreements, and the closure or exit of facilities. In addition, other costs include COVID-19 expenses incurred as a direct impact from the COVID-19 virus pandemic, such as cancellation fees of trade shows due to public safety issues, additional costs for disinfecting facilities, and personal protective equipment. We exclude restructuring and other exit costs and COVID-19 expenses 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 comparison to our past operating performance. Furthermore, these costs can vary significantly, thus exclusion from our non-GAAP results is useful to investors because it allows for period-over-period comparability.
(G).Non-GAAP items tax effected. This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (F) 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.
(H).Difference in GAAP and Non-GAAP tax rate. This amount represents the difference between the GAAP and non-GAAP tax rates applied to the non-GAAP operating income plus the non-GAAP non-operating expense, net. The non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property, tax law changes, 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.
(I).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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