Item 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 quarter of 2022. 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 2021 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:

  • Executing on our Connect and Scale strategy;

*•*Increasing focus on software and services;

  • Focus on attractive markets with significant growth and profitability potential;

  • Domain knowledge and technological innovation that benefit a diverse customer base;

  • Geographic expansion with localization strategy;

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

  • Strategic acquisitions;

  • Venture fund investments; and

  • Sustainability.

Our focus on these growth drivers has led over time to growth in revenue and profitability and an increasingly diversified business model. We continue to experience a shift toward a more significant mix of recurring revenue contracts, as demonstrated by our success in driving annualized recurring revenue (“ARR”) growth of 12% year-over-year at the end of the first quarter of 2022. Excluding the impact of foreign currency and acquisitions and divestitures, ARR organic growth was 14%. This shift has positively impacted our revenue mix and growth over time and is leading to improved visibility in our businesses. Our software, maintenance, subscriptions, and services represented 56% of total revenue for the first quarter of 2022. 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.

For a full definition of ARR as used in this discussion and analysis, refer to the “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue” later in this Item 2.

Impact of Recent Events on Our Business

Inflationary Cost Increases, Disruption in Our Supply Chain, and Russia’s Invasion of Ukraine

In 2021 and into the first quarter of 2022, we continued to experience inflationary cost increases in certain components of our hardware products and increased freight expenses due to supply chain disruptions resulting from strained transportation capacity, parts and labor shortages, and an increase in worldwide demand for components. Additionally, Russia's invasion of Ukraine and the current lockdowns in China as a result of rising COVID-19 cases may further impact the supply chain, both directly and indirectly. In response to these supply chain disruptions, we continue to make binding commitments with longer lead times, which may negatively impact our working capital in the short term and our flexibility to adapt to changing market conditions and product demand. Although we have initiated customer price increases to offset inflationary pressures, we 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.

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As the Russian invasion of Ukraine continues to evolve, we are monitoring the current and potential impact on our business, our people, and our customers. We stopped selling to Russia and Belarus customers in the first quarter and wrote off uncollected customer receivables and inventory located in these countries, totaling $5.7 million. Any future impairments of other assets, including long-lived assets, would not have a material impact on our financial results. Total revenue associated with Russia and Belarus customers, either sold directly or indirectly through resellers or OEMs, was less than 2% of our total Company revenue for 2021. For 2022, we expect that our current overall demand and backlog position will offset the majority of the revenue loss from these countries. While neither Russia nor Belarus constitutes a material portion of our business, a significant escalation of the conflict could add more pressure on supply chain issues or increase inflationary costs, and therefore, may have a negative impact on our operations.

See “Item 1A. Risk Factors” below for further discussion of the impacts on and risks to our business from Russia’s invasion of Ukraine.

Business Divestitures

On April 13, 2022, we announced that we entered into a definitive agreement to sell our Time and Frequency, LOADRITE, Spectra Precision Tools, and SECO accessories businesses to Precisional LLC, an affiliate of The Jordan Company. These businesses are reported as part of our Buildings and Infrastructure and Geospatial segments. On April 20, we announced that we entered into a definitive agreement to sell our BeenaVision business to Wabtec Corporation. The BeenaVision business is reported as part of our Transportation segment.

Both of these divestitures are in line with our strategy to focus on core areas of our long-term growth and strategic product roadmap. The transactions are subject to a number of customary closing conditions and are expected to close in the second quarter of 2022. The combined proceeds of both transactions are expected to be approximately $216.5 million, subject to working capital adjustments. For fiscal 2021, the revenue and operating income for these businesses was approximately $185.0 million and $37.0 million.

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RESULTS OF OPERATIONS

Overview

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

First Quarter of
20222021Dollar Change% Change
(In millions, except per share amounts)
Revenue:
Product$621.6$539.4$82.215%
Service161.1162.3(1.2)(1)%
Subscription211.0184.826.214%
Total revenue$993.7$886.5$107.212%
Gross margin$549.6$493.3$56.311%
Gross margin as a % of revenue55.3%55.6%
Operating income$156.9$140.9$16.011%
Operating income as a % of revenue15.8%15.9%
Diluted earnings per share$0.44$0.45$(0.01)(2)%
Non-GAAP revenue (1)$993.7$886.7$107.012%
Non-GAAP operating income (1)$233.1$209.2$23.911%
Non-GAAP operating income as a % of Non-GAAP Revenue(1)23.5%23.6%
Non-GAAP diluted earnings per share (1)$0.73$0.66$0.0711%
Annualized Recurring Revenue (“ARR”) (1)$1,472.4$1,319.2$153.212%

(1) Refer to “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue ” of this Form 10-Q for definitions.

First Quarter of 2022 Compared with First Quarter of 2021

Revenue

Despite supply constraints and increases in our backlog, revenue increased due to strong demand for our hardware and related software and higher term license and subscription sales and, to a lesser extent, the impact of customer price increases, slightly offset by unfavorable foreign currency exchange rates.

Product revenue increased primarily due to strong hardware and related perpetual software sales across Buildings and Infrastructure, Geospatial, and Resources and Utilities. Buildings and Infrastructure term license sales also contributed to product revenue growth. Service revenue was relatively flat. Subscription revenue increased primarily due to strong growth in Buildings and Infrastructure and, to a lesser extent, in Resources and Utilities.

Gross Margin

Gross margin increased primarily due to strong revenue growth. Gross margin as a percentage of revenue was relatively flat; gross margin compression in Resources and Utilities caused by hardware supply chain impacts was largely offset by Buildings and Infrastructure software and subscription service margin expansion.

Operating Income

Operating income increased primarily due to revenue growth in Buildings and Infrastructure, Geospatial, and Resources and Utilities, partially offset by gross margin compression in Resources and Utilities, higher restructuring expense, and Russia and Belarus write-offs. Operating income as a percentage of revenue was flat.

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

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

First Quarter of
20222021Dollar Change% Change
(In millions)
Research and development$140.3$129.4$10.98%
Percentage of revenue14.1%14.6%
Sales and marketing$131.9$122.4$9.58%
Percentage of revenue13.3%13.8%
General and administrative$101.5$85.4$16.119%
Percentage of revenue10.2%9.6%
Total$373.7$337.2$36.511%

R&D expense increased primarily due to higher compensation expense, including incentive compensation. 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 primarily due to higher compensation expense, including incentive compensation and commissions, and, to a lesser extent, higher travel expense.

G&A expense increased primarily due to higher bad debt expense associated with Russia and Belarus customers, higher compensation expense, including incentive compensation, and higher consulting expense.

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Amortization of Purchased Intangible Assets

First Quarter of
20222021Dollar Change% Change
(In millions)
Cost of sales$22.5$22.1$0.42%
Operating expenses12.113.7(1.6)(12)%
Total amortization expense of purchased intangibles$34.6$35.8$(1.2)(3)%
Total amortization expense of purchased intangibles as a percentage of revenue3%4%

Total amortization expense of purchased intangibles decreased due to the expiration of prior year acquisitions' amortization.

Non-operating Expense, Net

The components of non-operating expense, net, were as follows:

First Quarter of
20222021Dollar Change% Change
(In millions)
Interest expense, net$(16.0)$(16.9)$0.9(5)%
Income from equity method investments, net9.711.8(2.1)(18)%
Other income (expense), net(12.1)1.6(13.7)(856)%
Total non-operating expense, net$(18.4)$(3.5)$(14.9)426%

Non-operating expense, net increased primarily due to a divestiture-related loss and fluctuations in deferred compensation plan assets, both included in Other income (expense), net, and, to a lesser extent, lower joint venture profitability.

Inco****me Tax Provision

For the first quarter, our effective income tax rate was 20.4%, as compared to 16.6%. The increase was primarily due to a one-time tax benefit from foreign income tax refunds in 2021.

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.

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

First Quarter of
20222021Dollar Change% Change
(In millions)
Buildings and Infrastructure
Segment revenue$397.6$343.1$54.516%
Segment revenue as a percent of total revenue40%39%
Segment operating income$120.7$96.424.325%
Segment operating income as a percent of segment revenue30.4%28.1%
Geospatial
Segment revenue$207.5$181.725.814%
Segment revenue as a percent of total revenue21%20%
Segment operating income$57.9$48.79.219%
Segment operating income as a percent of segment revenue27.9%26.8%
Resources and Utilities
Segment revenue$229.9$205.224.712%
Segment revenue as a percent of total revenue23%23%
Segment operating income$75.1$80.1(5.0)(6)%
Segment operating income as a percent of segment revenue32.7%39.0%
Transportation
Segment revenue$158.7$156.72.01%
Segment revenue as a percent of total revenue16%18%
Segment operating income$9.2$8.40.810%
Segment operating income as a percent of segment revenue5.8%5.4%

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

First Quarter of
20222021
(In millions)
Consolidated segment operating income$262.9$233.6
Unallocated general corporate expenses(29.8)(24.4)
Purchase accounting adjustments(34.6)(34.8)
Acquisition / divestiture items(3.9)(3.5)
Stock-based compensation / deferred compensation(25.0)(28.7)
Restructuring and other costs(12.7)(1.3)
Consolidated operating income156.9140.9
Total non-operating expense, net(18.4)(3.5)
Consolidated income before taxes$138.5$137.4

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Buildings and Infrastructure

Revenue increased primarily due to strong demand for our civil construction hardware and related software across major regions, resulting from strong residential construction spend and higher term license and subscription revenue in our software businesses. The increase in subscription revenue resulted from higher sales to new and existing customers as well as conversions from perpetual licenses to recurring offerings. To a lesser extent, revenue was impacted by customer price increases, partially offset by unfavorable foreign currency exchange rates.

Operating income and operating income as a percentage of revenue increased primarily due to revenue and gross margin expansion and relative operating expense containment. Increased supply chain costs for hardware products were mitigated by customer price increases.

Geospatial

Revenue increased primarily due to strong demand for geospatial survey products and related software sales across major regions. North America was particularly robust. To a lesser extent, revenue was impacted by customer price increases, partially offset by unfavorable foreign currency exchange rates.

Operating income and operating income as a percentage of revenue increased primarily due to revenue growth and relative operating expense containment. Increased supply chain costs for hardware products were mitigated by customer price increases and favorable product mix, including higher margin GNSS sales.

Resources and Utilities

Revenue increased primarily due to continued agriculture business strength in the reseller and OEM channels in markets across major regions. Market fundamentals, including favorable commodity prices, continued to fuel growth. To a lesser extent, revenue was impacted by customer price increases, partially offset by unfavorable foreign currency exchange rates.

Operating income and operating income as a percentage of revenue decreased primarily due to gross margin compression associated with increased supply chain costs for hardware products, partially offset by customer price increases.

Transportation

Revenue increased primarily due to continued growth in enterprise software sales. Enterprise revenue continued to experience term license and subscription revenue growth as the business transitions from a perpetual software license model. Mobility sales were down due to reduced subscriber counts in North America, partially offset by higher sales in Latin America.

Operating income and operating income as a percentage of revenue increased due to slightly higher revenue and gross margin expansion due to product mix and cost reductions.

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LIQUIDITY AND CAPITAL RESOURCES

First Quarter ofYear End
As of20222021Dollar Change% Change
(In millions, except percentages)
Cash and cash equivalents$357.2$325.7$31.510%
As a percentage of total assets5.0%4.6%
Principal balance of outstanding debt$1,300.0$1,300.0$——%
First Quarter of
20222021Dollar Change% Change
(In millions)
Net cash provided by operating activities$153.0$228.2$(75.2)(33)%
Net cash used in investing activities(13.4)(9.2)(4.2)46%
Net cash used in financing activities(109.7)(186.9)77.2(41)%
Effect of exchange rate changes on cash and cash equivalents1.6(5.2)6.8(131)%
Net increase in cash and cash equivalents$31.5$26.9

Operating Activities

The decrease in cash provided by operating activities was primarily driven by higher accounts receivable, higher inventory purchases, and lower accrued compensation, partially offset by higher deferred revenue.

Investing Activities

The increase in cash used in investing activities was primarily due to higher capital expenditures,

Financing Activities

The decrease in cash used in financing activities was primarily driven by a decrease in debt repayments, net of debt proceeds, partially offset by an increase in common stock repurchases.

Cash and Cash Equivalents

We believe that our cash and cash equivalents and borrowings, along with cash provided by operations will be sufficient in the foreseeable future to meet our anticipated operating cash needs, expenditures related to our Connect and Scale strategy, debt service, and any stock repurchases under the stock repurchase program. In addition, on March 24, 2022, we entered into a new five-year, unsecured revolving loan facility for borrowings up to $1.25 billion, which replaced the 2018 Credit Facility. The 2022 Credit Facility contains an option to increase the borrowings up to $1.75 billion with lender approval. As of April 1, 2022, no amounts were outstanding under the 2022 Credit Facility.

We anticipate refinancing some or all of our outstanding indebtedness at or prior to its maturity, which could involve us accessing the capital markets.

A provision enacted in the Tax Cuts and Jobs Act of 2017 related to the capitalization of research and development costs for tax purposes became effective on January 1, 2022. If this provision is not deferred, our full year 2022 tax payments are expected to increase by an estimated $70 million.

Our cash requirements have not otherwise materially changed since the 2021 Form 10-K.

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

To supplement our consolidated financial information, we included non-GAAP financial measures, which are not meant to be considered in isolation or as a substitute for comparable GAAP. We believe non-GAAP financial measures provide useful information to investors and others in understanding our “core operating performance”, which excludes (i) the effect of non-cash items and certain variable charges not expected to recur; and (ii) transactions that are not meaningful in comparison to our past operating performance or not reflective of ongoing financial results. Lastly, we believe that our core operating performance offers a supplemental measure for period-to-period comparisons and can be used to evaluate our historical and prospective financial performance, as well as our performance relative to competitors. In addition to providing non-GAAP financial measures, we disclose Annualized Recurring Revenue (“ARR”) to give the investors supplementary indicators of the value of our current recurring revenue contracts.

ARR represents the estimated annualized value of recurring revenue, 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.

The non-GAAP financial measures, definitions, and explanations to the adjustments to comparable GAAP measures are included below:

First Quarter of
20222021
Dollar% ofDollar% of
(In millions, except per share amounts)AmountRevenueAmountRevenue
REVENUE:
GAAP revenue:$993.7$886.5
Purchase accounting adjustments(A)—0.2
Non-GAAP revenue:$993.7$886.7
GROSS MARGIN:
GAAP gross margin:$549.655.3%$493.355.6%
Purchase accounting adjustments(A)22.522.3
Stock-based compensation / deferred compensation(C)2.22.0
Restructuring and other costs(D)1.1—
Non-GAAP gross margin:$575.457.9%$517.658.4%
OPERATING EXPENSES:
GAAP operating expenses:$392.739.5%$352.439.8%
Purchase accounting adjustments(A)(12.1)(12.5)
Acquisition / divestiture items(B)(3.9)(3.5)
Stock-based compensation / deferred compensation(C)(22.8)(26.7)
Restructuring and other costs(D)(11.6)(1.3)
Non-GAAP operating expenses:$342.334.4%$308.434.8%
OPERATING INCOME:
GAAP operating income:$156.915.8%$140.915.9%
Purchase accounting adjustments(A)34.634.8
Acquisition / divestiture items(B)3.93.5
Stock-based compensation / deferred compensation(C)25.028.7
Restructuring and other costs(D)12.71.3
Non-GAAP operating income:$233.123.5%$209.223.6%
NON-OPERATING EXPENSE, NET:
GAAP non-operating expense, net:$(18.4)$(3.5)
Acquisition / divestiture items(B)8.9(2.1)
Deferred compensation(C)3.3(1.5)
Restructuring and other costs(D)0.1—
Non-GAAP non-operating expense, net:$(6.1)$(7.1)

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GAAP and Non-GAAP Tax Rate %GAAP and Non-GAAP Tax Rate %
(G)(G)
INCOME TAX PROVISION:
GAAP income tax provision:$28.220.4%$22.816.6%
Non-GAAP items tax effected(E)18.110.7
Difference in GAAP and Non-GAAP tax rate(F)(4.1)1.5
Non-GAAP income tax provision:$42.218.6%$35.017.3%
NET INCOME:
GAAP net income attributable to Trimble Inc.:$110.3$114.5
Purchase accounting adjustments(A)34.634.8
Acquisition / divestiture items(B)12.81.4
Stock-based compensation / deferred compensation(C)28.327.2
Restructuring and other costs(D)12.81.3
Non-GAAP tax adjustments(E) - (F)(14.0)(12.2)
Non-GAAP net income attributable to Trimble Inc.:$184.8$167.0
DILUTED NET INCOME PER SHARE:
GAAP diluted net income per share attributable to Trimble Inc.:$0.44$0.45
Purchase accounting adjustments(A)0.140.14
Acquisition / divestiture items(B)0.05—
Stock-based compensation / deferred compensation(C)0.110.11
Restructuring and other costs(D)0.050.01
Non-GAAP tax adjustments(E) - (F)(0.06)(0.05)
Non-GAAP diluted net income per share attributable to Trimble Inc.:$0.73$0.66
ADJUSTED EBITDA:
GAAP net income attributable to Trimble Inc.:$110.3$114.5
Non-operating expense, net, income tax provision, and net gain attributable to noncontrolling interests46.626.4
GAAP operating income:156.9140.9
Purchase accounting adjustments(A)34.634.8
Acquisition / divestiture items(B)3.93.5
Stock-based compensation / deferred compensation(C)25.028.7
Restructuring and other costs(D)12.71.3
Non-GAAP operating income:233.1209.2
Depreciation expense10.510.3
Income from equity method investments, net9.711.8
Adjusted EBITDA$253.325.5%$231.326.1%

Non-GAAP Definitions

Non-GAAP revenue

We define Non-GAAP revenue as GAAP revenue, excluding the effects of purchase accounting adjustments for acquisitions occurring prior to 2021. We believe this measure helps investors understand the performance of our business including acquisitions, 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 define Non-GAAP gross margin as GAAP gross margin, excluding the effects of purchase accounting adjustments, stock-based compensation, deferred compensation, and restructuring and other costs. We believe our investors benefit by understanding our non-GAAP gross margin as a way of understanding how product mix, pricing decisions, and manufacturing costs influence our business.

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Non-GAAP operating expenses

We define Non-GAAP operating expenses as GAAP operating expenses, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs. We believe this measure is important to investors evaluating our non-GAAP spending in relation to revenue.

Non-GAAP operating income

We define Non-GAAP operating income as GAAP operating income, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, deferred compensation, and restructuring and other costs. We believe our investors benefit by understanding our non-GAAP operating income trends, which are driven by revenue, gross margin, and spending.

Non-GAAP non-operating expense, net

We define Non-GAAP non-operating expenses, net as GAAP non-operating expenses, net, excluding acquisition/divestiture items, deferred compensation, and restructuring and other costs. We believe this measure helps investors evaluate our non-operating expense trends.

Non-GAAP income tax provision

We define Non-GAAP income tax provision as GAAP income tax provision, excluding charges and benefits such as net deferred tax impacts resulting from the non-U.S. intercompany transfer of intellectual property, tax law changes, and significant one-time reserve releases upon the statute of limitations expirations. We believe this measure helps investors because it provides for consistent treatment of excluded items in our non-GAAP presentation and a difference in the GAAP and non-GAAP tax rates.

Non-GAAP net income

We define Non-GAAP net income as GAAP net income, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, restructuring and other costs, and non-GAAP tax adjustments. This measure provides a supplemental view of net income trends, which are driven by non-GAAP income before taxes and our non-GAAP tax rate.

Non-GAAP diluted net income per share

We define Non-GAAP diluted net income per share as GAAP diluted net income per share, excluding the effects of purchase accounting adjustments, acquisition/divestiture items, stock-based compensation, restructuring and other costs, and non-GAAP tax adjustments. We believe our investors benefit by understanding our non-GAAP operating performance as reflected in a per share calculation as a way of measuring non-GAAP operating performance by ownership in the company.

Adjusted EBITDA

We define Adjusted EBITDA as non-GAAP operating income plus depreciation expense and income from equity method investments, net. Other companies may define Adjusted EBITDA differently. Adjusted EBITDA is not intended to purport to be an alternative to net income or operating income as a measure of operating performance or cash flow from operating activities as a measure of liquidity. Adjusted EBITDA is a performance measure that we believe offers a useful view of the overall operations of our business because it facilitates operating performance comparisons by removing potential differences caused by variations unrelated to operating performance, such as capital structures (interest expense), income taxes, depreciation and amortization expenses.

Explanations of Non-GAAP adjustments

(A).Purchase accounting adjustments**.** Purchase accounting adjustments consist of the following:

i.Acquired deferred revenue adjustment. We adopted ASU 2021-08 in the fourth quarter of 2021 for all acquisitions occurring in 2021, which requires the application of ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities on the acquisition date. For acquisitions occurring prior to 2021, non-GAAP revenue excludes the adjustment to our revenue as a result of measuring the contract liability at fair value on the acquisition date.

ii.Amortization of acquired capitalized commissions. Purchase accounting generally requires entities to eliminate capitalized sales commissions balances as of the acquisition date. Non-GAAP operating expenses exclude the

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adjustments that eliminate the capitalized sales commissions. For acquisitions occurring prior to 2021, non-GAAP operating expenses exclude the adjustment of acquired capitalized commissions amortization.

iii.Amortization of purchased intangible assets. Non-GAAP gross margin and operating expenses exclude the amortization of purchased intangible assets, which primarily represents technology and/or customer relationships already developed.

(B).Acquisition / divestiture items**.** Non-GAAP gross margin and operating expenses exclude acquisition costs consisting 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. Non-GAAP non-operating expense, net, exclude unusual one-time acquisition/divestiture charges and/or divestiture gains/losses. The costs that have been excluded from the non-GAAP measures are costs specific to particular acquisitions. As a result, these are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance.

(C).Stock-based compensation / deferred compensation**.** Non-GAAP gross margin and operating expenses exclude stock-based compensation and income or expense associated with movement in our non-qualified deferred compensation plan liabilities. Changes in non-qualified deferred compensation plan assets, included in non-operating expense, net, offset the income or expense in the plan liabilities.

(D).Restructuring and other costs. Non-GAAP gross margin and operating expenses exclude restructuring and other exit costs comprised of termination benefits related to reductions in employee headcount, including executive severance agreements, the closure or exit of facilities, and cancellation of certain contracts. In addition, other costs include a one-time charge for Russia and Belarus customer receivables and inventory.

(E).Non-GAAP items tax effected**.** This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (D) on non-GAAP net income.

(F).Difference in GAAP and Non-GAAP tax rate**.** This amount represents the difference between the GAAP and non-GAAP tax rates applied to the non-GAAP operating income plus the non-GAAP non-operating expense, net. The non-GAAP tax rate excludes charges and benefits such as net deferred tax impacts resulting from a non-U.S. intercompany transfer of intellectual property and significant one-time reserve releases upon statute of limitations expirations.

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

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