filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
74K characters. Original on sec.gov · Markdown
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 two quarters of 2023. 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 2022 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 report.
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 benefits a diverse customer base;
-
Geographic expansion with a 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 as demonstrated by our success in driving annualized recurring revenue (“ARR”) of $1,882.9 million, which represents growth of 24% year-over-year at the end of the second quarter of 2023. Excluding the impact of foreign currency, acquisitions, and divestitures, ARR organic growth was 14%. This shift toward recurring revenue has positively impacted our revenue mix and growth over time and is leading to improved visibility in our businesses. Additionally, we continue to maintain focus on new product introductions and transitions to recurring revenue as evidenced by the Transporeon acquisition.
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. In our Resources and Utilities segment, we are currently in the process of further building out our agriculture independent dealer network.
Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we refer to organic revenue growth, which is a non-GAAP measure. For a full definition of ARR, organic ARR, and organic revenue growth as used in this discussion and analysis, refer to the “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue” found later in this Item 2.
Impact of Recent Events on Our Business
Macroeconomic conditions, including geopolitical tensions, such as the ongoing military conflict between Russia and Ukraine and related sanctions, exchange rate and interest rate volatility, and inflationary pressures, will continue to evolve globally. In the first two quarters of 2023, as compared to the prior year, our organic hardware sales declined and bookings moderated as dealers moved towards lower levels of inventories due to improved product lead times and macroeconomic concerns. Geospatial, Buildings and Infrastructure, and Resources and Utilities all had strong hardware sales in the prior year.
Supply Chain
Due to previously extended component lead times, we made binding commitments over a longer horizon for certain components. We expect that our inventory levels will normalize over the next four quarters. However, as inventory levels
continue to normalize, macroeconomic conditions, including rising interest rates and inflation, could negatively impact the timing of inventory normalization.
Foreign Currency Fluctuations
We generate over half of our revenue from sales to customers outside of the U.S. Due to the strengthening of the U.S. dollar, year-over-year unfavorable foreign currency impacts on revenue and operating income for the first two quarters of 2023 were $18.4 million or 1% and $6.3 million or 2%. Impacts for the second quarter of 2023 were minimal.
Interest Rates Fluctuations
The global inflation rate has risen sharply, and interest rates are rising in an effort to curb inflation. These macroeconomic conditions have had and are expected to have a negative impact on our results of operations. Additionally, we may experience higher borrowing costs on variable-rate debt. In the second quarter of 2023, we borrowed $1.2 billion of variable-rate debt in conjunction with the Transporeon acquisition.
Acquisitions and Divestitures
We acquire businesses that align with our long-term growth strategies including our strategic product roadmap and, conversely, we divest certain business that no longer fit those strategies.
On April 3, 2023, we acquired all of the outstanding shares of Transporeon in an all-cash transaction valued at €1.9 billion or $2.1 billion. Transporeon is a Germany-based company and leading cloud-based transportation management software platform that connects key stakeholders across the industry lifecycle to positively impact the optimization of global supply chains, which aligns with our Connect and Scale strategy. By combining Transporeon’s operations with ours, we expect economies of scale and meaningful synergies such as acceleration of recurring revenue, expansion of the addressable market, cross-sell opportunities, and enhanced productivity and sustainability solutions for our customers. Transporeon is reported in our Transportation segment. We have included the financial results of Transporeon in our Consolidated Financial Statements in the second quarter of 2023.
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:
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | % Change | 2023 | 2022 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 490.5 | $ | 531.0 | $ | (40.5) | (8)% | $ | 924.9 | $ | 1,097.8 | $ | (172.9) | (16)% | |||||||||||||||||||||||||||||||||
| Subscription and services | 503.1 | 410.2 | 92.9 | 23% | 984.1 | 837.1 | 147.0 | 18% | |||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 993.6 | $ | 941.2 | $ | 52.4 | 6% | $ | 1,909.0 | $ | 1,934.9 | $ | (25.9) | (1)% | |||||||||||||||||||||||||||||||||
| Gross margin | $ | 604.5 | $ | 537.5 | $ | 67.0 | 12% | $ | 1,165.3 | $ | 1,087.1 | $ | 78.2 | 7% | |||||||||||||||||||||||||||||||||
| Gross margin as a % of revenue | 60.8 | % | 57.1 | % | 61.0 | % | 56.2 | % | |||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 93.6 | $ | 134.9 | $ | (41.3) | (31)% | $ | 230.6 | $ | 291.8 | $ | (61.2) | (21)% | |||||||||||||||||||||||||||||||||
| Operating income as a % of revenue | 9.4 | % | 14.3 | % | 12.1 | % | 15.1 | % | |||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.18 | $ | 0.67 | $ | (0.49) | (73)% | $ | 0.70 | $ | 1.11 | $ | (0.41) | (37)% | |||||||||||||||||||||||||||||||||
| Non-GAAP operating income (1) | $ | 231.0 | $ | 210.7 | $ | 20.3 | 10% | $ | 457.1 | $ | 443.8 | $ | 13.3 | 3% | |||||||||||||||||||||||||||||||||
| Non-GAAP operating income as a % of revenue(1) | 23.2 | % | 22.4 | % | 23.9 | % | 22.9 | % | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP diluted earnings per share (1) | $ | 0.64 | $ | 0.64 | $ | — | NM | $ | 1.35 | $ | 1.38 | $ | (0.03) | (2)% | |||||||||||||||||||||||||||||||||
| Annualized Recurring Revenue (“ARR”) (1) | $ | 1,882.9 | $ | 1,512.5 | $ | 370.4 | 24% | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
(1) Refer to “Supplemental Disclosure of Non-GAAP Financial Measures and Annualized Recurring Revenue” of this report for definitions.
Second Quarter and First Two Quarters of 2023 as Compared to 2022
Revenue
| Change versus the corresponding period in 2022 | Second Quarter of 2023 | First Two Quarters of 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Product | Subscription and Services | Total Revenue | Product | Subscription and Services | Total Revenue | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in Revenue | (8) | % | 23 | % | 6 | % | (16) | % | 18 | % | (1) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions | — | % | 12 | % | 6 | % | 1 | % | 7 | % | 4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Divestitures | (3) | % | (1) | % | (3) | % | (6) | % | (1) | % | (4) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency exchange | — | % | (1) | % | — | % | (1) | % | (1) | % | (1) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organic growth | (5) | % | 13 | % | 3 | % | (10) | % | 13 | % | — | % |
Organic growth increased 3% for the second quarter and was flat for the first two quarters, with strong growth coming from recurring revenue. The breakdown by category is as follows:
Organic product revenue decreased for the second quarter and first two quarters due to reductions in dealer inventory levels as a result of improved product lead times and macroeconomic concerns. The decreases were mainly in Buildings and Infrastructure and Resources and Utilities. Geospatial organic product revenue decreased for the first two quarters for the same reason but increased for the second quarter due to higher demand for surveying products.
Organic subscription and services revenue for the second quarter and first two quarters was up primarily due to strong growth across all segments, particularly for Buildings and Infrastructure. The recurring growth was driven by increased subscription and term license sales to new and existing customers, as evidenced by overall organic ARR growth of 14%.
Gross Margin
Gross margin and gross margin as a percentage of revenue increased for the second quarter and first two quarters due to strong growth of software and subscription revenue, favorable pricing and costs, as well as a higher margin mix within our product offerings.
Operating Income
Operating income and operating income as a percentage of revenue decreased for the second quarter and first two quarters primarily due to increased operating expense, partially offset by gross margin expansion. Operating expense increased primarily associated with the Transporeon acquisition, including acquisition costs and higher amortization of purchased intangible assets. In addition, we incurred higher research and development and general and administrative costs, including investments related to our Connect and Scale strategy.
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:
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | % Change | 2023 | 2022 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 174.8 | $ | 140.1 | $ | 34.7 | 25% | $ | 334.1 | $ | 280.4 | $ | 53.7 | 19% | |||||||||||||||||||||||||||||||||
| Percentage of revenue | 17.6 | % | 14.9 | % | 17.5 | % | 14.5 | % | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 155.3 | $ | 138.9 | $ | 16.4 | 12% | $ | 290.7 | $ | 270.8 | $ | 19.9 | 7% | |||||||||||||||||||||||||||||||||
| Percentage of revenue | 15.6 | % | 14.8 | % | 15.2 | % | 14.0 | % | |||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 141.3 | $ | 106.9 | $ | 34.4 | 32% | $ | 252.0 | $ | 208.4 | $ | 43.6 | 21% | |||||||||||||||||||||||||||||||||
| Percentage of revenue | 14.2 | % | 11.4 | % | 13.2 | % | 10.8 | % | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 471.4 | $ | 385.9 | $ | 85.5 | 22% | $ | 876.8 | $ | 759.6 | $ | 117.2 | 15% | |||||||||||||||||||||||||||||||||
R&D expense increased for the second quarter and first two quarters primarily due to higher compensation expense and the impact of the Transporeon acquisition, partially offset by divestitures and favorable foreign currency impacts. 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 second quarter and first two quarters primarily due to the impact of the Transporeon acquisition and higher marketing and consulting costs, partially offset by divestitures and favorable foreign currency impacts.
G&A expense increased for the second quarter and first two quarters primarily due to the impact of the Transporeon acquisition, including higher transaction costs, increased SaaS costs, and higher compensation expense, partially offset by divestitures.
Amortization of Purchased Intangible Assets
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | % Change | 2023 | 2022 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 30.2 | $ | 21.0 | $ | 9.2 | 44% | $ | 53.2 | $ | 43.5 | $ | 9.7 | 22% | |||||||||||||||||||||||||||||||||
| Operating expenses | 31.9 | 11.3 | 20.6 | 182% | 43.6 | 23.4 | 20.2 | 86% | |||||||||||||||||||||||||||||||||||||||
| Total amortization expense of purchased intangibles | $ | 62.1 | $ | 32.3 | $ | 29.8 | 92% | $ | 96.8 | $ | 66.9 | $ | 29.9 | 45% | |||||||||||||||||||||||||||||||||
| Total amortization expense of purchased intangibles as a percentage of revenue | 6 | % | 3 | % | 5 | % | 3 | % | |||||||||||||||||||||||||||||||||||||||
Total amortization expense of purchased intangibles increased for the second quarter and first two quarters primarily due to amortization of intangibles acquired from the Transporeon acquisition, which were not applicable in the prior year.
Non-operating Income (Expense), Net
The components of non-operating income (expense), net, were as follows:
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | % Change | 2023 | 2022 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Divestitures gain, net | $ | 1.1 | $ | 106.0 | $ | (104.9) | (99)% | $ | 5.1 | $ | 97.1 | $ | (92.0) | (95)% | |||||||||||||||||||||||||||||||||
| Interest expense, net | $ | (46.7) | $ | (15.3) | $ | (31.4) | 205% | (66.4) | (31.3) | (35.1) | 112% | ||||||||||||||||||||||||||||||||||||
| Income from equity method investments, net | 8.0 | 5.8 | 2.2 | 38% | 19.4 | 15.5 | 3.9 | 25% | |||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 1.5 | (9.8) | 11.3 | (115)% | 29.4 | (13.0) | 42.4 | (326)% | |||||||||||||||||||||||||||||||||||||||
| Total non-operating income (expense), net | $ | (36.1) | $ | 86.7 | $ | (122.8) | (142)% | $ | (12.5) | $ | 68.3 | $ | (80.8) | (118)% |
Non-operating expense, net increased for the second quarter and first two quarters primarily due to lower net gains from divestitures and higher interest expense from the new debt associated with the Transporeon acquisition. The increases were partially offset by fluctuations in the deferred compensation plan assets included in other income (expense), net. Additionally, other income (expense), net for the first two quarters of 2023 included a $27.6 million foreign currency hedging gain related to the Transporeon acquisition.
Income Tax Provision
For the second quarter, our effective income tax rate was 22.4%, as compared to 24.2% in the corresponding period in 2022. For the first two quarters, our effective income tax rate was 20.5%, as compared to 22.7% in the prior year. The decreases were primarily due to an increase in tax benefits from foreign-derived intangible income, favorable geographic mix of earnings, and a tax charge associated with prior year divestiture gains, partially offset by lower 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 6 “Segment Information” of this report.
The following table is a summary of revenue and operating income by segment compared for the periods indicated:
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | % Change | 2023 | 2022 | Dollar Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Buildings and Infrastructure | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 410.0 | $ | 382.6 | $ | 27.4 | 7% | $ | 809.5 | $ | 780.2 | $ | 29.3 | 4% | |||||||||||||||||||||||||||||||||
| Segment revenue as a % of total revenue | 41 | % | 41 | % | 43 | % | 40 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 105.8 | $ | 101.4 | 4.4 | 4% | $ | 219.1 | $ | 222.1 | (3.0) | (1)% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a % of segment revenue | 25.8 | % | 26.5 | % | 27.1 | % | 28.5 | % | |||||||||||||||||||||||||||||||||||||||
| Geospatial | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 192.9 | $ | 193.7 | (0.8) | —% | $ | 345.3 | $ | 401.2 | (55.9) | (14)% | |||||||||||||||||||||||||||||||||||
| Segment revenue as a % of total revenue | 19 | % | 20 | % | 18 | % | 21 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 67.1 | $ | 57.8 | 9.3 | 16% | $ | 104.4 | $ | 115.7 | (11.3) | (10)% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a % of segment revenue | 34.8 | % | 29.8 | % | 30.2 | % | 28.8 | % | |||||||||||||||||||||||||||||||||||||||
| Resources and Utilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 196.0 | $ | 214.8 | (18.8) | (9)% | $ | 404.6 | $ | 444.7 | (40.1) | (9)% | |||||||||||||||||||||||||||||||||||
| Segment revenue as a % of total revenue | 20 | % | 23 | % | 21 | % | 23 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 61.3 | $ | 73.0 | (11.7) | (16)% | $ | 140.4 | $ | 148.1 | (7.7) | (5)% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a % of segment revenue | 31.3 | % | 34.0 | % | 34.7 | % | 33.3 | % | |||||||||||||||||||||||||||||||||||||||
| Transportation | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 194.7 | $ | 150.1 | 44.6 | 30% | $ | 349.6 | $ | 308.8 | 40.8 | 13% | |||||||||||||||||||||||||||||||||||
| Segment revenue as a % of total revenue | 20 | % | 16 | % | 18 | % | 16 | % | |||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 30.8 | $ | 11.8 | 19.0 | 161% | $ | 54.2 | $ | 21.0 | 33.2 | 158% | |||||||||||||||||||||||||||||||||||
| Segment operating income as a % of segment revenue | 15.8 | % | 7.9 | % | 15.5 | % | 6.8 | % | |||||||||||||||||||||||||||||||||||||||
The following table is a reconciliation of our consolidated segment operating income to consolidated income before taxes:
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Consolidated segment operating income | $ | 265.0 | $ | 244.0 | $ | 518.1 | $ | 506.9 | |||||||||||||||
| Unallocated general corporate expenses | (34.0) | (33.3) | (61.0) | (63.1) | |||||||||||||||||||
| Amortization of purchased intangible assets | (62.1) | (32.3) | (96.8) | (66.9) | |||||||||||||||||||
| Acquisition / divestiture items | (26.5) | (7.3) | (33.5) | (11.2) | |||||||||||||||||||
| Stock-based compensation / deferred compensation | (42.1) | (26.2) | (77.5) | (51.2) | |||||||||||||||||||
| Restructuring and other costs | (6.7) | (10.0) | (18.7) | (22.7) | |||||||||||||||||||
| Consolidated operating income | 93.6 | 134.9 | 230.6 | 291.8 | |||||||||||||||||||
| Total non-operating income (expense), net | (36.1) | 86.7 | (12.5) | 68.3 | |||||||||||||||||||
| Consolidated income before taxes | $ | 57.5 | $ | 221.6 | $ | 218.1 | $ | 360.1 |
Buildings and Infrastructure
| Second Quarter of 2023 | First Two Quarters of 2023 | |||||||||||||||||||||||||
| Change versus the corresponding period in 2022 | % Change | % Change | ||||||||||||||||||||||||
| Change in Revenue - Buildings and Infrastructure | 7 | % | 4 | % | ||||||||||||||||||||||
| Acquisitions | 3 | % | 3 | % | ||||||||||||||||||||||
| Divestitures | (2) | % | (4) | % | ||||||||||||||||||||||
| Foreign currency exchange | — | % | (1) | % | ||||||||||||||||||||||
| Organic growth | 6 | % | 6 | % | ||||||||||||||||||||||
Organic revenue increased for the second quarter and first two quarters due to strong demand for our subscription and term license software and good net retention. The increases resulted from higher sales to new and existing customers as well as conversions to recurring offerings. Perpetual software revenue increased due to civil construction software passcode unlocks. The increase in organic revenue was offset by lower civil construction hardware sales as dealers worked through their inventories.
Operating income increased for the second quarter primarily due to higher revenue and gross margin expansion, offset by increased operating expense associated with revenue growth as well as investments, including our Connect and Scale strategy. Operating income as a percentage of revenue was relatively flat for the second quarter. Operating income and operating income as a percentage of revenue decreased for the first two quarters due to increased operating expense, partially offset by higher revenue and gross margin expansion.
Geospatial
| Second Quarter of 2023 | First Two Quarters of 2023 | |||||||||||||||||||||||||
| Change versus the corresponding period in 2022 | % Change | % Change | ||||||||||||||||||||||||
| Change in Revenue - Geospatial | — | % | (14) | % | ||||||||||||||||||||||
| Divestitures | (4) | % | (7) | % | ||||||||||||||||||||||
| Foreign currency exchange | — | % | (1) | % | ||||||||||||||||||||||
| Organic growth | 4 | % | (6) | % | ||||||||||||||||||||||
Organic revenue increased for the second quarter primarily from increased surveying hardware sales, due in part to a large government sale. Organic revenue decreased for the first two quarters due to lower hardware and related perpetual software sales as dealers continue to work through their inventories.
Operating income and operating income as a percentage of revenue increased for the second quarter primarily due to higher revenue, gross margin expansion, and strong operating expense control. Operating income for the first two quarters decreased due to decreased revenue, partially offset by gross margin expansion and strong operating expense control. Operating income as a percentage of revenue increased for the first two quarters.
Resources and Utilities
| Second Quarter of 2023 | First Two Quarters of 2023 | |||||||||||||||||||||||||
| Change versus the corresponding period in 2022 | % Change | % Change | ||||||||||||||||||||||||
| Change in Revenue - Resources and Utilities | (9) | % | (9) | % | ||||||||||||||||||||||
| Acquisitions | — | % | 1 | % | ||||||||||||||||||||||
| Divestitures | (1) | % | (1) | % | ||||||||||||||||||||||
| Foreign currency exchange | — | % | (1) | % | ||||||||||||||||||||||
| Organic growth | (8) | % | (8) | % | ||||||||||||||||||||||
Organic revenue decreased for the second quarter and first two quarters from weaker dealer aftermarket sales due in part to robust market strength in the first half of 2022. Dealer sales were also impacted by changes in our dealer aftermarket distribution network. The declines were partially offset by an increase in OEM sales.
Operating income decreased for the second quarter and first two quarters primarily due to decreased revenue and higher operating expense, partially offset by gross margin expansion. Operating income as a percentage of revenue decreased for the second quarter and increased slightly for the first two quarters.
Transportation
| Second Quarter of 2023 | First Two Quarters of 2023 | |||||||||||||||||||||||||
| Change versus the corresponding period in 2022 | % Change | % Change | ||||||||||||||||||||||||
| Change in Revenue - Transportation | 30 | % | 13 | % | ||||||||||||||||||||||
| Acquisitions | 27 | % | 13 | % | ||||||||||||||||||||||
| Divestitures | (3) | % | (4) | % | ||||||||||||||||||||||
| Organic growth | 6 | % | 4 | % | ||||||||||||||||||||||
Organic revenue increased for the second quarter and first two quarters primarily driven by enterprise and MAPS subscription revenue growth and higher hardware sales from Europe and Brazil Mobility.
Operating income and operating income as a percentage of revenue increased for the second quarter and first two quarters primarily due to the impact of the Transporeon acquisition, as well as organic revenue growth, gross margin expansion, and targeted cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
| Second Quarter of | Year End | ||||||||||||||||||||||
| As of | 2023 | 2022 | Dollar Change | % Change | |||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 237.3 | $ | 271.0 | $ | (33.7) | (12) | % | |||||||||||||||
| As a percentage of total assets | 2.5 | % | 3.7 | % | |||||||||||||||||||
| Principal balance of outstanding debt | $ | 3,204.3 | $ | 1,525.0 | $ | 1,679.3 | 110 | % | |||||||||||||||
| First Two Quarters of | |||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 351.1 | $ | 201.8 | $ | 149.3 | 74 | % | |||||||||||||||
| Net cash (used in) provided by investing activities | (2,050.2) | 172.3 | (2,222.5) | (1290) | % | ||||||||||||||||||
| Net cash provided by (used in) financing activities | 1,662.0 | (335.3) | 1,997.3 | (596) | % | ||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3.4 | (14.4) | 17.8 | (124) | % | ||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (33.7) | $ | 24.4 |
Operating Activities
The increase in cash provided by operating activities was driven by a reduction in inventory purchases, incentive compensation payouts, accounts receivable, and tax payments. The increase was partially offset by a decrease in deferred revenue due to the timing of billings.
Investing Activities
The increase in cash used in investing activities was primarily due to the Transporeon acquisition and reduced proceeds from divestitures.
Financing Activities
The increase in cash provided by financing activities was driven by proceeds from our $800.0 million issuance of the 2033 senior notes, borrowings of $1.0 billion in term loans in the current year, and common stock repurchases occurring in the prior year. The increase was partially offset by the repayment of the 2023 senior notes.
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, debt service, expenditures related to our Connect and Scale strategy, and any acquisitions.
Our 2022 credit facility allows us to borrow up to $1.25 billion, with an option to increase the borrowings up to $1.75 billion with lender approval. As of June 30, 2023, $400.0 million was outstanding under the 2022 credit facility.
Our 2023 senior notes totaling $300.0 million matured and were paid in June 2023.
In the second quarter of 2023, we acquired Transporeon, which was funded through a combination of $1.0 billion of term loans, $225.0 million drawn on the 2022 credit facility, as amended, and the 2033 senior notes, see Note 3 “Acquisition” of this report.
As a result of R&D cost capitalization for tax purposes, our tax cash costs in 2022 were approximately $88.0 million higher than they would have been had R&D costs continued to be expensed upfront for tax purposes. If this provision is deferred or repealed, we expect to get a significant portion returned to us as a refund or use it as a tax credit in future years. In 2023, we are expecting to pay approximately $66.0 million relating to this provision. The majority relates to Federal tax liability and will be paid during the fourth quarter of 2023, as we qualified for payment postponement under the IRS relief initiative for California disaster area taxpayers.
Our cash requirements have not otherwise materially changed since the 2022 Form 10-K.
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.
Organic revenue growth is a non-GAAP measure that refers to revenue excluding the impacts of (i) foreign currency translation, and (ii) acquisitions and divestitures. We believe organic revenue growth provides useful information in evaluating the results of our business because it excludes items that are not indicative of ongoing performance or impact comparability with the prior year. We provide a reconciliation tables showing the change in revenue growth to organic revenue growth in the “Results of Operations” section found earlier in this Item 2.
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. ARR is calculated by taking our subscription, maintenance and support, and recurring transaction revenue for the current quarter and adding the portion of the contract value of all of our term licenses attributable to the current quarter, and dividing that sum by the number of days in the quarter and then multiplying that quotient by 365. Organic ARR refers to annualized recurring revenue excluding the impacts of (i) foreign currency translation, and (ii) acquisitions and divestitures. ARR and organic ARR should be viewed independently of revenue and deferred revenue as they are performance measures and are 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:
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| 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: | $ | 993.6 | $ | 941.2 | $ | 1,909.0 | $ | 1,934.9 | |||||||||||||||||||||||||||||||||
| GROSS MARGIN: | |||||||||||||||||||||||||||||||||||||||||
| GAAP gross margin: | $ | 604.5 | 60.8 | % | $ | 537.5 | 57.1 | % | $ | 1,165.3 | 61.0 | % | $ | 1,087.1 | 56.2 | % | |||||||||||||||||||||||||
| Amortization of purchased intangible assets | (A) | 30.2 | 21.0 | 53.2 | 43.5 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | 0.2 | — | 0.4 | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (C) | 4.1 | 3.1 | 7.6 | 5.3 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | (1.0) | — | (0.7) | 1.1 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP gross margin: | $ | 638.0 | 64.2 | % | $ | 561.6 | 59.7 | % | $ | 1,225.8 | 64.2 | % | $ | 1,137.0 | 58.8 | % | |||||||||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||||||||||||||||||||
| GAAP operating expenses: | $ | 510.9 | 51.4 | % | $ | 402.6 | 42.8 | % | $ | 934.7 | 49.0 | % | $ | 795.3 | 41.1 | % | |||||||||||||||||||||||||
| Amortization of purchased intangible assets | (A) | (31.9) | (11.3) | (43.6) | (23.4) | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | (26.3) | (7.3) | (33.1) | (11.2) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (C) | (38.0) | (23.1) | (69.9) | (45.9) | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | (7.7) | (10.0) | (19.4) | (21.6) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP operating expenses: | $ | 407.0 | 41.0 | % | $ | 350.9 | 37.3 | % | $ | 768.7 | 40.3 | % | $ | 693.2 | 35.8 | % | |||||||||||||||||||||||||
| OPERATING INCOME: | |||||||||||||||||||||||||||||||||||||||||
| GAAP operating income: | $ | 93.6 | 9.4 | % | $ | 134.9 | 14.3 | % | $ | 230.6 | 12.1 | % | $ | 291.8 | 15.1 | % | |||||||||||||||||||||||||
| Amortization of purchased intangible assets | (A) | 62.1 | 32.3 | 96.8 | 66.9 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | 26.5 | 7.3 | 33.5 | 11.2 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (C) | 42.1 | 26.2 | 77.5 | 51.2 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | 6.7 | 10.0 | 18.7 | 22.7 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP operating income: | $ | 231.0 | 23.2 | % | $ | 210.7 | 22.4 | % | $ | 457.1 | 23.9 | % | $ | 443.8 | 22.9 | % | |||||||||||||||||||||||||
| Second Quarter of | First Two Quarters of | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| NON-OPERATING INCOME (EXPENSE), NET: | |||||||||||||||||||||||||||||||||||||||||
| GAAP non-operating income (expense), net: | $ | (36.1) | $ | 86.7 | $ | (12.5) | $ | 68.3 | |||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | (0.9) | (106.3) | (32.5) | (97.4) | ||||||||||||||||||||||||||||||||||||
| Deferred compensation | (C) | (1.7) | 7.0 | (3.7) | 10.3 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | — | — | 1.3 | 0.1 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP non-operating expense, net: | $ | (38.7) | $ | (12.6) | $ | (47.4) | $ | (18.7) | |||||||||||||||||||||||||||||||||
| GAAP and Non-GAAP Tax Rate % | GAAP and Non-GAAP Tax Rate % | GAAP and Non-GAAP Tax Rate % | GAAP and Non-GAAP Tax Rate % | ||||||||||||||||||||||||||||||||||||||
| (G) | (G) | (G) | (G) | ||||||||||||||||||||||||||||||||||||||
| INCOME TAX PROVISION: | |||||||||||||||||||||||||||||||||||||||||
| GAAP income tax provision: | $ | 12.9 | 22.4 | % | $ | 53.6 | 24.2 | % | $ | 44.7 | 20.5 | % | $ | 81.8 | 22.7 | % | |||||||||||||||||||||||||
| Non-GAAP items tax effected | (E) | 30.2 | (5.7) | 41.4 | 12.4 | ||||||||||||||||||||||||||||||||||||
| Difference in GAAP and Non-GAAP tax rate | (F) | (9.8) | (11.4) | (13.3) | (15.5) | ||||||||||||||||||||||||||||||||||||
| Non-GAAP income tax provision: | $ | 33.3 | 17.3 | % | $ | 36.5 | 18.4 | % | $ | 72.8 | 17.8 | % | $ | 78.7 | 18.5 | % | |||||||||||||||||||||||||
| NET INCOME: | |||||||||||||||||||||||||||||||||||||||||
| GAAP net income: | $ | 44.6 | $ | 168.0 | $ | 173.4 | $ | 278.3 | |||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (A) | 62.1 | 32.3 | 96.8 | 66.9 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | 25.6 | (99.0) | 1.0 | (86.2) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (C) | 40.4 | 33.2 | 73.8 | 61.5 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | 6.7 | 10.0 | 20.0 | 22.8 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP tax adjustments | (E) - (F) | (20.4) | 17.1 | (28.1) | 3.1 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP net income: | $ | 159.0 | $ | 161.6 | $ | 336.9 | $ | 346.4 | |||||||||||||||||||||||||||||||||
| DILUTED NET INCOME PER SHARE: | |||||||||||||||||||||||||||||||||||||||||
| GAAP diluted net income per share: | $ | 0.18 | $ | 0.67 | $ | 0.70 | $ | 1.11 | |||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (A) | 0.25 | 0.13 | 0.39 | 0.27 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | 0.10 | (0.39) | — | (0.34) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (C) | 0.16 | 0.13 | 0.29 | 0.24 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | 0.03 | 0.04 | 0.08 | 0.09 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP tax adjustments | (E) - (F) | (0.08) | 0.06 | (0.11) | 0.01 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP diluted net income per share: | $ | 0.64 | $ | 0.64 | $ | 1.35 | $ | 1.38 | |||||||||||||||||||||||||||||||||
| ADJUSTED EBITDA: | |||||||||||||||||||||||||||||||||||||||||
| GAAP net income: | $ | 44.6 | $ | 168.0 | $ | 173.4 | $ | 278.3 | |||||||||||||||||||||||||||||||||
| Non-operating income (expense), net and income tax provision | 49.0 | (33.1) | 57.2 | 13.5 | |||||||||||||||||||||||||||||||||||||
| GAAP operating income: | 93.6 | 134.9 | 230.6 | 291.8 | |||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | (A) | 62.1 | 32.3 | 96.8 | 66.9 | ||||||||||||||||||||||||||||||||||||
| Acquisition / divestiture items | (B) | 26.5 | 7.3 | 33.5 | 11.2 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation / deferred compensation | (C) | 42.1 | 26.2 | 77.5 | 51.2 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other costs | (D) | 6.7 | 10.0 | 18.7 | 22.7 | ||||||||||||||||||||||||||||||||||||
| Non-GAAP operating income: | 231.0 | 210.7 | 457.1 | 443.8 | |||||||||||||||||||||||||||||||||||||
| Depreciation expense and cloud computing amortization | 12.5 | 11.0 | 23.8 | 21.5 | |||||||||||||||||||||||||||||||||||||
| Income from equity method investments, net | 8.0 | 5.8 | 19.4 | 15.5 | |||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 251.5 | 25.3 | % | $ | 227.5 | 24.2 | % | $ | 500.3 | 26.2 | % | $ | 480.8 | 24.8 | % | |||||||||||||||||||||||||
Non-GAAP Definitions
Non-GAAP gross margin
We define Non-GAAP gross margin as GAAP gross margin, excluding the effects of amortization of purchased intangible assets, acquisition/divestiture items, 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.
Non-GAAP operating expenses
We define Non-GAAP operating expenses as GAAP operating expenses, excluding the effects of amortization of purchased intangible assets, 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 amortization of purchased intangible assets, 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 expense, net as GAAP non-operating income (expense), 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 amortization of purchased intangible assets, 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 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 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, cloud computing amortization, 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 of purchased intangibles and cloud computing costs.
Explanations of Non-GAAP adjustments
(A).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, excludes unusual one-time acquisition/divestiture charges, including foreign currency exchange rate gains/losses related to an acquisition, divestiture gains/losses, and strategic investment impairments. 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 costs comprised of termination benefits related to reductions in employee headcount and closure or exit of facilities, executive severance agreements, business exit costs, as well as a $20 million commitment to donate to the Trimble Foundation that was paid over four quarters.
(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.
Previous: Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK