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 three 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, joint ventures, and 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 $1,935.1 million, which represents growth of 25% year-over-year at the end of the third quarter of 2023. Excluding the impact of foreign currency, acquisitions, and divestitures, ARR organic growth was 13%. This shift toward recurring revenue has positively impacted our revenue mix, growth, and profitability 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 enterprise-level customer relationships.

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

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 September 28, 2023, we executed a definitive agreement with AGCO that provides for the formation of a JV with AGCO in the mixed fleet precision agriculture market (the “Trimble Ag JV Transaction”). Under the terms of the agreement, we will contribute our precision agriculture business (“Trimble Ag”), excluding certain Global Navigation Satellite System (“GNSS”) and guidance technologies, and AGCO will contribute its JCA Technologies business to the JV. We will sell an interest in the JV to AGCO for $2.0 billion in pre-tax cash proceeds, subject to working capital adjustments. Immediately following the closing of the Trimble Ag JV Transaction, we will own 15% of the JV and AGCO will own 85% of the JV.

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Additionally, we plan to enter into the following agreements with AGCO as part of the overall transaction:

  • a seven-year, renewable Supply Agreement through which we will provide key GNSS and guidance technologies to the JV for use in professional agriculture machines sold by AGCO, on an exclusive basis with limited exceptions;

  • a Technology Transfer and License Agreement to govern the licensing of certain non-divested intellectual property and technology for use by the JV in the agriculture field and, upon expiration of the Supply Agreement, to govern fixed and variable royalty payments made to us by the JV;

  • a Trademark License Agreement to govern the licensing of certain Trimble trademarks for use by the JV in the agriculture field;

  • a Positioning Services Agreement through which the JV will serve as our channel partner for the positioning services in the agriculture market; and

  • a Transition Services Agreement to provide contract manufacturing services for the divested products for two years following closing of the Transaction.

The formation of the JV is expected to better serve farmers with factory fit and aftermarket applications in the mixed fleet precision agriculture market to help farmers drive productivity, efficiency, and sustainability. Additionally, the transaction is expected to (i) simplify our Connect and Scale strategy, (ii) reduce risk of channel transition in the agriculture market, and (iii) enhance our financial profile and flexibility with a resulting higher mix of software, services, and recurring revenue, as well as repaying $1.1 billion of our debt and repurchasing our shares through use of the net proceeds.

The transaction is expected to close in the first half of 2024 and is subject to customary closing conditions, including regulatory approvals. Trimble Ag is reported as a part of our Resources and Utilities segment.

The assets and liabilities of Trimble Ag that are subject to the transaction were classified as held for sale at the end of the third quarter of 2023. See Note 4 “Assets Held for Sale” of this report.

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 Condensed Consolidated Financial Statements starting in the second quarter of 2023.

Macroeconomic Conditions

Macroeconomic conditions, including geopolitical tensions, such as the ongoing military conflicts in the Middle East and between Russia and Ukraine and related sanctions, exchange rate and interest rate volatility, and inflationary pressures, will continue to evolve globally.

In the first three quarters of 2023, as compared to the prior year, our organic hardware sales declined and bookings moderated as dealers moved toward 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. 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 first half of 2024. However, as our inventory levels continue to normalize, macroeconomic conditions, including rising interest rates and inflation, could negatively impact the timing of inventory normalization.

Global inflation 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. At the end of the third quarter of 2023, our outstanding balance of variable-rate debt was $1.3 billion.

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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:

Third Quarter ofFirst Three Quarters of
20232022Dollar Change% Change20232022Dollar Change% Change
(In millions, except per share amounts)
Revenue:
Product$444.0$472.5$(28.5)(6)%$1,368.9$1,570.3$(201.4)(13)%
Subscription and services513.3412.4100.924%1,497.41,249.5247.920%
Total revenue$957.3$884.9$72.48%$2,866.3$2,819.8$46.52%
Gross margin$590.2$515.4$74.815%$1,755.5$1,602.5$153.010%
Gross margin as a % of revenue61.7%58.2%61.2%56.8%
Operating income$121.3$122.4$(1.1)(1)%$351.9$414.2$(62.3)(15)%
Operating income as a % of revenue12.7%13.8%12.3%14.7%
Diluted earnings per share$0.30$0.34$(0.04)(12)%$1.00$1.45$(0.45)(31)%
Non-GAAP operating income (1)$251.0$209.9$41.120%$708.1$653.7$54.48%
Non-GAAP operating income as a % of revenue(1)26.2%23.7%24.7%23.2%
Non-GAAP diluted earnings per share (1)$0.68$0.66$0.023%$2.04$2.04$—NM
Annualized Recurring Revenue (“ARR”) (1)$1,935.1$1,546.8$388.325%N/AN/AN/AN/A

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

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Third Quarter and First Three Quarters of 2023 as Compared to 2022

Revenue

Change versus the corresponding period in 2022Third Quarter of 2023First Three Quarters of 2023
% Change% Change
ProductSubscription and ServicesTotal RevenueProductSubscription and ServicesTotal Revenue
Change in Revenue(6)%24%8%(13)%20%2%
Acquisitions1%11%6%1%9%4%
Divestitures—%(1)%(1)%(4)%(1)%(3)%
Foreign currency exchange1%1%1%—%(1)%—%
Organic growth(8)%13%2%(10)%13%1%

Organic total revenue increased for the third quarter and first three quarters, with strong growth coming from recurring revenue.

Organic product revenue decreased for the third quarter due to weakening end-user demand for our hardware products reflecting lower demand across markets, amid macroeconomic concerns. The first three quarters’ decline was also impacted by changes in dealer inventory levels due to improved product lead times. The decreases were in Buildings and Infrastructure, Resources and Utilities, and Geospatial.

Organic subscription and services revenue for the third quarter and first three 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 13%.

Gross Margin

Gross margin and gross margin as a percentage of revenue increased for the third quarter and first three 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 third quarter and first three quarters primarily due to increased operating expense, partially offset by gross margin expansion. Operating expense increased primarily associated with the Transporeon acquisition, including higher amortization of purchased intangible assets and acquisition costs. 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:

Third Quarter ofFirst Three Quarters of
20232022Dollar Change% Change20232022Dollar Change% Change
(In millions)
Research and development$162.5$127.0$35.528%$496.6$407.4$89.222%
Percentage of revenue17.0%14.4%17.3%14.4%
Sales and marketing$146.2$137.1$9.17%$436.9$407.9$29.07%
Percentage of revenue15.3%15.5%15.2%14.5%
General and administrative$117.2$109.6$7.67%$369.2$318.0$51.216%
Percentage of revenue12.2%12.4%12.9%11.3%
Total$425.9$373.7$52.214%$1,302.7$1,133.3$169.415%

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R&D expense increased for the third quarter and first three quarters primarily due to higher compensation expense and the impact of the Transporeon acquisition. For the first three quarters, the increase was partially offset by divestitures. 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 the impact of the Transporeon acquisition. For the first three quarters, the increase also was driven by higher consulting, advertising, and trade show costs, partially offset by divestitures.

G&A expense increased for the third quarter and first three quarters primarily due to the impact of the Transporeon acquisition and higher compensation expense.

Amortization of Purchased Intangible Assets

Third Quarter ofFirst Three Quarters of
20232022Dollar Change% Change20232022Dollar Change% Change
(In millions)
Cost of sales$27.7$19.9$7.839%$80.9$63.4$17.528%
Operating expenses31.211.120.1181%74.834.540.3117%
Total amortization expense of purchased intangibles$58.9$31.0$27.990%$155.7$97.9$57.859%
Total amortization expense of purchased intangibles as a percentage of revenue6%4%5%3%

Total amortization expense of purchased intangibles increased for the third quarter and first three 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:

Third Quarter ofFirst Three Quarters of
20232022Dollar Change% Change20232022Dollar Change% Change
(In millions)
Divestitures gain, net$5.5$6.0$(0.5)(8)%$10.6$103.1$(92.5)(90)%
Interest expense, net(46.8)(15.6)(31.2)200%(113.2)(46.9)(66.3)141%
Income from equity method investments, net5.26.8(1.6)(24)%24.622.32.310%
Other income (expense), net(5.8)(1.7)(4.1)241%23.6(14.7)38.3(261)%
Total non-operating income (expense), net$(41.9)$(4.5)$(37.4)831%$(54.4)$63.8$(118.2)(185)%

Non-operating expense, net increased for the third quarter and first three quarters primarily due to lower net gains from divestitures and higher interest expense from the new debt associated with the Transporeon acquisition. For the first three quarters, the increase was partially offset by a $27.6 million foreign currency exchange contract gain related to the Transporeon acquisition as well as fluctuations in the deferred compensation plan assets included in Other income (expense), net.

Income Tax Provision

For the third quarter, our effective income tax rate was 5.7%, as compared to 27.2% in the corresponding period in 2022. The decrease was primarily due to increases in tax benefit from U.S. federal R&D credit and foreign-derived intangible income in 2023, favorable geographic mix of earnings, and a tax charge associated with prior year divestiture gains. For the first three quarters, our effective income tax rate was 16.5%, as compared to 23.8% in the prior year. The decrease was primarily due to the same factors in the third quarter, partially offset by lower stock-based compensation deductions in the current year.

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 7 “Segment Information” of this report.

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

Third Quarter ofFirst Three Quarters of
20232022Dollar Change% Change20232022Dollar Change% Change
(In millions)
Buildings and Infrastructure
Segment revenue$395.1$363.6$31.59%$1,204.6$1,143.8$60.85%
Segment revenue as a % of total revenue41%41%42%41%
Segment operating income$113.5$96.716.817%$332.6$318.813.84%
Segment operating income as a % of segment revenue28.7%26.6%27.6%27.9%
Geospatial
Segment revenue$180.7$184.2(3.5)(2)%$526.0$585.4(59.4)(10)%
Segment revenue as a % of total revenue19%21%18%21%
Segment operating income$57.9$61.5(3.6)(6)%$162.3$177.2(14.9)(8)%
Segment operating income as a % of segment revenue32.0%33.4%30.9%30.3%
Resources and Utilities
Segment revenue$184.9$191.7(6.8)(4)%$589.5$636.4(46.9)(7)%
Segment revenue as a % of total revenue19%22%21%22%
Segment operating income$69.2$64.25.08%$209.6$212.3(2.7)(1)%
Segment operating income as a % of segment revenue37.4%33.5%35.6%33.4%
Transportation
Segment revenue$196.6$145.451.235%$546.2$454.292.020%
Segment revenue as a % of total revenue21%16%19%16%
Segment operating income$35.8$16.019.8124%$90.0$37.053.0143%
Segment operating income as a % of segment revenue18.2%11.0%16.5%8.1%

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

Third Quarter ofFirst Three Quarters of
2023202220232022
(In millions)
Consolidated segment operating income$276.4$238.4$794.5$745.3
Unallocated general corporate expenses(25.4)(28.5)(86.4)(91.6)
Amortization of purchased intangible assets(58.9)(31.0)(155.7)(97.9)
Acquisition / divestiture items(22.0)(9.1)(55.5)(20.3)
Stock-based compensation / deferred compensation(37.9)(31.7)(115.4)(82.9)
Restructuring and other costs(10.9)(15.7)(29.6)(38.4)
Consolidated operating income121.3122.4351.9414.2
Total non-operating income (expense), net(41.9)(4.5)(54.4)63.8
Consolidated income before taxes$79.4$117.9$297.5$478.0

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Buildings and Infrastructure

Third Quarter of 2023First Three Quarters of 2023
Change versus the corresponding period in 2022% Change% Change
Change in Revenue - Buildings and Infrastructure9%5%
Acquisitions2%3%
Divestitures—%(3)%
Foreign currency exchange1%(1)%
Organic growth6%6%

Organic revenue increased for the third quarter and first three 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 application sales. In the third quarter, the increase in organic revenue was offset by lower civil construction hardware sales due to weakening end-user demand. For the first three quarters, organic revenue was also negatively impacted by changes in dealer inventory levels.

Operating income increased for the third quarter and first three quarters 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 increased for the third quarter due to the same factors. Operating income as a percentage of revenue was relatively flat for the first three quarters.

Geospatial

Third Quarter of 2023First Three Quarters of 2023
Change versus the corresponding period in 2022% Change% Change
Change in Revenue - Geospatial(2)%(10)%
Divestitures(1)%(5)%
Foreign currency exchange1%—%
Organic growth(2)%(5)%

Organic revenue decreased for the third quarter due to weakening end-user demand, partially offset by higher U.S. Federal government sales. For the first three quarters, hardware and related perpetual software sales were also negatively impacted by changes in dealer inventory levels.

Operating income decreased for the third quarter and first three quarters primarily due to reduced revenue, partially offset by gross margin expansion and operating expense control. Operating income as a percentage of revenue decreased for the third quarter due to the same factors. Operating income as a percentage of revenue was relatively flat for the first three quarters.

Resources and Utilities

Third Quarter of 2023First Three Quarters of 2023
Change versus the corresponding period in 2022% Change% Change
Change in Revenue - Resources and Utilities(4)%(7)%
Acquisitions—%1%
Divestitures(1)%(1)%
Foreign currency exchange1%—%
Organic growth(4)%(7)%

Organic revenue decreased for the third quarter and first three quarters from weaker dealer aftermarket sales due to robust market strength in the prior year and impacts related to changes in our distribution network. The declines were partially offset by an increase in subscription and services revenue, mainly from positioning services, forestry, and utilities businesses.

Operating income and operating income as a percentage of revenue increased for the third quarter primarily due to gross margin expansion, partially offset by higher operating expense. Operating income for the first three quarters was relatively flat, and operating income as a percentage of revenue was slightly up due to gross margin expansion.

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Transportation

Third Quarter of 2023First Three Quarters of 2023
Change versus the corresponding period in 2022% Change% Change
Change in Revenue - Transportation35%20%
Acquisitions28%18%
Divestitures(1)%(3)%
Foreign currency exchange1%—%
Organic growth7%5%

Organic revenue increased for the third quarter and first three quarters primarily driven by enterprise and MAPS subscription revenue growth. Additionally, North American Mobility hardware sales increased in the third quarter.

Operating income and operating income as a percentage of revenue increased for the third quarter and first three 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

Third Quarter ofYear End
As of20232022Dollar Change% Change
(In millions, except percentages)
Cash and cash equivalents (1)$222.9$271.0$(48.1)(18)%
As a percentage of total assets2.4%3.7%
Principal balance of outstanding debt$3,068.3$1,525.0$1,543.3101%
First Three Quarters of
20232022Dollar Change% Change
(In millions)
Net cash provided by operating activities$498.2$285.1$213.175%
Net cash used in investing activities(2,064.4)(152.2)(1,912.2)1256%
Net cash provided by (used in) financing activities1,520.7(115.0)1,635.7(1422)%
Effect of exchange rate changes on cash and cash equivalents(2.6)(34.9)32.3(93)%
Net decrease in cash and cash equivalents$(48.1)$(17.0)

(1) Includes $6.1 million of cash and cash equivalents classified as held for sale as of September 29, 2023.

Operating Activities

The increase in cash provided by operating activities was primarily driven by a reduction in inventory purchases in the current year, and incentive compensation payouts and tax payments in the prior year. The increase was partially offset by a decrease in deferred revenue due to the timing of billings and higher interest payments.

Investing Activities

The increase in cash used in investing activities was primarily due to the Transporeon acquisition and higher divestiture proceeds in the prior year.

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 September 29, 2023, $210.0 million was outstanding under the 2022 credit facility.

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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.

In the third quarter of 2023, we executed a definitive agreement to contribute our Trimble Ag business to a newly formed JV with AGCO and sell 85% of the stake in the JV to AGCO for $2.0 billion in pre-tax cash proceeds, subject to certain adjustments. See Note 4 “Assets Held for Sale” of this report. Although we will continue to evaluate the optimal capital structure for our business following the completion of the pending sale, we expect to use the $1.5 billion of estimated proceeds after tax to repay approximately $1.1 billion in debt and repurchase shares.

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. In 2023, we are expecting to pay approximately $60.0 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.

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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.

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 table 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:

Third Quarter ofFirst Three Quarters of
2023202220232022
Dollar% ofDollar% ofDollar% ofDollar% of
(In millions, except per share amounts)AmountRevenueAmountRevenueAmountRevenueAmountRevenue
REVENUE:
GAAP revenue:$957.3$884.9$2,866.3$2,819.8
GROSS MARGIN:
GAAP gross margin:$590.261.7%$515.458.2%$1,755.561.2%$1,602.556.8%
Amortization of purchased intangible assets(A)27.719.980.963.4
Acquisition / divestiture items(B)——0.4—
Stock-based compensation / deferred compensation(C)3.83.411.48.7
Restructuring and other costs(D)0.1(0.1)(0.6)1.0
Non-GAAP gross margin:$621.865.0%$538.660.9%$1,847.664.5%$1,675.659.4%
OPERATING EXPENSES:
GAAP operating expenses:$468.949.0%$393.044.4%$1,403.649.0%$1,188.342.1%
Amortization of purchased intangible assets(A)(31.2)(11.1)(74.8)(34.5)
Acquisition / divestiture items(B)(22.0)(9.1)(55.1)(20.3)
Stock-based compensation / deferred compensation(C)(34.1)(28.3)(104.0)(74.2)
Restructuring and other costs(D)(10.8)(15.8)(30.2)(37.4)
Non-GAAP operating expenses:$370.838.7%$328.737.1%$1,139.539.8%$1,021.936.2%
OPERATING INCOME:
GAAP operating income:$121.312.7%$122.413.8%$351.912.3%$414.214.7%
Amortization of purchased intangible assets(A)58.931.0155.797.9
Acquisition / divestiture items(B)22.09.155.520.3
Stock-based compensation / deferred compensation(C)37.931.7115.482.9
Restructuring and other costs(D)10.915.729.638.4
Non-GAAP operating income:$251.026.2%$209.923.7%$708.124.7%$653.723.2%

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Third Quarter ofFirst Three Quarters of
2023202220232022
NON-OPERATING INCOME (EXPENSE), NET:
GAAP non-operating income (expense), net:$(41.9)$(4.5)$(54.4)$63.8
Acquisition / divestiture items(B)(5.1)(5.6)(37.6)(103.0)
Deferred compensation(C)0.80.2(2.9)10.5
Restructuring and other costs(D)0.1—1.40.1
Non-GAAP non-operating expense, net:$(46.1)$(9.9)$(93.5)$(28.6)
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:$4.55.7%$32.127.2%$49.216.5%$113.923.8%
Non-GAAP items tax effected(E)7.222.348.634.7
Difference in GAAP and Non-GAAP tax rate(F)23.0(18.4)9.7(33.9)
Non-GAAP income tax provision:$34.716.9%$36.018.0%$107.517.5%$114.718.3%
NET INCOME:
GAAP net income:$74.9$85.8$248.3$364.1
Amortization of purchased intangible assets(A)58.931.0155.797.9
Acquisition / divestiture items(B)16.93.517.9(82.7)
Stock-based compensation / deferred compensation(C)38.731.9112.593.4
Restructuring and other costs(D)11.015.731.038.5
Non-GAAP tax adjustments(E) - (F)(30.2)(3.9)(58.3)(0.8)
Non-GAAP net income:$170.2$164.0$507.1$510.4
DILUTED NET INCOME PER SHARE:
GAAP diluted net income per share:$0.30$0.34$1.00$1.45
Amortization of purchased intangible assets(A)0.240.130.630.39
Acquisition / divestiture items(B)0.070.010.07(0.33)
Stock-based compensation / deferred compensation(C)0.150.130.450.38
Restructuring and other costs(D)0.040.060.120.15
Non-GAAP tax adjustments(E) - (F)(0.12)(0.01)(0.23)—
Non-GAAP diluted net income per share:$0.68$0.66$2.04$2.04
ADJUSTED EBITDA:
GAAP net income:$74.9$85.8$248.3$364.1
Non-operating income (expense), net and income tax provision46.436.6103.650.1
GAAP operating income:121.3122.4351.9414.2
Amortization of purchased intangible assets(A)58.931.0155.797.9
Acquisition / divestiture items(B)22.09.155.520.3
Stock-based compensation / deferred compensation(C)37.931.7115.482.9
Restructuring and other costs(D)10.915.729.638.4
Non-GAAP operating income:251.0209.9708.1653.7
Depreciation expense and cloud computing amortization12.011.435.832.9
Income from equity method investments, net5.26.824.622.3
Adjusted EBITDA$268.228.0%$228.125.8%$768.526.8%$708.925.1%

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.

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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 costs consisting of external and incremental costs resulting directly from acquisitions, divestitures, 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

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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 ending in the first quarter of 2023.

(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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