UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 29, 2002 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE TRANSITION PERIOD FROM __________ TO__________ Commission file number: 0-18645 TRIMBLE NAVIGATION LIMITED (Exact name of registrant as specified in its charter) California 94-2802192 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 645 North Mary Avenue, Sunnyvale, CA 94088 (Address of principal executive offices) (Zip Code) Telephone Number (408) 481-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of May 3, 2002, there were 28,200,535 shares of Common Stock (no par value) outstanding.
TRIMBLE NAVIGATION LIMITED FORM 10-Q INDEX Page Number PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: Condensed Consolidated Balance Sheets-- March 29, 2002 and December 28, 2001 (unaudited)................ 3 Condensed Consolidated Statements of Operations-- Three Months Ended March 29, 2002 and March 30, 2001(unaudited). 4 Consolidated Statements of Cash Flows-- Three Months Ended March 29, 2002 and March 30, 2001(unaudited). 5 Notes to Condensed Consolidated Financial Statements................ 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 17 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......... 34 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings................................................... 37 ITEM 2. Changes in Securities and Use of Proceeds........................... 37 ITEM 6. Exhibits and Reports on Form 8-K.................................... 37 Signatures................................................................... 39 2
PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements TRIMBLE NAVIGATION LIMITED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> March 29, December 28, 2002 2001 (1) ------------------------------------------------------------------------- --------------------- --------------------- (In thousands) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 33,021 $ 31,078 Accounts and other receivable, net 72,805 71,680 Inventories 53,487 51,810 Other current assets 7,482 6,536 ----------- ----------- Total current assets 166,795 161,104 Property and equipment, net 25,893 27,542 Intangible assets 215,596 220,304 Deferred income taxes 406 383 Other assets 9,842 10,062 ----------- ---------- Total assets $418,532 $419,395 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank and other short-term borrowings $48,107 $ 40,025 Current portion of long-term debt 24,563 23,443 Accounts payable 21,046 21,494 Accrued compensation and benefits 16,687 13,786 Accrued liabilities 22,456 24,138 Accrued interest expense 520 3,616 Accrued warranty expense 7,062 6,827 Income taxes payable 7,911 7,403 Deferred gain on sale of assets 1,015 1,068 ---------- --------- Total current liabilities 149,367 141,800 ---------- --------- Noncurrent portion of long-term debt and other liabilities 97,067 127,097 Noncurrent portion of deferred gain 11,000 - Deferred tax liabilities 1,362 7,347 Other noncurrent liabilities 4,541 4,662 ----------- ----------- Total liabilities 263,337 280,906 ----------- ----------- Shareholders' equity: Common stock, no par value; 40,000 shares authorized; 28,182 and 26,862 shares outstanding, respectively 208,657 191,224 Accumulated deficit (34,534) (33,819) Accumulated other comprehensive loss (18,928) (18,916) ----------- ----------- Total shareholders' equity 155,195 138,489 ----------- ----------- Total liabilities and shareholders' equity $418,532 $419,395 =========== =========== </TABLE> (1) Derived from the December 28, 2001 audited consolidated financial statements included in the Annual Report on Form 10-K of Trimble Navigation Limited for fiscal year 2001. See accompanying notes to Condensed Consolidated Financial Statements. 3
TRIMBLE NAVIGATION LIMITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three Months Ended ---------------------------------------- March 29, March 30, 2002 2001 -------------------------------------------------------- --------------------- ------------------ (In thousands, except per share data) <S> <C> <C> Revenue $ 104,029 $ 117,863 Cost of sales 49,696 60,363 ------------- -------------- Gross Margin 54,333 57,500 Operating expenses: Research and development 15,038 15,819 Sales and marketing 22,127 28,141 General and administrative 10,798 9,392 Restructuring charges 304 1,724 Amortization of goodwill and other purchased intangibles 1,978 7,316 ------------- -------------- Total operating expenses 50,245 62,392 ------------- -------------- Operating income (loss) 4,088 (4,892) ------------- -------------- Nonoperating income (expense): Interest income 87 370 Interest expense (4,030) (6,087) Foreign exchange loss, net (59) (145) Other income (expense) 199 (333) -------------- --------------- (3,803) (6,195) -------------- --------------- Income (loss) before income taxes 285 (11,087) Income tax provision 1,000 500 -------------- -------------- Net loss $ (715) $ (11,587) ============== ============== Basic net loss per share $ (0.03) $ (0.48) ============== ============== Diluted net loss per share $ (0.03) $ (0.48) ============== ============== </TABLE> See accompanying notes to Condensed Consolidated Financial Statements. 4
TRIMBLE NAVIGATION LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------------------------------- March 29, March 30, 2002 2001 ------------------------------------------------------------------------- --------------------- --------------------- (In thousands) <S> <C> <C> Cash flow from operating activities: Net loss $ (715) $ (11,587) ---------- ------------- Adjustment to reconcile net loss to net cash provided (used) by operating activities: Depreciation expense 2,671 2,789 Amortization expense 2,186 7,520 Provision for bad debt 1,232 274 Amortization of deferred gain (398) (398) Other 803 (700) Add decrease (increase) in assets: Accounts receivables, net (2,357) 1,719 Inventories (1,677) (10,896) Deferred income taxes - 38 Other current and noncurrent assets (980) (440) Effect of foreign currency translation adjustment (1,284) (2,616) Add increase (decrease) in liabilities: Accounts payable (448) 5,128 Accrued compensation 2,901 146 Deferred tax liability - (335) Other accrued liabilities (4,540) 7,361 Deferred gain short term 345 - Deferred gain long term 11,000 - Income taxes payable 508 (783) --------------- ---------------- Net cash provided (used) by operating activities 9,247 (2,780) --------------- ---------------- Cash flows from investing activities: Acquisitions, net of cash acquired (2,158) (998) Acquisition of property and equipment (1,783) (2,134) Capitalized patents, software and intangibles (48) (318) ----------------- --------------- Net cash used in investing activities (3,989) (3,450) ----------------- --------------- Cash flow from financing activities: Issuance of common stock 17,433 1,271 Collections of notes receivable 80 352 Proceeds from long-term debt and revolving credit lines 13,000 10,000 Payments on long-term debt and revolving credit lines (33,828) (1,498) ---------------- -------------- Net cash provided (used) by financing activities (3,315) 10,125 ---------------- -------------- Effect of exchange rate changes on cash - (773) ---------------- -------------- Net increase in cash and cash equivalents 1,943 3,122 Cash and cash equivalents-- beginning of period 31,078 40,876 ---------------- -------------- Cash and cash equivalents-- end of period $ 33,021 $ 43,998 ================ ============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 7,287 $ 3,946 =============== ============== Income taxes, net of refunds $ 1,222 $ 178 =============== ============== </TABLE> See accompanying notes to Condensed Consolidated Financial Statements. 5
NOTE 1 -- Basis of Presentation: Basis of Presentation The Condensed Consolidated Financial Statements of Trimble Navigation Limited and subsidiaries, ("Trimble" or the "Company") for the three month periods ended March 29, 2002, and March 30, 2001, which are presented in this Quarterly Report on Form 10-Q are unaudited. The balance sheet at December 28, 2001, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. The Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Trimble's Annual Report on Form 10-K for the fiscal year ended December 28, 2001. The results of operations for the three month period ended March 29, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2003. New Accounting Standards Trimble adopted Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," at the beginning of fiscal 2002. The effect of adopting SFAS 144 did not have a material impact on the Company's financial position or results of operations. Trimble adopted Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), at the beginning of fiscal 2002. Application of the nonamortization provisions of SFAS 142 significantly reduced amortization expense to approximately $2.0 million for the period ended March 29, 2002. The Company reclassified identifiable intangible assets with indefinite lives, as defined by SFAS 142, to goodwill at the date of adoption. The Company tested goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. No impairment charge resulted from the impairment tests. The effect of adopting SFAS No. 141 and 142 did not have a material impact on the Company's financial position or results of operations. NOTE 2 -- Acquisitions: Grid Data On April 2, 2001, Trimble acquired certain assets of Grid Data, an Arizona corporation, for approximately $3.5 million in cash and the assumption of certain liabilities. In addition, the purchase agreement provided for Trimble to make certain earn-out payments based upon the completion of certain business milestones. In April 2002, Trimble agreed to issue 268,352 shares of Trimble's common stock to Grid Data in settlement of all earn-out payments due under the purchase agreement. These shares when issued will result in additional goodwill. Spectra Precision Group Restructuring Activities At the time the Company acquired the Spectra Precision Group in July 2000, the Company formulated a restructuring plan and provided approximately $9.0 million for costs to close certain duplicative office facilities, combine operations including redundant domestic and foreign legal entities, reduce workforce in overlapping areas, and relocate certain employees. These costs were accrued for as part of the allocation of the purchase price. Included in the total cost was approximately $2.7 million related to the discontinuance of overlapping product lines, which was included in our reserve for excess and obsolete inventory. The facility consolidation and employee relocations resulted primarily from combining certain office facilities and duplicative functions, including management functions, of the Spectra Precision Group. As of March 29, 2002, the Company had charged against the reserve approximately $3.6 million which consisted of $1.1 million for legal and tax consulting expenses relating to consolidation of legal entities, $1.3 million for severance expenses, $0.8 million for facilities and direct sales office 6
closures, $0.3 million for an underfunded pension plan, and other costs of $0.1 million, of which $0.3 million was paid in the first fiscal quarter of 2002. The Company revised its final estimates for costs to complete the remaining planned activities and accordingly reduced its restructuring reserve by approximately $1.1 million, with a corresponding adjustment to Goodwill, in the fourth quarter of fiscal 2001. The reserve balance was approximately $1.6 million at March 29, 2002, and the Company anticipates completing the majority of its remaining restructuring activities during fiscal 2002. These activities consist principally of legal costs and other expenses required to combine redundant legal entities. The elements of the reserve at March 29, 2002, on the balance sheet (included in accrued liabilities) are as follows: <TABLE> <CAPTION> Employee Severance and Facility Closure, Legal Relocation and Tax Expense Total (In thousands) <S> <C> <C> <C> Total reserve $ 1,945 $ 4,370 $ 6,315 Amounts paid/written off (1,685) (1,945) (3,630) Revision to estimates (260) (812) (1,072) ------------------------------------------------------------------------ Balance as of March 29, 2002 $ - $ 1,613 $ 1,613 ======================================================================== </TABLE> NOTE 3 -- Goodwill and Intangible Assets: Goodwill and purchased intangible assets consisted of the following: <TABLE> <CAPTION> March 29, December 28, 2002 2001 - ------------------------------------------------------------------------ --------------------- ---------------- (In thousands) <S> <C> <C> Intangible assets with indefinite life: Distribution channel $ - $ 73,363 Assembled workforce - 17,773 ----------------- ----------------- Total intangible assets with indefinite life - 91,136 Intangible assets with definite life: Existing technology 24,094 23,907 Trade names, trade marks, patents, and other intellectual properties 19,300 18,394 ----------------- ----------------- Total intangible assets with definite life 43,394 42,301 Goodwill, Spectra Precision acquisition 201,437 116,001 Goodwill, other acquisitions 16,867 14,710 ----------------- ----------------- $ 261,698 264,148 Less accumulated amortization (46,102) (43,844) ----------------- ----------------- $ 215,596 $ 220,304 ================= ================= </TABLE> The Company adopted SFAS No. 142 on January 1, 2002. As a result, goodwill is no longer amortized and intangible assets with indefinite lives were reclassified to goodwill. 7
NOTE 4 -- Certain Balance Sheet Components: Inventories consisted of the following: March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------- (In thousands) Raw materials $ 26,175 $ 25,790 Work-in-process 8,840 7,177 Finished goods 18,472 18,843 ---------- ------------- $ 53,487 $ 51,810 ========== ============= Property and equipment consisted of the following: March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------- (In thousands) Machinery and equipment $ 66,218 $ 66,265 Furniture and fixtures 6,249 6,367 Leasehold improvements 6,066 5,882 Buildings 3,960 3,979 Land 1,651 1,657 ---------------- --------------- 84,144 84,150 Less accumulated depreciation (58,252) (56,608) ---------------- --------------- $ 25,893 $ 27,542 ================ =============== Other current assets consisted of the following: March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------- (In thousands) Notes receivable $ 2,050 $ 2,130 Prepaid expenses 4,999 4,150 Other 433 256 ------------------ ------------- $ 7,482 $ 6,536 ================== ============= Other noncurrent assets consisted of the following: March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------- (In thousands) Debt issuance costs, net $ 2,806 $ 3,046 Other investments 2,094 2,737 Deposits 1,243 1,241 Other 3,699 3,038 ------------------- ---------------- $ 9,842 $ 10,062 ================== ================ NOTE 5 -- Derivative Financial Instruments: Forward foreign currency exchange contracts. At March 29, 2002, Trimble had forward foreign currency exchange contracts to sell approximately 308.4 million Japanese yen, approximately 4.6 million Euros, approximately 1.1 million British pounds sterling, and to buy approximately 13.7 million Japanese yen, approximately 0.2 million British pounds sterling, and approximately 1.6 million New Zealand dollars at contracted rates that mature over the next three months. 8
NOTE 6 -- Disposition of Line of Business and Assets: Disposition of Line of Business: On March 6, 2001, the Company sold certain product lines of its Air Transport Systems, to Honeywell Inc. for approximately $4.5 million in cash. Under the asset purchase agreement, Honeywell International, Inc. purchased product lines that included the HT 1000, HT 9000, HT 9100 and Trimble's TNL 8100. As part of this sale, during the third quarter of fiscal 2001, the Company also sold other product lines and discontinued its manufacturing operations in Austin, Texas. The Company also incurred severance costs of approximately $1,724,000 which is included in restructuring charges related to the termination of employees associated with the product lines disposed of in fiscal 2001. At March 29, 2002, the Company has a provision of $1.3 million for related liabilities associated with the disposition of these product lines and the discontinuance of its manufacturing operations. Disposition of Assets: On August 10, 1999, Trimble signed an asset purchase agreement with Solectron Corporation and Solectron Federal Systems, Inc. (collectively, "Solectron"). The closing of the transaction occurred on August 13, 1999. At the closing, Trimble transferred to Solectron substantially all of Trimble's tangible manufacturing assets located at Trimble's Sunnyvale, California campus, including but not limited to equipment, fixtures and work in progress, and certain contract and other intangible assets and rights, together with certain related obligations, including but not limited to real property subleases covering Trimble's manufacturing floor space, and outstanding purchase order commitments. In addition, the agreement also provided for Solectron's subsequent purchase, on August 30, 1999, of Trimble's component inventory, on hand as of August 13, 1999. The final purchase price for these assets was $26.9 million. Trimble recorded a gain on the transaction of $11.0 million. This gain was offset by certain costs incurred or accrued resulting from the transition by the Company and included payroll for specified individuals ($1.4 million), free rent assumed by the Company for space subleased by Solectron ($0.3 million), idle capacity on facilities that will no longer be used ($2.9 million) and other miscellaneous expenses ($0.4 million), netting to $5.9 million. The net gain was deferred and is being recognized as a reduction to cost of sales, over the three-year exclusive life of the supply agreement described below. In fiscal 2000, certain contingencies were finalized relating to some employee and facility related liabilities, and the deferred gain was reduced by $0.7 million. Concurrently with the closing of the transaction, Trimble and Solectron also entered into a supply agreement. The supply agreement provides for the exclusive manufacture by Solectron of a significant portion of Trimble products for the three-year period ending August 13, 2002. 9
NOTE 7 -- Long-Term Debt: Trimble's long-term debt consists of the following: <TABLE> <CAPTION> March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> Credit Facilities: Five Year Term Loan $ 47,600 $ 61,300 U.S. and Multi-Currency Revolving Credit Facility 48,000 40,000 Subordinated note 68,670 84,000 Promissory notes 5,416 5,189 Other 51 76 ------------------- ------------------ 169,737 190,565 Less current portion 72,670 63,468 ------------------- ------------------ Noncurrent portion $ 97,067 $ 127,097 =================== ================== </TABLE> Credit Facilities In July 2000, Trimble obtained $200 million of senior, secured credit facilities (the "Credit Facilities") from a syndicate of banks to support the acquisition of the Spectra Precision Group and the Company's ongoing working capital requirements and to refinance certain existing debt. At March 29, 2002, Trimble has approximately $95.6 million outstanding under the Credit Facilities, comprised of $47.6 million under a $100 million five-year term loan, $25 million under a $50 million three-year U.S. dollar only revolving credit facility ("revolver"), and $23 million under a $50 million three-year multi-currency revolver. The Company has access to $52 million of cash under the terms of its three-year revolver loans. The Company has commitment fees on the unused portion of 0.5% if the leverage ratio (which is defined as all outstanding debt, excluding the seller subordinated note, over Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), as defined in the related agreement) is 2.0 or greater and 0.375% if the leverage ratio is less than 2.0. Pricing for any borrowings under the Credit Facilities was fixed for the first six months at LIBOR plus 275 basis points and is thereafter tied to a formula, based on the Company's leverage ratio. The weighted average interest rate under the Credit Facilities was 5.4% for the month of March 29, 2002. The Credit Facilities are secured by all material assets of the Company, subject to foreign tax considerations. If Trimble is able to achieve and maintain a leverage ratio (Debt/EBITDA) of 2.0x or less for four consecutive quarters, the security for the Credit Facilities will be released. Financial covenants of the Credit Facilities include leverage, fixed charge, and minimum net worth tests. Should the Company default on one or more covenants, the Company will attempt to obtain either waivers or amendments to the Facilities. Two of the Company's financial covenants, minimum fixed charge coverage and maximum leverage ratios are sensitive to EBITDA. EBITDA is correlated to the Company's results of operations. Due to uncertainties associated with the downturn in the worldwide economy and other factors, future revenues by quarter are difficult to forecast. New cost cutting measures have been put in place by the management team; however, if revenues should decline at a higher rate than cost cutting measures on a quarter to quarter basis, the Company may violate the two above mentioned financial covenants. Subordinated Note In July 2000, as part of the acquisition of the Spectra Precision Group, Trimble issued Spectra Physics Holdings USA, Inc. a subordinated seller note that has a stated two year maturity ($40 million was due in fiscal 2001 and $40 million in fiscal 2002). On March 20, 2002, the Company renegotiated the terms of the 10
subordinated note and under the revised agreement, Spectra Physics Holdings, Inc., a subsidiary of Thermo Electron, extended the term of the note until July 14, 2004, at the current interest rate of approximately 10.4% per year. As a result of the amendment, the outstanding balance of the note at December 28, 2001 of $84 million was reclassified as long-term. In addition, on March 20, 2002, the Company used $21.2 million of net proceeds from its private placement of common stock to retire accrued interest and principal under the subordinated note, reducing the outstanding principal amount to $68.7 million. To the extent that interest and principal due on the maturity date becomes delinquent, an additional 4% interest rate per annum will apply. Currently, the note bears interest at a weighted average rate of 10.4%. The Credit Facilities allow Trimble to repay the seller note at any time (in part or in whole), provided that (a) Trimble's leverage ratio (Debt (excluding the seller note)/EBITDA) prior to such repayment is less than 1.0x and (b) after giving effect to such repayment Trimble would have (i) a leverage ratio (Debt (excluding any remaining portion of the seller note)/EBITDA) of less than 2.0x and (ii) cash and unused availability under the revolvers of the Credit Facilities of at least $35 million. The note, by its terms, is subordinated to the Credit Facilities. Promissory Notes The promissory notes at the end of March 29, 2002 include a $3.6 million obligation to the former owners of ZSP Geodetic Systems GmbH, a subsidiary of Trimble, assumed by the Company when it acquired the Spectra Precision Group. The $3.6 million debt obligation has a stated maturity of September 2002 and bears interest at 6%. In addition, these notes include a $1.9 million promissory note arising from the purchase of a building for the Company's Corvallis, Oregon site. The note is payable in monthly installments through April 2015 bearing a variable interest rate (7.14% at March 29, 2002). The Company's weighted average cost of debt is approximately 6.7% for the fiscal quarter ended March 29, 2002. NOTE 8 -- Segment Information: Trimble is a designer and distributor of positioning products and applications enabled by Global Positioning Systems (GPS), optical, laser, and wireless communications technology. The Company designs and markets products, which deliver integrated information solutions, such as collecting, analyzing, and displaying position data to its end-users. The Company offers an integrated product line for diverse applications in its targeted markets. In the first fiscal quarter of 2002, Trimble realigned two of its reportable segments. The Agriculture segment has been combined with the mapping and Geographic Information Systems (GIS) market to form Trimble Field Solutions. Mapping and GIS was previously part of Fleet and Asset Management. The mobile positioning market that was part of Fleet and Asset Management is now Trimble Mobile Solutions. To achieve distribution, marketing, production, and technology advantages in Trimble's targeted markets, the Company currently manages itself within five segments: o Engineering and Construction -- Consists of products currently used by construction professionals in the field for positioning data collection, field computing, data management, and automated machine guidance and control. These products provide solutions for numerous construction applications, including surveying; general construction; site preparation and excavation; road and runway construction; and underground construction. o Trimble Field Solutions -- Consists of products that provide solutions in a variety of agriculture and fixed asset applications, primarily in the areas of precise land leveling, machine guidance, yield monitoring, variable-rate applications of fertilizers and chemicals and fixed asset data collection for a variety of governmental and private entities. This segment is an aggregation of the Company's Mapping and GIS operation and the Company's Agriculture operation. The Company has aggregated these business operations under a single general manager in order to take advantage of the convergence of wireless communications and internet applications to provide 11
field solutions, and to continue to leverage its research and development activities due to the similarities of products across the segment. o Trimble Mobile Solutions -- Consists of products that enable end-users to monitor and manage their mobile assets by communicating location-relevant information from the field to the office. The Company offers a range of products that address a number of sectors of this market including truck fleets, security, telematics, and public safety vehicles. o Component Technologies -- Currently, the Company markets its component products through an extensive network of OEM relationships. These products include proprietary chipsets, modules and a variety of intellectual property. The applications into which end-users currently incorporate the Company's component products include: timing applications for synchronizing wireless and computer systems; in-vehicle navigation and telematics (tracking) systems; fleet management; security systems; data collection systems; and wireless handheld consumer products. o Portfolio Technologies -- The various operations that comprise this segment were aggregated on the basis that no single operation accounted for more than 10% of the total revenue of the Company. Consists of various markets that use accurate position, velocity, and timing information. These markets include the operations of the Military Advanced Systems division and Tripod Data Systems. Trimble evaluates each of these segment's performance and allocates resources based on profit and loss from operations before income taxes, and some corporate allocations. The accounting policies applied by each of the segments are the same as those used by Trimble in general. The following table presents revenues, operating income (loss), and identifiable assets for Trimble's five segments. The information for fiscal 2001 has been reclassified in order to conform to the new basis of presentation. The information includes the operations of Grid Data after April 2, 2001. Operating income (loss) is net revenue less operating expenses, excluding general corporate expenses, goodwill amortization, restructuring charges, nonoperating income (expense), and income taxes. The identifiable assets that Trimble's Chief Operating Decision Maker, the CEO, views by segment are accounts receivable and inventory. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Three Months Ended March 29, 2002 ------------------------------------------------------------------------------------------- (in thousands) ------------------------------------------------------------------------------------------- --------------- ------------- -------------- -------------- ---------------- -------------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total --------------- ------------- -------------- -------------- ---------------- -------------- <S> <C> <C> <C> <C> <C> <C> External net revenues $ 68,410 $ 18,031 $ 2,352 $ 10,025 $ 5,211 $ 104,029 Operating income (loss) before corporate allocations 11,668 4,517 (3,062) 1,225 (289) 14,059 --------------- ------------- -------------- -------------- ---------------- -------------- </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- March 29, 2002 ------------------------------------------------------------------------------------------- (in thousands) ------------------------------------------------------------------------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total --------------- ------------ --------------- -------------- ---------------- -------------- <S> <C> <C> <C> <C> <C> <C> Assets: Accounts receivable (1) $ 63,405 $ 13,610 $ 2,774 $ 6,871 $ 4,894 $ 91,554 Inventory 39,494 4,888 1,441 1,717 5,687 53,227 </TABLE> 12
<TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Three Months Ended March 30, 2001 ------------------------------------------------------------------------------------------- (in thousands) ------------------------------------------------------------------------------------------- --------------- ------------- -------------- -------------- ---------------- -------------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total --------------- ------------- -------------- -------------- ---------------- -------------- <S> <C> <C> <C> <C> <C> <C> External net revenues $ 73,713 $ 17,007 $ 2,925 $ 16,162 $ 8,056 $ 117,863 Operating income (loss) before corporate allocations 10,305 3,113 (2,800) 2,233 (637) 12,214 --------------- ------------- -------------- -------------- ---------------- -------------- </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- December 28, 2001 ------------------------------------------------------------------------------------------- (in thousands) ------------------------------------------------------------------------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total --------------- ------------ --------------- -------------- ---------------- -------------- <S> <C> <C> <C> <C> <C> <C> Assets: Accounts receivable (1) $ 62,471 $ 10,191 $ 4,274 $ 7,392 $ 7,249 $ 91,577 Inventory 37,246 4,639 1,992 2,490 5,463 51,830 </TABLE> - ---------------------------- (1) As presented, the accounts receivable number excludes cash received in advance and reserves, which are not allocated between segments. The following are reconciliations corresponding to totals in the accompanying consolidated financial statements: March 29, March 30, Three Months Ended 2002 2001 - ------------------------------------------------- --------------- -------------- (in thousands) Operating income (loss): Total for reportable segments $ 14,059 $ 12,214 Unallocated corporate expenses (9,971) (15,382) -------------- ------------- Operating income (loss) $ 4,088 $ (3,168) ============== ============= March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------- (in thousands) Assets: Accounts receivable total for reportable divisions $91,554 $91,577 Unallocated (1) (18,749) (19,897) --------- --------- Total $72,805 $71,680 ========= ========= Inventory total for reportable divisions $53,227 $51,830 Common inventory (2) 260 330 --------- --------- Net inventory $53,487 $52,160 ========= ========= - ---------------------------- (1) Includes cash in advance and reserves that are not allocated by segment. (2) Consists of inventory that is common between the segments. Parts can be used by more than one segment. 13
The following table presents revenues by product groups. March 29, March 30, Three Months Ended 2002 2001 - -------------------------------- ------------------------- --------------------- (in thousands) GPS products $ 53,902 $ 67,738 Laser and optical products 46,489 46,814 Other 3,638 3,311 ------------------------- --------------------- Total revenue $ 104,029 $ 117,863 ========================= ===================== NOTE 9 -- Equity: Comprehensive Income (Loss) The components of other comprehensive loss, net of related tax, include: March 29, March 30, Three Months Ended 2002 2001 - --------------------------------------------- ---------------- ----------------- (In thousands) Cumulative foreign currency translation $ (216) $ (8,177) adjustments Net gain (loss) on interest rate swap 203 (129) ------------ ------------ Other comprehensive loss $ (13) $ (8,306) ============ ============ Accumulated other comprehensive income (loss) on the consolidated balance sheets consists of unrealized gains on available for sale investments and foreign currency translation adjustments. The components of accumulated other comprehensive income (loss), net of related tax as follows: March 29, December 28, 2002 2001 - -------------------------------------------------------------------------------- (In thousands) Cumulative foreign currency translation adjustments $(18,944) $(18,729) Net loss on interest rate swap - (203) Net unrealized gain on investments 16 16 ----------- ---------- Accumulated other comprehensive loss $(18,928) $(18,916) =========== ========== Warrants On January 15, 2002, in connection with the second closing of the December 21, 2001 private placement, Trimble granted five-year warrants to purchase an additional 256,002 shares of common stock, subject to certain adjustments, at an exercise price of $19.475 per share. On March 20, 2002, the Company agreed to issue to Spectra Physics Holdings USA, Inc., a subsidiary of Thermo Electron Corporation, a warrant to purchase up to 376, 233 shares of Trimble's common stock over a fixed period of time (the warrant was subsequently issued on April 12, 2002). Initially, Spectra Physics' warrant entitles it to purchase 200,000 shares of common stock over a five-year period at an exercise price of $15.11 per share. Subsequently, on a quarterly basis beginning July 14, 2002, Spectra Physics' warrant will be exercisable for an additional 250 shares of common stock for every $1 million of principal and interest outstanding until the note is paid off in full. These shares will be purchasable at a price equal to the average of Trimble's closing price for the five days immediately preceding the last trading day of each quarter. Under the terms of the warrant, the total number of shares issued will not exceed 376,233 shares. The warrant was valued at $1.3 million and will be amortized to interest expense over the remaining term of the related subordinated note. 14
NOTE 10 -- Earnings Per Share: The following data show the amounts used in computing earnings (loss) per share and the effect on the weighted-average number of shares of dilutive potential Common Stock. March 29, March 30, Three Months Ended 2002 2001 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Numerator: Loss available to common shareholders used in basic and diluted loss per share $(715) $( 11,587) =========== ========== Denominator: Weighted-average number of common shares used in calculating basic income (loss) per share 27,959 24,219 Effect of dilutive securities: Common stock options -- -- Common stock warrants -- -- ---------- ---------- Weighted-average number of common shares and dilutive potential common shares used in calculating diluted income (loss) per share 27,959 24,219 ============ =========== Basic loss per share $ (0.03) $ (0.48) ============ =========== Diluted loss per share $ (0.03) $ (0.48) ============ =========== Options and warrants were not included in the computation of earnings per share in the first fiscal quarters of 2002 and 2001 because the Company reported a net loss in both fiscal quarters. If Trimble had reported net income, additional 517,000 and 1,466,000 common equivalent shares related to outstanding options and warrants would have been included in the calculation of diluted income (loss) per share for the first fiscal quarters of 2002 and 2001, respectively. NOTE 11 -- Related-Party Transactions: Related-Party Lease The Company currently leases office space in Ohio from an association of three individuals, two of whom are employees of one of the Company's U.S. operating units, under a noncancelable operating lease arrangement expiring in 2011. The annual rent is $345,000 and is subject to adjustment based on the terms of the lease. The Condensed Consolidated Statements of Operations include expenses from this operating lease of $88,025 and $86,351 for the periods ended March 29, 2002 and March 30, 2001, respectively. Related -Party Notes Receivable The Company has notes receivable from officers and employees of $1.3 million as of March 29, 2002 and $955,000 as of December 28, 2001. The notes bear interest from 4.49% to 6.62% and have an average remaining life of 3.4 years as of March 29, 2002. 15
NOTE 12 -- Contingencies: In January 2001, Philip M. Clegg instituted a lawsuit in the United States District Court for the District of Utah, Central Division, against Spectra-Physics Laserplane, Inc., Spectra Precision AB and Trimble Navigation Limited. The complaint alleges claims of infringement of U.S. Patent No. 4,807,131, breach of contract and unjust enrichment. The suit seeks damages and an accounting for moneys alleged to be owed under a license agreement, plus interest and attorney fees. In August 2001, Lockheed Martin Corporation served a complaint alleging patent infringement of U.S. Patent No. 4,949,089 on the Company, Spectra Precision, Inc., Leica Geosystems, Inc., Sokkia Corporation and Carl Zeiss, Inc. The lawsuit was filed in the United States District Court for the Eastern District of Texas, Marshall Division. Lockheed seeks treble damages, an injunction and attorney fees. In November 2001, Qualcomm Inc. filed a lawsuit against the Company in the Superior Court of the State of California. The complaint alleges claims for an unspecified amount of money damages arising out of Qualcomm's perceived lack of assurances in early 1999 that the Company's products purchased by Qualcomm would work properly after a scheduled week number rollover event that took place in August, 1999. Qualcomm is the only customer to make a claim against the Company based on the week number rollover event. In the opinion of management, the resolutions of the foregoing lawsuits are not expected to have a material adverse effect on the overall financial position of the Company. However, depending on the amount and timing, an unfavorable resolution in any one of these matters could materially affect the Company's future operations or cash flow in a particular period. The Company is also a party to other disputes incidental to its business. The Company believes that the ultimate liability of the Company as a result of such disputes, if any, would not be material to its overall financial position, results of operations, or liquidity. NOTE 13 -- Restructuring Charges: Restructuring charges of $0.3 million and $1.7 million were recorded for the three month periods ended March 29, 2002 and March 30, 2001, respectively, which are primarily related to severance costs. These restructuring activities impacted 7 individuals in the first fiscal quarter 2002 and 65 individuals in the first fiscal quarter of 2001. As of March 29, 2002, all of the restructuring charges except for approximately $106,000 have been paid. The remaining amounts are expected to be paid in the second fiscal quarter of 2002. NOTE 14 -- Joint Venture: On April 1, 2002, Caterpillar Trimble Control Technologies LLC a joint venture formed by Trimble and Caterpillar began operations. The joint venture, 50 percent owned by Trimble and 50 percent owned by Caterpillar, will develop the next generation of advanced electronic guidance and control products for earthmoving machines in the construction, mining and waste industries. Caterpillar Trimble Control Technologies LLC is based in Dayton, Ohio. Under the terms of the joint venture agreement, Caterpillar contributed $14.5 million cash and selected technology, and Trimble contributed selected existing machine control product technologies valued at $25.5 million. Additionally, both companies have licensed patents and other intellectual property from their portfolios to the joint venture. During the first fiscal quarter of 2002, Trimble received a special cash distribution of $11 million from the joint venture. This cash distribution has been treated as a deferred gain by the Company since the joint venture had not yet commenced operations at that time. The future accounting treatment of this $11m deferred gain is presently being researched by the Company. 16
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Actual results could differ materially from those indicated in the forward-looking statements due to a number of factors including, but not limited to, the risk factors discussed in "Certain Other Risk Factors" below and elsewhere in this report as well as in the Company's Annual Report on Form 10-K for fiscal year 2001 and other reports and documents that the Company files from time to time with the Securities and Exchange Commission. The Company has attempted to identify forward-looking statements in this report by placing an asterisk (*) before paragraphs. Discussions containing such forward-looking statements may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," " could," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," and similar expressions. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the Company disclaims any obligation to update these statements or to explain the reasons why actual results may differ. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Trimble's discussion and analysis of its financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, doubtful accounts, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring costs, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the amount and timing of revenue and expenses and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. BUSINESS DEVELOPMENTS * On April 1, 2002, Caterpillar Trimble Control Technologies LLC, a joint venture formed by Trimble and Caterpillar, began operations. The joint venture, 50 percent owned by Trimble and 50 percent owned by Caterpillar, is aimed at developing the next generation of advanced electronic guidance and control products for earthmoving machines in the construction, mining and waste industries. Caterpillar Trimble Control Technologies LLC is based in Dayton, Ohio. Under the terms of the joint venture agreement, Caterpillar contributed $14.5 million cash and selected technology, and Trimble contributed selected existing machine control product technologies valued at $25.5 million. Additionally, both companies have licensed patents and other intellectual property from their portfolios to the joint venture. Also, Trimble has received a special cash distribution of $11 million from the joint venture. The joint venture's intention is to develop machine control products that integrate site design information with accurate positioning technology to automatically control blades and other machine functions This machine control technology will combine historical Trimble positioning technology with capability gained through the acquisition of Spectra Precision. On April 2, 2001, Trimble acquired certain assets of Grid Data, an Arizona corporation, for approximately $3.5 million in cash and the assumption of certain liabilities. In addition, the purchase agreement provided for Trimble to make certain earn-out payments based upon the completion of certain business milestones. In April 2002, Trimble agreed to issue 268,352 shares of Trimble's common stock to Grid Data in settlement of all earn-out payments due under the purchase agreement. These shares, when issued will result in additional goodwill. In the first fiscal quarter of 2002, Trimble realigned two of its reportable segments. The Agriculture segment has been combined with the mapping and GIS market to form Trimble Field Solutions. Mapping and GIS was previously part of Fleet and Asset Management. The mobile positioning market that was part of Fleet and Asset Management is now Trimble Mobile Solutions. 17
RESULTS FROM CONTINUING OPERATIONS EXCLUDING INFREQUENT, AND ACQUISITION RELATED ADJUSTMENTS Income (loss) from continuing operations includes certain infrequent and acquisition related charges that management believes are not reflective of on-going operations. The following table, which does not purport to present the results of continuing operations in accordance with generally accepted accounting principles, reflects results of operations to exclude the effects of such items as follows (in thousands): March 29, March 30, Three Months Ended 2002 2001 - -------------------------------------------------------------------------------- Income (loss) before income taxes from continuing Operations $ 285 $ (11,087) Infrequent and acquisition-related charges: Loss on sale of business (Other income and expense) -- 240 Amortization of goodwill and other purchased intangibles 1,978 7,316 Restructuring charges 304 1,724 ----------- ---------- Total infrequent and acquisition-related charges 2,282 9,280 ----------- ---------- Adjusted income (loss) before income taxes from continuing operations 2,567 (1,807) Income tax provision 1,000 475 ----------- ---------- Adjusted net income $ 1,567 $ (2,282) =========== ========== RESULTS OF OPERATIONS The Company's annual revenues from operations for the three month period ended March 29, 2002 were $104.0 million, as compared with $117.9 million in the corresponding period in fiscal 2001. The net loss for the three months ended March 29, 2002, was $0.7 million, or $0.03 diluted loss per share, compared to a net loss for the corresponding period in fiscal 2001, of $11.6 million, or $0.48 diluted loss per share. Summary of financial data by business segment follows. The following table shows revenue and operating income by segment for the periods indicated and should be read in conjunction with the narrative descriptions below. Operating income by segment excludes unallocated corporate expenses, which are comprised primarily of general and administrative costs, amortization of goodwill and other purchased intangibles, as well as other items not controlled by the business segment. 18
<TABLE> <CAPTION> % of % of March 29, Total March 30, Total Three Months Ended 2002 Revenue 2001 Revenue - ----------------------------------- --------------- ----------- ---------------- ----------- (Dollars in thousands) <S> <C> <C> <C> <C> Engineering and Construction Revenue $ 68,410 66% $ 73,713 63% Segment Operating income from operations 12,218 10,305 Segment Operating income as a percentage of segment revenue 18% 14% Trimble Field Solutions Revenue 18,031 17% 17,007 14% Segment Operating income from operations 4,517 3,113 Segment Operating income as a percentage of segment revenue 25% 18% Trimble Mobile Solutions Revenue 2,352 2% 2,925 2% Segment Operating loss from operations (3,062) (2,800) Segment Operating loss as a percentage of segment revenue (130)% (95)% Component Technologies Revenue 10,025 10% 16,162 14% Segment Operating income from operations 1,225 2,233 Segment Operating income as a percentage of segment revenue 12% 14% Portfolio Technologies Revenue 5% 8,056 7% 5,211 Segment Operating loss from operations (289) (637) Segment Operating loss as a percentage of segment revenue (6)% (8%) Total Revenue $104,029 $117,863 Total Segment Operating income from continuing operations $14,609 $12,214 </TABLE> 19
A reconciliation of Trimble's consolidated segment operating income to consolidated income (loss) before income taxes from operations follows: March 29, March 30, Three Months Ended 2002 2001 - -------------------------------------------------------------------------------- (In thousands) Consolidated segment operating income from continuing operations $ 14,609 $ 12,214 Unallocated corporate expense (8,239) (6,342) Amortization of goodwill and other purchased intangibles (1,978) (7,316) Restructuring charges (304) (1,724) Non-operating income (expense), net (3,803) (7,919) ------------- ---------------- Income (loss) from operations before income taxes $ 285 $ (11,087) ============= ================ Revenue For the three months ended March 29, 2002, total revenue decreased by $13.8 million or 12% to $104.0 million from $117.9 million in the corresponding period in fiscal 2001. Engineering and Construction Revenue Products within the Engineering and Construction segment include surveying, general construction, site preparation, excavation, road and runway construction, interior construction and underground construction systems. Engineering and Construction revenues decreased by $5.3 million or 7% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The decrease was due to the following: o Construction Instruments and Machine Control product lines recorded reduced revenue as a result of a shift in the distribution model from direct sales offices, to more dealer dependent channels and as a result of the general economic slowdown. o In the first fiscal quarter of 2001 there was strong demand for the land survey product line primarily due to the introduction of the "Trimble Toolbox(TM)". The Trimble Toolbox is a set of integrated surveying tools that provides significantly higher functionality to surveyors and other construction professionals. Operating Income Engineering and Construction operating income increased by $1.9 million or 2% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The increase was due to the following: o A favorable mix of product sales, including increased sales of our virtual reference software, resulted in gross margins being slightly improved from prior year despite lower revenues. o The continued realization of cost synergies from actions implemented in 2001 as a result of the acquisition of the Spectra Precision Group. These actions included the integration of sales forces, rationalization of overlapping product lines, and the elimination of redundant development, and sales and service facilities. 20
Trimble Field Solutions Revenue Products within the Trimble Field Solutions segment include GPS-based machine guidance systems, field management systems, laser-based water management systems and solutions for a variety of applications in asset tracking. Trimble Field Solutions revenues increased by $1.0 million or 6% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The increase in revenue was due to new products and more competitive pricing offered in our Agriculture product line, resulting in higher sales volumes. Among the new products contributing to increased sales, was the EZ-Guide (TM) system for tractor guidance. Operating Income Trimble Field Solutions operating income increased by $1.4 million or 45% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The increase in operating income was due to the following: o Higher revenues and lower operating expenses combined to produce higher divisional income. o Engineering spending was reduced on some projects as they were completed and new products introduced. o Selling expenses were also reduced by the sale of some company owned retail operations to third party dealers. Trimble Mobile Solutions Revenue Products within the Trimble Mobile Solutions segment use GPS and information technologies to provide solutions for a variety of applications in fleet management. Trimble Mobile Solutions revenues decreased by $0.6 million or 20% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The decrease in revenue was due to the following factors: o Reduced sales of wireless products due to the economic slow down. o Weakness in our Satcom Galaxy Inmarsat -C business. We announced early last year that we would exit this product line due to the wide availability and significant cost savings of cellular products. Operating Income Trimble Mobile Solutions operating loss increased by $0.3 million or 9% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The increase in operating loss was due to the following factors: o Decrease in margins due to the sell-off of existing Satcom inventory at reduced prices. o Competitive pricing pressures on wireless hardware. o Significant costs incurred in the development of a service platform to enable a range of asset management solutions including an internet delivered cellular based solution for vehicle fleet management. Component Technologies Revenue Products within the Component Technologies segment consist principally of proprietary GPS chipsets and modules marketed to original equipment manufacturers. Component Technologies revenues decreased by $6.1 21
million or 38% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The decrease in revenue was due to the following factors: o Embedded product lines were down approximately $2.3 million or 48% year over year due to the economic slowdown. o Timing product lines were down due to reduced spending in the telecommunications market. o * In-vehicle navigation unit sales decreased by approximately $2.6 million due to decreases in average selling prices. We expect this trend to continue as technology advances in component technology will enable among other things, reduced cost. Operating Income Component Technologies operating income decreased by $1.0 million or 45% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The decrease in operating income was due primarily to lower revenue, which was offset by a reduction in operating expenses. Portfolio Technologies Revenue This segment is an aggregation of various operations that each equal less than ten percent of the Company's total operating revenue. These markets include the operations of the Military Advanced Systems division and Tripod Data Systems. Portfolio Technologies revenues decreased by $2.8 million or 55% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The decrease in revenue was due to the following: o Reduction of $1.7 million in our commercial aviation product line. The sale of the air transport product line to Honeywell was completed in March 2001. o Decrease of $1.5 million or 51% in our military products primarily due to a delayed shipment. We expect the order to ship during the second fiscal quarter of 2002. o The above decreases were partially offset by an increase of $0.5 million or 14% in our At Work Computer product lines. Operating Income Portfolio Technologies operating loss decreased by $0.3 million or 55% for the three months ended March 29, 2002 as compared with the same corresponding period in fiscal 2001. The decrease in operating loss was primarily due to the following: o Decrease in research and development expenses of approximately $0.6 million. o Disposal of the commercial aviation product line in the first fiscal quarter of 2001. International Revenues. * Sales to our unaffiliated customers in locations outside the U.S. comprised approximately 50% and 52% of total revenues for three months ended March 29, 2002 and March 30, 2001, respectively. North and South America represented 56% of total revenue, Europe 31%, and Asia 14% in the first fiscal quarter of 2002. We anticipate that sales to international customers will continue to account for a significant portion of our revenue. For this reason, we are subject to the risks inherent in these foreign sales, including unexpected changes in regulatory requirements, exchange rates, governmental approval, and tariffs or other barriers. Even though the U.S. Government announced on March 29, 1996, that it would support and maintain the GPS system, and on May 1, 2000, stated that it has no intent to ever again use Selective Availability (SA), a method of degrading GPS accuracy, there may be reluctance in certain foreign markets to purchase such products given the control of GPS by the U.S. Government. Trimble's 22
results of operations could be adversely affected if we were unable to continue to generate significant sales in locations outside the U.S. Gross Margin * Gross margin varies due to a number of factors, including product mix, international sales mix, customer type, the effects of production volumes and fixed manufacturing costs on unit product costs, and new product start-up costs. Gross margin as a percentage of total revenues was 52% for the three months ended March 29, 2002 and 49% for the same corresponding period in fiscal 2001. The increase in gross margin percentage for the first fiscal quarter of 2002, compared with the same corresponding period in fiscal 2001, was due to the fact in the first fiscal of quarter of 2001 the Company incurred a three million dollar charge primarily associated with the write-down of inventory related to the consolidation and simplification of product lines, which was not repeated in the first fiscal quarter of 2002. Cost synergies and further integration of our Spectra Precision acquisition also contributed to increased efficiencies in manufacturing costs over the prior fiscal year. Because of potential product mix changes within and among the industry markets, market pressures on unit selling prices, fluctuations in unit manufacturing costs, including increases in component prices and other factors, current level gross margins cannot be assured. In addition, should the global economic conditions deteriorate further, gross margin could be further adversely impacted. Operating Expenses The following table shows operating expenses for the periods indicated and should be read in conjunction with the narrative descriptions of those operating expenses below: March 29, March 30, Three Months Ended 2002 2001 - ----------------------------------------------------------------- -------------- (In thousands) Research and development $ 15,038 $ 15,819 Sales and marketing 22,127 28,141 General and administrative 10,798 9,392 Restructuring charges 304 1,724 Amortization of goodwill and other purchased intangibles 1,978 7,316 ------------ -------------- Total $ 50,245 $ 62,392 ============ ============== Research and Development Research and development spending decreased by $0.8 million during the first fiscal quarter of 2002, and represented 14% of revenue, compared with 13% in the same corresponding period in fiscal 2001. The decrease was due primarily to the following factors: o Decrease in temporary help and consulting expenses of approximately $0.5 million for the three months ended March 29, 2002 compared with similar period in prior year. o Decrease in outside engineering expenses related to chip development as well decrease in pilot run and non-recurring engineering tooling of approximately $0.4 million for the three months ended March 29, 2002 compared with similar period in prior year. o Trimble's receipt of approximately $0.4 million from cost reimbursement funds for military research and development programs for the three months ended March 29, 2002 as compared to the same period in fiscal year 2001. o The above decreases were partially offset by an increase in compensation and related expenses of $0.5 million for the three months ended March 29, 2002 as compared to the same period in fiscal year 2001. 23
* The Company believes that the development and introduction of new products is critical to its future success and expects to continue its active development of future products. Sales and Marketing Sales and marketing expense decreased by $6.0 million during the first fiscal quarter of 2002, and represents 21% of revenue, compared with 24% in the same corresponding period in fiscal 2001. The decrease in 2002 was due primarily to the following factors: o During first fiscal quarter of 2001 the Company sold off many of its direct sales offices which decreased sales and marketing expense by approximately $2.6 million for the three months ended March 29, 2002 as compared to the same period in fiscal year 2001. o Decreases in compensation and related expenses, as well as, temporary help and consulting expenses of approximately $1.3 million for the three months ended March 29, 2002 compared with similar period in prior year. o Decreases in travel, advertising, promotional, trade show, and sales commission expenses of approximately $1.4 million for the three months ended March 29, 2002 compared with similar period in prior year. o Reduction in facility, equipment, office and telephone expenses of approximately $0.6 million for the three months ended March 29, 2002 compared with similar period in prior year. * Trimble's future growth will depend in part on the timely development and continued viability of the markets in which we currently compete, and on our ability to continue to identify and exploit new markets for our products. General and Administrative General and administrative expense increased by $1.4 million during the first fiscal quarter of 2002, representing 10% of revenue, compared with 8% in the same corresponding period in fiscal 2001. The increase in 2002 was due primarily to the following factors: o Trimble also had increases in facility expenses of approximately $0.7 million for the three months ended March 29, 2002 compared with similar period in prior year. o An allowance for doubtful accounts charge of approximately $0.6 million during the first fiscal quarter of 2002 primarily related to exposures faced by the Company in Argentina because of the country's troubled economy, as well as customers impacted by the difficult economic climate. Restructuring charges Restructuring charges of $0.3 million and $1.7 million were recorded for the three month periods ended March 29, 2002 and March 30, 2001, respectively, which are primarily related to severance costs. These restructuring activities impacted 7 individuals in the first fiscal quarter 2002 and 65 individuals in the first fiscal quarter of 2001. As of March 29, 2002, all of the restructuring charges except for approximately $106,000 have been paid. The remaining amounts are expected to be paid in the second fiscal quarter of 2002. See Note 13 of the Condensed Consolidated Financial Statements for discussion regarding the restructuring. Spectra Precision Group Restructuring Activities At the time the Company acquired the Spectra Precision Group, the Company formulated a restructuring plan and provided approximately $9.0 million for costs to close certain duplicative office facilities, combine 24
operations including redundant domestic and foreign legal entities, reduce workforce in overlapping areas, and relocate certain employees. These costs were accrued for as part of the allocation of the purchase price. Included in the total cost was approximately $2.7 million related to the discontinuance of overlapping product lines, which was included in our reserve for excess and obsolete inventory. The facility consolidation and employee relocations resulted primarily from combining certain office facilities and duplicative functions, including management functions, of the Spectra Precision Group. As of March 29, 2002, the Company had charged against the reserve approximately $3.6 million which consisted of $1.1 million for legal and tax consulting expenses relating to consolidation of legal entities, $1.3 million for severance expenses, $0.8 million for facilities and direct sales offices closures, $0.3 million for an underfunded pension plan, and other costs of $0.1 million, of which $0.3 million was spent during the first fiscal quarter of fiscal 2002. The Company revised its final estimates for costs to complete the remaining planned activities and accordingly reduced its restructuring reserve by approximately $1.1 million, with a corresponding adjustment to goodwill in the fourth quarter of fiscal 2001. The reserve balance was approximately $1.6 million at March 29, 2002, and the Company anticipates completing the majority of its remaining restructuring activities during fiscal 2002. These activities consist principally of legal costs and other expenses required to combine redundant legal entities. The elements of the reserve at March 29, 2002, on the balance sheet (included in accrued liabilities) are as follows: <TABLE> <CAPTION> Employee Severance and Facility Closure, Legal Relocation and Tax Expense Total (In thousands) <S> <C> <C> <C> Total reserve $ 1,945 $ 4,370 $ 6,315 Amounts paid/written off (1,685) (1,945) (3,630) Revision to estimates (260) (812) (1,072) ------------------------------------------------------------------------ Balance as of March 29, 2002 $ - $ 1,613 $ 1,613 ======================================================================== </TABLE> Amortization of Goodwill and Other Purchased Intangibles March 29, March 30, Three Months Ended 2002 2001 - ------------------------------------------------------------------------------- (In thousands) Amortization of goodwill $ - $ 1,920 Amortization of other purchased intangibles 1,978 5,396 Amortization of other intangibles 208 204 -------------- -------------- Total amortization of goodwill, other purchased, and other intangibles $ 2,186 $ 7,520 ============== ============== Amortization expense of goodwill and other purchased intangibles decreased during the first fiscal quarter of 2002 by approximately $5.3 million representing 2% of revenue, compared with 6% in fiscal 2001. The decrease was primarily due to the adoption of SFAS 142, which does not require the amortization of goodwill and intangible assets with indefinite useful lives. 25
Nonoperating income (expense), net The following table shows nonoperating income (expenses), net for the periods indicated and should be read in conjunction with the narrative descriptions of those expenses below: March 29, March 30, Three Months Ended 2002 2001 - -------------------------------------- --------------- ---------------- (In thousands) Interest income $ 87 $ 370 Interest expense (4,030) (6,087) Foreign exchange gain (loss) (59) (145) Other income (expense) 199 (333) --------------- ---------------- Total $ (3,803) $ (6,195) =============== ================ Nonoperating expense, net decreased by $2.4 million during the first fiscal quarter of 2002 as compared with same fiscal period in 2001. The primary reason for the decrease was a reduction in interest expenses related to loans and Credit Facilities accounted for approximately $2.1 million. Income Taxes For the three months ended March 29, 2002 and March 30, 2001 the Company recorded provisions for income taxes of $1.0 million and $0.5 million respectively, which reflect foreign taxes on profits in foreign jurisdictions. Inflation The effects of inflation on the Company's financial results have not been significant to date. LIQUIDITY AND CAPITAL RESOURCES March 29, December 28, As of 2002 2001 - -------------------------------------------------------------- ----------------- (Dollars in thousands) Cash and cash equivalents $33,021 $31,078 As a percentage of total assets 7.9% 7.4% Accounts receivable days sales outstanding (DSO) 50 55 Inventory days sales outstanding 98 90 March 29, March 30, Three Months Ended 2002 2001 - -------------------------------------------------------------- ----------------- (Dollars in thousands) Cash provided (used) by operating activities $ 9,247 $(2,780) Cash used by investing activities $(3,989) $(3,450) Cash provided (used) by financing activities $(3,315) $10,025 Net increase in cash and cash equivalents $ 1,943 $ 3,122 At March 29, 2002, Trimble's cash and cash equivalents increased by $1.9 million from December 28, 2001. The Company repaid $21.2 million of its debt outstanding under its subordinated note in March 2002. This was financed by the issuance of common stock, net of issuance costs of approximately $17.4 million, and cash 26
generated from operating activities of approximately $9.3 million. The Company also used approximately $2.2 million for the purchase of certain assets, and approximately $1.8 million for net capital expenditures. At March 29, 2002, Trimble's debt mainly consisted of $95.6 million outstanding under senior secured credit facilities, and an $68.7 million subordinated promissory note related to the acquisition of the Spectra Precision Group. Trimble has relied primarily on cash provided by operating activities to fund capital expenditures, and other investing activities. During January 2002, the Company raised $19.2 million in a private placement of equity. On March 20, 2002, the Company used $21.2 million of net proceeds from its private placement to retire accrued interest and principal under its subordinated note with Spectra Physics Holdings USA, Inc., a subsidiary of Thermo Electron, reducing the outstanding principal amount to $68.7 million. In addition, the Company renegotiated the terms of the subordinated note. Under the revised agreement, the maturity of the note was extended until July 14, 2004, at the current interest rate of approximately 10.4% per year. In connection with the amendment, on April 12, 2002, the Company issued to Spectra Physics Holdings USA, Inc. a warrant to purchase up to 376,233 shares of Trimble's common stock over a fixed period of time. Initially, Spectra Physics' warrant entitles it to purchase 200,000 shares of common stock over a five-year period at an exercise price of $15.11 per share. Subsequently, on a quarterly basis beginning on July 14, 2002, Spectra Physics' warrant will be exercisable for an additional 250 shares of common stock for every $1 million of principal and interest outstanding until the note is paid off in full. These shares will be purchasable at a price equal to the average of Trimble's closing price for the five days immediately preceding the last trading day of each quarter. Under the terms of the warrant, the total number of shares issued will not exceed 376,233 shares. The warrant was valued at $1.3 million and will be amortized to interest expense over the remaining term of the related subordinated note. * In the first fiscal quarter of 2002, cash provided by operating activities was $9.3 million, as compared to cash used of $2.8 million in the corresponding fiscal period in 2001. In the first fiscal quarter of 2002, Trimble received a special cash distribution of $11 million from the joint venture with Caterpillar. Trimble's ability to continue to generate cash from operations will depend in large part on revenues, the rate of collections of accounts receivable, and continued focus on reducing operating costs and the move towards profitability. The accounts receivable days sales outstanding decreased from year end due to continued focus on specific past due balances worldwide. The inventory days outstanding increased from year end due to a build ahead of inventory across most product lines as an initial supply for the new European regional fulfillment center in the second quarter of fiscal 2002. Cash flows used in investing activities were $4.0 million in the first fiscal quarter of 2002 as compared to $3.5 million in the corresponding fiscal period in 2001. Cash used in investing activities in fiscal 2002 was primarily related to approximately 25% additional equity interest in Terrasat, a German corporation, and for the acquisition of property and equipment. Cash used by financing activities was $3.3 million in the first fiscal quarter of 2002 as compared with cash provided by financing activities of $10.1 million in the corresponding fiscal period in 2001. During the first fiscal quarter of 2002, the Company made $21.2 million of payments against its subordinated note. These payments were offset by proceeds from the issuance of common stock to employees pursuant to Trimble's stock option plan and employee stock purchase plan of $30,000, as well as issuance of common stock under a private equity placement of $17.4 million. In July 2000, Trimble obtained $200 million of senior, secured credit facilities (the "Credit Facilities") from a syndicate of banks to support the acquisition of the Spectra Precision Group and the Company's ongoing working capital requirements and to refinance certain existing debt (see Note 7 to the Condensed Consolidated Financial Statements). At March 29, 2002, Trimble had approximately $95.6 million outstanding under the Credit Facilities, comprised of $47.6 million under a five-year $100 million term loan, $25 million under a $50 million three-year U.S. dollar only revolving Credit Facility ("revolver"), and $23 million under a $50 million three-year multi-currency revolver. The Credit Facilities are secured by all material assets of the Company, subject to foreign tax considerations. If Trimble is able to achieve and maintain a leverage ratio (Debt/EBITDA) of 2.0x or less for four consecutive quarters, the security for the Credit Facilities will be released. Financial covenants of the Credit Facilities include leverage, fixed charge, and minimum net worth tests. At March 29, 2002, the Company is in 27
compliance with debt covenants. The amounts due under the three-year revolver loans are paid as the loans mature, and the loan commitment fees are paid on a quarterly basis. Under the five-year term loan, the Company is due to make payments (excluding interest) of approximately $15 million in fiscal 2002, $24 million in fiscal 2003 and the remaining $8.6 million in fiscal 2004. Management believes that its cash and cash equivalents, together with its credit facilities, will be sufficient to meet its anticipated operating cash needs for the next twelve months. At March 29, 2002, the Company had $33.0 million of cash and cash equivalents, as well as access to $52 million of cash under the terms of its three-year revolver loans. Trimble is currently restricted from paying dividends and is limited as to the amount of its common stock that it can repurchase under the terms of the Credit Facilities. We are allowed to pay dividends and repurchase shares of its common stock up to 25% of net income in the previous fiscal year. We have obligations under noncancelable operating leases for its office facilities. In fiscal 2002, the payments under these noncancelable operating leases are expected to be approximately $12.7 million. * We expect fiscal 2002 capital expenditures to be approximately $7.0 million to $9.0 million, primarily for computer equipment, software, and leasehold improvements associated with business expansion. Decisions related to how much cash is used for investing are influenced by the expected amount of cash to be provided by operations. * Trimble has entered into forward foreign currency exchange contracts to offset the effects of changes in exchange rates on foreign-denominated intercompany receivables. At March 29, 2002, we had forward foreign currency exchange contracts to sell approximately 308.4 million Japanese yen, approximately 4.6 million Euros, approximately 1.1 million British pounds sterling, and to buy approximately 13.7 million Japanese yen, approximately 0.2 million British pounds sterling, and approximately 1.6 million New Zealand dollars at contracted rates that mature over the next three months. Recent Accounting Pronouncements Trimble adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," at the beginning of fiscal 2002. The effect of adopting SFAS 144 did not have a material impact on the Company's financial position or results of operations. Trimble adopted Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, at the beginning of fiscal 2002. Application of the nonamortization provisions of Statement 142 significantly reduced amortization expense to approximately $2.0 million for the period ended March 29, 2002. The Company reclassified identifiable intangible assets with indefinite lives, as defined by Statement 142, to goodwill at the date of adoption. The Company tested goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. No impairment charge resulted from the impairment tests. The effect of adopting SFAS 141 and 142 did not have a material impact on the Company's financial position or results of operations. Certain Other Risk Factors Our Annual and Quarterly Performance May Fluctuate. Our operating results have fluctuated and can be expected to continue to fluctuate in the future on a quarterly and annual basis as a result of a number of factors, many of which are beyond our control. Results in any period could be affected by changes in market demand, competitive market conditions, market acceptance of new or existing products, fluctuations in foreign currency exchange rates, the cost and availability of components, our ability to manufacture and ship products, the mix of our customer base and sales channels, the mix of products sold, our ability to expand our sales and marketing organization effectively, our ability to attract and retain key technical and managerial employees, the timing of shipments of products under contracts and sale of licensing rights, and general global economic conditions. In addition, demand for our products in any quarter or year may vary due to the seasonal buying patterns of our customers in the agricultural and engineering and construction industries. Due to the foregoing factors, our operating results in one or more future periods are expected to be subject to significant fluctuations. The price of our common stock could decline substantially in the event such fluctuations result in our financial performance being 28
below the expectations of public market analysts and investors, which are based primarily on historical models that are not necessarily accurate representations of the future. Our Operating Results in Each Quarter May Not Accurately Reflect Business Activity in Each Quarter. Due, in part, to the buying patterns of our customers, a significant portion of our quarterly revenues occurs from orders received and immediately shipped to customers in the last few weeks and days of each quarter, although our operating expenses tend to remain constant. Engineering and construction purchases tend to occur in early spring, and governmental agencies tend to utilize funds available at the end of the government's fiscal year for additional purchases at the end of our third fiscal quarter in September of each year. Concentrations of orders sometimes also occur at the end of our other two fiscal quarters. Additionally, a majority of our sales force earn commissions on a quarterly basis, which may cause concentrations of orders at the end of any fiscal quarter. If for any reason expected sales are deferred, orders are not received, or shipments were to be delayed a few days at the end of a quarter, our operating results and reported earnings per share for that quarter could be significantly impacted. Our Inability to Accurately Predict Orders and Shipments May Affect Our Revenue, Expenses and Earnings per Share. Because we have been unable in the past to predict exactly when our customers will place orders and request shipments, we cannot accurately plan our manufacturing requirements. As a result, if the orders and shipments differ from what we predict, we may incur additional expenses and build unneeded inventory, which may require additional reserves. Any significant change in our customers' purchasing patterns could have a material adverse effect on our operating results and reported earnings per share for a particular quarter. Our Gross Margin Is Subject to Fluctuation. Our gross margin is affected by a number of factors, including product mix, product pricing, cost of components, foreign currency exchange rates and manufacturing costs. For example, since our Engineering and Construction and Geographic Information Systems (GIS) products generally have higher gross margins than our Component Technologies products, absent other factors, a shift in sales toward Engineering and Construction and GIS products would lead to a gross margin improvement. On the other hand, if market conditions in the highly competitive Engineering and Construction and GIS market segments forced us to lower unit prices, we would suffer a decline in gross margin unless we were able to timely offset the price reduction by a reduction in production costs or by sales of other products with higher gross margins. A decline in gross margin could have a material effect on our operating results. We Are Dependent on a Sole Manufacturer for Our Products and on Sole Suppliers of Critical Parts for Our Products. With the selection of Solectron Corporation in August 1999 as an exclusive manufacturing partner for many of our GPS products previously manufactured out of our Sunnyvale facilities, we are substantially dependent upon a sole supplier for the manufacture of our products. Under the agreement with Solectron, we provide to Solectron a twelve-month product forecast and place purchase orders with Solectron sixty calendar days in advance of the scheduled delivery of products to our customers. Although purchase orders placed with Solectron are cancelable, the terms of the agreement would require us to purchase from Solectron all material inventory not returnable or usable by other Solectron customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate manufacturing capacity from Solectron to meet customers' delivery requirements or we may accumulate excess inventories, if such inventories are not usable by other Solectron customers. In addition, we rely on sole suppliers for a number of our critical ASICS. We have experienced shortages of supplies, including ASICS, in the past. As an example, we were affected by industry-wide shortages of memory devices and electronic components that reached their most severe impact in the third calendar quarter of 2000. Our current reliance on sole or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could significantly delay our ability to ship our products, which could damage relationships with 29
current and prospective customers and could harm our reputation and brand, which could have a material adverse effect on our business. Our Credit Agreement Contains Stringent Financial Covenants. Two of the financial covenants in our Credit Agreement with ABN AMRO Bank, N.V. and certain other banks, dated as of July 14, 2000 as amended (the "Credit Agreement"), minimum fixed charge coverage and maximum leverage ratio, are extremely sensitive to changes in earnings before interest, taxes, depreciation and amortization ("EBITDA"). In turn, EBITDA is highly correlated to revenues and cost cutting. Due to uncertainties associated with the downturn in the worldwide economy, our future revenues by quarter are becoming increasingly more difficult to forecast and we have recently put in place various cost cutting measures, including the consolidation of service functions and centers, closure of redundant offices, consolidation of redundant product lines and reductions in staff. If revenues should decline at a faster pace than the rate of these cost cutting measures, on a quarter to quarter basis we may not be in compliance with the two above mentioned financial covenants. If we default on one or more covenants, we will have to obtain either negotiated waivers or amendments to the Credit Agreement. If we are unable to obtain such waivers or amendments, the banks would have the right to accelerate the payment of our outstanding obligations under the Credit Agreement, which would have a material adverse effect on our financial condition and viability as an operating company. In addition, a default under one of our debt instruments may also trigger cross-defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us. Our Substantial Indebtedness Could Materially Restrict Our Operations and Adversely Affect Our Financial Condition. We now have, and for the foreseeable future will have, a significant level of indebtedness. Our substantial indebtedness could: o increase our vulnerability to general adverse economic and industry conditions; o limit our ability to fund future working capital, capital expenditures, research and development and other general corporate requirements, or to make certain investments that could benefit us; o require us to dedicate a substantial portion of our cash flow to service interest and principal payments on our debt; o limit our flexibility to react to changes in our business and the industry in which we operate; and o limit our ability to borrow additional funds. We Face Competition in Our Markets. Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets. Within each of our markets, we encounter direct competition from other GPS, optical and laser suppliers and competition may intensify from various larger domestic and international competitors and new market entrants, some of which may be our current customers. The competition in the future, may, in some cases, result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition. We believe that our ability to compete successfully in the future against existing and additional competitors will depend largely on our ability to execute our strategy to provide systems and products with significantly differentiated features compared to currently available products. There can be no assurance that we will be able to implement this strategy successfully, or that any such products will be competitive with other technologies or products that may be developed by our competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures cause us to lose market share or force us to engage in price reductions that could have a material adverse effect on our business. We May Encounter Problems Associated With International Operations and Sales. Our customers are located throughout the world. Sales to unaffiliated customers in foreign locations represented approximately 50% of our revenues in our first fiscal quarter of 2002 and 52% in the corresponding fiscal 30
period for 2001. In addition, we have significant international operations, including manufacturing facilities, sales personnel and customer support operations. Our international sales operations include offices in Australia, Canada, China, France, Germany, Great Britain, Japan, Mexico, New Zealand, Sweden, Russia, Singapore and others. Our international manufacturing facilities are in Sweden and Germany. Our international presence exposes us to risks not faced by wholly-domestic companies. Specifically, we have experienced issues relating to integration of foreign operations, greater difficulty in accounts receivable collection, longer payment cycles and currency fluctuations. Additionally, we face the following risks, among others: unexpected changes in regulatory requirements; tariffs and other trade barriers; political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and research facilities; difficulties in staffing and management; language and cultural barriers; seasonal reductions in business activities in the summer months in Europe and some other countries; and potentially adverse tax consequences. Although we implemented a program to attempt to manage foreign exchange risks through hedging and other strategies, there can be no assurance that this program will be successful and that currency exchange rate fluctuations will not have a material adverse effect on our results of operations. In addition, in certain foreign markets, there may be reluctance to purchase products based on GPS technology, given the control of GPS by the U.S. Government. We Are Dependent on Proprietary Technology. Our future success and competitive position is dependent upon our proprietary technology, and we rely on patent, trade secret, trademark and copyright law to protect our intellectual property. There can be no assurance that the patents owned or licensed by us will not be invalidated, circumvented, challenged, or that the rights granted thereunder will provide competitive advantages to us or that any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all. We are currently defending two separate lawsuits for alleged patent infringement, one alleging infringement of a patent by some of our grade control systems, which products accounted for approximately two percent (2%) of our revenues in our fiscal year 2001, and another alleging infringement by our surveying products, which products accounted for approximately eleven percent (11%) of our revenues in our fiscal year 2001. In the event that in either or both of these suits our products are held to be infringing a valid patent, we could be prevented from continuing to sell these products and could be required to pay substantial damages, or, alternatively, enter into a royalty-bearing license agreement. There can be no assurance that others will not develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned by us. In addition, effective copyright, patent and trade secret protection may be unavailable, limited or not applied for in certain foreign countries. There can be no assurance that the steps taken by us to protect our technology will prevent the misappropriation of such technology. The value of our products relies substantially on our technical innovation in fields in which there are many current patent filings. We recognize that as new patents are issued or are brought to our attention by the holders of such patents, it may be necessary for us to withdraw products from the market, take a license from such patent holders, or redesign our products. We do not believe any of our products currently infringe patents or other proprietary rights of third parties, but we cannot be certain they do not do so. In addition, the legal costs and engineering time required to safeguard intellectual property or to defend against litigation could become a significant expense of operations. Such events could have a material adverse effect on our revenues or profitability. We Are Dependent on New Products. Our future revenue stream depends to a large degree on our ability to bring new products to market on a timely basis. We must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance of such products. However, there can be no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance. If we were unable to successfully define, develop and introduce competitive new products, and enhance existing products, our future results of operations would be adversely affected. Development and manufacturing schedules for technology products are difficult to predict, and there can be no assurance that we will achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success A delay in new product introductions could have a significant impact on our results of operations. No assurance can be given that we will not incur problems in the future in innovating and introducing new products. 31
Our Stock Price May Be Volatile. Our common stock has experienced and can be expected to experience substantial price volatility in response to actual or anticipated quarterly variations in results of operations, announcements of technological innovations or new products by us or our competitors, developments related to patents or other intellectual property rights, developments in our relationship with customers, suppliers, or strategic partners and other events or factors. In addition, any shortfall or changes in revenue, gross margins, earnings, or other financial results from analysts' expectations could cause the price of our common stock to fluctuate significantly. Additionally, certain macro-economic factors such as changes in interest rates as well as market climate for the high-technology sector could also have an impact on the trading price of our stock. We Face Risks of Entering Into and Maintaining Alliances. We believe that in certain emerging markets our success will depend on our ability to form and maintain alliances with established system providers and industry leaders. Our failure to form and maintain such alliances, or the preemption of such alliances by actions of other competitors or us will adversely affect our ability to penetrate emerging markets. No assurances can be given that we will not experience problems from current or future alliances or that we will realize value from any such strategic alliances. We Face Risks in Investing in and Integrating New Acquisitions. We are continuously evaluating external investments in technologies related to our business, and have made relatively small strategic equity investments in a number of GPS related technology companies. Acquisitions of companies, divisions of companies, or products entail numerous risks, including (i) the potential inability to successfully integrate acquired operations and products or to realize cost savings or other anticipated benefits from integration; (ii) diversion of management's attention; (iii) loss of key employees of acquired operations; and (iv) inability to recover strategic investments in development stage entities. As a result of such acquisitions, we have significant assets that include goodwill and other purchased intangibles. The testing of these intangibles under established accounting guidelines for impairment requires significant use of judgment and assumptions. Changes in business conditions could require adjustments to the valuation of these assets. Any such problems in integration or adjustments to the value of the assets acquired could harm our growth strategy and have a material adverse effect on our business, financial condition and compliance with debt covenants. We Are Dependent on Key Customers. We currently enjoy strong relationships with key customers. An increasing amount of our revenue is generated from large original equipment manufacturers such as Siemens VDO Automotive, Nortel, Caterpillar, CNH Global, Bosch, and others. A reduction or loss of business with these customers could have a material adverse effect on our financial condition and results of operations. There can be no assurance that we will be able to continue to realize value from these relationships in the future. We Are Dependent on Retaining and Attracting Highly Skilled Development and Managerial Personnel. Our ability to maintain our competitive technological position will depend, in a large part, on our ability to attract, motivate, and retain highly qualified development and managerial personnel. Competition for qualified employees in our industry and location is intense, and there can be no assurance that we will be able to attract, motivate and retain enough qualified employees necessary for the future continued development of our business and products. We Are Subject to the Impact of Governmental and Other Similar Certifications. We market certain products that are subject to governmental and similar certifications before they can be sold. For example, CE certification for radiated emissions is required for most GPS receiver and data communications products sold in the European Union. An inability to obtain such certifications in a timely manner could have an adverse effect on our operating results. Also, our products that use integrated radio communication technology require an end-user to obtain licensing from the Federal Communications Commission (FCC) for frequency-band usage. 32
During the fourth quarter of 1998, the FCC temporarily suspended the issuance of licenses for certain of our real-time kinematic products because of interference with certain other users of similar radio frequencies. An inability or delay in obtaining such certifications or delays of the FCC could adversely affect our ability to bring our products to market, which could harm our customer relationships and have a material adverse effect on our business. We Are Dependent on the Availability of Allocated Bands Within the Radio Frequency Spectrum. Our GPS technology is dependent on the use of the Standard Positioning Service ("SPS") provided by the U.S. Government's Global Positioning System (GPS). The GPS SPS operates in radio frequency bands that are globally allocated for radio navigation satellite services. International allocations of radio frequency are made by the International Telecommunications Union (ITU), a specialized technical agency of the United Nations. These allocations are further governed by radio regulations that have treaty status and which may be subject to modification every two-three years by the World Radiocommunication Conference. Any ITU reallocation of radio frequency bands, including frequency band segmentation or sharing of spectrum, may materially and adversely affect the utility and reliability of our products, which would, in turn, cause a material adverse effect on our operating results. Many of our products use other radio frequency bands, together with the GPS signal, to provide enhanced GPS capabilities, such as real-time kinematic precision. The continuing availability of these non-GPS radio frequencies is essential to provide enhanced GPS products to our precision survey markets. Any regulatory changes in spectrum allocation or in allowable operating conditions may materially and adversely affect the utility and reliability of our products, which would, in turn, cause a material adverse effect on our operating results. In addition, unwanted emissions from mobile satellite services and other equipment operating in adjacent frequency bands or inband from licensed and unlicensed devices may materially and adversely affect the utility and reliability of our products, which could result in a material adverse effect on our operating results. The FCC continually receives proposals for novel technologies and services, such as ultra-wideband technologies, which may seek to operate in, or across, the radio frequency bands currently used by the GPS SPS and other public safety services. Adverse decisions by the FCC that result in harmful interference to the delivery of the GPS SPS and other radio frequency spectrum also used in our products may materially and adversely affect the utility and reliability of our products, which could result in a material adverse effect on our business and financial condition. We Are Subject to the Adverse Impact of Radio Frequency Congestion. We have certain real-time kinematic products, such as our Land Survey 5700, that use integrated radio communication technology that requires access to available radio frequencies allocated by the FCC. In addition, access to these frequencies by state agencies is under management by state radio communications coordinators. Some bands are experiencing congestion that excludes their availability for access by state agencies in some states, including the state of California. An inability to obtain access to these radio frequencies could have an adverse effect on our operating results. We Are Reliant on the GPS Satellite Network. The GPS satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites were originally designed to have lives of 7.5 years and are subject to damage by the hostile space environment in which they operate. However, of the current deployment of 28 satellites in place, some have already been in place for 12 years. To repair damaged or malfunctioning satellites is currently not economically feasible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. A reduction in the number of operating satellites would impair the current utility of the GPS system and the growth of current and additional market opportunities. In addition, there can be no assurance that the U.S. Government will remain committed to the operation and maintenance of GPS satellites over a long period, or that the policies of the U.S. Government for the use of GPS without charge will remain unchanged. However, a 1996 Presidential Decision Directive marks the first time in the evolution of GPS that access for civilian use free of direct user fees is specifically recognized and supported by Presidential policy. In addition, Presidential policy has been complemented by corresponding legislation, signed into law. Because of ever-increasing commercial applications of GPS, other U.S. Government agencies may become involved in the administration or the regulation of the use of GPS signals. Any of the foregoing factors could affect the willingness of buyers of our products to select GPS-based systems instead of products based on competing technologies. Any resulting change in market demand for GPS products could have a material adverse effect on our financial results. For example, European governments have expressed interest in building an independent satellite navigation system, known as Galileo. 33
Depending on the as yet undetermined design and operation of this system, there may be interference to the delivery of the GPS SPS and may materially and adversely affect the utility and reliability of our products, which could result in a material adverse effect on our business and operating results. We Are Reliant on a Continuous Power Supply. California recently experienced an energy crisis that threatened to disrupt our operations and resulted in increased expenses for our California facilities. In the event of an acute power shortage, that is, when power reserves for the State of California fall below certain critical levels, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout the state. We currently do not have adequate backup generators or alternate sources of power in the event of a blackout, and our current insurance does not provide coverage for any damages we or our customers may suffer as a result of any interruption in our power supply. If blackouts interrupt our power supply or Solectron's power supply, we would be temporarily unable to continue operations at our California facilities. Any such interruption in our ability to continue operations at our facilities or Solectron's ability to manufacture product at its facilities could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. We Must Carefully Manage Our Future Growth. Any continued growth in our sales or any continued expansion in the scope of our operations could strain our current management, financial, manufacturing and other resources and may require us to implement and improve a variety of operating, financial and other systems, procedures and controls. Specifically we have experienced strain in our financial and order management system, as a result of our acquisitions. While we plan to expand our sales, accounting, manufacturing, and other information systems to meet these challenges, there can be no assurance that these efforts will succeed, or that any existing or new systems over time, procedures or controls will be adequate to support our operations or that our systems, procedures and controls will be designed, implemented or improved in a cost effective and timely manner. Any failure to implement, improve and expand such systems, procedures and controls in a timely and efficient manner could harm our growth strategy and adversely affect our financial condition and ability to achieve our business objectives. Provisions in Our Preferred Share Rights Agreement May Have Anti-Takeover Effects. Our preferred share rights agreement gives our board of directors and shareholders the ability to dilute the ownership of any person acquiring fifteen percent (15%) or more of our common stock, thereby potentially making any such acquisition impractical for an acquirer. The existence of this preferred share rights agreement could delay, defer or prevent a change of control of us in a transaction not approved by our board of directors. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. Trimble sometimes uses certain derivative financial instruments to manage these risks. Trimble does not use derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with polices approved by Trimble's board of directors. Market Interest Rate Risk The Company is exposed to market risk due to the possibility of changing interest rates under its senior secured credit facilities. The Company's credit facilities are comprised of a three-year US dollar-only revolver, a three-year Multi-Currency revolver, and a five-year term loan. Borrowings under the credit facility have interest payments based on a floating rate of LIBOR plus a number of basis points tied to a formula based on the Company's leverage ratio. As of March 29, 2002, our leverage ratio (total indebtedness, not including subordinated debt to EBITDA on a rolling four quarter basis) was approximately 2.27:1. At this leverage ratio our pricing will be LIBOR plus 225 basis points. The U.S. dollar and the Multi-Currency revolvers run through July 2003 and have outstanding principal balances at March 29, 2002 of $25.0 million and $23.0 million, respectively. As of March 29, 2002 the Company has borrowed from the Multi-Currency revolver in U.S. currency only. The term loan runs through July 2005 and has an outstanding principal balance of $47.6 million at March 29, 2002. The three-month LIBOR 34
effective rate at March 29, 2002 was 2.0475%. A hypothetical ten percent increase in three-month LIBOR rates could result in approximately $196,000 annual increase in interest expense on the existing principal balances. The Company also has $3.6 million of Euro-denominated debt, classified as a current liability March 29, 2002. The interest rate on this instrument is fixed at six percent. A hypothetical ten percent decrease in interest rates would not have a material impact on the results of operations of the Company as related to this debt. In addition, the Company has a $1.9 million promissory note, of which $66,000 was classified as a current liability at March 29, 2002. The note is payable in monthly installments, bearing a variable interest rate of 7.14% as of March 29, 2002. A hypothetical ten percent increase in interest rates would not have a material impact on the results of operations of the Company. * The hypothetical changes and assumptions made above will be different from what actually occurs in the future. Furthermore, the computations do not anticipate actions that may be taken by Trimble's management, should the hypothetical market changes actually occur over time. As a result, actual earnings effects in the future will differ from those quantified above. Foreign Currency Exchange Rate Risk Trimble hedges identified risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. Trimble utilizes forward contracts to hedge certain trade and intercompany receivables and payables. These contracts reduce the exposure to fluctuations in exchange rate movements, as the gains and losses associated with foreign currency balances are generally offset with the gains and losses on the hedge contracts. All hedge instruments are marked to market through earnings every period. Certain intercompany transactions such as the sale of products between our Spectra Precision Group entities are not specifically hedged utilizing forward contracts, because the Company believes that it has a natural hedge through its worldwide operating structure. The Company's practice is to settle these intercompany transactions on a timely basis which reduces our exposure to fluctuations in exchange rate movements. * Trimble does not anticipate any material adverse effect on its consolidated financial position utilizing our current hedging strategy. All forward contracts have a maturity of less than six months, and we do not defer any gains and losses with respect to such contracts, as they are all accounted for through earnings in each period. The following table provides information about Trimble's foreign exchange forward contracts outstanding as of March 29, 2002: <TABLE> <CAPTION> Foreign Currency Contract Value Fair Value in Amount USD USD Currency Buy/Sell (in thousands) (in thousands) (in thousands) - ----------------------- --------------------- -------------------- --------------------- -------------------- <S> <C> <C> <C> <C> EURO Sell 4,600 $ 4,051 $4,003 NZD Buy 1,600 $ 705 $ 708 STERLING Sell 183 $ 260 $ 262 STERLING Buy 1,060 $ 1,513 $1,513 YEN Sell 308,350 $ 2,323 $2,329 YEN Buy 13,650 $ 103 $ 103 </TABLE> 35
The following table provides information about Trimble's foreign exchange forward contracts outstanding as of March 30, 2001: <TABLE> <CAPTION> Foreign Contract Value Fair Value Buy/ Currency Amount USD in USD Currency Sell (in thousands) (in thousands) (in thousands) - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> YEN Sell 235,600 $2,021 $1,891 NZD Buy 2,778 $1,174 $1,118 EURO Sell 3,712 $3,412 $3,287 Sterling Buy 1,720 $2,494 $2,434 Sterling Sell 108 $ 157 $ 153 </TABLE> 36
PART II. OTHER INFORMATION ITEM 1. Legal Proceedings In January 2001, Philip M. Clegg instituted a lawsuit in the United States District Court for the District of Utah, Central Division, against Spectra-Physics Laserplane, Inc., Spectra Precision AB and Trimble Navigation Limited. The complaint alleges claims of infringement of U.S. Patent No. 4,807,131, breach of contract and unjust enrichment. The suit seeks damages and an accounting for moneys alleged to be owed under a license agreement, plus interest and attorney fees. In August 2001, Lockheed Martin Corporation served a complaint alleging patent infringement of U.S. Patent No. 4,949,089 on the Company, Spectra Precision, Inc., Leica Geosystems, Inc., Sokkia Corporation and Carl Zeiss, Inc. The lawsuit was filed in the United States District Court for the Eastern District of Texas, Marshall Division. Lockheed seeks treble damages, an injunction and attorney fees. In November 2001, Qualcomm Inc. filed a lawsuit against the Company in the Superior Court of the State of California. The complaint alleges claims for an unspecified amount of money damages arising out of Qualcomm's perceived lack of assurances in early 1999 that the Company's products purchased by Qualcomm would work properly after a scheduled week number rollover event that took place in August, 1999 Qualcomm is the only customer to make a claim against the Company based on the week number rollover event. In the opinion of management, the resolutions of the foregoing lawsuits are not expected to have a material adverse effect on the overall financial position of the Company. However, depending on the amount and timing, an unfavorable resolution in any one of these matters could materially affect the Company's future operations or cash flow in a particular period. The Company is also a party to other disputes incidental to its business. The Company believes that the ultimate liability of the Company as a result of such disputes, if any, would not be material to its overall financial position, results of operations, or liquidity. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On January 15, 2002, Trimble issued 1,280,004 shares of common stock at a price of $15.00 per share to certain qualified investors for aggregate cash proceeds of approximately $19.2 million in the second closing of a private placement offering. Additionally, the Company granted these investors five-year warrants to purchase an additional 256,002 shares of common stock, subject to certain adjustments, at an exercise price of $19.475 per share. The stock and warrants were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, based on the nature of the purchasers and the nature of the arms-length negotiated transaction. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 3.1 Restated Articles of Incorporation of Trimble Navigation Limited, filed June 25, 1986. (1) 3.2 Certificate of Amendment of Articles of Incorporation of Trimble Navigation Limited, filed October 6, 1988. (1) 3.3 Certificate of Amendment of Articles of Incorporation of Trimble Navigation Limited, filed July 18, 1990. (1) 3.4 Certificate of Determination of Trimble Navigation Limited, filed February 19, 1999. (1) 3.8 Amended and Restated Bylaws of Trimble Navigation Limited. (2) 37
4.1 First Amended and Restated Stock and Warrant Purchase Agreement, dated January 14, 2002. (3) 4.2 Form of Warrant, dated January 14, 2002. (3) 10.80Amended And Restated Subordinated Promissory Note, dated March 20, 2002, for the principal amount of $68,670,470 issued by Trimble Navigation Limited to Spectra Physics Holdings USA, Inc. 10.81 Credit Agreement - Third Amendment. ------------------------- (1) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits" of the registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1999, as filed with the SEC on March 29, 1999. (2) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits" of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the SEC on March 27, 2000. (3) Incorporated by reference to corresponding exhibits filed in response to Item 7(c), "Exhibits" of the registrant's Current Report on Form 8-K as filed with the SEC on January 16, 2002. (b) Reports on Form 8-K On March 28, 2002, the Company filed a report on Form 8-K/A amending the Company's Press Release dated January 30, 2002. On March 21, 2002, the Company filed a report on Form 8-K reporting that it had revised its two-year subordinated seller note with Thermo Electron Corporation relating to Trimble's July 2000 acquisition of the Spectra Precision Group. On March 19, 2002, the Company filed a report on Form 8-K reporting that Trimble and McNeilus Companies Inc. had formed and alliance to factory-install Fleet Management Solutions on ready mix concrete trucks. On March 18, 2002, the Company filed a report on Form 8-K reporting that Grayson Wireless had selected Trimble's GPS Receivers for Grayson's wireless 911 location systems. On March 18, 2002, the Company filed a report on Form 8-K reporting that Trimble and Caterpillar Inc. had reached a definitive agreement to form Caterpillar Trimble Control Technologies LLC. On January 30, 2002, the Company filed a report on Form 8-K reporting the financial results for the quarter and year ended December 28, 2001. On January 16, 2002, the Company filed a report on Form 8-K reporting that the Company had entered into the First Amended and Restated Stock and Warrant Purchase Agreement with certain investors. 38
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRIMBLE NAVIGATION LIMITED (Registrant) By: /s/ Mary Ellen Genovese ----------------------------------------------------------- Mary Ellen Genovese Chief Financial Officer (Authorized Officer and Principal Financial Officer) DATE: May 13, 2002 39
EXHIBIT INDEX Exhibit No. Description - -------------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of Trimble Navigation Limited, filed June 25, 1986. (1) 3.2 Certificate of Amendment of Articles of Incorporation of Trimble Navigation Limited, filed October 6, 1988. (1) 3.3 Certificate of Amendment of Articles of Incorporation of Trimble Navigation Limited, filed July 18, 1990. (1) 3.4 Certificate of Determination of Trimble Navigation Limited, filed February 19, 1999. (1) 3.8 Amended and Restated Bylaws of Trimble Navigation Limited. (2) 4.1 First Amended and Restated Stock and Warrant Purchase Agreement, dated January 14, 2002. (3) 4.2 Form of Warrant, dated January 14, 2002. (3) 10.80Amended And Restated Subordinated Promissory Note, dated March 20, 2002, for the principal amount of $68,670,470 issued by Trimble Navigation Limited to Spectra Physics Holdings USA, Inc. 10.81 Credit Agreement - Third Amendment. ------------------------- (1) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits" of the registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1999, as filed with the SEC on March 29, 1999. (2) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits" of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the SEC on March 27, 2000. (3) Incorporated by reference to corresponding exhibits filed in response to Item 7(c), "Exhibits" of the registrant's Current Report on Form 8-K as filed with the SEC on January 16, 2002. 40