Trimble - 10-Q quarterly report FY

Washington, D.C. 20549

FORM 10-Q

 

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(Mark One)

S          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2008

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)

                                                                           

(Address of principal executive offices) (Zip Code)

(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           S           No           £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes           £           No           S

As of July 31, 2008, there were 120,905,512 shares of Common Stock (no par value) outstanding.

 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

(UNAUDITED)

 

 

(1) Sales to related parties, Caterpillar Trimble Control Technologies Joint Venture (CTCT) and Nikon-Trimble Joint Venture (Nikon-Trimble), were $8.7 million and $6.3 million for the three months ended June 27, 2008 and June 29, 2007, respectively, with associated cost of sales of $7.2 million and $4.2 million, respectively.  Sales to CTCT and Nikon-Trimble were $15.2 million and $11.4 million for the six months ended June 27, 2008 and June 29, 2007, respectively, with associated cost of sales of $11.8 million and $7.7 million, respectively.  In addition, cost of sales associated with CTCT net inventory purchases was $7.4 million and $7.5 million for the three months ended June 27, 2008 and June 29, 2007, respectively, and $13.5 million and $14.2 million for the six months ended June 27, 2008 and June 29, 2007, respectively.  See Note 5 regarding joint ventures for further information about related party transactions.

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

(UNAUDITED)

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

 

 

NOTE 1. OVERVIEW AND BASIS OF PRESENTATION

Trimble Navigation Limited (the Company), incorporated in California in 1981, provides positioning solutions to commercial and government users in a large number of markets.  These markets include surveying, agriculture, construction, asset management, mapping and mobile resource management.

The Company has a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2007 was December 28. The second quarters of fiscal 2008 and fiscal 2007 ended on June 27, 2008 and June 29, 2007, respectively.  Fiscal 2008 is a 53-week year and fiscal 2007 is a 52-week year.  Unless otherwise stated, all dates refer to the Company’s fiscal year and fiscal periods.

The Condensed Consolidated Financial Statements include the results of the Company and its subsidiaries.  Inter-company accounts and transactions have been eliminated.  The Condensed Consolidated Balance Sheet is derived from the December 28, 2007 audited Consolidated Financial Statements included in the Annual Report on Form 10-K of Trimble Navigation Limited for fiscal year 2007. Certain amounts from prior periods have been reclassified to conform to the current period presentation.

 

The accompanying financial data as of June 27, 2008 and for the three and six months ended June 27, 2008 and June 29, 2007 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations.  The following discussion should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present a fair statement of financial position as of June 27, 2008, results of operations for the three and six months ended June 27, 2008 and June 29, 2007 and cash flows for the six months ended June 27, 2008 and June 29, 2007, as applicable, have been made.  The results of operations for the three and six months ended June 27, 2008 are not necessarily indicative of the operating results for the full fiscal year or any future periods.  Individual segment revenue may be affected by seasonal buying patterns.

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in its Condensed Consolidated Financial Statements and accompanying notes.  Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

On January 17, 2007, the Company’s Board of Directors approved a 2-for-1 split of all outstanding shares of the Company’s Common Stock, payable February 22, 2007 to stockholders of record on February 8, 2007.  All shares and per share information presented have been adjusted to reflect the stock split on a retroactive basis for all periods presented.

 

 

NOTE 2. UPDATES TO SIGNIFICANT ACCOUNTING POLICIES

There have been no changes to the Company’s significant accounting polices during the six months ended June 27, 2008 from those disclosed in the Company’s 2007 Form 10-K. 

Recent Accounting Pronouncements

Updates to recent accounting standards as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2007 are as follows:

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which clarifies the definition of fair value, establishes a framework for measuring fair value within GAAP and expands the disclosures regarding fair value measurements.  In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 deferring the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  SFAS No. 157 became effective for the Company beginning in its first quarter of fiscal 2008.  The adoption of SFAS No. 157 did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.”  SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings.  SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 became effective for the Company at the beginning of its first quarter of fiscal 2008.  The Company did not elect the fair value option for any of its financial assets or liabilities.  However, the Company may decide to elect the fair value option on new items in the future.  The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” which requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company does not expect the adoption of SFAS No. 161 will have a material impact on the Company’s financial position, results of operations or cash flows.

 

NOTE 3. BUSINESS COMBINATIONS

On December 10, 2006, the Company and @Road, Inc. (@Road) entered into a definitive merger agreement.  The acquisition became effective on February 16, 2007.  @Road is a global provider of solutions designed to automate the management of mobile resources and to optimize the service delivery process for customers across a variety of industries. The acquisition of @Road expands the Company’s investment and reinforces the existing growth strategy for its Mobile Solutions segment.  @Road’s results of operations since February 17, 2007 have been included in the Company’s Condensed Consolidated Statements of Income within the Mobile Solutions business segment.

Purchase Price

Under the terms of the agreement, the Company acquired all of the outstanding shares of @Road common stock for $7.50 per share.  The Company elected to issue $2.50 per share of the consideration in the form of the Company’s common stock (Common Stock) to be based upon the five-day average closing price of the Company’s shares six trading days prior to the closing of the transaction and the remaining $5.00 per share consideration was paid in cash. Further, each share of Series A-1 and Series A-2 Redeemable Preferred Stock, par value $0.001 per share, of @Road was converted into the right to receive an amount in cash equal to $100.00 plus all declared or accumulated but unpaid dividends with respect to such shares as of immediately prior to the effective time of the merger and each share of Series B-1 Redeemable Preferred Stock, par value $0.001 per share, of @Road and each share of Series B-2 Redeemable Preferred Stock, par value $0.001 per share, of @Road was converted into the right to receive an amount in cash equal to $831.39 plus all declared or accumulated but unpaid dividends with respect to such shares as of immediately prior to the effective time of the merger. In addition, all @Road vested stock options were terminated and the holders of each such option were entitled to receive the excess, if any, of the aggregate consideration over the exercise price. At the effective time of the merger, all unvested @Road stock options with an exercise price in excess of $7.50 were terminated and all unvested stock options that had exercise prices of $7.50 or less were assumed by the Company.

Concurrent with the merger, the Company amended its existing $200 million unsecured revolving credit agreement with a syndicate of 11 banks with The Bank of Nova Scotia as the administrative agent (the 2007 Credit Facility) and incurred a five-year term loan under the 2007 Credit Facility.  See Note 9 to the Condensed Consolidated Financial Statements for additional information.

The Company paid approximately $327.4 million in cash from debt and existing cash, and issued approximately 5.9 million shares of the Company’s common stock based on an exchange ratio of 0.0893 shares of the Company’s common stock for each outstanding share of @Road common stock as of February 16, 2007. The common stock issued had a fair value of $161.9 million and was valued using the average closing price of the Company’s common stock of $27.69 over a range of two trading days (February 14, 2007 through February 15, 2007) prior to, and including, the close date (February 16, 2007) of the transaction, which is also the date that the amount of the Company’s shares to be issued in accordance with the merger agreement was settled. The total purchase price is estimated as follows (in thousands):

* Merger costs consist of legal, advisory, accounting and administrative fees.

Purchase Price Allocation

In accordance with SFAS 141, "Business Combinations,” the total purchase price was allocated to @Road net tangible assets, identifiable intangible assets and in-process research and development based upon their estimated fair values as of February 16, 2007. The excess purchase price over the net tangible, identifiable intangible assets and in-process research and development was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on estimates and assumptions provided by management.

 

The total purchase price has been allocated as follows (in thousands):

 

Net Tangible Assets

 

The Company reviewed and adjusted @Road's net tangible assets and liabilities to fair value, as necessary, as of February 16, 2007, including the following adjustments:

Fixed assets – the Company decreased @Road's historical value of fixed assets by $2.1 million to adjust fixed assets to an amount equivalent to fair value.

Deferred revenue and cost of sales – the Company reduced @Road's historical value of deferred revenue by $39.6 million to adjust deferred revenue to the fair value of the direct cost associated with servicing the underlying obligation plus a reasonable margin. @Road’s deferred revenue balance consists of upfront payments of its hosted product, licensed product, extended warranty and maintenance. The Company reduced @Road's historical value of deferred product cost by $47.1 million to adjust deferred product cost to the asset's underlying fair value. The deferred product costs adjustment to fair value related to deferral of cost of sales of hardware that have shipped, resulting in no fair value relating to the associated deferred product costs.

Other receivables and non-current assets – Other receivables and non-current assets were increased by $15.4 million to adjust for the fair value of future cash collections from customer contracts assumed for products delivered prior to the acquisition date.   As the products were delivered prior to the acquisition date, revenue is not recognizable in the Company’s Condensed Consolidated Statements of Income.

 

Developed product technology, which is comprised of products that have reached technological feasibility, includes products in @Road's current product offerings. @Road's technology includes hardware, software and services that serve the mobile resource management market internationally. The Company expects to amortize the developed and core technology over a weighted average estimated life of seven years.

Customer relationships represent the value placed on @Road’s distribution channels and end users. The Company expects to amortize the fair value of these assets over a weighted average estimated life of seven years.

Trademarks and trade names represent the value placed on the @Road brand and recognition in the mobile resource management market. The Company expects to amortize the fair value of these assets over a weighted average estimated life of eight years.

The Company recorded an expense of $2.1 million relating to in-process research and development projects in @Road’s license business.   In-process research and development represents incomplete @Road research and development projects that had not reached technological feasibility and had no alternative future use as of the consummation of the merger.

The excess purchase price over the net tangible, identifiable intangible assets and in-process research and development was recorded as goodwill. The goodwill was attributed to the premium paid for the opportunity to expand and better serve the global mobile resource management market and achieve greater long-term growth opportunities than either company had operating alone. The Company believes these opportunities could include accelerating the rate at which products are brought to market and increasing the diversity and global reach of those products. In addition, the Company expects that the combined companies may be able to obtain greater operating leverage by reducing costs in areas of redundancy. Of the total $264.6 million assigned to goodwill, approximately $4.4 million is expected to be deductible for tax purposes.

Liabilities related to restructuring @Road's operations that meet the requirements of EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” have been recorded as adjustments to the purchase price and an increase in goodwill. Liabilities related to restructuring the Company's operations have been recorded as expenses in the Company's Condensed Consolidated Statements of Income in the period that the costs are incurred.

The Company recognized $56.9 million in net deferred tax liabilities for the tax effects of differences between assigned values in the purchase price and the tax bases of assets acquired and liabilities assumed.

In accordance with the merger agreement, the Company assumed all @Road unvested stock options that had exercise prices of $7.50 or less.  The Company issued approximately 795,000 stock options based on an exchange ratio of 0.268 shares of the Company’s common stock for each unvested stock option with exercise prices of $7.50 or less as of February 16, 2007.  The fair value of these assumed options was determined to be $10.1 million which will be expensed over the remaining vesting terms of the assumed options which is approximately three to four years.  The assumed options were valued using the binomial model similar to previously granted Trimble stock options as discussed in the Company’s fiscal 2007 Form 10-K.

 

 

NOTE 4. SHAREHOLDERS’ EQUITY

Stock Repurchase Activities

In January 2008, the Company’s Board authorized a stock repurchase program (“2008 Stock Repurchase Program”), authorizing the Company to repurchase up to $250 million of Trimble’s common stock under this program.  During the six months ended June 27, 2008, the Company repurchased approximately 1,255,000 shares of common stock in open market purchases at an average price of $28.90 per share.  The total purchase price of $36.3 million was reflected as a decrease to common stock based on the average stated value per share with the remainder to retained earnings.  Common stock repurchases under the program were recorded based upon the settlement date of the applicable trade for accounting purposes.  All common shares repurchased under this program have been retired. As of June 27, 2008, the 2008 Stock Repurchase Program had remaining authorized funds of $213.7 million.  The timing and actual number of future shares repurchased will depend on a variety of factors including price, regulatory requirements, capital availability, and other market conditions.  The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time without public notice.

Stock-Based Compensation

The Company accounts for its employee stock options and rights to purchase shares under its stock participation plans at fair value, in accordance with SFAS 123(R), “Share-Based Payment.” SFAS 123(R) requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the related employees’ requisite service periods in the Company’s Condensed Consolidated Statements of Income.

The following table summarizes stock-based compensation expense, net of tax, related to employee stock-based compensation included in the Consolidated Condensed Statements of Income in accordance with SFAS 123(R) for the three and six months ended June 27, 2008 and June 29, 2007.

 

 

(1) Tax benefit related to U.S. non-qualified options and restricted stock units, applying a Federal statutory and State (Federal effected) tax rate for the respective periods.

Options

Stock option expense recognized during the period is based on the value of the portion of the stock option that is expected to vest during the period. The fair value of each stock option is estimated on the date of grant using a binomial valuation model. The Black-Scholes model was used to value those options granted prior to the fourth quarter of fiscal 2005. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. For options granted for the three and six months ended June 27, 2008 and June 29, 2007, the following assumptions were used:

 

Expected Dividend Yield – The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Expected Stock Price Volatility – The Company’s computation of expected volatility is based on a combination of implied volatilities from traded options on the Company’s stock and historical volatility, commensurate with the expected life of the stock options.

Expected Risk Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected life of the stock options.

Expected Life Of Option – The Company’s expected life represents the period that the Company’s stock options are expected to be outstanding and was determined based on historical experience of similar stock options with consideration to the contractual terms of the stock options, vesting schedules and expectations of future employee behavior.

 

 

NOTE 5. JOINT VENTURES

Caterpillar Trimble Control Technologies Joint Venture

On April 1, 2002, Caterpillar Trimble Control Technologies LLC (CTCT), a joint venture formed by the Company and Caterpillar began operations. CTCT develops advanced electronic guidance and control products for earth moving machines in the construction and mining industries. The joint venture is 50% owned by the Company and 50% owned by Caterpillar, with equal voting rights. The joint venture is accounted for under the equity method of accounting. Under the equity method, the Company’s share of profits and losses are included in Income from joint ventures in the Non-operating income, net section of the Condensed Consolidated Statements of Income.  During the three and six months ended June 27, 2008, the Company recorded $2.9 million and $4.7 million, respectively, as its proportionate share of CTCT net income.  During the comparable period of 2007 the Company recorded $2.3 million and $4.5 million, respectively, as its proportionate share of CTCT net income.  During the fiscal quarters ended June 27, 2008 and June 29, 2007, there were no dividends received from CTCT.  The carrying amount of the investment in CTCT was $14.3 million at June 27, 2008 and $9.6 million at December 28, 2007, and is included in Other non-current assets on the Condensed Consolidated Balance Sheets.

The Company acts as a contract manufacturer for CTCT.  Products are manufactured based on orders received from CTCT and are sold at direct cost plus a mark-up for the Company’s overhead costs to CTCT.  CTCT then resells products at cost plus a mark-up in consideration for CTCT’s research and development efforts to both Caterpillar and to the Company for sales through their respective distribution channels. Generally, the Company sells products through its after-market dealer channel, and Caterpillar sells products for factory and dealer installation.  CTCT does not have net inventory on its balance sheet in that the resale of products to Caterpillar and the Company occur simultaneously when the products are purchased from the Company.  During the three and six months ended June 27, 2008, the Company recorded $3.5 million and $6.2 million of revenue, respectively, and $3.1 million and $5.4 million of cost of sales, respectively, for the manufacturing of products sold by the Company to CTCT and then sold through the Caterpillar distribution channel.  During the comparable three and six months ended June 29, 2007, the Company recorded $2.7 million and $4.9 million of revenue, respectively, and $2.4 million and $4.4 million of cost of sales, respectively.  In addition, during the three and six months ended June 27, 2008, the Company recorded $7.4 million and $13.5 million in net cost of sales for the manufacturing of products sold by the Company to CTCT and then repurchased by the Company upon sale through the Company’s distribution channel.  The comparable net cost of sales recorded by the Company for the three and six months ended June 29, 2007 were $7.5 million and $14.2 million, respectively.

In addition, the Company received reimbursement of employee-related costs from CTCT for company employees dedicated to CTCT or performance of work for CTCT totaling $3.5 million and $7.5 million for the three and six months ended June 27, 2008, respectively, and totaling $3.0 million and $6.3 million for the three and six months ended June 29, 2007, respectively. The reimbursements were offset against operating expenses.

 

At June 27, 2008 and December 28, 2007, the Company had amounts due to and from CTCT.  Receivables and payables to CTCT are settled individually with terms comparable to other non-related parties.  The amounts due to and from CTCT are presented on a gross basis in the Condensed Consolidated Balance Sheets.  At June 27, 2008 and December 28, 2007, the receivables from CTCT were $5.9 million and $5.6 million, respectively, and are included within Accounts receivable, net, on the Condensed Consolidated Balance Sheets.  As of the same dates, the payables due to CTCT were $5.9 million and $5.2 million, respectively, and are included within Accounts payable on the Condensed Consolidated Balance Sheets.

Nikon-Trimble Joint Venture

On March 28, 2003, Nikon-Trimble Co., Ltd (Nikon-Trimble), a joint venture was formed by the Company and Nikon Corporation.  The joint venture began operations in July 2003 and is 50% owned by the Company and 50% owned by Nikon, with equal voting rights. It focuses on the design and manufacture of surveying instruments including mechanical total stations and related products.

The joint venture is accounted for under the equity method of accounting.  Under the equity method, the Company’s share of profits and losses are included in Income from joint ventures in the Non-operating income, net section of the Condensed Consolidated Statements of Income.  During the three and six months ended June 27, 2008, the Company recorded a loss of $0.3 million and a loss of $0.1 million, respectively, and during the three and six months ended June 29, 2007, the Company recorded a loss of $0.3 million and a profit of $4,000, respectively, as its proportionate share of Nikon-Trimble net income.  During the six months ended June 27, 2008 and June 29, 2007, dividends received from Nikon-Trimble, amounted to $0.2 million and $0.6 million, and were recorded against Other non-current assets on the Condensed Consolidated Balance Sheets.  The carrying amount of the investment in Nikon-Trimble was $13.8 million at June 27, 2008 and $13.4 million at December 28, 2007, and is included in Other non-current assets on the Condensed Consolidated Balance Sheets.

Nikon-Trimble is the distributor in Japan for Nikon and the Company’s products.  The Company is the exclusive distributor outside of Japan for Nikon branded survey products. For products sold by the Company to Nikon-Trimble, revenue is recognized by the Company on a sell-through basis from Nikon-Trimble to the end customer.

The terms and conditions of the sales of products from the Company to Nikon-Trimble are comparable with those of the standard distribution agreements which the Company maintains with its dealer channel and margins earned are similar to those from third party dealers. Similarly, the purchases of product by the Company from Nikon-Trimble are made on terms comparable with the arrangements which Nikon maintained with its international distribution channel prior to the formation of the joint venture with the Company.  During the three and six months ended June 27, 2008, the Company recorded $5.1 million and $9.0 million of revenue and $4.1 million and $6.4 million of cost of sales for the manufacturing of products sold by the Company to Nikon-Trimble. During the three and six months ended June 29, 2007, the Company recorded $3.6 million and $6.5 million of revenue and $1.8 million and $3.3 million of cost of sales for the manufacturing of products sold by the Company to Nikon-Trimble.  The Company also purchases product from Nikon-Trimble for future sales to third party customers. Purchases of inventory from Nikon-Trimble were $4.1 million and $7.0 million during the three and six months ended June 27, 2008; and $6.0 million and $12.9 million during the three and six months ended June 29, 2007, respectively.

At June 27, 2008 and December 28, 2007, the Company had amounts due to and from Nikon-Trimble.  Receivables and payables to Nikon-Trimble are settled individually with terms comparable to other non-related parties.  The amounts due to and from Nikon-Trimble are presented on a gross basis in the Condensed Consolidated Balance Sheets. At June 27, 2008 and December 28, 2007, the amounts due from Nikon-Trimble were $3.5 million and $3.3 million, respectively, and are included within Accounts receivable, net on the Condensed Consolidated Balance Sheets.  As of the same dates, the amounts due to Nikon-Trimble were $5.6 million and $5.7 million, respectively, and are included within Accounts payable on the Condensed Consolidated Balance Sheets.

 

 

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

Intangible Assets

 

Intangible Assets consisted of the following:

 

 

The estimated future amortization expense of intangible assets as of June 27, 2008, is as follows:

Goodwill

 

The purchase price adjustments relate entirely to previous business acquisitions.  The total purchase price adjustments of $8.8 million recorded during the six months ended June 27, 2008 is comprised of earn-out payments of $3.1 million, tax adjustments of $5.6 million and $0.1 million for changes in purchase price allocation estimates.

 

 

NOTE 7. CERTAIN BALANCE SHEET COMPONENTS

Inventories, net consisted of the following:

 

Deferred costs of revenue are included within finished goods and were $15.9 million at June 27, 2008 and $11.0 million at December 28, 2007.

 

Other non-current liabilities consisted of the following:

 

 

As of June 27, 2008 and December 28, 2007, the Company has $28.1 million and $25.8 million, respectively, of unrecognized tax benefits included in Other non-current liabilities that, if recognized, would favorably affect the effective income tax rate in future periods and interest and/or penalties related to income tax matters.

 

 

NOTE 8. THE COMPANY AND SEGMENT INFORMATION

The Company is a designer and distributor of positioning solutions enabled by GPS, optical, laser, and wireless communications technology. The Company provides products for diverse applications in its targeted markets.

To achieve distribution, marketing, production, and technology advantages, the Company manages its operations in the following four segments:

The Company evaluates each of its segment's performance and allocates resources based on segment operating income from operations before income taxes, and some corporate allocations. The Company and each of its segments employ consistent accounting policies.

The following table presents revenue, operating income, and identifiable assets for the four segments. Operating income is revenue less cost of sales and operating expenses, excluding general corporate expenses, amortization of purchase intangibles, in-process research and development expenses and restructuring charges. The identifiable assets that the Company's Chief Operating Decision Maker views by segment are accounts receivable and inventory.

 

A reconciliation of our consolidated segment operating income to consolidated income before income taxes is as follows:

NOTE 9. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term debt consisted of the following:

 

 

Credit Facilities

Leases and other commitments

The estimated future minimum operating lease commitments as of June 27, 2008, is as follows (in thousands):

Additionally, as of June 27, 2008, the Company had acquisition-related earn-outs of $6.9 million and holdbacks of $11.7 million recorded in Other current liabilities and Other non-current liabilities. The maximum remaining payments, including the $6.9 million and $11.7 million recorded, will not exceed $72.9 million.  The remaining payments are based upon targets achieved or events occurring over time that would result in amounts paid that may be lower than the maximum remaining payments.  The remaining earn-outs and holdbacks are payable through 2010.

At June 27, 2008, the Company had unconditional purchase obligations of approximately $68.7 million. These unconditional purchase obligations primarily represent open non-cancelable purchase orders for material purchases with our vendors. Purchase obligations exclude agreements that are cancelable without penalty. These unconditional purchase obligations are related primarily to inventory and other items.

 

NOTE 10.  FAIR VALUE OF FINANCIAL INSTRUMENTS

As discussed in Note 2, SFAS No. 157, which requires enhanced disclosures about assets and liabilities measured at fair value, became effective for the Company beginning in its first quarter of fiscal 2008.  The Company’s forward foreign currency exchange contracts and its deferred compensation plan assets and liabilities are presented at fair value in the Condensed Consolidated Balance Sheets. Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

 

 

NOTE 11. PRODUCT WARRANTIES

The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, technical support labor costs, and costs incurred by third parties performing work on the Company's behalf.  The Company’s expected future costs are primarily estimated based upon historical trends in the volume of product returns within the warranty period and the costs to repair or replace the equipment. The products sold are generally covered by a warranty for periods ranging from 90 days to three years, and in some instances up to 5.5 years.

While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required.

 

Changes in the Company’s product warranty liability during the six months ended June 27, 2008 are as follows (in thousands):

 

NOTE 12. EARNINGS PER SHARE

The following data was used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive common stock.

 

NOTE 13: RESTRUCTURING CHARGES:

Restructuring expenses for the three and six months ended June 27, 2008 and June 29, 2007 were as follows:

 

 

During the three and six months ended June 27, 2008, restructuring expenses of $3.3 million were related to management decisions designed to improve operational efficiency and financial results.  The restructuring expenses, included in cost of sales and operating expenses, were related to a decision to streamline processes and reduce the cost structure of the Company, with approximately 90 employees affected worldwide. Of the total, $2.8 million is related to the Engineering and Construction segment and $0.5 million is related to the Mobile Solutions segment. As a result of these decisions, the Company expects restructuring activities in the Engineering and Construction segment to result in additional restructuring expenses totaling approximately $2.6 million through the first quarter of 2010.

 

During the three and six months ended June 29, 2007, restructuring expenses of $0.3 million and $3.0 million, respectively were for charges associated with the Company’s acquisition of @Road. The restructuring expenses were related to the acceleration of vesting of employee stock options for certain terminated @Road employees, of which $1.4 million was settled in cash and $1.6 million was recorded as Shareholders’ equity.

In addition to the restructuring expenses in the six months ended June 27, 2008, the Company had $0.9 million in restructuring activity reversals related to costs associated with exiting activities of pre-merger @Road.  The reversals were primarily due to severance and benefits costs for employees whose positions were retained in a variety of functions.  The reversals were recognized in the first quarter of fiscal 2008 as a reduction of the liability assumed in the purchase business combination that had been included in the allocation of the cost to acquire @Road and, accordingly, resulted in a decrease to goodwill rather than an expense reduction in the six months ended June 27, 2008.

 

In addition to the restructuring expenses in the six months ended June 29, 2007, costs associated with exiting activities of pre-merger @Road of $3.6 million, consisted of severance and benefits costs.  These costs were recognized as a liability assumed in the purchase business combination and were included in the allocation of the cost to acquire @Road and accordingly, resulted in an increase to goodwill rather than an expense in the six months ended June 29, 2007.

Restructuring activity for the six months ended June 27, 2008 was as follows (in thousands):

 

The $1.3 million restructuring accrual consists of severance and benefits.  Of the $1.3 million restructuring accrual, $0.9 million is included in Other current liabilities and is expected to be settled by the fourth quarter of fiscal 2008.  The remaining balance of $0.4 million is included in Other non-current liabilities and is expected to be settled by the first quarter of fiscal 2010.

 

 

NOTE 14: INCOME TAXES

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 applies to all tax positions related to income taxes subject to Statement of Financial Accounting Standard (SFAS) 109, “Accounting for Income Taxes.” Under FIN 48, a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits (UTB). FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet.

The Company adopted FIN 48 on December 30, 2006, and the amount of liabilities for unrecognized tax benefits (net of the federal benefit on state issues) that, if recognized, would favorably affect the effective income tax rate in any future period are $30.5 million and $28.4 million at June 27, 2008 and December 28, 2007, respectively.  The unrecognized tax benefits are recorded in Other non-current liabilities and within the deferred tax accounts in the accompanying Condensed Consolidated Balance Sheets.

The Company and its U.S. subsidiaries are subject to U.S. federal and state income tax.  The Company has substantially concluded all U.S. federal and state income tax matters for years through 1992.  Non-U.S. income tax matters have been concluded for years through 2000.  The Company is currently in various stages of multiple year examinations by Federal, State, and foreign taxing authorities.  At this point in the examinations, the Company does not anticipate a significant impact to the unrecognized tax benefits balance with respect to current tax examinations.  Furthermore, although the timing of the resolution and/or the closure on audits is highly uncertain, the Company does not believe that the unrecognized tax benefits would materially change in the next twelve months.

The Company’s effective income tax rate for the three  and six months ended June 27, 2008 was 27.5% and 30.1%, respectively, as compared to 37.7% and 35.2% for the three and six months ended June 29, 2007.

 

NOTE 15: COMPREHENSIVE INCOME:

The components of comprehensive income, net of related tax, are as follows:

 

 

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 “Risk Factors” below and elsewhere in this report as well as in the Company's Annual Report on Form 10-K for fiscal year 2007 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

The discussion and analysis of our 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 U. S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no changes to our significant accounting polices during the six months ended June 27, 2008 from those disclosed in our 2007 Form 10-K. 

Updates to recent accounting standards as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2007 are as follows:

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which clarifies the definition of fair value, establishes a framework for measuring fair value within GAAP and expands the disclosures regarding fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 deferring the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted SFAS 157 in the first quarter of fiscal 2008. The adoption did not have a material impact on our financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.”  SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings.  SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 became effective for us at the beginning of its first quarter of fiscal 2008.  We did not elect the fair value option for any of our financial assets or liabilities.  However, we may decide to elect the fair value option on new items in the future.  The adoption did not have a material impact on our financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” which requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  We do not expect the adoption of SFAS No. 161 will have a material impact on our financial position, results of operations or cash flows.

EXECUTIVE LEVEL OVERVIEW

 

* We believe that our markets provide us with additional, substantial potential for substituting our technology for traditional methods. We arecontinuing to develop new products and to strengthen our distribution channels in order to expand our market opportunity.In the first quarter of fiscal 2008, we introduced the AgGPS® EZ-Guide® lightbar guidance system,GPS Pathfinder® ProXTR receiver, and Trimble® MEP layout solution for the mechanical, electrical, and plumbing trades as well as a new wireless data controller for the LM80 Layout Manager to connect the office and job site.  In the second quarter of fiscal 2008, we introduced the Trimble® GeoExplorer® 2008 Series for mapping and Geographic Information System (GIS), Trimble GCS900 Grade Control System version 10.8, that provides automatic blade control and configurable earthworks progress monitoring in higher gears, and Trimble Coastal Center™ software that provides network operators the ability to monitor and control multiple differential GPS (DGPS) beacon stations from one central location.  All of these new productsstrengthened our competitive position and created new value for the user.

* We are utilizing the strength of theTrimble brand in our markets to expand our revenues by bringing new products to existing users. In the first quarter of fiscal 2008, we introduced the Agriculture Manager™ asset management system, a new sensor for the Trimble CCS900 compaction control system that provides real-time material density information to earthworks operators, and EZ-Office™ software for agriculture. In thesecond quarter of fiscal 2008, we were chosen to supply Trimble VRS™ (Virtual Reference Station) technology to establish a nationwide GNSS infrastructure network for the Republic of Croatia called the CROatian POsitioning System (CROPOS).  We launched Trimble VRS Now™ Service in Madrid, Spain to provide surveyors, civil engineers and geospatial professionals in the area with instant access to real-time kinematic (RTK) GNSS corrections without the need for a base station.

RECENT BUSINESS DEVELOPMENTS

During the last twelve months ended June 27, 2008, we acquired the following companies and the results of their operations have been combined with our operations from the date of acquisition:

 

Crain

On January 8, 2008, we acquired privately-held Crain Enterprises, Inc. of Mound City, Illinois, a leading manufacturer of accessories for the geomatics, surveying, mapping, and construction industries.  Crain’s performance is reported under our Engineering and Construction business segment.

Ingenieurbüro Breining GmbH

On September 19, 2007, we acquired Ingenieurbüro Breining GmbH of Kirchheim,Germany, a provider of customized field data collection and office software solutions for the survey market in Germany.  Ingenieurbüro Breining’s performance is reported under our Engineering and Construction business segment.

RESULTS OF OPERATIONS

Overview

The following table is a summary of revenue and operating income for the periods indicated and should be read in conjunction with the narrative descriptions below.

 

 

In the three months ended June 27, 2008, total revenue increased by $50.0 million or 15%, as compared to the same corresponding period in fiscal 2007. The increase resulted from strong revenue growth across Engineering and Construction and Field Solutions segments.  Engineering and Construction revenue increased $14.2 million, Field Solutions increased $34.8 million, Mobile Solutions increased $1.4 million, while Advanced Devices decreased $0.3 million, as compared to the same corresponding period in fiscal 2007.  Revenue growth was driven by new products, a robust agricultural environment, and strong international growth. The revenue growth was partially offset by softness in the U.S. market in Engineering and Construction.

In the six months ended June 27, 2008, total revenue increased by $119.6 million or 19%, as compared to the same corresponding period in fiscal 2007. The increase was primarily due to strong revenue performances across Engineering and Construction, Field Solutions, and Mobile Solutions.  Engineering and Construction revenue increased $32.7 million, Field Solutions increased $71.9 million, Mobile Solutions increased $15.5 million, while Advanced Devices decreased $0.5 million, compared to the same corresponding period in fiscal 2007.  Revenue growth within these segments was primarily driven by new product introductions, a robust agricultural environment, strong international growth and a full quarter of @Road for the first quarter as compared to a partial quarter of @Road revenue in the corresponding period in fiscal 2007.  The revenue growth was partially offset by softness in the U.S. market in Engineering and Construction.

Gross margin varies due to a number of factors including product mix, pricing, distribution channel, production volumes, and foreign currency translations.

 

Gross margin increased by $19.9 million and $51.2 million for the three and six months ended June 27, 2008, respectively, as compared to the corresponding period in the prior year.  Gross margin as a percentage of total revenue for the three months ended June 27, 2008 was 49.5%, as compared to 51.0% for the three months ended June 29, 2007.  Gross margin as a percentage of total revenue for the six months ended June 27, 2008 was 49.3% as compared to 50.6% for the six months ended June 29, 2007.

The increase in gross margin for the three and six month periods was primarily due to higher revenue.  The slight decrease in gross margin percentage for the three month and six month periods was driven by product mix, increased amortization of purchased intangibles, and restructuring costs.

Operating income increased by $7.0 million and $25.7 million for the three and six months ended June 27, 2008, respectively, as compared to the corresponding period in the prior year.  Operating income as a percentage of total revenue was 16.7% for the three months ended June 27, 2008, as compared to 17.1% for the three months ended June 29, 2007.  Operating income as a percentage of total revenue was 16.5% for the six month period ended June 27, 2008 as compared to 15.5% for the six months ended June 29, 2007.

The increase in operating income for both the three and six month periods was primarily driven by increased revenue.  The slight decrease in operating income percentage for the three month period was primarily due to restructuring costs and lower gross margin, offset by strong operating expense control in Field Solutions and Mobile Solutions.  The increase in operating income percentage for the six month periods was primarily due to strong operating expense control in Field Solutions and Mobile Solutions, offset partially by lower gross margin and also IPR&D expenses in the corresponding period in the prior year.

Results by Segment

To achieve distribution, marketing, production, and technology advantages in our targeted markets, we manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices.  Operating income equals net revenue less cost of sales and operating expenses, excluding general corporate expenses, amortization of purchased intangibles, in-process research and development expenses, and restructuring charges.

The following table is a breakdown of revenue and operating income by segment:

 

A reconciliation of our consolidated segment operating income to consolidated income before income taxes follows:

 

 

Engineering and Construction

Engineering and Construction revenue increased by $14.2 million or 7% and $32.7 million or 9% for the three and six months ended June 27, 2008, as compared to the same corresponding periods in fiscal 2007.  Segment operating income decreased $7.2 million or 14% and $12.4 million or 13% for the three and six months ended June 27, 2008, as compared to the same corresponding periods in fiscal 2007.

The revenue growth for both the three month and six month periods ended June 27, 2008 was driven by strong international sales, partially offset by softness in the U.S. markets.  Operating income for both the three and six month periods ended June 27, 2008 decreased primarily due to lower gross margin due to product mix and higher operating expenses due to the impact of acquisitions made during the last twelve months.

Field Solutions revenue increased by $34.8 million or 63% and $71.9 million or 68% for the three and six months ended June 27, 2008, as compared to the same corresponding period in fiscal 2007.  Segment operating income increased by $16.4 million or 89% and $34.9 million or 100% for the three and six months ended June 27, 2008, as compared to the same corresponding period in fiscal 2007.

The revenue increase for both the three and six month periods ended June 27, 2008 was driven by the introduction of new agricultural products and a worldwide robust agricultural market. Operating income for both the three and six month periods ended June 27, 2008 increased primarily due to higher revenue, gross margin improvement, and operating expense control.

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

Research and development (R&D), sales and marketing (S&M), and general and administrative (G&A) expenses are summarized in the following table (in thousands, except percentages):