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| TRMB > SEC Filings for TRMB > Form 10-K on 25-Feb-2013 | All Recent SEC Filings |
25-Feb-2013
Annual Report
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and those
listed under "Risks Factors." We have attempted to identify forward-looking
statements in this report by placing an asterisk (*) before paragraphs
containing such material.
EXECUTIVE LEVEL OVERVIEW
Trimble's focus is on integrating its broad technological and application
capabilities to create system-level solutions that transform how work is done
within the industries we serve, enhancing productivity, accuracy, safety and
regulatory compliance for our customers. The majority of our markets are
end-user markets, including engineering and construction firms, surveyors,
farmers, governmental organizations, energy and utility companies and
organizations who must manage fleets of mobile workers and assets. We also
provide components to original equipment manufacturers to incorporate into their
products. In the end user markets, we provide stand-alone systems which may
consist of software, hardware or some combination of the two, as well as
integrated enterprise or workflow solutions which address the entire work
process. Some examples of our solutions include products that automate and
simplify the process of surveying land, products that automate the control,
management and utilization of equipment such as tractors and bulldozers,
products for engineering or building design, construction and operations
management, products that enable a company to manage its mobile workforce and
assets, and products that allow municipalities or utilities to manage their
fixed assets and operations. 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.
Solutions targeted at the end-user make up a significant majority of our
revenue. To create compelling products, we must attain an understanding of the
end users' needs and work flow, and of how our broad based technological
capabilities can be deployed and integrated to enable that end user to work
faster, more efficiently, more accurately and more safely. We use this knowledge
to create highly innovative solutions that change the way work is done by the
end-user. With the exception of our Mobile Solutions and Advanced Devices
segments, our products are primarily sold through a dealer channel, and it is
crucial that we maintain a proficient, global, third-party distribution channel.
We continue to execute our strategy with a series of actions across new and
existing markets:
Reinforcing our position in new and existing markets
We believe many of our markets continue to be underpenetrated and provide us
with additional, substantial potential for substituting our technology for
traditional methods. We continue to utilize the strength of the Trimble brand in
our markets to expand our revenue by bringing new products to both new and
existing users.
In our Engineering and Construction segment, during the year we acquired
SketchUp, one of the most popular 3D modeling tools in the world which allows
modelers worldwide, across a wide range of industries, to express design
concepts easily, accurately and efficiently. Subsequently, we were able to
extend our BIM-to-Field Capabilities for building contractors by launching the
first integration of SketchUp file import capabilities into the Trimble Field
Link layout software. Trimble Field Link now allows contractors to take their 3D
SketchUp Pro models from the office into the field for quick site verification
and viability testing of the proposed prototype. We demonstrated our leadership
in technology innovation by introducing the Trimble R10 GNSS system, which is
our next generation state-of-the-art GNSS surveying solution. It is the smallest
and lightest receiver in its class yet combines powerful features and
groundbreaking technologies.
In our Field Solutions segment, the Agriculture division introduced four new
innovations designed to assist growers with planting and spreading
operations-Vehicle Sync, seed monitoring capability, application management of
up to two variable rate products and spinner speed control. These innovations
enable enhanced grower efficiency by increasing the quality of seed placement
and providing real-time wireless communication between vehicles in the field.
Furthermore, we launched the Connected Farm application for smartphone platforms
which gives farmers an easy-to-use tool to capture field data for later viewing
and analysis online, while also providing agronomists with access to additional
data they can use to better assess the needs of their customers.
In our Mobile Solutions segment, our acquisition of trucking industry enterprise
software TMW Systems will further expand our transportation and logistics reach.
TMW's software capability spans the entire surface transportation lifecycle,
delivering visibility, control and decision support for the intricate
relationships and complex processes involved in the movement of freight. TMW's
enterprise software currently integrates with Trimble's T&L solutions on many
fleets and when combined will jointly serve more than 3,000 fleets around the
world.
In our Advanced Devices segment, we introduced our next-generation UHF RFID
reader module which is designed to be embedded into a wide variety of handheld,
portable and stationary devices. The exceptionally small size and powerful
performance of the Mercury6e-Micro yields increased efficiency, reduced
development costs and time-to-market advantages for RFID applications.
Bringing existing technology to new geographic markets
We continue to position ourselves in newer geographic markets that will serve as
important sources of future growth. In our Engineering and Construction segment,
we further expanded our network of SITECH Technology Dealers during the year by
adding new dealerships to serve geographic markets such as Bahrain, Kuwait,
Qatar, United Arab Emirates, Tunisia and Siberia. We also expanded coverage of
our satellite-delivered Trimble RTX technology to most of the world. This
technology enables the Trimble xFill service, a new technique in surveying that
allows surveyors to continue working in the event the primary correction stream
is not available. In our Field Solutions segment, our high-accuracy CenterPoint
RTX correction service is also now available worldwide for agriculture
customers. This GPS and GLONASS-enabled correction service is delivered via
cellular communications and is currently certified for use in 38 countries on 5
continents. In our Mobile Solutions segment, we announced that Holcim Services
(South Asia) Limited, a unit of Holcim Group, one of the largest global cement
manufacturers, will deploy the Trimble trako Fleet Management and Visual Cargo
solutions in their outbound logistics fleet that transports cement to various
destinations across India.
Our acquisition of Plancal Corporation (headquartered in Horgen, Switzerland), a
leading 3D CAD/CAE and ERP software provider for the mechanical, electrical, and
plumbing (MEP) and HVAC industries also helps to broaden our industry-leading
BIM to Field solutions for MEP and HVAC contractors in Western Europe.
We also continue to focus on expansion initiatives in Africa, China, India, the
Middle-East, Russia, South America and South East Asia.
Recent Development
On February 11, 2013, our Board of Directors approved a 2-for-1 split of all
outstanding shares of our common stock. Each shareholder of record of our common
stock on the close of business on March 6, 2013 will be entitled to receive one
additional share of common stock for every outstanding share held on the record
date. The distribution of the new shares will occur on March 20, 2013 and
trading will begin on a split-adjusted basis on March 21, 2013. All shares and
per share information presented herein does not reflect the upcoming stock
split.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements. The preparation of financial statements and
related disclosures in conformity with U.S. generally accepted accounting
principles requires us to make judgments, assumptions, and estimates that affect
the amounts reported in the Consolidated Financial Statements and accompanying
Notes to the Consolidated Financial Statements. We consider the accounting
polices described below to be our critical accounting policies. These critical
accounting policies are impacted significantly by judgments, assumptions, and
estimates used in the preparation of the Consolidated Financial Statements, and
actual results could differ materially from the amounts reported based on these
policies.
Revenue Recognition
We recognize product revenue when persuasive evidence of an arrangement exists,
shipment has occurred, the fee is fixed or determinable, and collectibility is
reasonably assured. In instances where final acceptance of the product is
specified by the customer or is uncertain, revenue is deferred until all
acceptance criteria have been met.
Contracts and/or customer purchase orders are used to determine the existence of
an arrangement. Shipping documents and customer acceptance, when applicable, are
used to verify delivery. We assess whether the fee is fixed or determinable
based on the payment terms associated with the transaction and whether the sales
price is subject to refund or adjustment. We assess collectibility based
primarily on the creditworthiness of the customer as determined by credit checks
and analyses, as well as the customer's payment history.
Revenue for orders is generally not recognized until the product is shipped and
title has transferred to the buyer. We bear all costs and risks of loss or
damage to the goods up to that point. Our shipment terms for U.S. orders and
international orders fulfilled from our European distribution center typically
provide that title passes to the buyer upon delivery of the goods to the carrier
named by the buyer at the named place or point. If no precise point is indicated
by the buyer, delivery is deemed to occur when the carrier takes the goods into
its charge from the place determined by us. Other shipment terms may provide
that title passes to the buyer upon delivery of the goods to the buyer. Shipping
and handling costs are included in Cost of sales.
Revenue from sales to distributors and resellers is recognized upon shipment,
assuming all other criteria for revenue recognition have been met. Distributors
and resellers do not have a right of return.
Revenue from purchased extended warranty and post contract support (PCS)
agreements is deferred and recognized ratably over the term of the warranty or
support period.
We present revenue net of sales taxes and any similar assessments.
Our software arrangements generally consist of a perpetual license fee and PCS.
We generally have established vendor-specific objective evidence (VSOE) of fair
value for our PCS contracts based on the renewal rate. The remaining value of
the software arrangement is allocated to the license fee using the residual
method. License revenue is primarily recognized when the software has been
delivered and fair value has been established for all remaining undelivered
elements.
Some of our subscription product offerings include hardware, subscription
services and extended warranty. Under these hosted arrangements, the customer
typically does not have the contractual right to take possession of the software
at any time during the hosting period without incurring a significant penalty
and it is not feasible for the customer to run the software either on its own
hardware or on a third-party's hardware. Upfront fees related to our hosted
solutions typically consist of amounts for the in-vehicle enabling hardware
device and peripherals.
Our multiple deliverable product offerings include hardware with embedded
firmware, extended warranty, software, PCS services and subscription services,
which are considered separate units of accounting. For certain of our products,
software and non-software components function together to deliver the tangible
product's essential functionality.
In evaluating the revenue recognition for our hardware or subscription
agreements which contain multiple deliverable arrangements, we determined that
in certain instances we were not able to establish VSOE for some or all
deliverables in an arrangement as we infrequently sold each element on a
standalone basis, did not price products within a narrow range, or had a limited
sales history. When VSOE cannot be established, we attempt to establish the
selling price of each element based on relevant third-party evidence (TPE). TPE
is determined based on competitor prices for similar deliverables when sold
separately. Generally, our go-to-market strategy differs from that of
competitors, and offerings may contain a significant level of proprietary
technology, customization or differentiation such that the comparable pricing of
products with similar functionality cannot be obtained. Furthermore, we are
unable to reliably determine what similar competitor products' selling prices
are on a stand-alone basis. Therefore, we typically are not able to establish
the selling price of an element based on TPE.
When we are unable to establish selling price using VSOE or TPE, we use our best
estimate of selling price (BESP) in our allocation of arrangement consideration.
The objective of BESP is to determine the price at which we would transact a
sale if the product or service were sold on a stand-alone basis. BESP is
generally used for offerings that are not typically sold on a stand-alone basis
or for new or highly customized offerings. We determine BESP for a product or
service by considering multiple factors including, but not limited to, pricing
practices, market conditions, competitive landscape, internal costs, geographies
and gross margin. The determination of BESP is made through consultation with
and formal approval by our management, taking into consideration our
go-to-market strategy.
Allowance for Doubtful Accounts
Our accounts receivable balance, net of allowance for doubtful accounts and
sales returns reserve, was $323.5 million at the end of fiscal 2012, as compared
with $275.2 million at the end of fiscal 2011. The allowance for doubtful
accounts was $6.3 million and $6.7 million at the end of fiscal 2012 and 2011,
respectively. We evaluate ongoing collectibility of our trade accounts
receivable based on a number of factors such as age of the accounts receivable
balances, credit quality, historical experience, and current economic conditions
that may affect a customer's ability to pay. In circumstances where we are aware
of a specific customer's inability to meet its financial obligations to us, a
specific allowance for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount we believe will ultimately be
collected. In addition to specific customer identification of potential bad
debts, bad debt charges are recorded based on our recent past loss history and
an overall assessment of past due trade accounts receivable amounts outstanding.
Inventory Valuation
Our inventories, net balance was $240.5 million at the end of fiscal 2012 as
compared with $232.1 million at the end of fiscal 2011. Our inventory allowances
at the end of fiscal 2012 were $40.3 million, as compared with $37.6 million at
the end of fiscal 2011. Our inventories are stated at the lower of standard cost
(which approximates actual cost on a first-in, first-out basis) or market.
Adjustments to reduce the cost of inventory to its net realizable value, if
required, are made for estimated excess, or obsolescence balances. Factors
influencing these adjustments include decline in demand, technological changes,
product life cycle
and development plans, component cost trends, product pricing, physical
deterioration and quality issues. If actual factors are less favorable than
those projected by us, additional inventory write-downs may be required.
Income Taxes
Income taxes are accounted for under the liability method whereby deferred tax
asset or liability account balances are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. A valuation allowance is recorded to
reduce the carrying amounts of deferred tax assets if it is more likely than not
such assets will not be realized.
Relative to uncertain tax positions, we only recognize the tax benefit if it is
more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. Our practice is to recognize interest
and/or penalties related to income tax matters in income tax expense.
Our valuation allowance is primarily attributable to net operating losses and
research and development credit carryforwards. Management believes that it is
more likely than not that we will not realize these deferred tax assets, and,
accordingly, a valuation allowance has been provided for such amounts. Valuation
allowance adjustments associated with an acquisition after the measurement
period are recorded through income tax expense.
Goodwill and Purchased Intangible Assets
Goodwill represents the excess of the purchase consideration over the fair value
of the net tangible and identifiable intangible assets acquired in a business
combination. Intangible assets acquired individually, with a group of other
assets, or in a business combination, are recorded at fair value. Identifiable
intangible assets are comprised of distribution channels and distribution
rights, patents, licenses, technology, acquired backlog, trademarks, and
in-process research and development. The fair value of intangible assets
acquired is generally determined based on a discounted cash flow analysis.
Identifiable intangible assets are being amortized over the period of estimated
benefit using the straight-line method, reflecting the pattern of economic
benefits associated with these assets, and have estimated useful lives ranging
from one to ten years with a weighted average useful life of 6.5 years. Goodwill
is not subject to amortization, but is subject to at least an annual assessment
for impairment, applying a fair-value based test.
Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets
We evaluate goodwill, at a minimum, on an annual basis and whenever events and
changes in circumstances suggest that the carrying amount may not be
recoverable. The annual goodwill impairment testing is performed in the fourth
fiscal quarter of each year based on the values on the first day of that
quarter. Goodwill is reviewed for impairment utilizing a two-step process.
However, the provisions of the accounting standard for goodwill and other
intangibles allows us to first assess qualitative factors to determine whether
it is necessary to perform the two-step quantitative goodwill impairment test.
For our annual goodwill impairment test in the fourth quarter of fiscal 2012, we
performed a quantitative test for all of our reporting units. In the first step
of this test, goodwill is tested for impairment at the reporting unit level by
comparing the reporting unit's carrying amount, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using a discounted cash flow approach. If the carrying amount of the
reporting unit exceeds its fair value, a second step is performed to measure the
amount of impairment loss, if any. In step two, the implied fair value of
goodwill is calculated as the excess of the fair value of a reporting unit over
the fair values assigned to its assets and liabilities. If the implied fair
value of goodwill is less than the carrying value of the reporting unit's
goodwill, the difference is recognized as an impairment loss. When we perform a
quantitative assessment of goodwill impairment, the determination of fair value
of a reporting unit involves the use of significant estimates and assumptions.
The discounted cash flows are based upon, among other things, assumptions about
expected future operating performance using risk-adjusted discount rates. Actual
future results may differ from those estimates. As of the first day of the
fourth quarter of fiscal 2012, for each reporting unit, our estimated fair
values exceeded the carrying value by substantial margins on a percentage basis.
However for certain earlier stage reporting units, due to the smaller magnitude
of the carrying value and fair value of each respective reporting units, the
margins by which the fair value exceeded the carrying value on an absolute
dollar basis were relatively small.
Depreciation and amortization of the intangible assets and other long-lived
assets is provided using the straight-line method over their estimated useful
lives, reflecting the pattern of economic benefits associated with these assets.
Changes in circumstances such as technological advances, changes to our business
model, or changes in the capital strategy could result in the actual useful
lives of intangible assets or other long-lived assets differing from initial
estimates. In those cases where we determine that the useful life of an asset
should be revised, the net book value in excess of the estimated residual value
will be depreciated over its revised remaining useful life. These assets are
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable based on their
future cash flows. The estimated future cash flows are based upon, among other
things, assumptions about expected future operating performance and may differ
from actual cash
flows. The assets evaluated for impairment are grouped with other assets to the
lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. If the sum of the
projected undiscounted cash flows (excluding interest) is less than the carrying
value of the assets, the assets will be written down to the estimated fair
value.
Warranty Costs
The liability for product warranties was $17.1 million at the end of fiscal
2012, as compared with $18.4 million at the end of fiscal 2011. We accrue for
warranty costs as part of cost of sales based on associated material product
costs, technical support labor costs, and costs incurred by third parties
performing work on our behalf. Our expected future cost is primarily estimated
based upon historical trends in the volume of product returns within the
warranty period and the cost to repair or replace the equipment. The products
sold are generally covered by a warranty for periods ranging from 90 days to 5.5
years.
While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, our
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 our
estimates, revisions to the estimated warranty accrual and related costs may be
required.
Stock-Based Compensation
We recognize compensation expense for all share-based payment awards made to our
employees and directors based on estimated fair values. The grant date fair
value for options is estimated using a binomial valuation model. The fair value
of rights to purchase shares under our employee stock purchase plan is estimated
using the Black-Scholes option-pricing model.
The determination of fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include our expected stock price volatility over the term of the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rates, and expected dividends. In addition, the binomial model
incorporates actual option-pricing behavior and changes in volatility over the
option's contractual term.
We base the expected stock price volatility for stock purchase rights on implied
volatilities of traded options on our stock and our expected stock price
volatility for stock options is based on a combination of our historical stock
price volatility for the period commensurate with the expected life of the stock
option and the implied volatility of traded options. The use of implied
volatilities is based upon the availability of actively traded options on our
stock with terms similar to our awards and also upon our assessment that implied
volatility is more representative of future stock price trends than historical
volatility. However, because the expected life of our stock options is greater
than the terms of our traded options, we use a combination of our historical
stock price volatility commensurate with the expected life of our stock options
and implied volatility of traded options.
We estimate the expected life of the awards based on an analysis of our
historical experience of employee exercise and post-vesting termination behavior
considered in relation to the contractual life of the options and purchase
rights. The risk-free interest rate assumption is based upon observed interest
rates appropriate for the expected term of the awards.
We do not currently pay cash dividends on our common stock and do not anticipate
doing so in the foreseeable future. Accordingly, our expected dividend yield is
zero.
Stock-based compensation expense recognized in the Consolidated Statement of
Income for fiscal 2012, 2011 and 2010 is based on awards ultimately expected to
vest, and has been reduced for estimated forfeitures. The stock-based
compensation guidance requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on historical experience.
If factors change and we employ different assumptions to determine the fair
value of our share-based payment awards granted in future periods, the
compensation expense that we record under it may differ significantly from what
we have recorded in the current period. In addition, valuation models, including
the Black-Scholes and binomial models, may not provide reliable measures of the
fair values of our stock-based compensation. Consequently, there is a risk that
our estimates of the fair values of our stock-based compensation awards on the
grant dates may bear little resemblance to the actual values realized upon the
exercise, expiration, early termination, or forfeiture of those stock-based
payments in the future. Certain stock-based payments, such as employee stock
options, may expire worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant date and reported
in our financial statements. Alternatively, values may be realized from these
instruments that are significantly higher than the fair values originally
estimated on the grant date and reported in our financial statements.
See Note 2 and Note 12 to the Consolidated Financial Statements for additional
information.
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