10-Q 1 q310q-11702.txt 10Q 11072002 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 SEPTEMBER 27, 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 November 1, 2002, there were 29,075,613 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-- September 27, 2002 and December 28, 2001 (unaudited)..... 3 Condensed Consolidated Statements of Operations-- Three and Nine Months Ended September 27, 2002 and June 29, 2001 (unaudited)............................ 4 Consolidated Statements of Cash Flows-- Nine Months Ended September 27, 2002 and September 28, 2001(unaudited)........................ 5 Notes to Condensed Consolidated Financial Statements......... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 20 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk... 40 ITEM 4. Controls and Procedures...................................... 42 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings............................................ 43 ITEM 2. Changes in Securities and Use of Proceeds.................... 43 ITEM 6. Exhibits and Reports on Form 8-K............................. 43 Signatures............................................................ 45 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements TRIMBLE NAVIGATION LIMITED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 27, December 28, 2002 2001 (1) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 30,352 $ 31,078 Accounts and other receivable, net 82,015 71,680 Inventories 57,368 51,810 Other current assets 7,702 6,536 --------- ---------- Total current assets 177,437 161,104 Property and equipment, net 23,015 27,542 Goodwill, net 200,220 120,052 Intangible assets, net 23,531 100,252 Deferred income taxes 433 383 Other assets 11,237 10,062 --------- ---------- Total assets $435,873 $419,395 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank and other short-term borrowings $ 40,019 $ 40,025 Current portion of long-term debt 22,317 23,443 Accounts payable 25,962 21,494 Accrued compensation and benefits 18,089 13,786 Accrued liabilities 21,660 28,822 Accrued warranty expense 7,299 6,827 Income taxes payable 7,977 7,403 --------- --------- Total current liabilities 143,323 141,800 ------- ------- Noncurrent portion of long-term debt and other liabilities 87,532 127,097 Noncurrent portion of deferred gain 11,000 - Deferred tax liabilities 1,842 7,347 Other noncurrent liabilities 4,853 4,662 --------- -------- Total liabilities 248,550 280,906 --------- --------- Shareholders' equity: Common stock, no par value; 40,000 shares authorized; 28,681 and 26,862 shares outstanding, respectively 223,781 191,224 Accumulated deficit (27,500) (33,819) Accumulated other comprehensive loss (8,958) (18,916) --------- ------- Total shareholders' equity 187,323 138,489 -------- ------- Total liabilities and shareholders' equity $435,873 $419,395 ======== ======== (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. TRIMBLE NAVIGATION LIMITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended ------------------------------------ ----------------------------------- September 27, September 28, September 27, September 28, 2002 2001 2002 2001 --------------------------------------------------- ----------------- ------------------ ----------------- ----------------- --------------------------------------------------- ----------------- ------------------ ----------------- ----------------- (In thousands, except per share data) Revenue $ 114,748 $ 117,437 $ 342,033 $ 368,887 Cost of sales 57,167 57,122 169,168 185,541 -------------- -------------- ------- -------- Gross margin 57,581 60,315 172,865 183,346 Operating expenses: Research and development 15,235 15,726 45,259 47,281 Sales and marketing 21,338 25,345 65,362 81,016 General and administrative 10,812 9,727 31,484 29,098 Restructuring charges 154 363 646 2,997 Amortization of goodwill and other purchased intangibles 1,832 7,378 6,134 22,088 --------------- --------------- --------------- -------------- Total operating expenses 49,371 58,539 148,885 182,480 -------------- -------------- --------------- -------------- Operating income 8,210 1,776 23,980 866 --------------- --------------- -------------- -------------- Nonoperating income (expense): Interest income 116 210 336 946 Interest expense (3,654) (5,327) (11,232) (16,861) Foreign exchange gain (loss), net (354) 813 (1,123) 549 Expense for affiliated operations, net (1,516) - (2,726) - Other income (expense) 156 42 334 (47) ---------------- --------------- ------------- ------------ Total nonoperating income (expense) (5,252) (4,262) (14,411) (15,413) --------------- -------------- ------------- ------------ Income (loss) before income taxes 2,958 (2,486) 9,569 (14,547) Income tax provision 250 200 3,250 1,700 ------------- ------------- --------- ------------ Net income (loss) $ 2,708 $ (2,686) $ 6,319 $ (16,247) ============ ============= ========= ============ Basic net income (loss) per share $ 0.09 $ (0.11) $ 0.22 $ (0.66) ============= ============== ============ ============ Diluted net income (loss) per share $ 0.09 $ (0.11) $ 0.22 $ (0.66) ============= ============== ============ ============
See accompanying notes to Condensed Consolidated Financial Statements. TRIMBLE NAVIGATION LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended --------------------- September 27, September 28, 2002 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (In thousands) Cash flow from operating activities: Net income (loss) $6,319 $(16,247) -------- --------- Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense 7,804 8,945 Amortization expense 6,775 22,088 Provision for bad debt 3,590 2,949 Amortization of deferred gain (1,061) (1,193) Other 2,277 21 Add decrease (increase) in assets: Accounts receivables, net (11,132) (1,133) Inventories (3,873) 2,281 Deferred income taxes 731 38 Other current and noncurrent assets (2,395) 2,228 Effect of foreign currency translation adjustment 506 (3,544) Add increase (decrease) in liabilities: Accounts payable 3,886 (3,405) Accrued compensation 3,813 1,550 Deferred tax liability (860) Other accrued liabilities (3,743) (3,185) Deferred gain short term (7) - Deferred gain long term 11,000 - Income taxes payable 574 430 --------- ------- Net cash provided by operating activities 25,064 10,963 ------ ------ Cash flows from investing activities: Acquisitions, net of cash acquired 1,717 (4,886) Acquisition of property and equipment (5,474) (6,366) Capitalized patents, software and intangibles (48) (1,166) --------- --------- Net cash used in investing activities (3,805) (12,418) --------- --------- Cash flow from financing activities: Issuance of common stock 19,302 9,348 (Payment)/Collections of notes receivable (590) 404 Proceeds from long-term debt and revolving credit lines 13,000 34,062 Payments on long-term debt and revolving credit lines (53,697) (40,832) --------- -------- Net cash provided (used) by financing activities (21,985) 2,982 --------- ------- Net increase (decrease) in cash and cash equivalents (726) 1,527 Cash and cash equivalents-- beginning of period 31,078 40,876 -------- ------- Cash and cash equivalents-- end of period $30,352 $42,403 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $11,163 $14,916 ======= ======= Income taxes, net of refunds 1,906 1,426 ======== ======= In 2002, the purchase of LeveLite Technology, Inc., a non-cash financing and investing activity, was made with common stock of the Company with a value of approximately $5.7 million. See accompanying notes to Condensed Consolidated Financial Statements. 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 and nine month periods ended September 27, 2002, and September 28, 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 and nine month periods ended September 27, 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 of purchased intangibles and goodwill to approximately $6.1 million for the nine month period ended September 27, 2002 from $22.1 million in the prior year. 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. In July 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management's intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial position or results of operations. NOTE 2 -- Acquisitions: LeveLite Technology, Inc. On August 15, 2002, Trimble acquired LeveLite Technology, Inc., a California corporation, for approximately $5.7 million. This strategic acquisition complements the Company's low-end construction instrument product line. The purchase price consisted of 437,084 shares of Trimble's common stock. The merger agreement provides for Trimble to make earn-out payments not to exceed $3.9 million based on future revenues derived from existing product sales to a certain customer. Also, if Trimble receives any proceeds from a pending litigation, a portion will be paid to the former shareholders of Levelite. The additional payments, if earned, will result in additional goodwill. 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 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 were issued in June 2002 and resulted in additional goodwill of $4.7 million, with a final purchase price of approximately $8.2 million. 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 estimated costs were accrued for as part of the allocation of the purchase price. Included in the total estimated cost was approximately $2.7 million related to the discontinuance of overlapping product lines, which was included in reserves for excess and obsolete inventory. As of September 27, 2002, the Company had charged against the reserve approximately $4.5 million of non-inventory related charges, which consisted of $1.8 million for legal and tax consulting expenses relating to consolidation of legal entities, $1.3 million for severance expenses, $1.0 million for facilities and direct sales office closures, $0.3 million for an underfunded pension plan, and other costs of $0.1 million, of which $1.2 million was paid in the first nine months 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 $0.8 million at September 27, 2002, and the Company anticipates completing the majority of its remaining restructuring activities during the fourth fiscal quarter of 2002. These activities consist principally of legal costs and other expenses required to combine redundant legal entities. The elements of the reserve at September 27, 2002, on the balance sheet (included in accrued liabilities) are as follows: Employee Severance Facility Closure, and Relocation Legal and Tax and Other Expense Total (In thousands) Total reserve $ 1,945 $ 4,370 $ 6,315 Amounts paid/written off (1,685) (2,788) (4,473) Revision to estimates (260) (812) (1,072) ------------------------------------------------- Balance as of September 27, 2002 $ - $ 770 $ 770 ================================================= NOTE 3 -- Goodwill and Intangible Assets: Goodwill and intangible assets consisted of the following: September 27, December 28, 2002 2001 ---------------------------------------------------- --------------------------- ---------------------------------------------------- --------------------------- (In thousands) Intangible assets: 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 25,096 23,907 Trade names, trade marks, patents, and other intellectual properties 19,475 18,394 ---------- --------- Total intangible assets with definite life 44,571 42,301 ---------- --------- Total intangible assets 44,571 $ 133,437 Less accumulated amortization (21,040) (33,185) ----------- ---------- Total net intangible assets $ 23,531 $ 100,252 ========== ========== Goodwill: Goodwill, Spectra Precision acquisition* 179,518 116,001 Goodwill, other acquisitions* 20,702 14,710 ---------- --------- Total goodwill 200,220 130,711 Less accumulated amortization * - (10,659) -------------- ---------- Total net goodwill $ 200,220 $ 120,052 ========== ========== -------------------------------------------------------------------------- * Goodwill as of September 27, 2002 includes assembled workforce and distribution channel amounts, which were reclassified to goodwill in accordance with FAS 142. Also, September 27, 2002 amounts are shown net of accumulated depreciation from December 2001. 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. For comparative purposes, the pro forma adjusted net income per share excluding amortization of goodwill, distribution channel, and assembled workforce is as follows:
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ---------------------------------------------------------- ---------------- ----------------- ---------------- --------------- ---------------------------------------------------------- ---------------- ----------------- ---------------- --------------- (In thousands) Net income (loss) $ 2,708 $(2,686) $ 6,319 $(16,247) Add back SFAS 142 adjustments: Amortization of Goodwill $ 1,954 $ 5,863 Amortization of distribution channel 2,808 8,423 Amortization of assembled workforce 459 1,376 -------- --------- --------- -------- Adjusted net income (loss) $ 2,708 $ 2,535 $ 6,319 $ (585) ======= ======= ======= ======= Basic and diluted net income (loss) per share $ 0.09 $ (0.11) $ 0.22 $ (0.66) Add back: Amortization of Goodwill $ 0.08 $ 0.24 Amortization of distribution channel $ 0.11 $ 0.34 Amortization of assembled workforce $ 0.02 $ 0.06 Pro forma adjusted basic and diluted net income (loss) per share $ 0.09 $0 .10 $ 0.22 $ (0.02) ====== ====== ====== ========
NOTE 4 -- Certain Balance Sheet Components: Inventories consisted of the following: September 27, December 28, 2002 2001 -------------------------------------------- -------------------- -------------- -------------------------------------------- -------------------- -------------- (In thousands) Raw materials $ 20,896 $ 25,790 Work-in-process 6,337 7,177 Finished goods 30,135 18,843 ------------- ------------ $ 57,368 $ 51,810 ============ ============ Property and equipment consisted of the following: September 27, December 28, 2002 2001 ------------------------------------------ ------------------ ------------------ ------------------------------------------ ------------------ ------------------ (In thousands) Machinery and equipment $ 69,606 $ 66,265 Furniture and fixtures 6,506 6,367 Leasehold improvements 6,340 5,882 Buildings 2,908 3,979 Land 1,391 1,657 ------------ ----------- 86,751 84,150 Less accumulated depreciation (63,736) (56,608) ------------ ----------- $ 23,015 $ 27,542 ============= =========== Other current assets consisted of the following: September 27, December 28, 2002 2001 ----------------------------------------- ------------------- ------------------ ----------------------------------------- ------------------- ------------------ (In thousands) Notes receivable $ 1,193 $ 2,130 Prepaid expenses 5,669 4,150 Other 840 256 ------------- -------------- $ 7,702 $ 6,536 ============ ============= Other noncurrent assets consisted of the following: September 27, December 28, 2002 2001 ----------------------------------------- -------------------- ----------------- ----------------------------------------- -------------------- ----------------- (In thousands Debt issuance costs, net $ 2,888 $ 3,046 Other investments 2,835 2,737 Deposits 1,206 1,241 Other 4,308 3,038 ------------ ----------- $ 11,237 $ 10,062 ============ =========== NOTE 5 -- Derivative Financial Instruments: Forward foreign currency exchange contracts. At September 27, 2002, Trimble had the following forward foreign currency exchange contracts: Amount (in Currency Buy/Sell millions) -------- -------- --------- Japanese Yen* Sell 855.0 Mexican Pesos Sell 5.0 Euro Sell 17.0 Canadian Dollars Sell 1.6 Swedish Krona Sell 10.7 British Pounds Sell 2.5 Swedish Krona Buy 180.0 New Zealand Dollar Buy 1.9 Euro Buy 4.0 British Pounds Buy 1.6 * approximately 295 million Yen was designated to hedge firm orders to one particular customer In July 2002, the Company expanded its worldwide hedging program to include intercompany transactions among the former Spectra Precision Group entities in order to minimize the impact of changes in foreign exchange rates on earnings. The forward foreign currency exchange contracts mature over the next twelve months. NOTE 6 -- Disposition of Line of Business: 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 $1.7 million which are included in restructuring charges related to the termination of employees associated with the product lines disposed of in fiscal 2001. At September 27, 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. NOTE 7 -- Long-Term Debt: Trimble's long-term debt consists of the following: September 27, December 28, 2002 2001 -------------------------------------------------------------------------------- (In thousands) Credit Facilities: Five Year Term Loan $ 37,600 $ 61,300 U.S. and Multi-Currency Revolving Credit Facility 40,000 40,000 Subordinated note 69,136 84,000 Promissory notes 3,113 5,189 Other 19 76 ------------- ------------ 149,868 190,565 Less current portion 62,336 63,468 ------------- ------------ Noncurrent portion $ 87,532 $ 127,097 ============= ============ 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, the Company's ongoing working capital requirements and to refinance certain existing debt. At September 27, 2002, Trimble has approximately $77.6 million outstanding under the Credit Facilities, comprised of $37.6 million under a $100 million five-year term loan, $25 million under a $50 million three-year U.S. dollar only revolving credit facility, and $15 million under a $50 million three-year multi-currency revolver. The Company has access to $60 million of cash under the terms of its three-year revolver loans. The Company has annual 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, divided by the last twelve months 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 4.2% for the month of September 2002. The Credit Facilities are secured by all material assets of the Company, except for assets that are subject to foreign tax considerations. 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. There can be no assurances that the Company will be able to obtain any necessary waivers or amendments. 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 management; however, if revenues should decline at a higher rate than cost cutting measures reduce our expenses on a quarterly basis, the Company may violate the two above mentioned financial covenants. Subordinated Note In the first fiscal quarter of 2002, the Company renegotiated the terms of its 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 of September 27, 2002 the principal amount outstanding was approximately $69.1 million. To the extent that interest and principal due on the maturity date becomes delinquent, an additional 4% interest rate per annum will apply. The Credit Facilities allow Trimble to repay the subordinated 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 subordinated 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 September 27, 2002 include a $1.3 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 which was paid subsequent to September 27, 2002. In addition, these notes include a $1.8 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 (5.4% at September 27, 2002). The Company's weighted average cost of debt is approximately 6.6% as of September 27, 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 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. These markets include the operations of the Military Advanced Systems business 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 and LeveLite Technology, Inc. after August 15, 2002. 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.
------------------------------------------------------------------------------------ Three Months Ended September 27, 2002 ------------------------------------------------------------------------------------ -------------- ------------ ------------ --------------- -------------- ------------ Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total ---------------------------------- -------------- ------------ ------------ --------------- -------------- ------------ ---------------------------------- -------------- ------------ ------------ --------------- -------------- ------------ (In thousands) External net revenues $78,993 $13,252 $2,244 $14,607 $ 5,652 $114,748 ======= ======= ====== ======= ========= ======== Operating income (loss) before corporate allocations 15,232 1,445 (2,836) 2,563 757 17,161
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Nine Months Ended September 27, 2002 ---------------------------------------------------------------------------------- -------------- ------------ ------------ --------------- ------------- ----------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total ------------------------------------ -------------- ------------ ------------ --------------- ------------- ----------- ------------------------------------ -------------- ------------ ------------ --------------- ------------- ----------- (In thousands) External net revenues $227,294 $49,495 $6,436 $39,807 $19,001 $342,033 ======== ======= ====== ======= ======= ======== Operating income (loss) before corporate allocations 42,618 9,831 (8,742) 6,162 3,376 53,245
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September 27, 2002 ------------------------------------------------------------------------------------ -------------- ------------ ------------ --------------- -------------- ------------ Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total ---------------------------------- -------------- ------------ ------------ --------------- -------------- ------------ (In thousands) Assets: Accounts receivable (1) $72,786 $11,077 $2,723 $8,706 $4,723 $100,015 Inventory 43,205 6,829 1,897 911 3,886 56,728
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Three Months Ended September 28, 2001 ------------------------------------------------------------------------------------ -------------- ------------ ------------ --------------- -------------- ------------ Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total ---------------------------------- -------------- ------------ ------------ --------------- -------------- ------------ ---------------------------------- -------------- ------------ ------------ --------------- -------------- ------------ (In thousands) External net revenues $74,221 $18,017 $4,412 $12,602 $8,185 $117,437 ======= ======= ====== ======= ====== ======== Operating income (loss) before corporate allocations 13,256 4,120 (1,719) 2,160 377 18,194
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Nine Months Ended September 28, 2001 ---------------------------------------------------------------------------------- -------------- ------------ ------------ --------------- ------------- ----------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total ------------------------------------ -------------- ------------ ------------ --------------- ------------- ----------- ------------------------------------ -------------- ------------ ------------ --------------- ------------- ----------- (In thousands) External net revenues $234,868 $53,987 $10,300 $45,379 $24,353 $368,887 ======== ======= ======= ======= ======= ======== Operating income (loss) before corporate allocations 41,048 11,249 (7,170) 7,404 (856) 51,675
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December 28, 2001 ---------------------------------------------------------------------------------- -------------- ------------ ------------ --------------- -------------- ---------- Engineering Trimble Trimble & Field Mobile Component Portfolio Construction Solutions Solutions Technologies Technologies Total ------------------------------------ -------------- ------------ ------------ --------------- -------------- ---------- (In thousands) Assets: Accounts receivable (1) $ 62,471 $ 10,191 $ 4,274 $ 7,392 $ 7,249 $91,577 Inventory 36,896 4,639 1,992 2,490 5,463 51,480
---------------------------- (1) As presented, the accounts receivable number excludes cash received in advance, deferred revenue and reserves, which are not allocated between segments. The following are reconciliations corresponding to totals in the accompanying consolidated financial statements:
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------------------- --------------- ---------------- ------------- -------------- (In thousands) Operating income (loss): Total for reportable segments $17,161 $ 18,194 $53,245 $ 51,675 Unallocated corporate expenses (8,951) (16,418) (29,265) (49,085) ------- -------- -------- -------- Operating income (loss) $ 8,210 $ 1,776 $23,980 $ 866 ======= ======== ======== =======
September 27, December 28, 2002 2001 -------------------------------------------------- --------------- ------------- -------------------------------------------------- --------------- ------------- (In thousands) Assets: Accounts receivable total for reportable divisions $100,015 $91,577 Unallocated (1) (20,800) (19,897) -------- -------- Total $ 79,215 $71,680 ======== ======= Inventory total for reportable divisions $56,728 $51,480 Common inventory (2) 640 330 ------- ------- Net inventory $57,368 $51,810 ======= ======= ---------------------------- (1) Includes cash in advance, deferred revenue 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. The following table presents revenues by product groups. Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------- -------------- --------------------------- (In thousands) GPS products $58,556 $68,260 $177,680 $ 211,258 Laser and optical products 53,147 43,723 153,704 146,303 Other 3,045 5,454 10,649 11,326 ----------- ----------- ------------- -------------- Total revenue $114,748 $117,437 $342,033 $368,887 =========== ============ ============ ============== NOTE 9 -- Equity: Comprehensive Income (Loss) The components of other comprehensive loss, net of related tax, include:
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 --------------------------------------------- ---------------- ----------------- ---------------- -------------- --------------------------------------------- ---------------- ----------------- ---------------- -------------- (In thousands) Cumulative foreign currency translation $(1,778) $2,388 $9,691 $(9540) adjustments Unrealized gain - hedges of forecasted 50 - 50 - transactions Net gain (loss) on interest rate swap - (42) 203 (273) Net unrealized gain on investments - (77) 14 28 -------- ------- ------ ------- Other comprehensive loss $(1,728) $2,269 $9,958 $(9,785) -------- ======= ====== =======
The change in cumulative foreign currency translation for the nine months ended September 27, 2002 was primarily due to the weakening of the U.S. dollar against the Euro and Swedish Krona. 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: September 27, December 28, 2002 2001 ---------------------------------------------------- -------------- ------------ --------------------------------------------------- -------------- ------------ (In thousands) Cumulative foreign currency translation adjustments $(9,008) $(18,729) Unrealized gain on hedges of forecasted transactions 50 - Net loss on interest rate swap - (203) Net unrealized gain on investments - 16 -------- --------- Accumulated other comprehensive loss $(8,958) $(18,916) ======== ========= Warrants On April 12, 2002, the Company issued 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. 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. On a quarterly basis beginning July 14, 2002, Spectra Physics' warrant became 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 are 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. On July 14, 2002 an additional 17,364 shares became exercisable at an exercise price of $14.46 per share. On October 14, 2002 an additional 17,824 shares became exercisable at an exercise price of $9.18. The additional shares are exercisable over a 5-year period. Under the terms of the warrant, the total number of shares issued will not exceed 376,233 shares. The warrant was valued at approximately $1.3 million and is being amortized to interest expense over the remaining term of the related subordinated note. 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.
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Numerator: Income (loss) available to common shareholders used in basic and diluted loss per share $ 2,708 $ (2,686) $ 6,319 $(16,247) ======= ========= ======= ======== Denominator: Weighted-average number of common shares used in calculating basic income (loss) per share 28,819 24,889 28,372 24,707 Effect of dilutive securities: Common stock options 384 -- 525 -- Common stock warrants 8 -- 10 -- ------------ ----------- ---------- ----------- Weighted-average number of common shares and dilutive potential common shares used in calculating diluted income (loss) per share 29,211 24,889 28,907 24,707 ======= ======= ====== ======= Basic income (loss) per share $ 0.09 $ (0.11) $ 0.22 $(0.66) ====== ======== ====== ====== Diluted income (loss) per share $ 0.09 $ (0.11) $ 0.22 $(0.66) ====== ======== ====== =======
Options and warrants were not included in the computation of earnings per share in the three and nine months ended September 28, 2001 because the Company reported a net loss. If Trimble had reported net income, additional 855,000 and 1,025,000 common equivalent shares related to outstanding options and warrants would have been included in the calculation of diluted income (loss) per share for the three and nine months ended September 28, 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 $86,351 and $259,054 for the three and nine month periods ended September 27, 2002 and September 28, 2001, respectively. Related-Party Notes Receivable The Company has notes receivable from officers and employees of $1,213,000 as of September 27, 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 2.89 years as of September 27, 2002. 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 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 $ 154,000 and $646,000 were recorded for the three and nine month periods ended September 27, 2002 respectively, which are primarily related to severance costs. For the nine month period ended September 28, 2001, restructuring charges of $3.0 million were recorded, which are primarily related to severance costs. These restructuring activities impacted 40 individuals in the first nine months of fiscal 2002. In the nine months of fiscal 2001, 160 individuals were impacted. As of September 27, 2002, all of the restructuring charges have been paid. NOTE 14 -- Joint Venture: On April 1, 2002, Caterpillar Trimble Control Technologies LLC (CTCT, or "Joint Venture"), 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 and market, the next generation of advanced electronic guidance and control products for earthmoving machines in the construction, mining and waste industries. CTCT is based in Dayton, Ohio. Under the terms of the joint venture agreement, Caterpillar contributed $11.0 million cash and selected technology, for a total contributed value of $14.5 million 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 $11.0 million from the joint venture. During the third fiscal quarter of 2002, Trimble recorded approximately $1.5 million of expenses under the heading of "Expense for affiliated operations, net" in Non operating income (expense) related to certain transactions between the Company and the Joint Venture. This was comprised of approximately $1.8 million of incremental costs incurred by Trimble as a result of purchasing products from the Joint Venture at a higher transfer price than its original manufacturing costs, offset by approximately $0.3 million of contract manufacturing fees charged to the Joint Venture by Trimble. Due to the nature of the transfer price agreements between Trimble and the Joint Venture, a related party, the impact of these agreements are classified under Non operating income (expense). In addition, during the third fiscal quarter of 2002, the Company recorded lower operating expenses of approximately $1.3 million due to the transfer of employee related expenses for research and development ($0.8 million), and sales, marketing and administrative functions ($0.5 million) to the Joint Venture. These employees are devoted to the Joint Venture and are primarily engaged in developing next generation products and technology for that entity. Trimble has adopted the equity method of accounting for its investment in the Joint Venture. This requires the company to record 50 percent of the Joint Venture profits or losses in a given fiscal period. During the third fiscal quarter of 2002, the Joint Venture reported a loss of $185,000 of which Trimble's share is $92,500. During the nine month period ended September 27, 2002, the joint venture reported a gain of $77,000 of which Trimble share is $38,500. The Company has elected to treat the cash distribution of $11.0 million as a deferred gain, being amortized to the extent that losses are attributable from the Joint Venture under the equity method described above. When the Joint Venture is profitable on a sustainable basis, and future operating losses are not anticipated, then Trimble will recognize as a gain, the portion of the $11.0 million which is unamortized. To the extent that it is possible that Trimble will have any future funding obligation relating to the Joint Venture, then the relevant amount of the $11.0 million will be deferred until such a time as the funding obligation no longer exists. In future periods, both the Company's share of profits (losses) under the equity method, and the amortization of its $11.0 million deferred gain will be recorded under the heading of "Expense for affiliated operations, net" in Non operating income (expense). 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. See the discussion of our critical accounting policies under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10K for fiscal 2001. BUSINESS DEVELOPMENTS On August 15, 2002, Trimble acquired LeveLite Technology, Inc., a California corporation, for approximately $5.7 million. This strategic acquisition complements the Company's low-end construction instrument product line. The purchase price consisted of 437,084 shares of Trimble's common stock. The merger agreement provides for Trimble to make earn-out payments not to exceed $3.9 million based on future revenues derived from existing product sales to a certain customer. Also, if Trimble receives any proceeds from a pending litigation, a portion will be paid to the former shareholders of Levelite. The additional payments, if earned, will result in additional goodwill. 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 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 were issued in June 2002 and resulted in additional goodwill of $4.7 million, with a final purchase price of approximately $8.2 million. In August 1999, Trimble and Solectron entered into a supply agreement that provided for the exclusive manufacture by Solectron of a significant portion of Trimble's products for the three-year period ending August 13, 2002. The agreement was extended for a one year period expiring in August 2003. As of the date of this report, the Company is engaged in negotiations with Solectron regarding the nature of the manufacturing agreement going forward. The Company does not expect to experience any disruptions in its product supply as a result of these negotiations. During the fourth quarter of fiscal 2002, the Company began shipping certain of its products out of Solectron's China manufacturing facilities. CATERPILLAR JOINT VENTURE On April 1, 2002, Caterpillar Trimble Control Technologies LLC (CTCT, or "Joint Venture"), 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 and market, the next generation of advanced electronic guidance and control products for earthmoving machines in the construction, mining and waste industries. CTCT is based in Dayton, Ohio. Under the terms of the joint venture agreement, Caterpillar contributed $11.0 million cash and selected technology, for a total contributed value of $14.5 million 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 $11.0 million from the joint venture. During the third fiscal quarter of 2002, Trimble recorded approximately $1.5 million of expenses under the heading of "Expense for affiliated operations, net" in Non operating income (expense) related to certain transactions between the Company and the Joint Venture. This was comprised of approximately $1.8 million of incremental costs incurred by Trimble as a result of purchasing products from the Joint Venture at a higher transfer price than its original manufacturing costs, offset by approximately $0.3 million of contract manufacturing fees charged to the Joint Venture by Trimble. Due to the nature of the transfer price agreements between Trimble and the Joint Venture, a related party, the impact of these agreements are classified under Non operating income (expense). In addition, during the third fiscal quarter of 2002, the Company recorded lower operating expenses of approximately $1.3 million due to the transfer of employee related expenses for research and development ($0.8 million), and sales, marketing and administrative functions ($0.5 million) to the Joint Venture. These employees are devoted to the Joint Venture and are primarily engaged in developing next generation products and technology for that entity. Trimble has adopted the equity method of accounting for its investment in the Joint Venture. This requires the company to record 50 percent of the Joint Venture profits or losses in a given fiscal period. During the third fiscal quarter of 2002, the Joint Venture reported a loss of $185,000 of which Trimble's share is $92,500. During the nine month period ended September 27, 2002, the joint venture reported a gain of $77,000 of which Trimble share is $38,500. The Company has elected to treat the cash distribution of $11.0 million as a deferred gain, being amortized to the extent that losses are attributable from the Joint Venture under the equity method described above. When the Joint Venture is profitable on a sustainable basis, and future operating losses are not anticipated, then Trimble will recognize as a gain, the portion of the $11.0 million which is unamortized. To the extent that it is possible that Trimble will have any future funding obligation relating to the Joint Venture, then the relevant amount of the $11.0 million will be deferred until such a time as the funding obligation no longer exists. In future periods, both the Company's share of profits (losses) under the equity method, and the amortization of its $11.0 million deferred gain will be recorded under the heading of "Expense for affiliated operations, net" in Non operating income (expense). RESULTS FROM CONTINUING OPERATIONS EXCLUDING INFREQUENT AND ACQUISITION RELATED ADJUSTMENTS Income (loss) from continuing operations include 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):
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes from continuing Operations $ 2,958 $ (2,486) $ 9,569 $ (14,547) Infrequent and acquisition-related charges: Loss on sale of business (Other income and expense) - - - 1,964 Amortization of goodwill and other purchased intangibles 1,832 7,378 6,134 22,088 Gain on sale of assets (Other income and expense) (165) - (165) (270) Restructuring charges 154 363 646 2,997 ----------- ---------- ---------- ----------- Total infrequent and acquisition-related charges 1,821 7,741 6,615 26,779 ---------- --------- -------- ---------- Adjusted income before income taxes from continuing operations 4,779 5,255 16,184 12,232 Income tax provision, adjusted 250 475 3,250 1,425 ----------- ---------- ---------- ---------- Adjusted net income $ 4,529 $ 4,780 $ 12,934 $ 10,807 ========= ======== ======== ==========
RESULTS OF OPERATIONS The Company's annual revenues from operations for the three and nine month periods ended September 27, 2002 were $114.7 million and $342.0 million, as compared with $117.4 million and $368.9 million in the corresponding periods in fiscal 2001. The net income for the three and nine months ended September 27, 2002, was $2.7 million, or $0.09 diluted income per share and $6.3 million, or $0.22 diluted income per share, compared to a net loss for the corresponding periods in fiscal 2001, of $2.7 million, or $0.11 loss per share and $16.2 million or $0.66 loss per share. 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.
Three Months Ended Nine Months Ended % of % of % of % of September 27, Total September 28, Total September 27, Total September Total 2002 Revenue 2001 Revenue 2002 Revenue 28, Revenue 2001 ---------------------------------- -------------- --------- -------------- -------- -------------- ------- ------------ ------- (Dollars in thousands) Engineering and Construction Revenue $78,993 69% $74,221 63% $227,294 66% $234,868 64% Segment Operating income from operations 15,232 13,256 42,618 41,048 Segment Operating income as a percentage of segment revenue 19% 18% 19% 18% Trimble Field Solutions Revenue 13,252 12% 18,017 15% 49,495 14% 53,987 15% Segment Operating income from operations 1,445 4,120 9,831 11,249 Segment Operating income as a percentage of segment revenue 9% 23% 20% 21% Trimble Mobile Solutions Revenue 2,244 2% 4,412 4% 6,436 2% 10,300 3% Segment Operating loss from operations (2,836) (1,719) (8,742) (7,170) Segment Operating loss as a percentage of segment revenue 126)% (39)% (136)% (70)% Component Technologies Revenue 14,607 13% 12,602 11% 39,807 12% 45,379 12% Segment Operating income from operations 2,563 2,160 6,162 7,404 Segment Operating income as a percentage of segment revenue 18% 17% 15% 16% Portfolio Technologies Revenue 5,652 4% 8,185 7% 19,001 6% 24,353 6% Segment Operating income (loss) from operations 757 (377) 3,376 (856) Segment Operating income (loss) as a percentage of segment revenue 13% (5%) 18% (4)% Total Revenue $114,748 100% $117,437 100% $342,033 100% $368,887 100% Total Segment Operating income from continuing operations $17,161 $18,194 53,245 51,675
A reconciliation of Trimble's consolidated segment operating income to consolidated income (loss) before income taxes from operations follows:
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------------------------- ----------------- ----------------- ---------------- ---------------- (In thousands) Consolidated segment operating income from continuing operations $ 17,161 $ 18,194 $ 53,245 $ 51,675 Unallocated corporate expense (6,965) (8,677) (22,485) (25,724) Amortization of goodwill and other purchased intangibles (1,832) (7,378) (6,134) (22,088) Restructuring charges (154) (363) (646) (2,997) Non-operating income (expense), net (5,252) (4,262) (14,411) (15,413) ----------------- ----------------- ---------------- --------------- Income (loss) from operations before income taxes $ 2,958 $ (2,486) $ 9,569 $ (14,547) ================= ================= ================ ================
Revenue For the three months ended September 27, 2002, total revenue decreased by $2.7 million or 2% to $114.7 million from $117.4 million in the corresponding period in fiscal 2001. For the nine months ended September 27, 2002, total revenue decreased by $26.9 million or 7% to $342.0 million from $368.9 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 increased by $4.8 million or 6% for the three months ended September 27, 2002 as compared with the same corresponding period in fiscal 2001. The increase was due to the following: o Continued strong demand for our Machine Control products combined with new Survey product introductions during the quarter. o Inclusion of revenues from the acquisition of LeveLite on August 15, 2002 of approximately $1.3 million. Engineering and Construction revenues decreased by $7.6 million or 3% for the nine months ended September 27, 2002 as compared with the same corresponding period in fiscal 2001. The decrease was due to the following: o A shift in the distribution model from direct sales offices to dealer dependent channels, resulted in reduced revenue for the Construction Instruments and Machine Control product lines, due to discount offered on sales to dealers. o Survey equipment revenues decreased due to the general economic slowdown. The decrease in Survey equipment and Construction Instrument revenues was partially offset by an increase in Machine Control revenues due to strong acceptance of the GPS site vision product line. Operating Income Engineering and Construction operating income increased by $1.9 million and $1.5 million or 15% and 4% for the three and nine months ended September 27, 2002 as compared with the same corresponding periods in fiscal 2001. The increases were due to 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. These cost savings helped to offset a decline in gross margins caused by shifting product mix, as well as reduced revenue due to the general economic slowdown. 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 decreased by $4.8 million and by $4.5 million or 26% and 8% for the three and nine months ended September 27, 2002 as compared with the same corresponding periods in fiscal 2001. The decreases were due to the following: o Delays in shipping of a recently announced new product, the GeoExplorer CE series GPS handheld for mobile mapping applications, as a result of delivery delays of a critical component by one of our vendors. o Lower volumes for GIS data capture products partially due to weakness in US federal, state, and local government spending for the three and nine month period ended September 27, 2002, compared to the corresponding period in 2001. For the nine month period ended September 27, 2002, the decrease in US federal, state and local government revenues was partially offset by increased Agriculture revenues compared to the corresponding period in 2001. Operating Income Trimble Field Solutions operating income decreased by $2.7 million and $1.4 million or 65% and 13% for the three and nine months ended September 27, 2002 as compared with the same corresponding periods in fiscal 2001. The decreases in operating income were primarily due to lower revenues. Trimble Mobile Solutions Revenue Products within the Trimble Mobile Solutions segment combine GPS and information technologies to provide solutions for a variety of applications in fleet management. Trimble Mobile Solutions revenues decreased by $2.2 million and $3.9 million or 49% and 38% for the three months and nine months ended September 27, 2002 as compared with the corresponding periods in fiscal 2001. The decreases in revenue were due to the following factors: o Reduction 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. o Slow down in system integration projects due to reduced spending at municipalities. o Reduced sales of wireless products due to a transition from a sensor provider to a full integrated service provider. Operating Income Trimble Mobile Solutions operating loss increased by $1.1 million and $1.6 million or 65% and 22% for the three and nine months ended September 27, 2002 as compared with the corresponding periods in fiscal 2001. The increases in operating loss were due to the following: o Lower revenue base as compared to the same corresponding period of the previous year. o Decrease in margins due to the sell-off of existing Satcom inventory at reduced prices. 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 increased by $2.0 million or 16% for the three months ended September 27, 2002 as compared with the corresponding period in fiscal 2001. The increase is primarily due to introduction of our low power LassenTM SQ product which was introduced in our second fiscal quarter. Component Technologies revenues decreased by $5.6 million or 12% from $45.4 million to $39.8 million for the nine months ended September 27, 2002 as compared with the corresponding period in fiscal 2001. The decrease in revenue was due to the following factors: o A reduction in sales of Embedded product lines due to the economic slowdown, primarily in the first half of the year, and a decrease in Timing product lines due to reduced spending in the telecommunications market. * A slight decrease of In-vehicle navigation sales due to decrease in average selling prices. We expect this trend to continue, as technology advances in component technology will enable among other things, reduced costs. Operating Income Component Technologies operating income increased by $0.4 million or 19% for the three months ended September 27, 2002 as compared with the corresponding period in fiscal 2001. The increase in operating income was due primarily to higher revenue, and partially offset by higher operating expenses. Component Technologies operating income decreased by $1.3 million or 17% for the nine months ended September 27, 2002 as compared with the corresponding period in fiscal 2001. The decrease in operating income was due primarily to lower revenue, and partially offset by reductions 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 business and Tripod Data Systems, or TDS. Portfolio Technologies revenues decreased by $2.5 million and $5.4 million or 31% and 22% for the three and nine months ended September 27, 2002 as compared with the same corresponding periods in fiscal 2001. The decrease in revenue was primarily due to a reduction of $1.3 million and $4.4 million for the three and nine month, respectively, in our commercial aviation product line as a result of the sale of the air transport product line to Honeywell in the first fiscal quarter of 2001. In addition, the economic slowdown resulted in lower TDS revenues. Operating Income Portfolio Technologies operating income increased by $1.1 million or 301%, and $4.2 million or 494% for the three and nine months ended September 27, 2002 as compared with the same corresponding periods in fiscal 2001. The increase in operating income was primarily due to the following: o A decrease in research and development expenses of approximately $0.7 million and $1.3 million, which was primarily due to an increase in cost reimbursement for military research and development programs and a reduction in temporary help and consultants. o Disposal of the loss generating commercial aviation product line, which accounted for approximately $1.9 million in the nine months of fiscal 2001. International Revenues * Sales to our unaffiliated customers in locations outside the U.S. comprised approximately 49% and 48% of total revenues for nine months ended September 27, 2002 and September 28, 2001, respectively. North and South America represented 59% of total revenue, Europe 29%, and Asia 12% in the first nine months of fiscal 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 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 50% and 51% for the three and nine months ended September 27, 2002 and 50% and 51% for the same corresponding periods in fiscal 2001. The gross margin was slightly impacted by shifting product mix; lower revenue from high margin Geographic Information Systems products was offset by higher revenue from lower margin Component Technologies. 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: Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- (In thousands) Research and development $ 15,235 $ 15,726 $ 45,259 $ 47,281 Sales and marketing 21,338 25,345 65,362 81,016 General and administrative 10,812 9,727 31,358 29,098 Restructuring charges 154 363 646 2,997 Amortization of goodwill and other purchased intangibles 1,832 7,378 6,134 22,088 --------- ---------- ----------- --------- Total $ 49,371 $ 58,539 $ 148,885 $ 182,480 ========= ========= ========== ========= Research and Development Research and development spending decreased by $0.5 million and $2.0 million during the three and nine month periods ended September 27, 2002, and represented 13% and 12% of revenue, compared with 13% for the three and nine month ended September 28, 2001. The reduction of research and development expenses was primarily due to the transfer of employee related expenses to the CTCT joint venture of approximately $0.9 million and $1.5 million for the three and nine months ended September 27, 2002. * 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 $ 4.0 million and $15.7 million during the three and nine month periods ended September 27, 2002, and represents 13% of revenue, compared with 13% in the same corresponding periods in fiscal 2001. The decreases in 2002 were due primarily to the following factors: o During fiscal 2001, the Company sold off many of its direct sales offices which decreased sales and marketing expense by approximately $1.7 million and $6.6 million for the three and the nine months ended September 27, 2002 as compared to the same periods in prior year 2001. o Decreased in compensation and related expenses, as well as temporary help and consulting expenses of approximately $0.9 million and $3.8 million for the three and the nine months ended September 27, 2002. o Decrease in travel, advertising, promotional, trade show and sales commission expenses of approximately $1.8 million and $4.0 million for the three and nine months ended September 27, 2002 compared with the corresponding periods in fiscal 2001. o Reduction in facility, equipment, office and telephone expenses of approximately $1.5 million for the nine months ended September 27, 2002 compared to the corresponding period in fiscal 2001. * 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 $1.1 million and $2.3 million during the three and the nine month periods ended September 27, 2002, representing 9% of revenue, compared with 8% in the same corresponding periods in fiscal 2001. The increases in 2002 was due primarily to increased provisions for receivables due from customers in troubled South American economies and a $1.5 million charge resulting from the write-off of receivables due from a Japanese distributor, partially offset by reduction in compensation and professional fees of approximately $0.6 million. Restructuring charges Restructuring charges of $ 154,000 and $646,000 were recorded for the three and nine month periods ended September 27, 2002 respectively, which are primarily related to severance costs. For the nine month period ended September 28, 2001, restructuring charges of $3.0 million were recorded, which are primarily related to severance costs. These restructuring activities impacted 40 individuals in the first nine months of fiscal 2002. In the nine months of fiscal 2001, 160 individuals were impacted. As of September 27, 2002, all of the restructuring charges have been paid. 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 estimated costs were accrued for as part of the allocation of the purchase price. Included in the total estimated 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. As of September 27, 2002, the Company had charged against the reserve approximately $4.5 million of non-inventory related charges, which consisted of $1.8 million for legal and tax consulting expenses relating to consolidation of legal entities, $1.3 million for severance expenses, $1.0 million for facilities and direct sales office closures, $0.3 million for an underfunded pension plan, and other costs of $0.1 million, of which $1.2 million was paid in the first nine months 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 $0.8 million at September 27, 2002, and the Company anticipates completing the majority of its remaining restructuring activities during the fourth fiscal quarter of 2002. These activities consist principally of legal costs and other expenses required to combine redundant legal entities. The elements of the reserve at September 27, 2002, on the balance sheet (included in accrued liabilities) are as follows: Employee Severance Facility Closure, and Relocation Legal and Tax Expense Total (In thousands) Total reserve $ 1,945 $ 4,370 $ 6,315 Amounts paid/written off (1,685) (2,788) (4,473) Revision to estimates (260) (812) (1,072) ----------------------------------------------- Balance as of September 27, 2002 $ - $ 770 $ 770 =============================================== Amortization of Goodwill, Purchased and Other Intangibles
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------------------------- ----------------- ----------------- ---------------- ----------------- ------------------------------------------------------- ----------------- ----------------- ---------------- ----------------- (In thousands) Amortization of goodwill $ - $ 1,954 $ - $ 5,863 Amortization of purchased intangibles 1,832 5,424 6,134 16,225 Amortization of other intangibles 171 229 641 699 ----------------- ----------------- ---------------- ----------------- Total amortization of goodwill, purchased, and other intangibles $ 2,003 $ 7,607 $ 6,775 $ 22,787 ================= ================= ================ =================
Amortization expense of goodwill, purchased and other intangibles decreased during the three and nine month periods ended September 27, 2002 by approximately $5.6 million and $16.0 million. Total amortization expense of goodwill, purchased and other intangibles represented 2% of revenue in the first nine month period of fiscal 2002, compared with 4% in the same period in 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. 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:
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2002 2001 2002 2001 ------------------------------------- ---------------- --------------- ---------------- ----------------- ------------------------------------- ---------------- --------------- ---------------- ----------------- (In thousands) Interest income $ 116 $ 210 $ 336 $ 946 Interest expense (3,654) (5,327) (11,232) (16,861) Foreign exchange gain (loss) (354) 813 (1,123) 549 Expense for affiliated operations, (1,516) - (2,726) - net Other income (expense) 156 42 334 (47) ---------------- --------------- ---------------- ----------------- Total $(5,252) $(4,262) $(14,411) $(15,413) ================ =============== ================ =================
Nonoperating expense, net increased by $1.0 million during the three months ended September 27, 2002 as compared with same fiscal period in 2001. The primary reasons for the increase were as follows: o Expense for affiliated operations of $1.5 million is primarily a result of transfer pricing effects on transactions between Trimble and the CTCT joint venture. o Foreign exchange loss of $0.4 million in the third fiscal quarter of 2002 compared to a $0.8 million gain in third fiscal quarter of 2001. o The increase above was offset by lower interest expense due to reduction of the debt balance of approximately $95 million and lower interest rates. Nonoperating expense, net decreased by $2.7 million during the first nine months of fiscal 2002 as compared with same fiscal period in 2001. The primary reasons for the decrease were as follows: o Lower interest expense due to reduction of the debt balance of approximately $95 million accounted for $5.6 million. o Lower interest expense was offset by expense for affiliated operations of $2.7 million as a result of transfer pricing effects on transactions between Trimble and the CTCT joint venture and a foreign exchange loss of $1.1 million in the nine months ended September 27, 2002. Income Taxes The Company recorded provisions for income taxes of $0.25 million for the three months ended September 27, 2002 and $3.3 million for the nine months ended September 27, 2002. The provisions for income taxes for the comparable periods in 2001 were $0.2 million and $1.7 million, respectively. These amounts reflect foreign taxes on profits in foreign jurisdictions, withholding taxes and the inability to realize the benefit of net operating losses generated in the United States. Inflation The effects of inflation on the Company's financial results have not been significant to date. LIQUIDITY AND CAPITAL RESOURCES September 27, December 28, As of 2002 2001 ------------------------------------------------- ----------------- ------------ (Dollars in thousands) Cash and cash equivalents $30,352 $31,078 As a percentage of total assets 7.0% 7.4% Accounts receivable days sales outstanding (DSO) 52 55 Inventory days sales outstanding 92 90 September 27, September 28, Nine Months Ended 2002 2001 ------------------------------------------------- --------------- -------------- (Dollars in thousands) Cash provided by operating activities $25,064 $10,963 Cash used by investing activities (3,805) (12,418) Cash provided (used) by financing activities (21,985) 2,982 Net increase/(decrease) in cash and cash equivalents (726) 1,527 At September 27, 2002, Trimble's cash and cash equivalents decreased by $0.8 million from December 28, 2001. During the first nine months of fiscal 2002, the Company repaid $21.2 million of its debt outstanding under its subordinated note and $18.5 million of its debt outstanding under its credit facilities. This was financed by the issuance of common stock, net of issuance costs of approximately $17.4 million, and cash generated from operating activities of approximately $25.0 million. The Company also used approximately $2.2 million for the purchase of certain assets, and approximately $5.5 million for net capital expenditures. The Company also acquired $3.9 million cash through the LeveLite acquisition. At September 27, 2002, Trimble's debt mainly consisted of $77.6 million outstanding under senior secured credit facilities, and a $69.1 million subordinated 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. In the first fiscal quarter of 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. On June 29, 2002, $465,000 of accrued interest was converted into principal. In addition, the Company renegotiated the terms of the subordinated note extending the maturity until July 14, 2004, at the current interest rate of approximately 10.4% per year. In connection with the renegotiation, 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. On a quarterly basis beginning on July 14, 2002, Spectra Physics' warrant became 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 are 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. On July 14, 2002 additional 17,364 shares became exercisable at an exercise price of $14.46 per share. On October 14, additional 17,824 shares became exercisable at an exercise price of $9.18. The additional shares are exercisable over a 5-year period. Under the terms of the warrant, the total number of shares issued will not exceed 376,233 shares. The warrant was valued at approximately $1.3 million and is being amortized to interest expense over the remaining term of the related subordinated note. * In the nine months of fiscal 2002, cash provided by operating activities was $25.0 million, as compared to $11.6 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 profitability. The accounts receivable days sales outstanding slightly decreased and inventory days outstanding slightly increased from year end. Cash flows used in investing activities were $3.8 million in the first nine months of 2002 as compared to $12.4 million in the corresponding fiscal period in 2001. Cash used in investing activities in the first nine months of 2002 was primarily related to the acquisition of an additional 25% equity interest in Terrasat, a German corporation and the acquisition of property and equipment partially offset by cash acquired through the LeveLite acquisition. Cash used by financing activities was $22.0 million in the first nine months of 2002 as compared with cash provided by financing activities of $3.0 million in the corresponding fiscal period in 2001. During the first nine months of 2002, the Company made $21.2 million of payments against its subordinated note and $18.5 million of payments against its credit facilities. 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 $1.9 million, 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 September 27, 2002, Trimble had approximately $77.6 million outstanding under the Credit Facilities, comprised of $37.6 million under a five-year $100 million term loan, $25 million under a $50 million three-year U.S. dollar only revolving Credit Facility, and $15 million under a $50 million three-year multi-currency revolver. The Credit Facilities are secured by all material assets of the Company, except for assets subject to foreign tax considerations. Financial covenants of the Credit Facilities, which were amended during the quarter, include leverage, fixed charge, and minimum net worth tests. At September 27, 2002, the Company is in 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 $5 million in the last quarter of fiscal 2002, $24.0 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 and anticipated renewals, will be sufficient to meet its anticipated operating cash needs for at least the next twelve months. At September 27, 2002, the Company had $30.3 million of cash and cash equivalents. At September 27, 2002, the Company had access to $60 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 common stock up to 25% of net income in the previous fiscal year. We have obligations under noncancelable operating leases for our principal facilities in the United States that expire at various dates through 2011. Trimble has options to renew certain of these leases for an additional five years. The Company also leases facilities under operating leases in the United Kingdom, Sweden and Germany that expire in 2011. The following table represents the remaining future minimum payments under the noncancelable operating leases. Operating Lease Payments (In thousands) Remaining fiscal 2002 $ 3,195 2003 11,916 2004 7,288 2005 6,847 2006 1,795 Thereafter 6,576 -------- Total $ 37,617 ======== We also have noncancellable purchase commitments, primarily relating to inventory in our ordinary course of business, as of September 27, 2002 of approximately $17.8 million. * We expect fiscal 2002 capital expenditures to be approximately $7.0 million to $8.0 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 some of its foreign-denominated intercompany receivables. At September 27, 2002, Trimble had forward foreign currency exchange contracts to sell approximately 855.0 million Japanese Yen (of which approximately 295 million Yen was designated to hedge firm orders to one particular customer), to sell approximately 5.0 million Mexican Pesos, to sell approximately 17.0 million Euros, to sell approximately 1.6 million Canadian Dollars, to sell approximately 10.7 million Swedish Krona, and to sell approximately 2.5 million British pounds, to buy approximately 1.6 million British pounds, to buy approximately 180.0 million Swedish Krona, to buy approximately 1.9 million New Zealand dollars, to buy approximately 4.0 million Euros at contracted rates that mature over the next twelve months. In July 2002, the Company expanded its worldwide hedging program to include intercompany transactions among the former Spectra Precision Group entities in order to minimize the impact of changes in foreign exchange rates on earnings. 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 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 of purchased intangibles and goodwill to approximately $6.1 million for the nine month period ended September 27, 2002 from $22.1 million in the prior year. 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. In July 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management's intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial position or results of operations. Certain Other Risk Factors 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 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 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 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 consistently 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 Many of 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 many 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 current and prospective customers and could harm our reputation and brand, which could have a material adverse effect on our business. 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 49% of our revenues in our first nine months of fiscal 2002 and 48% in the corresponding fiscal 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, and we have a regional fulfillment center in the Netherlands. 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 a lawsuit for alleged patent infringement by some of our grade control systems, which products accounted for approximately two percent (2%) of our revenues in our fiscal year 2001. In the event that in this suit 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. 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. These are secondary licenses that are subject to certain restrictions. 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 changes to the rules by 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. 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 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 September 27, 2002, our leverage ratio (total indebtedness, not including subordinated debt to EBITDA on a rolling four quarter basis) was approximately 1.78. At this leverage ratio our pricing will be LIBOR plus 175 basis points. The U.S. dollar and the Multi-Currency revolvers run through July 2003 and have outstanding principal balances at September 27, 2002 of $25 million and $15 million, respectively. As of September 27, 2002 the Company has borrowed from the Multi-Currency revolver in U.S. currency only. The term loan runs through June 2004 and has an outstanding principal balance of $37.6 million at September 27, 2002. The three-month LIBOR effective rate at September 27, 2002 was 1.79063% as a result our borrowing rate at September 27, 2002 was 3.54063%. A hypothetical ten percent increase in three-month LIBOR rates could result in approximately $139,000 annual increase in interest expense on the existing principal balances. In addition, the Company has a $1.8 million promissory note, of which $12,000 was classified as a current liability at September 27, 2002. The note is payable in monthly installments, bearing a variable interest rate of 5.4% as of September 27, 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 transacts business in various foreign currencies and 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. These hedge instruments are marked to market through earnings every period. From time to time, Trimble may also utilize forward foreign exchange contracts designated as Cash Flow hedges of operational exposures represented by firm backlog orders to specific accounts over a specific period of time. We record changes in the fair value of cash flow hedges in accumulated other comprehensive income (loss), until the firm backlog transaction ships. Upon shipment, we reclassify the gain or loss on the cash flow hedge to the statement of operations. For fiscal quarter ended September 27, 2002, Trimble recorded a $50,000 gain reflected the net change and ending balance in relating to a firm backlog hedge. The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flow from the forecasted transactions. All forward contracts have maturity of less than twelve months. The counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. To mitigate this risk Trimble uses high quality counterparties and per our hedging policy establishes maximum limits and/or percentages for each counterparty. The Company's practice is to settle the underlying intercompany transactions on a timely basis to reduce our exposure to fluctuations in exchange rates. * Trimble does not anticipate any material adverse effect on its consolidated financial position utilizing our current hedging strategy. The following table provides information about Trimble's foreign exchange forward contracts outstanding as of September 27, 2002: Foreign Currency Contract Value Fair Value in Amount USD USD Currency Buy/Sell (in thousands) (in thousands) (in thousands) ---------------- ----------- ------------------ ---------------- --------------- Yen Sell 855,000 $7,033 $6,995 ---------------- Euro Sell 17,000 $16,658 $16,604 ---------------- Euro Buy 4,000 $3,936 $3,917 ---------------- Krona Sell 10,717 $1,154 $1,154 ---------------- Krona Buy 180,000 $19,305 $19,257 ---------------- Sterling Sell 2,500 $3,865 $3,924 ---------------- Sterling Buy 1,650 $2,580 $2,590 ---------------- Pesos Sell 5,000 $469 $473 ---------------- NZD Buy 1,850 $873 $860 ---------------- CAD Sell 1,630 $1,033 $1,026 ---------------- The following table provides information about Trimble's foreign exchange forward contracts outstanding as of September 28, 2001: Foreign Contract Value Fair Value Buy/ Currency Amount USD in USD Currency Sell (in thousands) (in thousands) (in thousands) -------------------------------------------------------------------------------- Yen Sell 858,000 $7,259 $7,294 Euro Sell 5,175 $4,504 $4,749 Sterling Buy 1,011 $1,462 $1,485 ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as defined in the Exchange Act Rule 13a-14 as of a date within 90 days of the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's reports filed under the Exchange Act. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. 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. In July 2002, the Company entered into a settlement agreement with Lockheed Martin and the court action was dismissed. The settlement did not have a material adverse effect on the financial results of the Company. 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 August 15, 2002, the Company issued 437,084 shares of its Common Stock (valued at approximately $5.7 million) to the shareholders of LeveLite Technology, Inc. in exchange for all of the outstanding capital stock of LeveLite. (See "Business Developments" on page 20 for a description of the transaction.) Upon a hearing before the California Department of Corporations in which the terms and conditions of the offer were approved, the shares of Common Stock issued in the transaction were exempt from registration by reason of qualification under Section 3(a)(10) of the Securities Act of 1933, as amended. 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. 10.1 Amendment No. 4 to Credit Agreement, dated September 10, 2002. (2) 99.1 Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. ------------------------- (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 Exhibit number 99.2 to the registrant's Current Report on Form 8-K, which was filed on September 18, 2002. (b) Reports on Form 8-K On July 24, 2002, the Company filed a report on Form 8-K reporting the financial results for the quarter ended June 28, 2002. On September 18, 2002, the Company filed a report on Form 8-K reporting updated financial guidance for the quarter ending September 27, 2002 and the amendment of its Credit Agreement. On October 24, 2002, the Company filed a report on Form 8-K reporting the financial results for the quarter ended September 27, 2002. 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: November 7, 2002 Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Steven W. Berglund, the Chief Executive Officer of Trimble Navigation Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Trimble Navigation Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the date of the filing of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report, our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 7, 2002 /s/ Steven W. Berglund ---------------------- Steven W. Berglund Chief Executive Officer Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mary Ellen Genovese, the Chief Financial Officer of Trimble Navigation Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Trimble Navigation Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the date of the filing of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report, our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 7, 2002 /s/ Mary Ellen Genovese ------------------------ Mary Ellen Genovese Chief Financial Officer 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. 10.1 Amendment No. 4 to Credit Agreement, dated September 10, 2002. (2) 99.1 Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------------------------- (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 Exhibit number 99.2 to the registrant's Current Report on Form 8-K, which was filed on September 18, 2002.