Mentor Graphics Corporation (Nasdaq:MENT) today announced record
fourth quarter revenue of $221.3 million, up 3% from the prior
fourth quarter. Diluted earnings per share were $.19 on a GAAP
basis and $.42 on a non-GAAP basis. Bookings were up more than 5%
from the fourth quarter of 2004. "We were pleased to see continued
growth in bookings in the fourth quarter of 2005, especially
considering the tough comparison to last year's fourth quarter
growth of more than 35%," said Walden C. Rhines, chairman and CEO
of Mentor Graphics. "Renewals showed strong growth, with contract
values up nearly 30% over prior contract levels. Mentor's
book-to-bill ratio was positive for the year, and the fourth
quarter was the highest quarterly book-to-bill ratio since 1996."
Three of the four major product categories set new quarterly and
annual bookings records. Compared to the fourth quarter of 2004,
bookings grew 50% in Integrated Systems Design, 15% in IC Design to
Silicon and 20% in New and Emerging. Mentor's new Questa(TM)
verification platform, launched in May, saw rapid customer adoption
with over a thousand seats installed by the fourth quarter.
TestKompress(R) bookings more than doubled during the year, while
automotive products grew 40%. Strength in FPGA-related products
like synthesis and I/O Designer(TM) helped provide increased
bookings in the Integrated Systems Design product category.
Calibre(R) resolution enhancement technology continued to expand
with annual bookings growth of 25%. Calibre
Design-for-Manufacturing (DFM) bookings grew 1000% over 2004 and
materially improved fourth quarter 2005 results. Two new Calibre
DFM products and the company's automotive solution were launched
during the fourth quarter of 2005 and performed well.
YieldAssist(TM) had more than $1 million in bookings, while Calibre
OPCverify(TM) had $5 million in bookings. Mentor's automotive
solution was adopted at Shanghai Motors, one of the largest
manufacturers of automobiles in the world. The resulting orders
were the largest Mentor Graphics has ever received from China.
North America and Europe both saw strength in the quarter with
bookings up 20% over the fourth quarter of 2004. Japan was weaker
with bookings down 35%, while the Pacific Rim bookings dropped 5%
over the year ago levels. Split of revenue by geography was 45%
North America, 35% Europe, 10% Japan, and 10% Pacific Rim. "During
the quarter, we examined several opportunities for savings to fuel
our investment in high growth opportunities like Calibre
Design-for-Manufacturing, Electronic System Level (ESL) tools, and
automotive," said Gregory K. Hinckley, president of Mentor
Graphics. "As a result of this review, we took steps which will
conclude in the first quarter to reduce cost and headcount in our
Intellectual Property business." Special charges of $4.2 million
were restructuring related. Guidance Based upon selective cost
reduction programs, the company is raising non-GAAP earnings per
share guidance for the full year 2006. For the first quarter of
2006, the company expects revenue of approximately $170 million, a
GAAP loss per share of $.06 and approximately breakeven non-GAAP
earnings per share. For full year 2006, Mentor Graphics expects
revenue of about $755 million, GAAP earnings per share of $.18 and
non-GAAP earnings per share of approximately $.55. Discussion of
Non-GAAP Financial Measures Mentor Graphics management evaluates
and makes operating decisions using various performance measures.
In addition to our GAAP results, we also consider adjusted net
income (loss), which we refer to as non-GAAP net income (loss).
This measure is generally based on the revenues of our product,
maintenance and services business operations and the costs of those
operations, such as cost of revenue, research and development,
sales and marketing and general and administrative expenses, that
management considers in evaluating our ongoing core operating
performance. Non-GAAP net income (loss) consists of net income
(loss) excluding amortization of intangible assets, merger and
acquisition charges, special charges, equity plan-related
compensation expenses and charges and gains which management does
not consider reflective of our core operating business. Intangible
assets consist primarily of purchased technology, backlog, trade
names, customer relationships, employment agreements and stock
options issued in connection with acquisitions. Merger and
acquisition charges represent in-process research and development
charges related to products in development that had not reached
technological feasibility at the time of acquisition. Special
charges consist of post-acquisition restructuring costs including
severance and benefits, excess facilities and asset-related
charges, and also include strategic reallocations or reductions of
personnel resources. For purposes of comparability across other
periods and against other companies in our industry, non-GAAP net
income (loss) is adjusted by the amount of additional taxes or tax
benefit that the company would accrue using a normalized effective
tax rate applied to the non-GAAP results. In addition, during the
twelve months ended December 31, 2005, a $4.75 million purchase of
technology that had not yet reached technological feasibility, a
$957 thousand gain on the sale of a building and an $800 thousand
gain on investment earnout income were excluded as management does
not consider these transactions a part of its core operating
performance. During the twelve months ended December 31, 2004,
investment earnout and holdback income of $1,403 thousand were also
excluded. Non-GAAP net income (loss) is a supplemental measure of
our performance that is not required by, or presented in accordance
with, GAAP. Moreover, it should not be considered as an alternative
to net income, operating income or any other performance measure
derived in accordance with GAAP, or as an alternative to cash flow
from operating activities or as a measure of our liquidity. We
present non-GAAP net income (loss) because we consider it an
important supplemental measure of our performance. Management
excludes from its non-GAAP net income (loss) certain recurring
items to facilitate its review of the comparability of the
company's core operating performance on a period to period basis
because such items are not related to the company's on going core
operating performance as viewed by management. Management uses this
view of its operating performance for purposes of comparison with
its business plan and individual operating budgets and allocation
of resources. Additionally, when evaluating potential acquisitions,
management excludes the items described above from its
consideration of target performance and valuation. More
specifically management adjusts for the excluded items for the
following reasons: -- Amortization charges for our intangible
assets are inconsistent in amount and frequency and are
significantly impacted by the timing and magnitude of the company's
acquisition transactions. We therefore consider our operating
results without these charges when evaluating our core performance.
Generally, the most significant impact to inter-period
comparability of the company's net income (loss) is in the first
twelve months following the acquisition. -- Special charges are
primarily severance related and are due to the company's
reallocation or reduction of personnel resources driven by
modifications of business strategy or business emphasis and by
assimilation of acquired businesses. These costs are originated
based on the particular facts and circumstances of business
decisions and can vary in size. Special charges also include excess
facility and asset-related restructuring charges. These charges are
not specifically included in the company's annual operating plan
and related budget due to the rapidly changing technology and
competitive environment in our industry. We therefore exclude them
when evaluating our managers' performance internally. -- Merger and
acquisition charges are in- process R&D charges, which are
largely disregarded as acquisition decisions are made and which
often result in charges that vary significantly in size and amount.
Management excludes these charges when evaluating the impact of an
acquisition transaction and our ongoing performance. -- Equity-plan
related compensation expenses are non-cash expenses that are
inconsistent in amount and frequency from period to period that
depend on the timing of the grant of stock options and varying
levels of participation in the company's stock purchase plan. We
therefore exclude these charges for purposes of evaluating our core
performance as well as with respect to evaluating any potential
acquisition. -- Income tax expense (benefit) is adjusted by the
amount of additional tax expense or benefit that we would accrue if
we used non-GAAP results instead of GAAP results in the calculation
of our tax liability, taking into consideration the company's
long-term tax structure. We use a normalized effective tax rate of
17%, which reflects the weighted average tax rate applicable under
the various tax jurisdictions in which the company operates. This
non-GAAP tax rate is subject to change as the geographic business
mix and statutory tax rates and their effect on the weighted
average tax rate differ over time. Our GAAP tax rate for the twelve
months ended December 31, 2005 is 63%. This tax rate was
substantially impacted by our pre-tax income for the year being
near break-even, which exacerbates the effect of certain mandatory
payments in some jurisdictions on our overall tax rate. Our
adjustment for tax related items in 2005 applies this normalized
rate to our non-GAAP pre-tax income, and thereby reduces the
unusually large provision for taxes reflected in our GAAP results.
Our adjustment for tax-related items in 2004 primarily reflects the
elimination of the additional tax charge associated with a one-time
inter-company tax dividend of $120 million, in addition to the tax
impact of other previously described non-GAAP adjustments. Non-GAAP
net income (loss) also facilitates comparison with other companies
in our industry, which use similar financial measures to supplement
their GAAP results. However, non-GAAP net income (loss) has
limitations as an analytical tool, and you should not consider this
measure in isolation or as a substitute for analysis of our results
as reported under GAAP. In the future the company expects to
continue to incur expenses similar to the non-GAAP adjustments
described above and exclusion of these items in our non-GAAP
presentation should not be construed as an inference that these
costs are unusual, infrequent or non-recurring. Some of the
limitations in relying on non-GAAP net income (loss) are: --
Amortization of intangibles, though not directly affecting our
current cash position, represent the loss in value as the
technology in our industry evolves, is advanced or is replaced over
time. The expense associated with this loss in value is not
included in the non-GAAP net income (loss) presentation and
therefore does not reflect the full economic effect of the ongoing
cost of maintaining our current technological position in our
competitive industry, which is addressed through our research and
development program. -- The company regularly engages in
acquisition and assimilation activities as part of its ongoing
business and therefore we will continue to experience special
charges and merger and acquisition charges on a regular basis.
These costs also directly impact available funds of the company. --
The company's stock option and stock purchase plans are important
components of our incentive compensation arrangements and will be
reflected as expenses in our GAAP results for the foreseeable
future under FAS 123(R). -- The company's income tax expense
(benefit) will be ultimately based on its GAAP taxable income and
actual tax rates in effect, which may differ significantly from the
17% rate assumed in our non-GAAP presentation. -- Other companies,
including other companies in our industry, may calculate non-GAAP
net income (loss) differently than we do, limiting its usefulness
as a comparative measure. About Mentor Graphics Mentor Graphics
Corporation (Nasdaq: MENT) is a world leader in electronic hardware
and software design solutions, providing products, consulting
services and award-winning support for the world's most successful
electronics and semiconductor companies. Established in 1981, the
company reported revenues over the last 12 months of about $700
million and employs approximately 4,000 people worldwide. Corporate
headquarters are located at 8005 S.W. Boeckman Road, Wilsonville,
Oregon 97070-7777. World Wide Web site: http://www.mentor.com/.
TestKompress is a registered trademark and Questa, I/O Designer,
Calibre OPCverify and YieldAssist are trademarks of Mentor Graphics
Corporation. Statements in this press release regarding the
company's guidance for future periods constitute "forward-looking"
statements based on current expectations within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company or industry results to
be materially different from any results, performance or
achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: (i)
the company's ability to successfully offer products and services
that compete in the highly competitive EDA industry including the
risk that the company's technology, products or inventory become
obsolete; (ii) reductions in spending on EDA tools by the company's
customers due to cyclical downturns or initiatives to increase
profitability, (iii) discounting of products and services by
competitors, which could force the company to lower its prices or
offer other more favorable terms to customers (iv) changes in
accounting or reporting rules or interpretations, limitations on
repatriation of earnings, licensing and intellectual property
rights protection; (v) changes in tax laws, regulations or
enforcement practices where the company does business; (vi) effects
of the increasing volatility of foreign currency fluctuations on
the company's business and operating results; (vii) effects of
unanticipated shifts in product mix on gross margin and
unanticipated shifts in geographic mix on the overall tax rate,
(viii) effects of customer seasonal purchasing patterns and the
timing of significant orders may negatively or positively impact
the company's quarterly results of operations, (ix) the company's
ability to successfully integrate and manage its acquisitions, all
as may be discussed in more detail under the heading "Factors That
May Affect Future Results and Financial Condition" in the company's
most recent Form 10-K or Form 10-Q. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on
such forward-looking statements. In addition, statements regarding
guidance do not reflect potential impacts of mergers or
acquisitions that have not been announced or closed as of the time
the statements are made. Mentor Graphics disclaims any obligation
to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements to reflect
future events or developments. The company is currently in
discussions with its external auditors on an emerging accounting
issue related to Financial Accounting Standard No. 133 "Accounting
for Derivative Instruments and Hedging Activities." The company
hedges future cash flows in certain jurisdictions where it has long
or short positions in key foreign currencies, namely the Japanese
Yen, the Euro and the British Pound Sterling. The fair value of the
related hedge instruments as of December 31, 2005 is a net
unrealized gain. If the conclusion related to this emerging issue
is different than our current position, the impact on our financial
results for 2005 is expected to be in the range of neutral to a
positive 3 cents per share. A conclusion on this matter is expected
in the next week. -0- *T MENTOR GRAPHICS CORPORATION CONSOLIDATED
STATEMENTS OF OPERATIONS (In thousands, except earnings per share
data - Unaudited) Three Months Ended Twelve Months Ended December
31, December 31, ------------------------------------- 2005 2004
2005 2004 -------- -------- --------- -------- Revenues: System and
software $145,837 $140,127 $ 410,264 $422,672 Service and support
75,433 74,822 294,985 288,284 -------- -------- --------- --------
Total revenues 221,270 214,949 705,249 710,956 -------- --------
--------- -------- Cost of revenues: System and software 5,305
4,839 18,034 16,639 Service and support 21,196 20,800 81,039 80,294
Amortization of purchased technology 3,150 2,982 11,639 10,624
-------- -------- --------- -------- Total cost of revenues 29,651
28,621 110,712 107,557 -------- -------- --------- -------- Gross
margin 191,619 186,328 594,537 603,399 -------- -------- ---------
-------- Operating expenses: Research and development 53,610 54,594
212,676 202,289 Marketing and selling 77,319 76,126 274,946 267,181
General and administration 19,491 18,825 76,834 74,255 Amortization
of intangible assets 1,080 1,098 4,233 3,586 Special charges 4,248
4,843 6,777 9,213 Merger and acquisition related charges - 50 750
7,700 -------- -------- --------- -------- Total operating expenses
155,748 155,536 576,216 564,224 -------- -------- ---------
-------- Operating income 35,871 30,792 18,321 39,175 Other income,
net 6,197 2,689 16,798 8,388 Interest expense (7,366) (4,838)
(23,496) (18,619) -------- -------- --------- -------- Income
before income taxes 34,702 28,643 11,623 28,944 Income tax expense
19,287 12,829 7,278 49,494 -------- -------- --------- -------- Net
income (loss) $ 15,415 $ 15,814 $ 4,345 $(20,550) ======== ========
========= ======== Net income (loss) per share: Basic $ 0.19 $ 0.21
$ 0.06 $ (0.28) ======== ======== ========= ======== Diluted $ 0.19
$ 0.20 $ 0.05 $ (0.28) ======== ======== ========= ========
Weighted average number of shares outstanding: Basic 79,202 76,354
78,633 72,381 ======== ======== ========= ======== Diluted 80,144
78,426 80,133 72,381 ======== ======== ========= ======== MENTOR
GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
earnings per share data-Unaudited) Three Months Ended December 31,
2005 GAAP Adjustments Non-GAAP -----------------------------------
Revenues: System and software $145,837 $ - $145,837 Service and
support 75,433 - 75,433 -------- -------- -------- Total revenues
221,270 - 221,270 -------- -------- -------- Cost of revenues:
System and software 5,305 - 5,305 Service and support 21,196 -
21,196 Amortization of purchased technology 3,150 (3,150)(1) -
-------- -------- -------- Total cost of revenues 29,651 (3,150)
26,501 -------- -------- -------- Gross margin 191,619 3,150
194,769 -------- -------- -------- Gross margin percentage 86.6%
88.0% -------- -------- Operating expenses: Research and
development 53,610 - 53,610 Marketing and selling 77,319 - 77,319
General and administration 19,491 - 19,491 Amortization of
intangible assets 1,080 (1,080)(2) - Special charges 4,248
(4,248)(3) - -------- -------- -------- Total operating expenses
155,748 (5,328) 150,420 -------- -------- -------- Operating income
35,871 8,478 44,349 Other income, net 6,197 (331)(4) 5,866 Interest
expense (7,366) - (7,366) -------- -------- -------- Income before
income taxes 34,702 8,147 42,849 Income tax expense 19,287
(12,003)(5) 7,284 -------- -------- -------- Net income $ 15,415 $
20,150 $ 35,565 ======== ======== ======== Net income per share:
Basic $ 0.19 $ 0.45 ======== ======== Diluted $ 0.19 $ 0.42
======== ======== Weighted average number of shares outstanding:
Basic 79,202 79,202 ======== ======== Diluted 80,144 12,070 (6)
92,214 ======== ======== ======== (1) Amortization of purchased
technology acquired in 17 separate acquisition transactions, three
of which were completed in the twelve months ended December 31,
2005. Purchased technology is amortized over two to five years. (2)
Amortization of other identified intangible assets including trade
names, employment agreements and customer relationships acquired in
11 separate acquisition transactions, four of which were completed
in the last twelve months. Other identified intangible assets are
amortized over two to five years. (3) Special charges consist of
costs incurred related to the discontinuation of a product line in
the fourth quarter of 2005. The total costs of this product line
discontinuation were $2,290 which include (i) $1,151 of severance
benefits, notice pay, and outplacement services related to employee
rebalances, (ii) $936 for the abandonment of excess leased facility
space, and (iii) $203 for other costs related to the discontinued
product line. In addition, special charges include (i) $1,242
incurred for severance benefits, notice pay and outplacement
services related to employee rebalances, (ii) $551 for the
abandonment of excess leased facilities space in North America,
(iii) $165 for other costs incurred to restructure the
organization. (4) Investment earnout payment received related to a
sale of stock in 2003. (5) Non-GAAP income tax expense adjustment
is based upon the assumption of a normalized effective rate of 17%
on non-GAAP income before income taxes. (6) Dilutive shares related
to the company's convertible debt as required by EITF 04-8. In
calculating non-GAAP diluted net income per share, $3,069,
representing the after-tax interest and amortization on the
company's convertible debt, is added back to non-GAAP net income.
MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
earnings per share data-Unaudited) Three Months Ended December 31,
2004 GAAP Adjustments Non-GAAP -----------------------------------
Revenues: System and software $140,127 $ - $140,127 Service and
support 74,822 - 74,822 -------- -------- -------- Total revenues
214,949 - 214,949 -------- -------- -------- Cost of revenues:
System and software 4,839 - 4,839 Service and support 20,800 -
20,800 Amortization of purchased technology 2,982 (2,982)(1) -
-------- -------- -------- Total cost of revenues 28,621 (2,982)
25,639 -------- -------- -------- Gross margin 186,328 2,982
189,310 -------- -------- -------- Gross margin percentage 86.7%
88.1% -------- -------- Operating expenses: Research and
development 54,594 - 54,594 Marketing and selling 76,126 - 76,126
General and administration 18,825 - 18,825 Amortization of
intangible assets 1,098 (1,098)(2) - Special charges 4,843
(4,843)(3) - Merger and acquisition related charges 50 (50)(4) -
-------- -------- -------- Total operating expenses 155,536 (5,991)
149,545 -------- -------- -------- Operating income 30,792 8,973
39,765 Other income, net 2,689 (658)(5) 2,031 Interest expense
(4,838) - (4,838) -------- -------- -------- Income before income
taxes 28,643 8,315 36,958 Income tax expense 12,829 (6,546)(6)
6,283 -------- -------- -------- Net income $ 15,814 $ 14,861 $
30,675 ======== ======== ======== Net income per share: Basic $
0.21 $ 0.40 ======== ======== Diluted $ 0.20 $ 0.38 ========
======== Weighted average number of shares outstanding: Basic
76,354 76,354 ======== ======== Diluted 78,426 12,099 (7) 90,525
======== ======== ======== (1) Amortization of purchased technology
acquired in 13 separate acquisition transactions, five of which
were completed in the twelve months ended December 31, 2004.
Purchased technology is amortized over two to five years. (2)
Amortization of other identified intangible assets including trade
names, employment agreements, customer relationships and deferred
compensation acquired in six separate acquisition transactions,
three of which were completed in the last twelve months. Other
identified intangible assets are amortized over two to five years.
(3) Special charges primarily consist of $3,658 in costs incurred
for employee rebalances, which included severance benefits, notice
pay and outplacement services, partially offset by a $52 net
reversal related to the decision to utilize space that was
previously abandoned. In addition, the company incurred $1,237 in
costs related to additional funding for a defined benefit pension
plan liability the company acquired as a result of an acquisition
in 1999. (4) Merger and acquisition related charges consist of an
in-process R&D charge related to the acquisition of VeSys. (5)
Investment earnout and holdback payments received related to a sale
of stock in 2003. (6) Non-GAAP income tax expense adjustment is
based upon the assumption of a normalized effective rate of 17% on
non-GAAP income before income taxes. (7) Dilutive shares related to
the company's convertible debt as required by EITF 04-8. In
calculating non-GAAP diluted net income per share, $3,682,
representing the after-tax interest and amortization on the
company's convertible debt, is added back to non-GAAP net income.
MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
earnings per share data-Unaudited) Twelve Months Ended December 31,
2005 GAAP Adjustments Non-GAAP ----------------------------------
Revenues: System and software $ 410,264 $ - $ 410,264 Service and
support 294,985 - 294,985 --------- --------- --------- Total
revenues 705,249 - 705,249 --------- --------- --------- Cost of
revenues: System and software 18,034 - 18,034 Service and support
81,039 - 81,039 Amortization of purchased technology 11,639
(11,639)(1) - --------- --------- --------- Total cost of revenues
110,712 (11,639) 99,073 --------- --------- --------- Gross margin
594,537 11,639 606,176 --------- --------- --------- Gross margin
percentage 84.3% 86.0% --------- --------- Operating expenses:
Research and development 212,676 (4,750)(2) 207,926 Marketing and
selling 274,946 - 274,946 General and administration 76,834 -
76,834 Amortization of intangible assets 4,233 (4,233)(3) - Special
charges 6,777 (6,777)(4) - Merger and acquisition related charges
750 (750)(5) - --------- --------- --------- Total operating
expenses 576,216 (16,510) 559,706 --------- --------- ---------
Operating income 18,321 28,149 46,470 Other income, net 16,798
(1,757)(6) 15,041 Interest expense (23,496) - (23,496) ---------
--------- --------- Income before income taxes 11,623 26,392 38,015
Income tax expense 7,278 (815)(7) 6,463 --------- ---------
--------- Net loss $ 4,345 $ 27,207 $ 31,552 ========= =========
========= Net income per share: Basic $ 0.06 $ 0.40 =========
========= Diluted $ 0.05 $ 0.39 ========= ========= Weighted
average number of shares outstanding: Basic 78,633 78,633 =========
========= Diluted 80,133 80,133 ========= ========= (1)
Amortization of purchased technology acquired in 17 separate
acquisition transactions, three of which were completed in the
twelve months ended December 31, 2005. Purchased technology is
amortized over two to five years. (2) A charge of $4,750 for a
purchase of technology that had not reached technological
feasibility. This technology will be the basis for a new offering
in the Calibre product family which is expected to be introduced in
2006. (3) Amortization of other identified intangible assets
including trade names, employment agreements, customer
relationships and deferred compensation acquired in 11 separate
acquisition transactions, four of which were completed in the last
twelve months. Other identified intangible assets are amortized
over two to five years. (4) Special charges consist of costs
incurred related to the discontinuation of a product line in the
fourth quarter of 2005. The total costs of this product line
discontinuation were $2,290 which include (i) $1,151 of severance
benefits, notice pay, and outplacement services related to employee
rebalances, (ii) $936 for the abandonment of excess leased facility
space, and (iii) $203 for other costs related to the discontinued
product line. In addition, special charges consist of (i) $4,005 of
costs incurred for employee rebalances in other areas of the
company, which included severance benefits, notice pay and
outplacement services, (ii) $642 for charges for the abandonment of
excess leased facilities space in North America, (iii) $390 in
other costs incurred to restructure the organization, and (iv) a
$550 reversal of previously recorded non-cancellable lease payments
related to a facility in North America due to an increase in the
expected sublease income. (5) Merger and acquisition related
charges consist of in-process R&D charges related to the
acquisitions of Volcano Communications Technologies AB and Aptix
Corporation. (6) Investment earnout payment of $800 received
related to a sale of stock in 2003 and a $957 gain on sale of a
building in the first quarter of 2005. (7) Non-GAAP income tax
expense adjustment is based upon the assumption of a normalized
effective rate of 17% on non-GAAP income before income taxes.
MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
earnings per share data-Unaudited) Twelve Months Ended December 31,
2004 GAAP Adjustments Non-GAAP ---------------------------------
Revenues: System and software $422,672 $ - $ 422,672 Service and
support 288,284 - 288,284 -------- --------- --------- Total
revenues 710,956 - 710,956 -------- --------- --------- Cost of
revenues: System and software 16,639 - 16,639 Service and support
80,294 - 80,294 Amortization of purchased technology 10,624
(10,624)(1) - -------- --------- --------- Total cost of revenues
107,557 (10,624) 96,933 -------- --------- --------- Gross margin
603,399 10,624 614,023 -------- --------- --------- Gross margin
percentage 84.9% 86.4% -------- --------- Operating expenses:
Research and development 202,289 - 202,289 Marketing and selling
267,181 - 267,181 General and administration 74,255 - 74,255
Amortization of intangible assets 3,586 (3,586)(2) - Special
charges 9,213 (9,213)(3) - Merger and acquisition related charges
7,700 (7,700)(4) - -------- --------- --------- Total operating
expenses 564,224 (20,499) 543,725 -------- --------- ---------
Operating income 39,175 31,123 70,298 Other income, net 8,388
(1,403)(5) 6,985 Interest expense (18,619) - (18,619) --------
--------- --------- Income before income taxes 28,944 29,720 58,664
Income tax expense 49,494 (39,521)(6) 9,973 -------- ---------
--------- Net income (loss) $(20,550) $ 69,241 $ 48,691 ========
========= ========= Net income (loss) per share: Basic $ (0.28) $
0.67 ======== ========= Diluted $ (0.28) $ 0.65 ======== =========
Weighted average number of shares outstanding: Basic 72,381 72,381
======== ========= Diluted 72,381 75,397 ======== ========= (1)
Amortization of purchased technology acquired in 13 separate
acquisition transactions, five of which were completed in the
twelve months ended December 31, 2004. Purchased technology is
amortized over two to five years. (2) Amortization of other
identified intangible assets including trade names, employment
agreements, customer relationships and deferred compensation
acquired in seven separate acquisition transactions, three of which
were completed in the last twelve months. Other identified
intangible assets are amortized over two to five years. (3) Special
charges consist of (i) $1,946 in adjustments primarily related to
previously recorded non-cancelable lease payments related to a
facility in North America as a result of a reduction in the
estimated expected sublease income, (ii) $5,655 in costs incurred
for employee rebalances, which included severance benefits, notice
pay and outplacement services, and (iii) $1,612 which primarily
represents costs related to additional funding for a defined
benefit pension plan liability the company acquired as a result of
an acquisition in 1999. (4) Merger and acquisition related charges
consist of an in-process R&D charge related to the acquisitions
of 0-In, Palmchip, Project Technology and VeSys. (5) Investment
earnout and holdback payments received related to a sale of stock
in 2003. (6) Non-GAAP income tax expense adjustment is based upon
the assumption of a normalized effective rate of 17% on non-GAAP
income before income taxes. MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE DILUTED NET EARNINGS
PER SHARE (Unaudited) The following table reconciles the specific
items excluded from GAAP in the calculation of non-GAAP earnings
per share for the periods shown below: Q1 2006 2006 --------
------- Diluted GAAP net earnings per share $ (0.06)$ 0.18
Amortization of purchased technology (1) 0.03 0.13 Amortization of
intangible assets (2) 0.01 0.05 Estimated impact of stock
compensation expense (3) 0.03 0.12 Shares used in calculation of
net earnings per share (4) 0.01 - Income tax adjustment (5) (0.02)
0.07 ------- ------- Diluted non-GAAP net earnings per share $ 0.00
$ 0.55 ======= ======= (1) Excludes amortization of purchased
technology acquired in 20 separate acquisition transactions.
Purchased technology is amortized over two to five years. The
guidance for Q1 2006 and 2006 do not assume any new acquisition
transactions. (2) Excludes amortization of other identified
intangible assets including trade names, employment agreements and
customer relationships acquired in 11 separate acquisition
transactions. Other identified intangible assets are amortized over
two to five years. The guidance for Q1 2006 and 2006 do not assume
any new acquisition transactions. (3) Excludes the expense related
to stock options and employee stock purchase plans as required with
the adoption of FAS 123R, effective Q1 2006. (4) Shares used in the
calculation of diluted GAAP net earnings per share are expected to
be the same as shares used in the calculation of diluted non-GAAP
earnings per share except when the Company reports a GAAP loss and
a non-GAAP income, or GAAP income and a non- GAAP loss. For Q1 2006
guidance, basic shares outstanding are used for diluted GAAP
earnings per share and diluted shares outstanding are used for
diluted non-GAAP earnings per share. (5) Non-GAAP income tax
expense adjustment is based upon the assumption of a normalized
effective rate of 17% on non-GAAP income (loss) before income
taxes. MENTOR GRAPHICS CORPORATION CONDENSED CONSOLIDATED BALANCE
SHEETS (In thousands - Unaudited) As of As of December 31, December
31, 2005 2004 (1)
----------------------------------------------------------------------
Assets Current assets: Cash, cash equivalents and short-term
investments $ 114,410 $ 94,287 Trade accounts receivable, net
101,593 116,858 Term receivables, short-term 133,273 125,832
Prepaid expenses and other 30,778 28,457 Deferred income taxes
13,127 8,351 ---------- --------------- Total current assets
393,181 373,785 Property, plant and equipment, net 81,374 91,224
Term receivables, long-term 131,676 139,146 Intangibles, net
381,125 374,144 Other assets 34,631 34,336 ----------
--------------- Total assets $1,021,987 $ 1,012,635 ==========
=============== Liabilities and Stockholders' Equity Current
liabilities: Short-term borrowings $ 11,858 $ 9,632 Accounts
payable 15,268 18,037 Income taxes payable 38,278 26,027 Accrued
payroll and related liabilities 73,405 81,709 Accrued liabilities
29,363 37,098 Deferred revenue 106,453 103,336 ----------
--------------- Total current liabilities 274,625 275,839 Long-term
notes payable 282,188 283,983 Other long-term liabilities 16,825
19,098 ---------- --------------- Total liabilities 573,638 578,920
---------- --------------- Stockholders' equity: Common stock
381,962 363,455 Deferred compensation - (508) Retained earnings
44,062 39,717 Accumulated other comprehensive income 22,325 31,051
---------- --------------- Total stockholders' equity 448,349
433,715 ---------- --------------- Total liabilities and
stockholders' equity $1,021,987 $ 1,012,635 ==========
===============
----------------------------------------------------------------------
(1) Certain reclassifications have been made for 2004 to conform
with the 2005 presentation. MENTOR GRAPHICS CORPORATION CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands - Unaudited)
Three Months Ended Twelve Months Ended December 31, December 31,
----------------------------------------- 2005 2004 (1) 2005 2004
(1) --------- ---------- ---------- -------- Operating Cash Flows:
Net income (loss) $ 15,415 $ 15,814 $ 4,345 $(20,550) Depreciation
and amortization 10,941 11,442 44,069 43,720 Other adjustments to
reconcile operating cash (9,915) 18,475 (12,349) 52,585 Changes in
working capital 1,197 (42,310) 8,191 (35,173) --------- ----------
---------- -------- Net cash provided by operating activities
17,638 3,421 44,256 40,582 Net cash used in investing activities
(7,866) (10,609) (55,279) (60,898) Net cash provided by (used in)
financing activities 5,082 (668) 18,918 19,347 Effect of exchange
rate changes on cash and cash equivalents 778 601 (1,158) 552
--------- ---------- ---------- -------- Net change in cash and
cash equivalents 15,632 (7,255) 6,737 (417) Cash and cash
equivalents at beginning of period 59,021 75,171 67,916 68,333
--------- ---------- ---------- -------- Cash and cash equivalents
at end of period, excluding short-term investments $ 74,653 $
67,916 $ 74,653 $ 67,916 ========= ========== ========== ========
(1) Certain reclassifications have been made for 2004 to conform
with the 2005 presentation.
----------------------------------------------------------------------
MENTOR GRAPHICS CORPORATION SUPPLEMENTAL FINANCIAL AND OTHER
INFORMATION (In thousands, except for days sales outstanding
-Unaudited) Three Months Twelve Months Ended Ended December 31,
December 31, --------------------------------------------- 2005
2004 2005 2004 ---------- ---------- ---------- -----------
Geographic Revenue: Americas $ 100,653 $ 90,336 $ 304,554 $ 306,911
45% 42% 43% 43% Europe $ 74,431 $ 64,660 $ 215,047 $ 199,417 34%
30% 31% 28% Japan $ 20,227 $ 32,617 $ 99,301 $ 131,107 9% 15% 14%
19% Pac Rim $ 25,959 $ 27,336 $ 86,347 $ 73,521 Other Data: 12% 13%
12% 10% Capital expenditures $ 8,584 $ 7,590 $ 25,843 $ 24,423 Days
sales outstanding 96 102 - - *T
Mentor Graphics Corp. (NASDAQ:MENT)
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Mentor Graphics Corp. (NASDAQ:MENT)
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