MENT Mentor Graphics Corp.

Mentor Graphics Corporation (Nasdaq:MENT) today announced fiscal second quarter revenue of $182.4 million, a GAAP loss of $.19 per share, and a non-GAAP loss of $.02 per share. �Mentor Graphics continues to execute against its plan in an environment which remains challenging,� said Walden C. Rhines, chairman and CEO of Mentor Graphics. �Our young and innovative product portfolio has enabled Mentor Graphics to continue to perform as customers adopt new process nodes. Customer adoption of leading-edge physical place and route technology at 45nm is accelerating, and is rapidly expanding Mentor�s base of Olympus-SoC users.� During the quarter, the company unveiled its sub-45nm integrated circuit (IC) implementation strategy, blending the strengths of its Calibre� design for manufacturing (DFM), Olympus-SoC� place and route, design for test (DFT) and yield learning solutions. The company also built on its leadership in automotive electrical system design with a new version of its CHS� software. The company�s inFact� intelligent testbench software was updated to allow it to automatically scale across a server farm of up to 1000 CPUs. The company announced that it had enhanced its award-winning support with personalized support web portals, allowing customers to quickly and easily access the support content they need. The company made two acquisitions in the quarter. It acquired substantially all of the assets of Ponte Solutions to extend the company�s Calibre DFM product line. The company also acquired Flomerics, a market leading provider of thermal simulation and analysis tools. �We predicted a tough environment this year, and we continue to see it. Despite this, the company performed better than our guidance for the quarter,� said Gregory K. Hinckley, president of Mentor Graphics. �We saw some bright spots in our newer products with Calibre DFM and automotive both performing quite well. Additionally, consulting was up 25% over last year. I view increased bookings in consulting as a leading indicator of an improving business climate. Lastly, our cost-saving initiatives are on track to meet or exceed our goals. Mentor is committed to delivering the most effective cost control program within the EDA industry.� GUIDANCE For fiscal 2009, the company continues to expect revenue growth of about 4% to $915 million, with non-GAAP earnings per share in the range of $1.05 - $1.10 and GAAP earnings per share in the range of $0.22 - $0.27. For fiscal third quarter, the company expects revenue of about $220 million with Non-GAAP earnings per share of approximately $.15 - $.20 and GAAP earnings of $0.03 - $0.08. 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 gross margin, operating margin and net income (loss), which we refer to as non-GAAP gross margin, operating margin, and net income (loss), respectively. These non-GAAP measures are derived from the revenues of our product, maintenance, and services business operations and the costs directly related to the generation of those revenues, 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. These non-GAAP measures exclude amortization of purchased and other identified intangible assets, in-process research and development, special charges, equity plan-related compensation expenses and charges, and gains which management does not consider reflective of our core operating business. Purchased and other identified intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships, and employment agreements. In-process research and development charges represent products in development that had not reached technological feasibility at the time of acquisition. Special charges consist of post-acquisition rebalance costs including severance and benefits, excess facilities, and asset-related charges, and also include strategic reallocations or reductions of personnel resources. Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options, as required under Statement of Financial Accounting Standards No. 123 (revised 2004), �Share-Based Payment� (SFAS 123R). 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 we would accrue using a normalized effective tax rate applied to the non-GAAP results. During the six months ended July 31, 2007, we excluded $164 thousand of interest expense attributable to net retirement premiums and write-offs of debt issuance costs. The amounts were expensed in connection with the refinancing or repurchase of certain convertible debt. The amounts were excluded as management does not consider these transactions a part of its core operating performance. There were no debt repurchases during the six months ended July 31, 2008. During the six months ended July 31, 2008, we excluded $643 thousand of equity in losses of unconsolidated entities. The amounts represent our equity in the losses of a common stock investment accounted for under the equity method. The amounts were excluded as management does not consider these transactions a part of its core operating performance. We had no equity in unconsolidated entities during the six months ended July 31, 2007. In certain instances our GAAP results of operations may not be profitable when our corresponding non-GAAP results are profitable or vice versa. The number of shares on which our non-GAAP EPS is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options in a loss situation. Non-GAAP gross margin, operating margin and net income (loss) are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We present non-GAAP gross margin, operating margin and net income (loss) because we consider them to be important supplemental measures of our operating performance and profitability trends, and because we believe they give investors useful information on period-to-period performance as evaluated by management. Management excludes from our non-GAAP measures certain recurring items to facilitate its review of the comparability of our core operating performance on a period-to-period basis because such items are not related to our ongoing core operating performance as viewed by management. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Management uses this view of our operating performance for purposes of comparison with our 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 purchased and other identified intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of our 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 our net income (loss) is in the first twelve months following an acquisition. Special charges are primarily severance related and are due to our 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 our 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. In-process research and development charges are largely disregarded as acquisition decisions are made, since they 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. Management supplementally considers performance without the impact of equity plan-related compensation charges and believes this information is useful to investors to compare our performance to the performance of other companies in our industry who present non-GAAP results adjusted to exclude stock compensation expense. We view equity plan-related compensation as a key element of our employee retention and long-term incentives, not as an expense that should be an element of evaluating core operations in any given period. We therefore exclude these charges for purposes of evaluating our core performance. 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 our 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 we operate. This non-GAAP weighted average tax rate is subject to change over time for various reasons, including changes in the geographic business mix and changes in statutory tax rates. Our GAAP tax rate for the six months ended July 31, 2008, is 36% after consideration of discrete items. Without discrete items of $1,425 thousand, our GAAP tax rate is 38%. Inclusive of discrete items, our full fiscal year 2009 GAAP tax rate is projected to be 46%. The GAAP tax rate�considers certain mandatory and�other non-scalable tax costs which may adversely or beneficially�affect�our tax rate depending upon our level of profitability. 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 we expect 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 purchased intangibles, though not directly affecting our current cash position, represents 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. We regularly engage in acquisition and assimilation activities as part of our ongoing business and therefore we will continue to experience special charges and in-process research and development charges on a regular basis. These costs also directly impact our available funds. Our 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 SFAS 123R. Our income tax expense (benefit) will be ultimately based on our GAAP taxable income and actual tax rates in effect, which often 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 $850 million and employs approximately 4,500 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/. Mentor Graphics and Calibre are registered trademarks and Olympus, CHS and inFact are trademarks of Mentor Graphics Corporation. All other company or product names are the registered trademarks or trademarks of their respective owners. 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) reductions in the spending on the company�s products and services�by its customers due to cyclical downturns; (ii)�weakness�or recession in the US or other economies;�(iii) the company�s ability to successfully offer products and services that compete in the highly competitive EDA industry; (iv)�product bundling or discounting of products and services by competitors, which could force the company to lower its prices or offer other more favorable terms to customers; (v) effects of the increasing volatility of foreign currency fluctuations on the company�s business and operating results; (vi) changes in accounting or reporting rules or interpretations; (vii)�the impact of tax audits by the IRS or other taxing authorities, or changes in the tax laws, regulations or enforcement practices where the company does business; (viii)�effects of unanticipated shifts in product mix on gross margin; and (ix)�effects of customer seasonal purchasing patterns and the timing of significant orders may negatively or positively impact the company�s quarterly results of operations, (x) an industry downturn that could lead to smaller customer renewals, all as may be discussed in more detail under the heading �Risk Factors� 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. MENTOR GRAPHICS CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data) � � � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 Revenues: System and software $ 95,830 $ 127,884 $ 192,673 $ 245,769 Service and support � 86,574 � � 82,049 � � 168,938 � � 158,654 � Total revenues � 182,404 � � 209,933 � � 361,611 � � 404,423 � Cost of revenues: (1) System and software 4,356 7,354 9,638 11,842 Service and support 24,030 23,067 49,372 45,250 Amortization of purchased technology � 1,992 � � 2,332 � � 5,230 � � 5,374 � Total cost of revenues � 30,378 � � 32,753 � � 64,240 � � 62,466 � Gross margin � 152,026 � � 177,180 � � 297,371 � � 341,957 � Operating expenses: Research and development (2)(a) 64,251 65,063 128,633 123,922 Marketing and selling (3) 72,799 75,139 149,447 147,699 General and administration (4) 24,099 23,957 47,160 46,897 Other general expense (income), net (273 ) 14 (437 ) (216 ) Amortization of intangible assets (5) 2,537 2,279 4,970 3,657 Special charges (6) 3,235 (8 ) 12,885 4,045 In-process research and development (7) � 15,285 � � 4,100 � � 15,285 � � 4,100 � Total operating expenses � 181,933 � � 170,544 � � 357,943 � � 330,104 � Operating income (loss) (29,907 ) 6,636 (60,572 ) 11,853 Other income, net (8) 628 1,651 3,003 2,935 Interest expense (9) � (3,798 ) � (4,941 ) � (7,960 ) � (10,059 ) Income (loss) before income tax (33,077 ) 3,346 (65,529 ) 4,729 Income tax expense (benefit) (10)(a) (15,796 ) 1,165 (23,345 ) 2,056 Minority interest in net loss of subsidiary � (89 ) � - � � (89 ) � - � Net income (loss) $ (17,192 ) $ 2,181 � $ (42,095 ) $ 2,673 � Net income (loss) per share: Basic $ (0.19 ) $ 0.02 � $ (0.46 ) $ 0.03 � Diluted $ (0.19 ) $ 0.02 � $ (0.46 ) $ 0.03 � Weighted average number of shares outstanding: Basic � 91,352 � � 87,526 � � 91,054 � � 86,361 � Diluted � 91,352 � � 89,351 � � 91,054 � � 88,704 � � Refer to following page for a description of footnotes. � (a) For the July 31, 2007 presentation, the French research and development credit was reclassified from Income tax expense (benefit) to Research and development. The reclassifications were made for consistency in presentation with the current year. Listed below are the items included in net income that management excludes in computing the non-GAAP financial measures referred to in the text of this press release. Items are further described under "Discussion of Non-GAAP Financial Measures." � � � � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 (1) Cost of revenues: Equity plan-related compensation $ 375 $ 200 $ 751 $ 361 Prepaid royalty costs - - 103 - Amortization of purchased intangible assets � 1,992 � � 2,332 � � 5,230 � � 5,374 � $ 2,367 � $ 2,532 � $ 6,084 � $ 5,735 � � (2) Research and development: Equity plan-related compensation $ 2,919 � $ 1,690 � $ 5,851 � $ 2,939 � � (3) Marketing and selling: Equity plan-related compensation $ 2,116 � $ 1,154 � $ 4,221 � $ 2,121 � � (4) General and administration: Equity plan-related compensation $ 2,174 � $ 1,407 � $ 3,312 � $ 2,095 � � (5) Amortization of intangible assets: Amortization of purchased intangible assets $ 2,537 � $ 2,279 � $ 4,970 � $ 3,657 � � (6) Special charges: Rebalance and restructuring costs $ 3,235 � $ (8 ) $ 12,885 � $ 4,045 � � (7) In-process research and development In-process research and development $ 15,285 � $ 4,100 � $ 15,285 � $ 4,100 � � (8) Other income, net: Equity in losses of unconsolidated entities $ 475 � $ - � $ 643 � $ - � � (9) Interest expense: Debt retirement costs $ - � $ - � $ - � $ 164 � � (10) Income tax benefit: Income tax effects $ (15,461 ) $ (1,640 ) $ (21,258 ) $ (2,973 ) � � � � � � � � � MENTOR GRAPHICS CORPORATION UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS (In thousands, except earnings per share data) � � � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP net income (loss) $ (17,192 ) $ 2,181 $ (42,095 ) $ 2,673 Non-GAAP adjustments: Equity plan-related compensation: (1) � Cost of revenues 375 200 751 361 � Research and development (R&D) 2,919 1,690 5,851 2,939 � Marketing and selling 2,116 1,154 4,221 2,121 � General and administration, and other 2,174 1,407 3,312 2,095 System and software cost of revenues (2) - - 103 - Acquisition - related items: � Amortization of purchased intangible assets � Cost of revenues (3) 1,992 2,332 5,230 5,374 � Amortization of intangible assets (4) 2,537 2,279 4,970 3,657 � In-process R&D (5) 15,285 4,100 15,285 4,100 Special charges (6) 3,235 (8 ) 12,885 4,045 Other income, net (7) 475 - 643 - Interest expense (8) - - - 164 Income tax effects (9) � (15,461 ) � (1,640 ) � (21,258 ) � (2,973 ) Total of non-GAAP adjustments � 15,647 � � 11,514 � � 31,993 � � 21,883 � Non-GAAP net income (loss) $ (1,545 ) $ 13,695 � $ (10,102 ) $ 24,556 � � GAAP weighted average shares (diluted) 91,352 89,351 91,054 88,704 Non-GAAP adjustment � - � � - � � - � � - � Non-GAAP weighted average shares (diluted) � 91,352 � � 89,351 � � 91,054 � � 88,704 � � GAAP net income (loss) per share (diluted) $ (0.19 ) $ 0.02 $ (0.46 ) $ 0.03 Non-GAAP adjustments detailed above � 0.17 � � 0.13 � � 0.35 � � 0.25 � Non-GAAP net income (loss) per share (diluted) $ (0.02 ) $ 0.15 � $ (0.11 ) $ 0.28 � � � � � � � � � � � � (1) Equity plan-related compensation expense recognized in accordance with SFAS 123R. (2) Amount represents the write-off of prepaid royalty amounts associated with the closure of our Intellectual Property division. (3) Amount represents amortization of capitalized purchased intangible assets resulting from acquisitions. Purchased intangible assets are amortized over two to five years. (4) Purchased intangible assets are amortized to other operating expense over two to five years. Purchased intangible assets include tradenames, employment agreements, customer relationships and deferred compensation which are the result of acquisition transactions. (5) Three and six months ended July 31, 2008: A write off of $1,300 for in-process research and development related to the Ponte acquisition and $13,985 related to the acquisition of technology which had not yet reached technological feasibility and provided no alternative future uses. The technology is expected to be the basis for a new offering in the Calibre product family once development is completed. Three and six months ended July 31, 2007: A write off of $4,100 for in-process research and development related to the Sierra acquisition. (6) Three months ended July 31, 2008: Special charges consist of (i) $730 of costs incurred for employee rebalances consisting of severance benefits, notice pay and outplacement services, (ii) $1,513 related to the abandonment of excess leased facility space, (iii) $1,073 in fees incurred in response to the unsolicited bid by Cadence Design Systems, and (iv) ($81) in other costs and adjustments, net. Three months ended July 31, 2007: Special charges consist of (i) $714 of costs incurred for employee rebalances consisting of severance benefits, notice pay and outplacement services, (ii) $(721) related to reoccupation of a previously abandoned facility, and (iii) ($1) in other costs and adjustments, net. Six months ended July 31, 2008: Special charges consist of (i) $8,844 of costs incurred for employee rebalances consisting of severance benefits, notice pay and outplacement services, (ii) $2,956 related to the abandonment of excess leased facility space, (iii) $1,073 in fees incurred in response to the unsolicited bid by Cadence Design Systems, (iv) $93 in fixed asset write-offs related to the closure of our Intellectual Property division, and (v) ($81) in other costs and adjustments, net. Six months ended July 31, 2007: Special charges consist of (i) $4,683 of costs incurred for employee rebalances consisting of severance benefits, notice pay and outplacement services, (ii) $100 for a wind-up services agreement related to the liquidation of a subsidiary, (iii) $(721) related to reoccupation of a previously abandoned facility, and (iv) ($17) resulting from the true-up of previously accrued items. (7) Amount represents our equity in the loss of an investment accounted for under the equity method. (8) Premium and unamortized debt costs related to the redemption of convertible debt. (9) Non-GAAP income tax expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our GAAP pre-tax income and the application of the 17% tax rate to our non-GAAP adjustments. MENTOR GRAPHICS CORPORATION UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (In thousands, except percentages) � � � � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP gross margin $ 152,026 $ 177,180 $ 297,371 $ 341,957 Reconciling items to non-GAAP gross margin � Equity plan-related compensation 375 200 751 361 � Prepaid royalty costs - - 103 - � Amortization of purchased intangible assets � 1,992 � � 2,332 � � 5,230 � � 5,374 � Non-GAAP gross margin $ 154,393 � $ 179,712 � $ 303,455 � $ 347,692 � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP gross margin as a percent of total revenue 83 % 84 % 82 % 85 % � Non-GAAP adjustments detailed above � 2 % � 2 % � 2 % � 1 % Non-GAAP gross margin as a percent of total revenue � 85 % � 86 % � 84 % � 86 % � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP operating expenses $ 181,933 $ 170,544 $ 357,943 $ 330,104 Reconciling items to non-GAAP operating expenses � Equity plan-related compensation (7,209 ) (4,251 ) (13,384 ) (7,155 ) � Amortization of purchased intangible assets (2,537 ) (2,279 ) (4,970 ) (3,657 ) � Rebalance and restructuring costs (3,235 ) 8 (12,885 ) (4,045 ) � In-process research and development � (15,285 ) � (4,100 ) � (15,285 ) � (4,100 ) Non-GAAP operating expenses $ 153,667 � $ 159,922 � $ 311,419 � $ 311,147 � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP operating income (loss) $ (29,907 ) $ 6,636 $ (60,572 ) $ 11,853 Reconciling items to non-GAAP operating income � Equity plan-related compensation 7,584 4,451 14,135 7,516 � Prepaid royalty costs - - 103 - � Amortization of purchased intangible assets: � Cost of revenues 1,992 2,332 5,230 5,374 � Amortization of intangible assets 2,537 2,279 4,970 3,657 � Rebalance and restructuring costs 3,235 (8 ) 12,885 4,045 � In-process research and development � 15,285 � � 4,100 � � 15,285 � � 4,100 � Non-GAAP operating income (loss) $ 726 � $ 19,790 � $ (7,964 ) $ 36,545 � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP operating margin as a percent of total revenue -16 % 3 % -17 % 3 % � Non-GAAP adjustments detailed above � 16 % � 6 % � 15 % � 6 % Non-GAAP operating margin as a percent of total revenue � 0 % � 9 % � -2 % � 9 % � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 GAAP other income, net and interest expense $ (3,170 ) $ (3,290 ) $ (4,957 ) $ (7,124 ) Reconciling items to non-GAAP other income, net and interest expense � Equity in losses of unconsolidated entities 475 - 643 - � Debt retirement costs � - � � - � � - � � 164 � Non-GAAP other income, net and interest expense $ (2,695 ) $ (3,290 ) $ (4,314 ) $ (6,960 ) MENTOR GRAPHICS CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) � � � � � July 31, January 31, 2008 2008 Assets Current assets: � Cash, cash equivalents, and short-term investments $ 102,036 $ 126,215 � Restricted cash 5,910 - � Trade accounts receivable, net 95,281 175,564 � Term receivables, short-term 144,058 157,077 � Income taxes receivable 27,614 - � Prepaid expenses and other 45,192 38,051 � Deferred income taxes � 12,622 � 9,574 � � Total current assets 432,713 506,481 Property, plant, and equipment, net 107,718 100,421 Term receivables, long-term 119,092 134,059 Goodwill and intangible assets, net 448,441 451,881 Unallocated purchase price of Flomerics Group, PLC acquisition 40,816 - Other assets � 45,275 � 45,271 � � Total assets $ 1,194,055 $ 1,238,113 � Liabilities and Stockholders' Equity Current liabilities: � Short-term borrowings $ 6,169 $ 14,178 � Accounts payable 17,421 23,634 � Income taxes payable - 6,675 � Accrued payroll and related liabilities 50,984 78,948 � Accrued liabilities 54,908 40,697 � Deferred revenue � 141,442 � 154,821 � � Total current liabilities 270,924 318,953 Long-term notes payable 201,102 201,102 Deferred revenue, long-term 20,011 18,977 Other long-term liabilities � 72,198 � 59,914 � Total liabilities � 564,235 � 598,946 � Minority interest � 691 � - � Stockholders' equity: � Common stock 558,922 531,153 � Retained earnings 29,055 71,150 � Accumulated other comprehensive income � 41,152 � 36,864 � Total stockholders' equity � 629,129 � 639,167 � � Total liabilities and stockholders' equity $ 1,194,055 $ 1,238,113 MENTOR GRAPHICS CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS AND SUPPLEMENTAL INFORMATION (In thousands, except days sales outstanding) � � � � � � Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007 Operating activities Net income (loss) $ (17,192 ) $ 2,181 $ (42,095 ) $ 2,673 Depreciation and amortization (1) 12,986 11,927 26,977 23,451 Other adjustments to reconcile: � Operating cash 21,658 6,212 28,220 10,406 � Changes in working capital � (19,274 ) � (3,772 ) � 30,035 � � (31,047 ) � Net cash provided by (used in) operating activities (1,822 ) 16,548 43,137 5,483 � Investing activities Net cash used in investing activities (41,867 ) (56,440 ) (77,543 ) (48,403 ) � Financing activities Net cash provided by financing activities 10,727 7,706 6,915 13,049 � Effect of exchange rate changes on cash and cash equivalents � (204 ) � (123 ) � 238 � � 803 � � Net change in cash and cash equivalents (33,166 ) (32,309 ) (27,253 ) (29,068 ) Cash and cash equivalents at beginning of period � 123,839 � � 98,473 � � 117,926 � � 95,232 � � Cash and cash equivalents at end of period $ 90,673 � $ 66,164 � $ 90,673 � $ 66,164 � � (1) Depreciation and amortization includes a write-off of note issuance costs in the amount of $62 for the six months ending July 31, 2007. � � � Other data: � Capital expenditures $ 10,799 � $ 11,092 � $ 19,773 � $ 20,154 � � Days sales outstanding � 118 � � 116 � � - � � - � MENTOR GRAPHICS CORPORATION UNAUDITED SUPPLEMENTAL BOOKINGS AND REVENUE INFORMATION (Rounded to nearest 5%) � � � � � � � � � � � � � � FY 2009 Fiscal year ended January 31, 2008 Fiscal year ended December 31, 2006 Product Group Bookings (a) Q1 � Q2 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Integrated Systems Design 15% 20% 20% 15% 20% 20% 15% 20% 10% 15% 20% 20% 20% IC Design to Silicon 40% 30% 35% 40% 35% 30% 40% 35% 50% 40% 35% 25% 35% Scalable Verification 20% 20% 20% 20% 25% 20% 20% 25% 20% 25% 25% 30% 25% New & Emerging Products 10% 20% 15% 15% 15% 20% 20% 15% 10% 15% 15% 20% 15% Services & Other (b) 15% � 10% � 10% 10% � 5% � 10% � 5% � 5% 10% � 5% � 5% � 5% � 5% Total 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% � � FY 2009 Fiscal year ended January 31, 2008 Fiscal year ended December 31, 2006 Product Group Revenue (a) Q1 � Q2 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Integrated Systems Design 20% 20% 20% 20% 20% 25% 20% 20% 25% 20% 25% 25% 25% IC Design to Silicon 40% 30% 35% 40% 40% 25% 30% 35% 35% 30% 30% 25% 30% Scalable Verification 20% 25% 25% 20% 20% 25% 30% 25% 20% 25% 30% 30% 25% New & Emerging Products 10% 15% 15% 10% 15% 15% 15% 15% 10% 15% 10% 15% 15% Services & Other (b) 10% � 10% � 5% 10% � 5% � 10% � 5% � 5% 10% � 10% � 5% � 5% � 5% Total 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% � � FY 2009 Fiscal year ended January 31, 2008 Fiscal year ended December 31, 2006 Bookings by Geography Q1 � Q2 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR North America 40% 30% 35% 50% 40% 45% 30% 40% 30% 50% 40% 65% 50% Europe 35% 35% 35% 25% 30% 15% 30% 25% 30% 20% 20% 20% 25% Japan 15% 20% 15% 10% 10% 20% 20% 15% 25% 10% 20% 5% 10% Pac Rim 10% � 15% � 15% 15% � 20% � 20% � 20% � 20% 15% � 20% � 20% � 10% � 15% Total 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% � � FY 2009 Fiscal year ended January 31, 2008 Fiscal year ended December 31, 2006 Revenue by Geography Q1 � Q2 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR North America 40% 35% 40% 50% 55% 40% 40% 45% 35% 45% 45% 55% 45% Europe 30% 30% 30% 25% 20% 25% 30% 25% 30% 20% 25% 25% 25% Japan 20% 20% 20% 15% 10% 20% 15% 15% 20% 15% 20% 10% 15% Pac Rim 10% � 15% � 10% 10% � 15% � 15% � 15% � 15% 15% � 20% � 10% � 10% � 15% Total 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% � � FY 2009 Fiscal year ended January 31, 2008 Fiscal year ended December 31, 2006 Bookings by Business Model (c) Q1 � Q2 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Perpetual 20% 20% 20% 30% 25% 30% 10% 20% 30% 30% 25% 20% 25% Ratable 25% 20% 20% 20% 20% 10% 10% 15% 25% 20% 10% 10% 15% Up Front 55% � 60% � 60% 50% � 55% � 60% � 80% � 65% 45% � 50% � 65% � 70% � 60% Total 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% � � FY 2009 Fiscal year ended January 31, 2008 Fiscal year ended December 31, 2006 Revenue by Business Model (c) Q1 � Q2 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Perpetual 20% 20% 20% 25% 20% 20% 15% 20% 30% 30% 20% 25% 25% Ratable 20% 20% 20% 15% 15% 20% 10% 15% 15% 15% 15% 10% 15% Up Front 60% � 60% � 60% 60% � 65% � 60% � 75% � 65% 55% � 55% � 65% � 65% � 60% Total 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% 100% � 100% � 100% � 100% � 100% � (a) Product Group Bookings excludes support bookings for all sub-flow categories. (b) Product Group Revenue includes support revenue for each sub-flow category as appropriate. (c) Bookings and Revenue by Business Model are System and Software only. MENTOR GRAPHICS CORPORATION UNAUDITED RECLASSIFICATION OF FRENCH RESEARCH & DEVELOPMENT CREDIT (In thousands) � � � � � � Quarter Ended April 30, Fiscal year ended January 31, 2009 2008 � Research and development expense prior to reclassification $ 65,497 French research credit � (1,115 ) Research and development expense after reclassification $ 64,382 � � Income tax expense prior to reclassification $ (6,079 ) French research credit � (1,470 ) Income tax expense after reclassification $ (7,549 ) � Quarter Ended Year-to-Date April 30, July 31, July 31, Fiscal year ended January 31, 2008 2007 2007 2007 � Research and development expense prior to reclassification $ 59,190 $ 65,468 $ 124,658 French research credit � (331 ) � (405 ) � (736 ) Research and development expense after reclassification $ 58,859 � $ 65,063 � $ 123,922 � � Income tax expense prior to reclassification $ 762 $ 1,034 $ 1,796 French research credit � 129 � � 131 � � 260 � Income tax expense after reclassification $ 891 � $ 1,165 � $ 2,056 � MENTOR GRAPHICS CORPORATION UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP EARNINGS PER SHARE GUIDANCE � � � The following table reconciles management's estimates of the specific items excluded from GAAP in the calculation of expected non-GAAP earnings per share for the periods shown below: � � � Q3 FY09 FY09 Diluted GAAP net earnings per share $0.03 to 0.08 $0.22 to 0.27 Non-GAAP Adjustments: Amortization of purchased intangible assets (1) 0.02 0.10 Amortization of other identified intangible assets (2) 0.03 0.10 Equity plan-related compensation (3) 0.08 0.31 Equity in loss of unconsolidated entities (4) 0.00 0.01 Special Charges (5) - 0.30 Income tax effects (6) (0.01 ) 0.01 Non-GAAP net income $0.15 to 0.20 $1.05 to 1.10 � � � � � � � � (1) Excludes amortization of purchased intangible assets resulting from acquisition transactions. Purchased intangible assets are amortized over two to five years. The guidance for fiscal year 2009 (FY09) assumes no additional acquisitions and does not include the impact of the Flomerics acquisition which is unallocated as of July 31, 2008. (2) Excludes amortization of other identified intangible assets including trade names, employment agreements and customer relationships resulting from acquisition transactions. Other identified intangible assets are amortized over two to five years. The guidance for FY09 assumes no additional acquisitions and does not include the impact of the Flomerics acquisition which is unallocated as of July 31, 2008. (3) Excludes equity plan-related compensation expense recognized in accordance with SFAS 123R, Share-Based Payment. (4) Projected loss on equity interest in technology investment. (5) Excludes special charges incurred during the first six months of FY09 consisting primarily of costs incurred for in-process research and development, facility closures, and employee rebalances, which includes severance benefits, notice pay, and outplacement services. Fees associated with the unsolicited bid by Cadence Design Systems are included in special charges. The impact of in-process research and development charges associated with the Flomerics acquisition was unallocated at July 31, 2008 and its impact on Q3 FY09 special charges is not forecasted at this time. (6) Non-GAAP income tax expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our GAAP pre-tax income and the application of the 17% tax rate to our non-GAAP adjustments.