Mentor Graphics Corporation (Nasdaq: MENT) today announced revenues
for fiscal third quarter ending October 31st, 2008 of $184.9
million, a GAAP loss of $.85 per share, and a non-GAAP loss of $.04
per share. The GAAP loss is primarily driven by a $.55 per share
tax provision that is abnormally high as it includes recapture of
tax benefits previously claimed in prior quarters as well as the
continuing effect of tax expense in non-US jurisdictions. �The
current economic outlook has delayed the typical contract renewal
pattern we had been seeing. Customers are now more typically
waiting until the quarter of contract expiration to renew. One of
the consequences of this pattern is that we see greater strength
going into fiscal 2010,� said Walden C. Rhines, chairman and CEO of
Mentor Graphics. �Even in this tougher environment, renewals in our
top ten contracts in the quarter increased 35% over their previous
contract value primarily due to adoption of new capabilities, like
design for manufacturing, that were just emerging three years ago
when the contracts were created.� During the quarter, the company
released a parallelized version of its Olympus-SOC� place and route
solution, significantly improving completion times for design
closure, analysis and optimization. The company also introduced
Calibre� equation-based design rule checking (DRC), allowing
customers to embed complex design-for-manufacturing checks directly
into their DRC runs. �Cost control measures begun earlier in the
year, as well as the weakening of the Euro and the strengthening of
the Yen, have benefited the company,� said Gregory K. Hinckley,
president of Mentor Graphics. �In addition to the $26 million in
cost reductions that we will deliver over the course of fiscal
2009, we see an additional $30 million in expense savings that we
can deliver in fiscal 2010. We continue to look carefully at all of
our business investments in light of the current environment.�
GUIDANCE For the fiscal fourth quarter ending January 31st, 2009,
the company now expects revenues of about $270 million, non-GAAP
earnings per share of approximately $.55, and GAAP earnings per
share of about $.65. GAAP earnings in the fiscal fourth quarter
will be relatively stronger as a portion of the tax provision
recorded in the fiscal third quarter is recaptured. For fiscal 2009
the company expects full year revenues of approximately $815
million, non-GAAP earnings per share of about $0.40 and a GAAP loss
per share of approximately $.65. For fiscal first quarter 2010
ending April 30, 2009, the company initially expects revenues of
$200 to $210 million, non-GAAP earnings per share between $.05 and
$.10, and a GAAP loss per share between $.01 and $.06. 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 primarily
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 nine months ended
October 31, 2007, we excluded $452 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 nine months ended October 31, 2008. During
the nine months ended October 31, 2008, we excluded $1,088 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 nine months ended October 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 nine
months ended October 31, 2008 is (29%), which considers tax expense
on our international operations, not withstanding a projected GAAP
loss for the year. Our full fiscal year 2009 GAAP tax rate is
projected to be (31%). 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 4,450 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-SOC is a trademark 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, EU, Japan 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 Nine Months Ended October 31, 2008 October 31, 2007
October 31, 2008 October 31, 2007 Revenues: System and software $
97,312 $ 108,393 $ 289,985 $ 354,162 Service and support � 87,540 �
� 82,096 � � 256,478 � � 240,750 � Total revenues � 184,852 � �
190,489 � � 546,463 � � 594,912 � Cost of revenues: (1) System and
software 3,566 4,706 13,204 16,548 Service and support 24,350
24,453 73,722 69,703 Amortization of purchased technology � 3,810 �
� 2,139 � � 9,040 � � 7,513 � Total cost of revenues � 31,726 � �
31,298 � � 95,966 � � 93,764 � Gross margin � 153,126 � � 159,191 �
� 450,497 � � 501,148 � Operating expenses: Research and
development (2)(a) 65,146 63,706 193,779 187,628 Marketing and
selling (3) 76,688 74,580 226,135 222,279 General and
administration (4) 24,333 24,183 71,493 71,080 Other general
expense (income), net 168 178 (269 ) (38 ) Amortization of
intangible assets (5) 3,129 2,704 8,099 6,361 Special charges (6)
2,214 1,115 15,099 5,160 In-process research and development (7) �
6,790 � � - � � 22,075 � � 4,100 � Total operating expenses �
178,468 � � 166,466 � � 536,411 � � 496,570 � Operating income
(loss) (25,342 ) (7,275 ) (85,914 ) 4,578 Other income, net (8)
1,694 1,026 4,697 3,961 Interest expense (9) � (4,270 ) � (5,053 )
� (12,230 ) � (15,112 ) Loss before income tax (27,918 ) (11,302 )
(93,447 ) (6,573 ) Income tax expense (benefit) (10)(a) 50,369
(2,506 ) 27,024 (450 ) Minority interest in net loss of subsidiary
� (43 ) � - � � (132 ) � - � Net loss $ (78,244 ) $ (8,796 ) $
(120,339 ) $ (6,123 ) Net loss per share: Basic $ (0.85 ) $ (0.10 )
$ (1.32 ) $ (0.07 ) Diluted $ (0.85 ) $ (0.10 ) $ (1.32 ) $ (0.07 )
Weighted average number of shares outstanding: Basic � 92,354 � �
89,609 � � 91,484 � � 87,456 � Diluted � 92,354 � � 89,609 � �
91,484 � � 87,456 � � Refer to following page for a description of
footnotes. � (a) For the October 31, 2007 presentation, the
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. MENTOR GRAPHICS CORPORATION FOOTNOTES TO
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) � �
� � � � � 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 Nine Months Ended October 31, 2008 October 31,
2007 October 31, 2008 October 31, 2007 (1) Cost of revenues: Equity
plan-related compensation $ 351 $ 281 $ 1,102 $ 642 Prepaid royalty
costs - - 103 - Amortization of purchased intangible assets � 3,810
� 2,139 � 9,040 � 7,513 $ 4,161 $ 2,420 $ 10,245 $ 8,155 � (2)
Research and development: Equity plan-related compensation $ 2,979
$ 2,240 $ 8,830 $ 5,179 � (3) Marketing and selling: Equity
plan-related compensation $ 2,150 $ 1,557 $ 6,371 $ 3,678 � (4)
General and administration: Equity plan-related compensation $
1,518 $ 892 $ 4,830 $ 2,987 � (5) Amortization of intangible
assets: Amortization of other identified intangible assets $ 3,129
$ 2,704 $ 8,099 $ 6,361 � (6) Special charges: Rebalance,
restructuring, and other costs $ 2,214 $ 1,115 $ 15,099 $ 5,160 �
(7) In-process research and development In-process research and
development $ 6,790 $ - $ 22,075 $ 4,100 � (8) Other income, net:
Equity in losses of unconsolidated entities $ 445 $ - $ 1,088 $ - �
(9) Interest expense: Debt retirement costs $ - $ 288 $ - $ 452 �
(10) Income tax expense (benefit): Income tax effects $ 51,140 $
(2,491) $ 29,882 $ (5,464) � � � � � � � � � � � � � MENTOR
GRAPHICS CORPORATION UNAUDITED RECONCILIATION OF NON-GAAP
ADJUSTMENTS (In thousands, except earnings per share data) � � � �
� � � Three Months Ended Nine Months Ended October 31, 2008 October
31, 2007 October 31, 2008 October 31, 2007 GAAP net loss $ (78,244
) $ (8,796 ) $ (120,339 ) $ (6,123 ) Non-GAAP adjustments: Equity
plan-related compensation: (1) Cost of revenues 351 281 1,102 642
Research and development 2,979 2,240 8,830 5,179 Marketing and
selling 2,150 1,557 6,371 3,678 General and administration, and
other 1,518 892 4,830 2,987 System and software cost of revenues
(2) - - 103 - Acquisition - related items: Amortization of
purchased and other identified intangible assets Cost of revenues
(3) 3,810 2,139 9,040 7,513 Amortization of intangible assets (4)
3,129 2,704 8,099 6,361 In-process R&D (5) 6,790 - 22,075 4,100
Special charges (6) 2,214 1,115 15,099 5,160 Other income, net (7)
445 - 1,088 - Interest expense (8) - 288 - 452 Income tax effects
(9) � 51,140 � � (2,491 ) � 29,882 � � (5,464 ) Total of non-GAAP
adjustments � 74,526 � � 8,725 � � 106,519 � � 30,608 � Non-GAAP
net income (loss) $ (3,718 ) $ (71 ) $ (13,820 ) $ 24,485 � � GAAP
weighted average shares (diluted) 92,354 89,609 91,484 87,456
Non-GAAP adjustment � - � � - � � - � � 2,293 � Non-GAAP weighted
average shares (diluted) � 92,354 � � 89,609 � � 91,484 � � 89,749
� � GAAP net loss per share (diluted) $ (0.85 ) $ (0.10 ) $ (1.32 )
$ (0.07 ) Non-GAAP adjustments detailed above � 0.81 � � 0.10 � �
1.17 � � 0.34 � Non-GAAP net income (loss) per share (diluted) $
(0.04 ) $ - � $ (0.15 ) $ 0.27 � � � � � � � � � � � � � (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 purchased
intangible assets resulting from acquisitions. Purchased intangible
assets are amortized over two to five years. (4) Other identified
intangible assets are amortized to other operating expense over two
to five years. Other identified intangible assets include
tradenames, employment agreements, customer relationships and
deferred compensation which are the result of acquisition
transactions. (5) Three months ended October 31, 2008: Write off of
$6,790 for in-process research and development related to the
Flomerics acquisition. Nine months ended October 31, 2008: Write
off of $8,090 for in-process research and development related to
the Ponte and Flomerics acquisitions and $13,985 related to the
acquisition of technology from IBM which has 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. Nine
months ended October 31, 2007: A write off of $4,100 for in-process
research and development related to the Sierra acquisition. (6)
Three months ended October 31, 2008: Special charges consist of (i)
$2,273 in fees incurred in response to the unsolicited bid by
Cadence Design Systems, (ii) $350 of costs incurred for employee
rebalances consisting of severance benefits, notice pay and
outplacement services, and (iii) $(409) related to leased
facilities. Three months ended October 31, 2007: Special charges
consist of $1,115 of costs incurred for employee rebalances
consisting of severance benefits, notice pay and outplacement
services. Nine months ended October 31, 2008: Special charges
consist of (i) $9,194 of costs incurred for employee rebalances
consisting of severance benefits, notice pay and outplacement
services, (ii) $3,345 in fees incurred in response to the
unsolicited bid by Cadence Design Systems, (iii) $2,547 related to
the abandonment of excess leased facility space, and (iv) $13 in
fixed asset write-offs related to the closure of our Intellectual
Property division. Nine months ended October 31, 2007: Special
charges consist of (i) $5,798 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) in
other costs and adjustments, net. (7) Amount represent our equity
in the loss of an investment accounted for under the equity method.
(8) Discounts, premiums, 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 Nine Months Ended October 31, 2008 October 31, 2007
October 31, 2008 October 31, 2007 GAAP gross margin $ 153,126 $
159,191 $ 450,497 $ 501,148 Reconciling items to non-GAAP gross
margin Equity plan-related compensation 351 281 1,102 642 Prepaid
royalty costs - - 103 - Amortization of purchased intangible assets
� 3,810 � � 2,139 � � 9,040 � � 7,513 � Non-GAAP gross margin $
157,287 � $ 161,611 � $ 460,742 � $ 509,303 � � � � Three Months
Ended Nine Months Ended October 31, 2008 October 31, 2007 October
31, 2008 October 31, 2007 GAAP gross margin as a percent of total
revenues 83 % 84 % 82 % 84 % Non-GAAP adjustments detailed above �
2 % � 1 % � 2 % � 2 % Non-GAAP gross margin as a percent of total
revenues � 85 % � 85 % � 84 % � 86 % � � � Three Months Ended Nine
Months Ended October 31, 2008 October 31, 2007 October 31, 2008
October 31, 2007 GAAP operating expenses $ 178,468 $ 166,466 $
536,411 $ 496,570 Reconciling items to non-GAAP operating expenses
Equity plan-related compensation (6,647 ) (4,689 ) (20,031 )
(11,844 ) Amortization of other identified intangible assets (3,129
) (2,704 ) (8,099 ) (6,361 ) Rebalance, restructuring and other
costs (2,214 ) (1,115 ) (15,099 ) (5,160 ) In-process research and
development � (6,790 ) � - � � (22,075 ) � (4,100 ) Non-GAAP
operating expenses $ 159,688 � $ 157,958 � $ 471,107 � $ 469,105 �
� � � Three Months Ended Nine Months Ended October 31, 2008 October
31, 2007 October 31, 2008 October 31, 2007 GAAP operating income
(loss) $ (25,342 ) $ (7,275 ) $ (85,914 ) $ 4,578 Reconciling items
to non-GAAP operating income Equity plan-related compensation 6,998
4,970 21,133 12,486 Prepaid royalty costs - - 103 - Amortization of
purchased and other identified intangible assets: Cost of revenues
3,810 2,139 9,040 7,513 Amortization of intangible assets 3,129
2,704 8,099 6,361 Rebalance, restructuring and other costs 2,214
1,115 15,099 5,160 In-process research and development � 6,790 � �
- � � 22,075 � � 4,100 � Non-GAAP operating income (loss) $ (2,401
) $ 3,653 � $ (10,365 ) $ 40,198 � � � � Three Months Ended Nine
Months Ended October 31, 2008 October 31, 2007 October 31, 2008
October 31, 2007 GAAP operating margin as a percent of total
revenues -14 % -4 % -16 % 1 % Non-GAAP adjustments detailed above �
13 % � 6 % � 14 % � 6 % Non-GAAP operating margin as a percent of
total revenues � -1 % � 2 % � -2 % � 7 % � � � Three Months Ended
Nine Months Ended October 31, 2008 October 31, 2007 October 31,
2008 October 31, 2007 GAAP other income, net and interest expense $
(2,576 ) $ (4,027 ) $ (7,533 ) $ (11,151 ) Reconciling items to
non-GAAP other income, net and interest expense Equity in losses of
unconsolidated entities 445 - 1,088 - Debt retirement costs � - � �
288 � � - � � 452 � Non-GAAP other income, net and interest expense
$ (2,131 ) $ (3,739 ) $ (6,445 ) $ (10,699 ) MENTOR GRAPHICS
CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) �
� � October 31, January 31, 2008 2008 Assets Current assets: Cash,
cash equivalents, and short-term investments $ 79,590 $ 126,215
Trade accounts receivable, net 112,268 175,564 Term receivables,
short-term 131,731 157,077 Prepaid expenses and other 38,461 38,051
Deferred income taxes � 10,747 � � 9,574 � Total current assets
372,797 506,481 Property, plant, and equipment, net 106,063 100,421
Term receivables, long-term 124,791 134,059 Goodwill and intangible
assets, net 486,035 451,881 Other assets � 34,780 � � 45,271 �
Total assets $ 1,124,466 � $ 1,238,113 � Liabilities and
Stockholders' Equity Current liabilities: Short-term borrowings $
39,705 $ 14,178 Accounts payable 10,143 23,634 Income taxes payable
18,880 6,675 Accrued payroll and related liabilities 54,032 78,948
Accrued liabilities 50,950 40,697 Deferred revenue � 132,447 � �
154,821 � Total current liabilities 306,157 318,953 Long-term notes
payable 201,102 201,102 Deferred revenue, long-term 17,835 18,977
Other long-term liabilities � 71,724 � � 59,914 Total liabilities �
596,818 � � 598,946 � Stockholders' equity: Common stock 565,745
531,153 Retained earnings (49,189 ) 71,150 Accumulated other
comprehensive income � 11,092 � � 36,864 Total stockholders' equity
� 527,648 � � 639,167 � Total liabilities and stockholders' equity
$ 1,124,466 � $ 1,238,113 MENTOR GRAPHICS CORPORATION UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS AND SUPPLEMENTAL INFORMATION
(In thousands, except days sales outstanding) � � � � � � � Three
Months Ended Nine Months Ended October 31, 2008 October 31, 2007
October 31, 2008 October 31, 2007 Operating activities Net loss $
(78,244 ) $ (8,796 ) $ (120,339 ) $ (6,123 ) Depreciation and
amortization (1) 15,532 12,702 42,509 36,153 Other adjustments to
reconcile: Operating cash 20,413 3,528 48,633 13,934 Changes in
working capital � 4,231 � � 7,242 � � 34,266 � � (23,805 ) � Net
cash provided by (used in) operating activities (38,068 ) 14,676
5,069 20,159 � Investing activities Net cash provided by (used in)
investing activities (4,471 ) 10,097 (82,014 ) (38,306 ) �
Financing activities Net cash provided by (used in) financing
activities 33,211 (8,146 ) 40,126 4,903 � Effect of exchange rate
changes on cash and cash equivalents � (3,752 ) � 569 � � (3,514 )
� 1,372 � � Net change in cash and cash equivalents (13,080 )
17,196 (40,333 ) (11,872 ) Cash and cash equivalents at beginning
of period � 90,673 � � 66,164 � � 117,926 � � 95,232 � � Cash and
cash equivalents at end of period $ 77,593 � $ 83,360 � $ 77,593 �
$ 83,360 � � (1) Depreciation and amortization includes a write-off
of note issuance costs in the amount of $119 for the three months
ending October 31, 2007 and $181 for the nine months ending October
31, 2007. � � � Other data: Capital expenditures $ 14,077 � $ 9,154
� $ 33,850 � $ 29,308 � Days sales outstanding � 119 � � 131 � � -
� � - � 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 � Q3 �
YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Integrated
Systems Design 15% 20% 25% 20% 15% 20% 20% 15% 20% 10% 15% 20% 20%
20% IC Design to Silicon 40% 30% 30% 35% 40% 35% 30% 40% 35% 50%
40% 35% 25% 35% Scalable Verification 20% 20% 20% 20% 20% 25% 20%
20% 25% 20% 25% 25% 30% 25% New & Emerging Products 10% 20% 15%
15% 15% 15% 20% 20% 15% 10% 15% 15% 20% 15% Services & Other
(b) 15% � 10% � 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% � 100% � FY 2009 Fiscal year ended
January 31, 2008 Fiscal year ended December 31, 2006 Product Group
Revenues (a) Q1 � Q2 � Q3 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 �
Q3 � Q4 � YEAR Integrated Systems Design 20% 20% 25% 25% 20% 20%
25% 20% 20% 25% 20% 25% 25% 25% IC Design to Silicon 40% 30% 30%
30% 40% 40% 25% 30% 35% 35% 30% 30% 25% 30% Scalable Verification
20% 25% 25% 25% 20% 20% 25% 30% 25% 20% 25% 30% 30% 25% New &
Emerging Products 10% 15% 10% 10% 10% 15% 15% 15% 15% 10% 15% 10%
15% 15% Services & Other (b) 10% � 10% � 10% � 10% 10% � 5% �
10% � 5% � 5% 10% � 10% � 5% � 5% � 5% Total 100% � 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 � Q3 � YEAR
Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR North America 40%
30% 40% 35% 50% 40% 45% 30% 40% 30% 50% 40% 65% 50% Europe 35% 35%
35% 35% 25% 30% 15% 30% 25% 30% 20% 20% 20% 25% Japan 15% 20% 10%
15% 10% 10% 20% 20% 15% 25% 10% 20% 5% 10% Pac Rim 10% � 15% � 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% � 100% � � FY 2009 Fiscal year ended January 31,
2008 Fiscal year ended December 31, 2006 Revenues by Geography Q1 �
Q2 � Q3 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR
North America 40% 35% 40% 40% 50% 55% 40% 40% 45% 35% 45% 45% 55%
45% Europe 30% 30% 35% 30% 25% 20% 25% 30% 25% 30% 20% 25% 25% 25%
Japan 20% 20% 10% 15% 15% 10% 20% 15% 15% 20% 15% 20% 10% 15% Pac
Rim 10% � 15% � 15% � 15% 10% � 15% � 15% � 15% � 15% 15% � 20% �
10% � 10% � 15% Total 100% � 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 � Q3 � YEAR Q1 � Q2 � Q3 �
Q4 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Perpetual 20% 20% 20% 20% 30%
25% 30% 10% 20% 30% 30% 25% 20% 25% Ratable 25% 20% 15% 20% 20% 20%
10% 10% 15% 25% 20% 10% 10% 15% Up Front 55% � 60% � 65% � 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% � 100% � FY 2009 Fiscal year ended January 31, 2008
Fiscal year ended December 31, 2006 Revenues by Business Model (c)
Q1 � Q2 � Q3 � YEAR Q1 � Q2 � Q3 � Q4 � YEAR Q1 � Q2 � Q3 � Q4 �
YEAR Perpetual 20% 20% 20% 20% 25% 20% 20% 15% 20% 30% 30% 20% 25%
25% Ratable 20% 20% 20% 20% 15% 15% 20% 10% 15% 15% 15% 15% 10% 15%
Up Front 60% � 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% � 100% � (a) Product
Group Bookings excludes support bookings for all sub-flow
categories. (b) Product Group Revenues includes support revenue for
each sub-flow category as appropriate. (c) Bookings and Revenues by
Business Model are System and Software only. MENTOR GRAPHICS
CORPORATION UNAUDITED RECLASSIFICATION OF RESEARCH &
DEVELOPMENT CREDIT (In thousands) � � � � � Quarter Ended
Year-to-Date Fiscal year ended January 31, 2008 April 30, 2007 July
31, 2007 October 31, 2007 October 31, 2007 � Research and
development expense prior to reclassification $ 59,190 $ 65,468 $
64,034 $ 188,692 Research credit � (331 ) � (405 ) � (328 ) �
(1,064 ) Research and development expense after reclassification $
58,859 � $ 65,063 � $ 63,706 � $ 187,628 � � Income tax expense
(benefit) prior to reclassification $ 762 $ 1,034 $ (2,480 ) $ (684
) Research credit � 129 � � 131 � � (26 ) � 234 � Income tax
expense after reclassification $ 891 � $ 1,165 � $ (2,506 ) $ (450
) 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: � � � � � Q4 FY09 FY09 Q1 FY10
Diluted GAAP net earnings per share $ 0.65 $ (0.65 ) ($0.06) -
($0.01 ) Non-GAAP Adjustments: Amortization of purchased intangible
assets (1) 0.04 0.13 0.03 Amortization of other identified
intangible assets (2) 0.03 0.12 0.03 Equity plan-related
compensation (3) 0.08 0.31 0.09 Special charges (4) 0.00 0.40 0.00
Income tax effects (5) � (0.25 ) � 0.09 � � (0.04 ) Non-GAAP net
income $ 0.55 � $ 0.40 � $ 0.05 - $0.10 � � � � � � � � � � � (1)
Excludes amortization of purchased intangible assets resulting from
acquisition transactions. Purchased intangible assets are amortized
over two to five years. The guidance for Q4 FY09 and Q1 FY10
assumes no additional acquisitions. (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 Q4 FY09 and Q1
FY10 assumes no additional acquisitions. (3) Excludes equity
plan-related compensation expense recognized in accordance with
SFAS 123R, Share-Based Payment. (4) Excludes special charges
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 guidance for Q4 FY09 and Q1
FY10 assumes no additional special charges. (5) 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. FY09 GAAP forecast reflects a negative
tax rate as we expect to realize a net tax expense despite a
projected pre-tax net loss. This is primarily due to certain
foreign operations where we remain profitable and jurisdictions
where we have withholding tax expenses.
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