Mentor Graphics Corporation (NASDAQ:MENT) today announced
results for the fiscal second quarter 2010, ending July 31, 2009.
For the quarter, the company reported revenues of $182.6 million,
non-GAAP earnings per share of $.02, and a GAAP loss per share of
$.22. Bookings for the quarter rose 15% over the prior fiscal
second quarter.
“The quarter’s strong bookings performance was driven by new
customers and new products. Though the business climate is still
difficult, we did see strong sequential increases in consulting and
distributor bookings during the quarter, both signs we take as
indicators of an improving customer environment,” said Walden C.
Rhines, CEO and chairman of Mentor Graphics. “The company continues
to build its strength in new markets, expanding its electronic
system level design (ESL) and low-power product offerings during
the quarter. Taiwan Semiconductor Manufacturing Company’s (TSMC)
inclusion of a full Mentor low-power implementation flow in their
Reference Flow 10.0 further strengthens the company’s position in
the physical implementation market.”
During the quarter, Mentor released a new version of its
Catapult® C synthesis tool enabling full chip synthesis, including
control logic, and better power management. The company also
released its PADS® 9.0 printed circuit board flow which
incorporated new collaboration, manufacturing and analysis tools.
At the Design Automation Conference (DAC) in July, Mentor advanced
its full system low-power strategy by launching its VistaTM
platform which enables engineers to model power early in the design
cycle. Also at DAC, Mentor and its partners detailed the company’s
multi-operating system, multi-core embedded system strategy
featuring Linux, Android, and Nucleus® operating systems. On
Tuesday, the company closed its acquisition of LogicVision
announced during the second quarter. The acquisition strengthens
the company’s market-leading position in the design-for-test market
by combining LogicVision’s strength in built-in-self-test (BIST)
with the company’s strength in automated test pattern generation
(ATPG) and embedded test pattern compression technology.
“With a tight rein on costs and the beginnings of an improving
economic climate, the company performed better than we were
confident to predict,” said Gregory K. Hinckley, president of
Mentor Graphics. “The contract renewals we had in the quarter were
at similar levels to their previous contract values, which was an
improvement from the first quarter’s renewal rates. And despite
acquisitions, headcount and operating expenses are down from a year
ago, as the company continued to attack costs like travel,
facilities and outside services.”
Outlook
For the third quarter fiscal 2010, the company expects revenue
of about $183 million, non-GAAP earnings per share of about $.01
and a GAAP loss per share of about $.19.
Adoption of FASB Staff Position APB 14-1
During the first quarter of fiscal 2010, Mentor Graphics adopted
FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 requires
retroactive application to all prior periods reported. Accordingly,
we have adjusted the applicable prior period balance sheets,
statements of operations including net income (loss) per share, and
statements of cash flows to reflect the adjusted balance of the
convertible notes and related items, and to record the amortization
of the discount on the convertible notes as a non-cash interest
expense. A reconciliation of our adjusted Condensed Consolidated
Balance Sheets as of January 31, 2009, our adjusted Condensed
Consolidated Statements of Operations, and our adjusted Condensed
Consolidated Statements of Cash Flows for the three and six months
ended July 31, 2008 to their original filings is included with this
release.
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 intangible assets, in-process
research and development, special charges, equity plan-related
compensation expenses and charges, interest expense attributable to
net retirement premiums or discounts on the early retirement of
debt and associated debt issuance costs, interest expense
associated with the amortization of debt discount on convertible
debt recorded under FSB APB 14-1, impairment of cost method
investments, and the equity in income or losses of unconsolidated
entities, which management does not consider reflective of our core
operating business.
Identified intangible assets consist primarily of purchased
technology, backlog, trade names, customer relationships, and
employment agreements. In periods prior to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 141 (revised
2007), “Business Combinations,” in-process research and development
charges represented products in development that had not reached
technological feasibility at the time of acquisition. Special
charges primarily consist of costs incurred for employee
terminations due to a reduction of personnel resources driven by
modifications of business strategy or business emphasis. Special
charges may also include expenses incurred related to potential
acquisitions, excess facility costs, asset-related charges,
post-acquisition rebalance costs and restructuring costs, including
severance and benefits. 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 SFAS
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.
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
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.
- 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.
- Special charges are incurred
based on the particular facts and circumstances of acquisition and
restructuring decisions and can vary in size and frequency. These
charges are not ordinarily included in our annual operating plan
and related budget due the unpredictability of economic trends and
the rapidly changing technology and competitive environment in our
industry. We therefore exclude them when evaluating our managers'
performance internally.
- We view equity plan-related
compensation as a key element of our employee retention and
long-term incentives, not as an expense that we use in evaluating
core operations in any given period. Management also 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.
- Interest expense attributable to
net retirement premiums or discounts on the early retirement of
debt, the write-off of associated debt issuance costs and the
amortization of the debt discount on convertible debt were
excluded. Management does not consider these charges as a part of
our core operating performance. The early retirement of debt and
the associated debt issuance costs is not included in our annual
operating plan and related budget due to unpredictability of market
conditions which could facilitate an early retirement of debt. We
consider the amortization of the debt discount on convertible debt
recorded under FSP APB 14-1 not to be a direct cost of operations.
We also believe this presentation is more useful to investors in
comparing our performance to the performance of other companies in
our industry who present non-GAAP results adjusted to exclude such
items.
- Impairment of cost method
investments can occur when the fair value of the investment is less
than its cost. This can occur when there is a significant
deterioration in the investee’s earnings performance, significant
adverse changes in the general market conditions of the industry in
which the investee operates, or indications that the investee may
no longer be able to conduct business. These charges are
inconsistent in amount and frequency. We therefore consider our
operating results without these charges when evaluating our core
performance.
- Equity in income or losses of
unconsolidated subsidiaries represents the net income (losses) in
an investment accounted for under the equity method. The amounts
represent our equity in the net income (losses) of a common stock
investment. The carrying amount of our investment is adjusted for
our share of earnings or losses of the investee. The amounts were
excluded as we do not influence or control the results of
operations for these investments and management does not consider
this activity a part of our core operating 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, 2009 is (28%), after the consideration of
discrete items. Without discrete items of $(3,530) thousand, our
GAAP tax rate is (41%). Inclusive of discrete items, our full
fiscal year 2010 GAAP tax rate is projected to be (34%). 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 in various jurisdictions.
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. Non-GAAP net income (loss)
also facilitates comparison with other companies in our industry,
which use similar financial measures to supplement their GAAP
results. Non-GAAP net income (loss) has limitations as an
analytical tool, and therefore should not be considered 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 intangibles
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 regularly evaluate our businesses to determine whether
any operations should be eliminated or curtailed. We therefore will
continue to experience special charges on a regular basis. These
costs also directly impact our available funds.
- We perform impairment analyses
on cost method investments when triggering events occur and adjust
the carrying value of assets when we determine it to be necessary.
Impairment charges could therefore be incurred in any period.
- 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 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, 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 $800 million and employs approximately 4,425 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, Catapult, PADS and Nucleus are registered
trademarks and Vista 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 the Securities
Exchange Act of 1934. 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 the current
worldwide downturn, and the company’s ability to appropriately
reduce its expenses in response; (ii) liquidity concerns, business
insolvencies and bankruptcies by the company’s customers;
(iii) continued weakness or recession in the US, EU,
Japan or other economies; (iv) the company’s ability to
successfully offer products and services that compete in the highly
competitive EDA industry; (v) 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; (vi) effects of the increasing volatility of foreign
currency fluctuations on the company’s business and operating
results; (vii) changes in accounting or reporting rules or
interpretations; (viii) 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;
(ix) effects of unanticipated shifts in product mix on gross
margin; and (x) effects of customer seasonal purchasing
patterns and the timing of significant orders may negatively or
positively impact the company’s quarterly results of operations,
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 July 31, Six
Months Ended July 31, 2009 2008 2009
2008 Revenues:
System and software
$ 103,884 $ 95,830 $ 219,302 $ 192,673 Service and support
78,737 86,574 157,094
168,938 Total revenues 182,621 182,404
376,396 361,611
Cost of
revenues: (1) System and software 9,511 4,356 14,400 9,638
Service and support 20,518 24,030 41,721 49,372 Amortization of
purchased technology 2,928 1,992
5,876 5,230 Total cost of revenues
32,957 30,378 61,997
64,240 Gross margin 149,664 152,026
314,399 297,371
Operating
expenses: Research and development (2) 60,843 64,251 123,134
128,633 Marketing and selling (3) 71,430 72,799 148,031 149,447
General and administration (4) 21,730 24,099 44,766 47,160 Other
general expense (income), net 68 (273 ) 456 (437 ) Amortization of
intangible assets (5) 2,888 2,537 5,758 4,970 Special charges (6)
4,202 3,235 9,897 12,885 In-process research and development (7)
- 15,285 - 15,285
Total operating expenses 161,161
181,933 332,042 357,943
Operating loss (11,497 ) (29,907 ) (17,643 ) (60,572 ) Other
income (expense), net (8) (356 ) 717 (258 ) 3,092 Interest expense
(9)(a) (4,723 ) (4,404 ) (8,874 )
(9,159 ) Loss before income tax (16,576 ) (33,594 ) (26,775 )
(66,639 ) Income tax expense (benefit) (10) 4,690
(15,796 ) 7,447 (23,345 ) Net loss $
(21,266 ) $ (17,798 ) $ (34,222 ) $ (43,294 ) Net loss per share:
Basic $ (0.22 ) $ (0.19 ) $ (0.36 ) $ (0.48 ) Diluted $ (0.22 ) $
(0.19 ) $ (0.36 ) $ (0.48 ) Weighted average number of shares
outstanding: Basic 94,853 91,352
94,514 91,054 Diluted 94,853
91,352 94,514 91,054
Refer to following page for a description of footnotes.
(a) For the July 31, 2008 presentation, Interest expense has
been adjusted for the retrospective adoption of FSP APB 14-1.
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 July 31, Six Months Ended July 31, 2009
2008 2009 2008 (1) Cost of revenues:
Equity plan-related compensation $ 470 $ 375 $ 969 $ 751 Prepaid
royalty costs - - - 103 Amortization of purchased technology
2,928 1,992 5,876 5,230
$ 3,398 $ 2,367 $ 6,845 $ 6,084
(2) Research and development: Equity plan-related
compensation $ 3,058 $ 2,919 $ 6,505 $ 5,851
(3) Marketing and selling: Equity plan-related
compensation $ 2,391 $ 2,116 $ 4,928 $ 4,221
(4) General and administration: Equity
plan-related compensation $ 1,578 $ 2,174 $ 2,865
$ 3,312
(5) Amortization of intangible
assets: Amortization of other identified intangible assets $
2,888 $ 2,537 $ 5,758 $ 4,970
(6) Special charges: Rebalance, restructuring, and other
costs $ 4,202 $ 3,235 $ 9,897 $ 12,885
(7) In-process research and development In-process
research and development $ - $ 15,285 $ - $
15,285
(8) Other income (expense), net: Equity
in losses of unconsolidated entities and impairment of investments
$ 244 $ 475 $ 681 $ 643
(9)
Interest expense: Amortization of debt discount $ 684 $ 628 $
1,353 $ 1,243 Debt retirement costs (106 ) -
(354 ) - $ 578 $ 628 $ 999
$ 1,243
(10) Income tax expense
(benefit):a Income tax effects $ 4,391 $ (15,480
) $ 5,458 $ (21,280 ) a Adjusted for the
retrospective adoption of FSP APB 14-1.
MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF NON-GAAP
ADJUSTMENTS
(In thousands, except earnings per share data)
Three Months Ended July 31, Six Months
Ended July 31, 2009 2008 2009 2008
GAAP net lossa $ (21,266 ) $ (17,798 ) $ (34,222 ) $ (43,294 )
Non-GAAP adjustments: Equity plan-related compensation: (1) Cost of
revenues 470 375 969 751 Research and development 3,058 2,919 6,505
5,851 Marketing and selling 2,391 2,116 4,928 4,221 General and
administration 1,578 2,174 2,865 3,312 System and software cost of
revenues (2) - - - 103 Acquisition - related items: Amortization of
purchased intangible assets Cost of revenues (3) 2,928 1,992 5,876
5,230 Amortization of intangible assets (4) 2,888 2,537 5,758 4,970
In-process research and development (5) - 15,285 - 15,285 Special
charges (6) 4,202 3,235 9,897 12,885 Other income (expense), net
(7) 244 475 681 643 Interest expense (8) 578 628 999 1,243 Income
tax effects a(9) 4,391 (15,480 ) 5,458
(21,280 ) Total of non-GAAP adjustments 22,728
16,256 43,936 33,214
Non-GAAP net income (loss)a $ 1,462 $ (1,542 ) $
9,714 $ (10,080 ) GAAP weighted average shares
(diluted) 94,853 91,352 94,514 91,054 Non-GAAP adjustment
387 - 13 -
Non-GAAP weighted average shares (diluted) 95,240
91,352 94,527 91,054
GAAP net loss per share (diluted)a $ (0.22 ) $ (0.19 ) $
(0.36 ) $ (0.48 ) Non-GAAP adjustments detailed above 0.24
0.17 0.46 0.37
Non-GAAP net income (loss) per share (diluted)a $ 0.02 $
(0.02 ) $ 0.10 $ (0.11 ) a Adjusted for the
retrospective adoption of FSP APB 14-1.
(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 technology 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 trade names, employment agreements, customer relationships,
and deferred compensation which are the result of acquisition
transactions.
(5) 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 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.
(6) Three months ended July 31, 2009: Special
charges consist of (i) $1,599 of costs incurred for employee
rebalances consisting of severance benefits, notice pay, and
outplacement services, (ii) $1,175 in advisory fees, (iii) $865
related to the abandonment of excess leased facility space, (iv)
$270 in acquisition costs, (v) $242 related to a facility fire, and
(vi) $51 in other adjustments. Three months ended July 31, 2008:
Special charges consist of (i) $1,513 related to the abandonment of
excess leased facility space, (ii) $1,073 in advisory fees, (iii)
$730 of costs incurred for employee rebalances consisting of
severance benefits, notice pay, and outplacement services, and (iv)
$(81) in other costs and adjustments, net. Six months ended July
31, 2009: Special charges consist of (i) $5,627 of costs incurred
for employee rebalances consisting of severance benefits, notice
pay, and outplacement services, (ii) $2,350 in advisory fees, (iii)
$824 related to the abandonment of excess leased facility space,
(iv) $538 in acquisition costs, (v) $507 related to a facility
fire, and (vi) $51 in other costs. 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 advisory fees,
(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.
(7) Three months ended July 31, 2009:
Equity in losses of Calypto Design Systems of $244. Three months
ended July 31, 2008: Equity in losses of Calypto Design Systems of
$475. Six months ended July 31, 2009: Other income, net consists of
(i) equity in losses of Calypto Design Systems of $568 and (ii) an
impairment of $113 for an investment accounted for under the cost
method. Six months ended July 30, 2008: Equity in losses of Calypto
Design Systems of $643.
(8) Three months ended July 31,
2009: $684 in amortization of original issuance debt discount in
accordance with FSP APB 14-1 and $(106) in discounts and
unamortized debt costs related to a partial redemption of the
$110.0M convertible debt. Six months ended July 31, 2009: $1,353 in
amortization of original issuance debt discount in accordance with
FSP APB 14-1 and $(354) in discounts and unamortized debt costs
related to a partial redemption of the $110.0M convertible debt.
Three and six months ended April 30, 2008: Amortizaton of original
issuance debt discount in accordance with FSP APB 14-1.
(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 July 31, Six Months
Ended July 31, 2009 2008 2009 2008
GAAP gross margin $ 149,664 $ 152,026 $ 314,399 $ 297,371
Reconciling items to non-GAAP gross margin Equity plan-related
compensation 470 375 969 751 Prepaid royalty costs - - - 103
Amortization of purchased technology 2,928
1,992 5,876 5,230 Non-GAAP gross
margin $ 153,062 $ 154,393 $ 321,244 $ 303,455
Three Months Ended July 31, Six
Months Ended July 31, 2009 2008 2009
2008 GAAP gross margin as a percent of total revenues 82 %
83 % 84 % 82 % Non-GAAP adjustments detailed above 2 %
2 % 1 % 2 % Non-GAAP gross margin as a percent
of total revenues 84 % 85 % 85 % 84 %
Three Months Ended July 31, Six Months
Ended July 31, 2009 2008 2009 2008
GAAP operating expenses $ 161,161 $ 181,933 $ 332,042 $ 357,943
Reconciling items to non-GAAP operating expenses Equity
plan-related compensation (7,027 ) (7,209 ) (14,298 ) (13,384 )
Amortization of other identified intangible assets (2,888 ) (2,537
) (5,758 ) (4,970 ) Rebalance, restructuring, and other costs
(4,202 ) (3,235 ) (9,897 ) (12,885 ) In-process research and
development - (15,285 ) -
(15,285 ) Non-GAAP operating expenses $ 147,044 $ 153,667
$ 302,089 $ 311,419
Three
Months Ended July 31, Six Months Ended July 31,
2009 2008 2009 2008 GAAP operating loss
$ (11,497 ) $ (29,907 ) $ (17,643 ) $ (60,572 ) Reconciling items
to non-GAAP operating income Equity plan-related compensation 7,497
7,584 15,267 14,135 Prepaid royalty costs - - - 103 Amortization of
purchased intangible assets: Cost of revenues 2,928 1,992 5,876
5,230 Amortization of intangible assets 2,888 2,537 5,758 4,970
Rebalance, restructuring, and other costs 4,202 3,235 9,897 12,885
In-process research and development - 15,285
- 15,285 Non-GAAP operating
income (loss) $ 6,018 $ 726 $ 19,155 $ (7,964
)
Three Months Ended July 31, Six Months
Ended July 31, 2009 2008 2009 2008
GAAP operating margin as a percent of total revenues -6 % -16 % -5
% -17 % Non-GAAP adjustments detailed above 9 % 16 %
10 % 15 % Non-GAAP operating margin as a percent of
total revenues 3 % 0 % 5 % -2 %
Three Months Ended July 31, Six Months Ended July
31, 2009 2008 2009 2008 GAAP other
income (expense), net and interest expensea $ (5,079 ) $ (3,687 ) $
(9,132 ) $ (6,067 ) Reconciling items to non-GAAP other income, net
and interest expense Equity in losses of unconsolidated entities
244 475 681 643 Amortization of debt discount and debt retirement
costs 578 628 999
1,243 Non-GAAP other income (expense), net and interest
expensea $ (4,257 ) $ (2,584 ) $ (7,452 ) $ (4,181 ) a
Adjusted for the retrospective adoption of FSP APB 14-1.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED BALANCE
SHEETS
(In thousands)
July 31, January
31, 2009 2009 (As Adjusted)a
Assets Current assets: Cash, cash equivalents, and
short-term investments $ 76,083 $ 95,639 Trade accounts receivable,
net 107,348 133,719 Term receivables, short-term 152,315 139,133
Prepaid expenses and other 31,905 39,146 Deferred income taxes
8,442 10,163 Total current
assets 376,093 417,800
Property, plant, and equipment, net
97,063 100,991
Term receivables, long-term 142,132 146,682
Goodwill and intangible assets, net 476,078 480,956
Other
assets 37,644 39,641 Total
assets $ 1,129,010 $ 1,186,070
Liabilities
and Stockholders' Equity Current liabilities: Short-term
borrowings $ 11,269 $ 36,998 Accounts payable 9,071 10,197 Income
taxes payable 6,082 5,340 Accrued payroll and related liabilities
58,232 65,687 Accrued liabilities 37,786 46,034 Deferred revenue
145,097 155,098 Total current
liabilities 267,537 319,354
Long-term notes payable 185,693
188,170
Deferred revenue, long-term 12,730 16,890
Other
long-term liabilities 69,030 75,211
Total liabilities 534,990 599,625
Stockholders' equity: Common stock 625,417 602,064
Accumulated deficit (61,075 ) (26,853 ) Accumulated other
comprehensive income 29,678 11,234
Total stockholders' equity 594,020 586,445
Total liabilities and stockholders' equity $
1,129,010 $ 1,186,070 a Adjusted for the
retrospective adoption of FSP APB 14-1.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS AND SUPPLEMENTAL INFORMATION
(In thousands, except days sales outstanding)
Three Months Ended July 31, Six
Months Ended July 31, 2009 2008 2009
2008 Operating activities Net lossa $ (21,266 ) $
(17,798 ) $ (34,222 ) $ (43,294 ) Depreciation and amortization
a(1) 14,737 13,592 30,800 28,176 Other adjustments to reconcile:
Operating casha 4,894 21,712 15,114 28,239 Changes in working
capitala 21,818 (19,328 ) 7,521
30,016 Net cash provided by (used in)
operating activities 20,183 (1,822 ) 19,213 43,137
Investing activities Net cash used in investing activities
(11,354 ) (41,867 ) (16,077 ) (77,543 )
Financing
activities Net cash provided by (used in) financing activities
(11,309 ) 10,727 (20,103 ) 6,915 Effect of exchange rate
changes on cash and cash equivalents (220 ) (204 )
(598 ) 238 Net change in cash and cash
equivalents (2,700 ) (33,166 ) (17,565 ) (27,253 ) Cash and cash
equivalents at beginning of period 78,777
123,839 93,642 117,926
Cash and cash equivalents at end of period $ 76,077 $ 90,673
$ 76,077 $ 90,673 a Adjusted for the
retrospective adoption of FSP APB 14-1.
(1) Depreciation and
amortization includes a write-off of note issuance costs in the
amount of $10 for the three months ended July 31, 2009 and $26 for
the six months ended July 31, 2009.
Other data: Capital expenditures $
6,398 $ 10,799 $ 10,968 $ 19,773 Days
sales outstanding 128 118
MENTOR GRAPHICS CORPORATION
UNAUDITED SUPPLEMENTAL BOOKINGS AND REVENUE
INFORMATION
(Rounded to nearest 5%)
FY
2010 Fiscal year ended January 31, 2009 Fiscal year
ended January 31, 2008 Product Group Bookings (a)
Q1 Q2 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR Integrated Systems Design 20% 20%
20% 15% 20%
25% 15%
20% 15% 20% 20% 15%
20% IC Design to Silicon
40% 40%
40% 40% 30% 30% 40%
35% 40% 35% 30% 40%
35% Scalable Verification 20% 25%
20% 20% 20% 20% 30%
20% 20% 25% 20% 20%
25% New & Emerging Products
10% 5%
10% 10% 20% 15% 10%
15% 15% 15% 20% 20%
15% Services & Other (b) 10% 10%
10% 15% 10% 10% 5%
10%
10% 5% 10% 5%
5% Total
100% 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% FY 2010
Fiscal year ended January 31, 2009 Fiscal year ended
January 31, 2008 Product Group Revenue (b) Q1
Q2 YEAR Q1 Q2
Q3 Q4 YEAR Q1
Q2 Q3 Q4
YEAR Integrated Systems Design 20% 20%
20% 20% 20%
25% 20%
20% 20% 20% 25% 20%
20% IC Design to Silicon
45% 35%
40% 40% 30% 30% 35%
35% 40% 40% 25% 30%
35% Scalable Verification 20% 25%
25% 20% 25% 25% 30%
25% 20% 20% 25% 30%
25% New & Emerging Products
10% 10%
10% 10% 15% 10% 10%
10% 10% 15% 15% 15%
15% Services & Other (b) 5% 10%
5%
10% 10% 10% 5%
10% 10% 5%
10% 5%
5% Total 100%
100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% FY 2010
Fiscal year ended January 31, 2009 Fiscal year ended
January 31, 2008 Bookings by Geography Q1
Q2 YEAR Q1 Q2
Q3 Q4 YEAR Q1
Q2 Q3 Q4 YEAR
North America 40% 55%
50% 40% 30% 40% 35%
35% 50% 40%
45% 30%
40% Europe 25% 25%
25% 35% 35% 35% 35%
35% 25% 30% 15% 30%
25% Japan 25% 5%
10% 15%
20% 10% 5%
15% 10% 10% 20% 20%
15% Pac Rim 10%
15%
15% 10% 15% 15% 25%
15% 15% 20% 20% 20%
20%
Total 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
FY 2010 Fiscal year ended January 31, 2009
Fiscal year ended January 31, 2008 Revenue by
Geography Q1 Q2 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR North America 40% 50%
45% 40%
35% 40% 40%
40% 50% 55% 40% 40%
45% Europe 20% 30%
25% 30% 30% 35% 35%
30% 25% 20% 25% 30%
25%
Japan 20% 5%
10% 20% 20% 10% 10%
15% 15% 10% 20% 15%
15% Pac Rim 20% 15%
20% 10% 15%
15% 15%
15% 10% 15% 15%
15%
15% Total 100%
100% 100% 100% 100%
100% 100% 100%
100% 100% 100%
100% 100% FY 2010
Fiscal year ended January 31, 2009 Fiscal year ended
January 31, 2008 Bookings by Business Model (c)
Q1 Q2 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR Perpetual 15% 25%
20% 20% 20% 20% 10%
15%
30% 25% 30% 10%
20% Ratable 15% 15%
15% 25% 20% 15%
10%
15% 20% 20% 10% 10%
15% Up Front 70% 60%
65% 55% 60% 65% 80%
70% 50% 55% 60% 80%
65%
Total 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
FY 2010 Fiscal year ended January 31, 2009
Fiscal year ended January 31, 2008 Revenue by Business
Model (c) Q1 Q2 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Perpetual 15% 25%
20% 20% 20%
20% 10%
15% 25% 20% 20% 15%
20% Ratable 10% 15%
15% 20% 20% 20% 10%
15% 15% 15% 20% 10%
15% Up
Front 75% 60%
65% 60% 60% 60%
80%
70% 60% 65% 60% 75%
65% 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.
Impact of Accounting Change on the Unaudited
Consolidated Statement of Operations:
Three months ended July 31, 2008 Six
months ended July 31, 2008
As Originally
Reported
Impact ofaccounting
changefor FSP APB 14-1
As Adjusted
As Originally
Reported
Impact ofaccounting
changefor FSP APB 14-1
As Adjusted Operating loss (29,907 ) - (29,907
) (60,572 ) - (60,572 ) Other income, net 717 - 717 3,092 - 3,092
Interest expense (3,798 ) (606 ) (4,404 )
(7,960 ) (1,199 ) (9,159 ) Loss before income
tax (32,988 ) (606 ) (33,594 ) (65,440 ) (1,199 ) (66,639 ) Income
tax benefit (15,796 ) - (15,796 )
(23,345 ) - (23,345 ) Net loss $
(17,192 ) $ (606 ) $ (17,798 ) $ (42,095 ) $ (1,199 ) $ (43,294 )
Basic and diluted net loss per share $ (0.19 ) $
-
$ (0.19 ) $ (0.46 ) $ (0.02 ) $ (0.48 )
Impact of Accounting Change on the Unaudited Consolidated
Balance Sheet: As of January 31, 2009
As
OriginallyReported
Impact ofaccounting
changefor FSP APB 14-1
As Adjusted
Assets Current assets: Cash, cash equivalents and
short-term investments $ 95,639 $ - $ 95,639 Trade accounts
receivable, net 133,719 - 133,719 Term receivables, short-term
139,133 - 139,133 Prepaid expenses and other 39,236 (90 ) 39,146
Deferred income taxes 10,163 -
10,163 Total current assets 417,890 (90 ) 417,800
Property, plant, and equipment 100,991 - 100,991 Term receivables,
long-term 146,682 - 146,682 Goodwill and intangible assets, net
480,956 - 480,956 Other assets 39,918 (277 )
39,641 Total assets $ 1,186,437 $ (367 ) $
1,186,070
Liabilities and Stockholder's
Equity Total current liabilities $ 319,354 $ - $ 319,354
Long-term notes payable 201,102 (12,932 ) 188,170 Deferred
revenue, long-term 16,890 - 16,890 Other long-term liabilities
75,211 - 75,211 Total
liabilities 612,557 (12,932 ) 599,625
Stockholders' equity: Common stock 580,298
21,766 602,064 Accumulated deficit (17,652 ) (9,201 ) (26,853 )
Accumulated other comprehensive income 11,234
- 11,234 Total stockholders' equity
573,880 12,565 586,445 Total
liabilities and stockholders' equity $ 1,186,437 $ (367 ) $
1,186,070
Impact of Accounting Change on
the Unaudited Consolidated Statement of Cash Flows:
Three months ended July 31, 2008
Impact of accounting change
for:
As
OriginallyReported
FSP APB 14-1 Other As Adjusted Operating
Cash Flows: Net loss $ (17,192 ) $ (606 ) $ - $ (17,798 )
Depreciation and amortization 12,986 606 - 13,592 Other adjustments
to reconcile: Operating cash 21,658 - 54 21,712 Changes in working
capital (19,274 ) (54 ) (19,328 ) Net
cash provided by operating activities (1,822 ) - - (1,822 )
Investing Cash Flows: Net cash used in investing activities
(41,867 ) - - (41,867 )
Financing Cash Flows: Net
cash used in financing activities 10,727 - - 10,727 Effect of
exchange rate changes on cash and cash equivalents (204 )
- - (204 ) Net change in cash
and cash equivalents (33,166 ) - - (33,166 ) Cash and cash
equivalents at the beginning of the period 123,839
- - 123,839 Cash and cash
equivalents at the end of the period $ 90,673 $ - $ -
$ 90,673
Six months ended July 31,
2008
Impact of accounting change
for:
As
OriginallyReported
FSP APB 14-1 Other As Adjusted Operating
Cash Flows: Net loss $ (42,095 ) $ (1,199 ) $ - $ (43,294 )
Depreciation and amortization 26,977 1,199 - 28,176 Other
adjustments to reconcile: Operating cash 28,220 - 19 28,239 Changes
in working capital 30,035 (19 )
30,016 Net cash provided by operating activities 43,137 - -
43,137
Investing Cash Flows: Net cash used in
investing activities (77,543 ) - - (77,543 )
Financing
Cash Flows: Net cash used in financing activities 6,915 - -
6,915 Effect of exchange rate changes on cash and cash equivalents
238 - - 238
Net change in cash and cash equivalents (27,253 ) - - (27,253 )
Cash and cash equivalents at the beginning of the period
117,926 - - 117,926
Cash and cash equivalents at the end of the period $ 90,673
$ - $ - $ 90,673
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 FY10 Diluted GAAP net loss per
share ($0.19) Non-GAAP Adjustments: Amortization of purchased
intangible assets (1) 0.04 Amortization of other identified
intangible assets (2) 0.03 Equity plan-related compensation (3)
0.06 Other Income & Interest expenses (4) 0.01 Income tax
effects (5) 0.06 Non-GAAP net income per share $0.01
(1) Excludes amortization of purchased intangible assets
resulting from acquisition transactions. Purchased intangible
assets are amortized over two to five years. The guidance for Q3
FY10 assumes no additional acquisitions.
(2) Excludes amortization
of other identified intangible assets including trade names,
employment agreements and customer relationships, and deferred
compensation resulting from acquisition transactions. Other
identified intangible assets are amortized over two to five years.
The guidance for Q3 FY10 assumes no additional acquisitions.
(3) Excludes equity plan-related compensation expense
recognized in accordance with SFAS 123R, Share-Based Payment.
(4) Amortization of original issuance debt discount in
accordance with FSP APB 14-1. Equity in losses of Calypto Design
Systems.
(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.
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