Mentor Graphics Corporation (NASDAQ: MENT) today announced
results for the fiscal third quarter 2010, ending October 31, 2009.
For the quarter, the company reported revenues of $189.2 million,
non-GAAP earnings per share of $.05, and a GAAP loss per share of
$.28.
“During the quarter, we saw positive signs of recovery in the
semiconductor market with semiconductor unit shipments and revenue,
as well as foundry revenue and utilization, up sharply,” said
Walden C. Rhines, CEO and chairman of Mentor Graphics. “The
diversity of our product line continues to help us weather the
difficult economic environment. Embedded software and cabling
solutions are both up for the quarter. Strong results from our
design-to-silicon platform, including Calibre, Olympus-SoC place
and route, and Tessent silicon test products, and a recovery in our
emulation business also helped drive results.”
During the quarter, the company announced that its low power
RTL-to-GDSII tool flow has been included in Taiwan Semiconductor
Manufacturing Company, Ltd. (TSMC) Reference Flow 10.0. TSMC also
selected the Calibre® physical verification platform for its
Integrated Sign-Off Flow. In October, the company signed a
definitive merger agreement with Valor Computerized Systems Ltd., a
world leader in printed circuit board design manufacturing software
solutions.
In August, the company closed its acquisition of LogicVision
Inc., a market leader in built-in-self-test silicon test solutions.
In November, the company unveiled its strategy for silicon test and
yield analysis solutions incorporating both the company’s existing
product line and LogicVision’s technologies under the Tessent™
brand.
“Despite the continuing challenges of the market, we saw
annualized contract values of renewals in our top ten contracts
increase 5% in the quarter,” said Gregory K. Hinckley, president of
Mentor Graphics. “In addition, our cost control efforts are ahead
of plan, with operating expenses down about 3% over the year ago
third quarter.”
Special charges were primarily related to headcount,
acquisitions and ongoing investment banking fees.
Outlook
For the fiscal fourth quarter ending January 31, 2010, the
company expects revenue of about $230 million, non-GAAP earnings
per share of about $.28 and GAAP earnings per share of about $.33.
GAAP earnings in the fiscal fourth quarter will be relatively
stronger as a portion of the tax provision recorded earlier in the
fiscal year is recaptured. For fiscal 2010, the company expects
full year revenues to increase one percent from fiscal 2009 to
approximately $795 million, non-GAAP earnings per share of about
$0.44 and a GAAP loss per share of approximately $.28. In
Fiscal 2009, the company had revenues of $789 million.
Cash flow is expected to be approximately $15 million for the
fiscal fourth quarter and consistent with the same quarter last
year. Fiscal 2010 year cash flow from operations is expected to be
approximately $45 to $50 million up from $23 million in fiscal
2009.
Fiscal Year Definition
Mentor Graphics fiscal year runs from February 1st to January
31st. The fiscal year is dated by the calendar year in which the
fiscal year ends. As a result, the first three fiscal quarters of
any fiscal year will be dated with the next calendar year, rather
than the current calendar year.
Adoption of Accounting Guidance for Convertible Debt
During the first quarter of fiscal 2010, Mentor Graphics adopted
the Financial Accounting Standard Board’s (FASB) new accounting
guidance for accounting for convertible debt instruments that may
be settled in cash upon conversion. This new guidance 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 nine months
ended October 31, 2008 to their original filings is included with
this release. Interest expense associated with the adoption of the
guidance was $0.7 million for the three months ended October 31,
2009 and $0.6 million for the three months ended October 31, 2008.
Interest expense was $2.1 million for the nine months ended October
31, 2009 and $1.9 million for the nine months ended October 31,
2008.
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, net income (loss), and earnings (loss)
per share, 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, 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-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. 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 tax expense or 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.
- Prior to adopting the FASB’s
authoritative guidance on business combinations in February 2009,
in-process research and development was expensed upon acquisition.
These 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
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 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 nine
months ended October 31, 2009 is (55)%, after the consideration of
period specific items. Without period specific items of $4,201
thousand, our GAAP tax rate is (66)%. Inclusive of period specific
items, our full fiscal year 2010 GAAP tax rate is projected to be
(48)%. 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.
- 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 and Calibre are registered trademarks and
Olympus-SOC and Tessent 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 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) continued 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) liquidity concerns, business
insolvencies and bankruptcies by the company’s 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 October 31, Nine
Months Ended October 31, 2009
2008 2009 2008
Revenues: System and software $ 106,344 $ 97,312 $
325,646 $ 289,985 Service and support 82,852
87,540 239,946 256,478 Total
revenues 189,196 184,852 565,592
546,463
Cost of revenues: (1) System
and software 2,966 3,566 17,366 13,204 Service and support 21,414
24,350 63,135 73,722 Amortization of purchased technology
3,089 3,810 8,965 9,040
Total cost of revenues 27,469 31,726
89,466 95,966 Gross margin
161,727 153,126 476,126
450,497
Operating expenses: Research and
development (2) 64,293 65,146 187,427 193,779 Marketing and selling
(3) 73,093 76,688 221,124 226,135 General and administration (4)
22,702 24,333 67,468 71,493 Other general expense (income), net 118
168 574 (269 ) Amortization of intangible assets (5) 2,796 3,129
8,554 8,099 Special charges (6) 5,993 2,214 15,890 15,099
In-process research and development (7) -
6,790 - 22,075 Total operating
expenses 168,995 178,468 501,037
536,411
Operating loss
(7,268 ) (25,342 ) (24,911 ) (85,914 ) Other income (expense), net
(8) (1,004 ) 1,737 (1,262 ) 4,829 Interest expense (9)a
(4,385 ) (4,889 ) (13,259 ) (14,048 ) Loss
before income tax (12,657 ) (28,494 ) (39,432 ) (95,133 ) Income
tax expense (10) 14,377 50,369
21,824 27,024 Net loss $ (27,034 ) $ (78,863 )
$ (61,256 ) $ (122,157 ) Net loss per share: Basic $ (0.28 ) $
(0.85 ) $ (0.64 ) $ (1.34 ) Diluted $ (0.28 ) $ (0.85 ) $ (0.64 ) $
(1.34 ) Weighted average number of shares outstanding: Basic
97,854 92,354 95,636
91,484 Diluted 97,854 92,354
95,636 91,484
Refer to following table for a
description of footnotes.
a Interest expense for the three and nine months ended
October 31, 2008 presentation has been adjusted for the
retrospective adoption of the FASB's convertible debt accounting
guidance.
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 October
31, Nine Months Ended October 31, 2009
2008 2009
2008 (1) Cost of revenues: Equity plan-related
compensation $ 349 $ 351 $ 1,318 $ 1,102 Prepaid royalty costs - -
- 103 Amortization of purchased technology 3,089
3,810 8,965 9,040 $ 3,438
$ 4,161 $ 10,283 $ 10,245
(2)
Research and development: Equity plan-related compensation $
2,374 $ 2,979 $ 8,879 $ 8,830
(3) Marketing and selling: Equity plan-related compensation
$ 1,856 $ 2,150 $ 6,784 $ 6,371
(4) General and administration: Equity plan-related
compensation $ 1,130 $ 1,518 $ 3,995 $ 4,830
(5) Amortization of intangible assets:
Amortization of other identified intangible assets $ 2,796 $
3,129 $ 8,554 $ 8,099
(6) Special
charges: Rebalance, restructuring, and other costs $ 5,993
$ 2,214 $ 15,890 $ 15,099
(7)
In-process research and development In-process research and
development $ - $ 6,790 $ - $ 22,075
(8) Other income (expense), net: Equity in losses of
unconsolidated entities and impairment of investments $ 170
$ 445 $ 851 $ 1,088
(9) Interest
expensea: Amortization of debt discount $ 698 $
642 $ 2,051 $ 1,885 Debt retirement costs - -
(354 ) - $ 698 $ 642 $
1,697 $ 1,885
(10) Income tax expense:
Income tax effects $ 13,391 $ 51,128 $ 18,849
$ 29,848 a Interest expense for the three and nine
months ended October 31, 2008 presentation has been adjusted for
the retrospective adoption of the FASB's convertible debt
accounting guidance.
MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF NON-GAAP
ADJUSTMENTS
(In thousands, except earnings per share data)
Three Months Ended October 31,
Nine Months Ended October 31, 2009
2008 2009
2008 GAAP net lossa $ (27,034 ) $ (78,863 ) $ (61,256
) $ (122,157 ) Non-GAAP adjustments: Equity plan-related
compensation: (1) Cost of revenues 349 351 1,318 1,102 Research and
development 2,374 2,979 8,879 8,830 Marketing and selling 1,856
2,150 6,784 6,371 General and administration 1,130 1,518 3,995
4,830 System and software cost of revenues (2) - - - 103
Acquisition - related items: Amortization of purchased assets Cost
of revenues (3) 3,089 3,810 8,965 9,040 Amortization of intangible
assets (4) 2,796 3,129 8,554 8,099 In-process research and
development (5) - 6,790 - 22,075 Special charges (6) 5,993 2,214
15,890 15,099 Other income, net (7) 170 445 851 1,088 Interest
expense a(8) 698 642 1,697 1,885 Income tax effects (9)
13,391 51,128 18,849
29,848 Total of non-GAAP adjustments 31,846
75,156 75,782 108,370
Non-GAAP net income (loss)a $ 4,812 $ (3,707 ) $
14,526 $ (13,787 ) GAAP weighted average
shares (diluted) 97,854 92,354 95,636 91,484 Non-GAAP adjustment
2,042 - 656 -
Non-GAAP weighted average shares (diluted) 99,896
92,354 96,292 91,484
GAAP net loss per share (diluted)a $
(0.28
)
$
(0.85
)
$
(0.64
)
$
(1.34
)
Non-GAAP adjustments detailed above
0.33
0.81
0.79
1.19
Non-GAAP net income (loss) per share (diluted)a $
0.05
$
(0.04
)
$
0.15
$
(0.15
)
a The three and nine months ended October 31, 2008
presentations have been adjusted for the retrospective adoption of
the FASB's convertible debt accounting guidance.
(1 ) Equity plan-related compensation
expense.
(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 ) 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 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 October 31, 2009: Special charges
consist of (i) $3,369 of costs incurred for employee rebalances
which includes severance benefits, notice pay, and outplacement
services, (ii) $1,231 in acquisition costs, (iii) $1,175 in
advisory fees, (iv) $159 related to the abandonment of excess
leased facility space, and (v) $59 related to a casualty loss.
Three months ended October 31, 2008: Special charges consist of (i)
$2,273 in advisory fees, (ii) $350 of costs incurred for employee
rebalances consisting of severance benefits, notice pay and
outplacement services, and (iii) $(409) related to leased
facilities. Nine months ended October 31, 2009: Special charges
consist of (i) $8,996 of costs incurred for employee rebalances
which includes severance benefits, notice pay, and outplacement
services, (ii) $3,525 in advisory fees, (iii) $983 related to the
abandonment of excess leased facility space, (iv) $1,769 in
acquisition costs, (v) $566 related to a casualty loss, and (vi)
$51 in other costs. Nine months ended October 31, 2008: Special
charges consist of (i) $9,194 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $3,345 in advisory fees, (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.
(7 ) Three
months ended October 31, 2009: Loss of $170 on investment accounted
for under the equity method of accounting. Three months ended
October 31, 2008: Loss of $445 on investment accounted for under
the equity method of accounting. Nine months ended October 31,
2009: Other income, net consists of (i) loss of $738 on investment
accounted for under the equity method of accounting and (ii) an
impairment of $113 for an investment accounted for under the cost
method. Nine months ended October 31, 2008: Loss of $1,088 on
investment accounted for under the equity method of accounting.
(8 ) Three months ended October 31, 2009: $698
in amortization of original issuance debt discount. Three months
ended October 31, 2008: $642 in amortization of original issuance
debt discount. Nine months ended October 31, 2009: $2,051 in
amortization of original issuance debt discount and $(354) in
discounts and unamortized debt costs related to a partial
redemption of the $110.0M convertible debt.
Nine months ended October 31,
2008: $1,885 in amortization of original issuance debt
discount.
(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 non-GAAP pre-tax income.
MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF GAAP FINANCIAL
MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except percentages)
Three Months Ended October 31, Nine
Months Ended October 31, 2009
2008 2009 2008
GAAP gross margin $ 161,727 $ 153,126 $ 476,126 $ 450,497
Reconciling items to non-GAAP gross margin Equity plan-related
compensation 349 351 1,318 1,102 Prepaid royalty costs - - - 103
Amortization of purchased technology 3,089
3,810 8,965 9,040 Non-GAAP gross
margin $ 165,165 $ 157,287 $ 486,409 $ 460,742
Three Months Ended October 31, Nine
Months Ended October 31, 2009
2008 2009 2008
GAAP gross margin as a percent of total revenues 85 % 83 %
84 % 82 % Non-GAAP adjustments detailed above 2 % 2 %
2 % 2 % Non-GAAP gross margin as a percent of total
revenues 87 % 85 % 86 % 84 %
Three Months Ended October 31, Nine Months Ended
October 31, 2009 2008
2009 2008 GAAP operating
expenses $ 168,995 $ 178,468 $ 501,037 $ 536,411 Reconciling items
to non-GAAP operating expenses Equity plan-related compensation
(5,360 ) (6,647 ) (19,658 ) (20,031 ) Amortization of other
identified intangible assets (2,796 ) (3,129 ) (8,554 ) (8,099 )
Special charges (5,993 ) (2,214 ) (15,890 ) (15,099 ) In-process
research and development - (6,790 ) -
(22,075 ) Non-GAAP operating expenses $ 154,846
$ 159,688 $ 456,935 $ 471,107
Three Months Ended October 31, Nine Months Ended
October 31, 2009 2008
2009 2008 GAAP operating
loss $ (7,268 ) $ (25,342 ) $ (24,911 ) $ (85,914 ) Reconciling
items to non-GAAP operating income Equity plan-related compensation
5,709 6,998 20,976 21,133 Prepaid royalty costs - - - 103
Amortization of purchased intangible assets: Cost of revenues 3,089
3,810 8,965 9,040 Amortization of intangible assets 2,796 3,129
8,554 8,099 Special Charges 5,993 2,214 15,890 15,099 In-process
research and development - 6,790
- 22,075 Non-GAAP operating income (loss) $
10,319 $ (2,401 ) $ 29,474 $ (10,365 )
Three Months Ended October 31, Nine Months Ended October
31, 2009 2008
2009 2008 GAAP operating margin
as a percent of total revenues -4 % -14 % -4 % -16 % Non-GAAP
adjustments detailed above 9 % 13 % 9 %
14 % Non-GAAP operating margin as a percent of total revenues
5 % -1 % 5 % -2 %
Three Months Ended October 31, Nine Months Ended October
31, 2009 2008
2009 2008 GAAP other income, net
and interest expensea $ (5,389 ) $ (3,152 ) $ (14,521 ) $ (9,219 )
Reconciling items to non-GAAP other income, net and interest
expense Equity in losses of unconsolidated entities 170 445 851
1,088 Amortization of debt discount and retirement costs 698
642 1,697 1,885
Non-GAAP other income, net and interest expensea $ (4,521 ) $
(2,065 ) $ (11,973 ) $ (6,246 )
a The three and nine months ended
October 31, 2008 presentations have been adjusted for the
retrospective adoption of the FASB's convertible debt accounting
guidance.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED BALANCE
SHEETS
(In thousands)
October 31,
January 31, 2009 2009a
Assets Current assets: Cash, cash
equivalents, and short-term investments $ 84,658 $ 95,639 Trade
accounts receivable, net 76,988 133,719 Term receivables,
short-term 164,871 139,133 Prepaid expenses and other 32,559 39,146
Deferred income taxes 8,755 10,163
Total current assets 367,831 417,800
Property, plant, and
equipment, net 95,921 100,991
Term receivables,
long-term 146,167 146,682
Goodwill and intangible assets,
net 485,116 480,956
Other assets 38,988
39,641 Total assets $ 1,134,023 $
1,186,070
Liabilities and Stockholders' Equity
Current liabilities: Short-term borrowings $ 7,529 $ 36,998
Current portion of notes payable 32,272 - Accounts payable 7,559
10,197 Income taxes payable 18,644 5,340 Accrued payroll and
related liabilities 70,554 65,687 Accrued liabilities 38,517 46,034
Deferred revenue 131,975 155,098
Total current liabilities 307,050 319,354
Long-term notes
payable 154,119 188,170
Deferred revenue, long-term
10,443 16,890
Other long-term liabilities 67,905
75,211 Total liabilities 539,517
599,625
Stockholders' equity: Common
stock 647,834 602,064 Retained earnings (88,109 ) (26,853 )
Accumulated other comprehensive income 34,781
11,234 Total stockholders' equity 594,506
586,445 Total liabilities and stockholders'
equity $ 1,134,023 $ 1,186,070 a The
consolidated balance sheet as of January 31, 2009 has been adjusted
for the retrospective adoption of the FASB's convertible debt
accounting guidance.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS AND SUPPLEMENTAL INFORMATION
(In thousands, except days sales outstanding)
Three Months Ended October 31, Nine
Months Ended October 31, 2009
2008 2009 2008
Operating activities Net lossa $ (27,034 ) $ (78,863
) $ (61,256 ) $ (122,157 ) Depreciation and amortization a(1)
14,452 16,151 45,252 44,327 Other adjustments to reconcile:
Operating cash 519 15,190 15,633 43,429 Changes in working capital
25,804 9,454 33,325
39,470 Net cash provided by (used in)
operating activities 13,741 (38,068 ) 32,954 5,069
Investing activities Net cash used in investing activities
(3,824 ) (4,471 ) (19,901 ) (82,014 )
Financing
activities Net cash provided by (used in) financing activities
(2,673 ) 33,211 (22,776 ) 40,126 Effect of exchange rate
changes on cash and cash equivalents 1,330
(3,752 ) 732 (3,514 ) Net change in
cash and cash equivalents 8,574 (13,080 ) (8,991 ) (40,333 ) Cash
and cash equivalents at beginning of period 76,077
90,673 93,642 117,926
Cash and cash equivalents at end of period $ 84,651 $
77,593 $ 84,651 $ 77,593 a The three
and nine months ended October 31, 2008 presentations have been
adjusted for the retrospective adoption of the FASB's convertible
debt accounting guidance.
(1)
Depreciation and amortization includes a write-off of note issuance
costs in the amount of $26 for the nine months ended October 31,
2009.
Other data: Capital expenditures $ 6,983
$ 14,077 $ 17,951 $ 33,850 Days sales
outstanding 115 119
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 Q3 YEAR
Q1 Q2 Q3 Q4 YEAR Q1
Q2 Q3 Q4 YEAR Integrated Systems Design
20% 20% 20%
20% 15% 20% 25% 15%
20% 15% 20% 20% 15%
20% IC Design to Silicon 40% 40% 35%
40% 40% 30% 30%
40%
35% 40% 35% 30% 40%
35% Functional Verification
20% 25% 15%
20% 20% 20% 20% 30%
20% 20% 25% 20% 20%
25% New & Emerging Products 10% 5% 20%
10% 10%
20% 15% 10%
15% 15% 15% 20% 20%
15% Services &
Other 10% 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%
100% FY 2010 Fiscal year ended
January 31, 2009 Fiscal year ended January 31, 2008
Product Group Revenues (b) Q1 Q2 Q3
YEAR Q1 Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4 YEAR Integrated
Systems Design 20% 20% 30%
25% 20% 20% 25% 20%
20%
20% 20% 25% 20%
20% IC Design to Silicon 45% 35% 30%
35% 40% 30% 30% 35%
35% 40% 40% 25% 30%
35%
Functional Verification 20% 25% 20%
25% 20% 25% 25% 30%
25% 20% 20% 25% 30%
25% New & Emerging Products
10% 10% 10%
10% 10% 15% 10% 10%
10% 10% 15% 15% 15%
15% Services & Other 5% 10% 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% 100% FY 2010
Fiscal year ended January 31, 2009 Fiscal year ended
January 31, 2008 Bookings by Geography Q1
Q2 Q3 YEAR Q1 Q2 Q3
Q4 YEAR Q1 Q2 Q3 Q4
YEAR North America 40% 55% 45%
50% 40% 30% 40% 35%
35% 50% 40% 45% 30%
40% Europe 25% 25% 15%
20%
35% 35% 35% 35%
35% 25% 30% 15% 30%
25% Japan 25% 5%
20%
15% 15% 20% 10% 5%
15% 10% 10% 20% 20%
15%
Pac Rim 10% 15% 20%
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%
100% FY 2010 Fiscal year ended
January 31, 2009 Fiscal year ended January 31, 2008
Revenue by Geography Q1 Q2 Q3
YEAR Q1 Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4 YEAR North America
40% 50% 40%
45% 40% 35% 40% 40%
40% 50% 55% 40% 40%
45% Europe 20% 30% 25%
25% 30% 30% 35% 35%
30%
25% 20% 25% 30%
25% Japan 20% 5% 15%
15% 20% 20% 10%
10%
15% 15% 10% 20% 15%
15% Pac Rim 20% 15% 20%
15% 10% 15% 15% 15%
15% 10% 15% 15% 15%
15%
Total 100% 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 Q3 YEAR Q1
Q2 Q3 Q4 YEAR Q1 Q2
Q3 Q4 YEAR Perpetual 15% 25% 20%
20%
20% 20% 20% 10%
15% 30% 25% 30% 10%
20% Ratable 15%
15% 15%
15% 25% 20% 15% 10%
15% 20% 20% 10% 10%
15% Up Front 70% 60% 65%
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% 100% FY 2010
Fiscal year ended January 31, 2009 Fiscal year ended
January 31, 2008 Revenues by Business Model (c)
Q1 Q2 Q3 YEAR Q1 Q2
Q3 Q4 YEAR Q1 Q2 Q3
Q4 YEAR Perpetual 15% 25% 15%
20% 20% 20% 20%
10%
15% 25% 20% 20% 15%
20% Ratable 10% 15% 15%
15% 20% 20% 20% 10%
15% 15% 15% 20% 10%
15% Up
Front 75% 60% 70%
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%
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 IMPACT OF ACCOUNTING
CHANGE
(In thousands)
Impact of
Retrospective Adoption of FASB's Convertible Debt Accounting
Guidance on the Unaudited Consolidated Statement of Operations:
Three months ended October 31, 2008 Prior to
Adoption Effect of Change As Adjusted
Operating loss $ (25,342 ) - $ (25,342 ) Other income
(expense), net 1,737 - 1,737 Interest expense (4,270 )
(619 ) (4,889 ) Loss before income tax (27,875 ) (619
) (28,494 ) Income tax expense 50,369 -
50,369 Net loss $ (78,244 ) $ (619 ) $ (78,863 )
Basic and diluted net loss per share $ (0.85 ) $ - $
(0.85 )
Nine months ended October 31, 2008
Prior to Adoption Effect of Change As
Adjusted Operating loss $ (85,914 ) - $ (85,914 )
Other income (expense), net 4,829 - 4,829 Interest expense
(12,230 ) (1,818 ) (14,048 ) Loss before income tax
(93,315 ) (1,818 ) (95,133 ) Income tax expense 27,024
- 27,024 Net loss $ (120,339 ) $
(1,818 ) $ (122,157 ) Basic and diluted net loss per share $
(1.32 ) $ (0.02 ) $ (1.34 )
Impact of
Retrospective Adoption of FASB's Convertible Debt Accounting
Guidance on the Unaudited Consolidated Balance Sheet:
Prior to As of January 31, 2009 Adoption
Effect of Change 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 Stockholders' 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
MENTOR GRAPHICS CORPORATION
UNAUDITED IMPACT OF ACCOUNTING
CHANGE
(In thousands)
Impact of Retrospective Adoption of FASB's
Convertible Debt Accounting Guidance on the Unaudited Consolidated
Statement of Cash Flows: Three months ended October
31, 2008 Prior to Adoption Effect of
Change As Adjusted Operating Cash Flows: Net loss
$ (78,244 ) $ (619 ) $ (78,863 ) Depreciation and amortization
15,532 619 16,151 Other adjustments to reconcile: Operating cash
20,413 - 15,190 Changes in working capital 4,231
- 9,454 Net cash provided by operating
activities (38,068 ) - (38,068 )
Investing Cash
Flows: Net cash used in investing activities (4,471 ) - (4,471
)
Financing Cash Flows: Net cash used in financing
activities 33,211 - 33,211 Effect of exchange rate changes on cash
and cash equivalents (3,752 ) - (3,752
) Net change in cash and cash equivalents (13,080 ) - (13,080 )
Cash and cash equivalents at the beginning of the period
90,673 - 90,673 Cash and cash
equivalents at the end of the period $ 77,593 $ - $
77,593
Nine months ended October 31,
2008 Prior to Adoption Effect of Change
As Adjusted Operating Cash Flows: Net loss $ (120,339
) $ (1,818 ) $ (122,157 ) Depreciation and amortization 42,509
1,818 44,327 Other adjustments to reconcile: Operating cash 48,633
- 43,429 Changes in working capital 34,266 -
39,470 Net cash provided by operating
activities 5,069 - 5,069
Investing Cash Flows: Net
cash used in investing activities (82,014 ) - (82,014 )
Financing Cash Flows: Net cash used in financing activities
40,126 - 40,126 Effect of exchange rate changes on cash and cash
equivalents (3,514 ) - (3,514 ) Net
change in cash and cash equivalents (40,333 ) - (40,333 ) Cash and
cash equivalents at the beginning of the period 117,926
- 117,926 Cash and cash
equivalents at the end of the period $ 77,593 $ - $
77,593
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 FY10 FY10
Diluted GAAP net income (loss) per share $ 0.33 $ (0.28 ) Non-GAAP
Adjustments: Amortization of purchased intangible assets (1) 0.04
0.14 Amortization of other identified intangible assets (2) 0.03
0.12 Equity plan-related compensation (3) 0.05 0.27 Special charges
(4) 0.00 0.16 Other income and interest expense (5) 0.01 0.04
Income tax effects (6) (0.18 ) (0.01 ) Non-GAAP net
income per share $ 0.28 $ 0.44
(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 FY10 assumes no
additional acquisitions.
(2 ) Excludes
amortization of other identified intangible assets including trade
names, employment agreements, customer relationships, and deferred
compensation resulting from acquisition transactions. Other
identified intangible assets are amortized over two to five years.
The guidance for Q4 FY10 assumes no additional acquisitions.
(3 ) Excludes equity plan-related compensation
expense.
(4 ) Excludes special charges
consisting primarily of costs incurred for facility closures,
employee rebalances (which includes severance benefits, notice pay
and outplacement services), advisory fees, and acquisition costs.
The guidance for Q4 FY10 assumes no additional special charges.
(5 ) Reflects amortization of original
issuance debt discount and equity in losses of an equity method
investment.
(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
non-GAAP pre-tax income.
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