Mentor Graphics Corporation (NASDAQ:MENT) today announced
results for the fiscal second quarter ending July 31, 2010. For the
fiscal second quarter, the company reported revenues of $187.9
million, non-GAAP earnings per share of $.01, and a GAAP loss per
share of $.13.
“Semiconductor markets continue to improve, with revenues at an
all-time high, and industry analysts forecasting continued growth,”
said Walden C. Rhines, CEO and chairman of Mentor Graphics. “Our
solid results across all core EDA product lines reflected that.
Annualized revenue from renewal contracts in our top ten accounts
this quarter grew 45% compared to prior contract values. Leading
indicators of the business, like consulting and training, were
strong, with revenues up 30% and 70% respectively, year over year.
Our strategy of investing in markets adjacent to semiconductor EDA,
such as transportation, continues to pay off, with revenue from
transportation products nearly doubling year on year, and bookings
nearly tripling.”
The company also announced this quarter that the Mentor Graphics
track in the TSMC Reference Flow has expanded to a complete
front-to-back solution with new support for the Vista™ platform and
the Catapult® C synthesis tool, expanded low power and 28nm routing
features in the Olympus-SoC™ place and route system, and the
Calibre® InRoute solution. Also released during the quarter were
new versions of Mentor’s 0-In® Formal and 0-In Clock Domain
Crossing products, both enabling greater speed and ease of use in
verifying complex IC designs. The company’s recently acquired Valor
division released version 9.0 of its vSure™ product, with
enhancements enabling designers to more easily perform extensive
design-for-manufacturing analysis during the printed circuit board
design process.
“This was our sixth consecutive quarter of meeting or exceeding
guidance,” said Gregory K. Hinckley, president of Mentor Graphics.
“Our Flomerics and LogicVision acquisitions are performing well,
and our new Valor division is on track to contribute to a strong
second half. As a result, we are increasing guidance for the full
year.”
Outlook
For the fiscal third quarter ending October 31, 2010, the
company expects revenues of about $220 million, non-GAAP earnings
per share of approximately $.15, and GAAP earnings per share of
approximately $.08. For the full fiscal year 2011, the
company now expects revenues of approximately $880 million,
non-GAAP earnings per share of about $.65, and GAAP earnings per
share of approximately $.20.
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. Corporate headquarters are located at
8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide
Web site: http://www.mentor.com/.
(Mentor Graphics, Calibre, Catapult, and 0-In are registered
trademarks and Vista, vSure and Olympus-SoC 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 spending on the company’s
products and services by its customers due to the worldwide
economic environment, and the company’s ability to appropriately
reduce its expenses in response; (ii) the company’s ability to
successfully offer products and services that compete in the highly
competitive EDA industry; (iii) product bundling or
discounting of products and services by competitors; (iv) effects
of the increasing volatility of foreign currency fluctuations on
the company’s business; (v) changes in accounting or reporting
rules or interpretations; (vi) the impact of tax audits, or
changes in the tax laws, regulations or enforcement practices;
(vii) effects of unanticipated shifts in product mix on gross
margin; and (viii) effects of customer seasonal purchasing
patterns and the timing of significant orders which 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.
Fiscal Year Definition
Mentor Graphics fiscal year runs from February 1 to January 31.
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.
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, net income (loss), and earnings (loss) per share 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, 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 long-lived assets, 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. 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, abandonment of in-process
research and development acquired in an acquisition, 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 excluded as they 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 incurred
based on the particular facts and circumstances of acquisition and
restructuring decisions and can vary in size and frequency. These
charges are excluded as they are not ordinarily included in our
annual operating plan and related budget due to 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 are 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 are 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
do not consider the amortization of the debt discount on
convertible debt 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 earnings or losses of
unconsolidated subsidiaries, with the exception of our investment
in Frontline P.C.B. Solutions Limited Partnership (Frontline),
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 are excluded as we do not
control the results of operations for these investments, we do not
participate in regular and periodic operating activities and
management does not consider these businesses a part of our core
operating performance.
- In connection with the Company’s
acquisition of Valor on March 18, 2010, we also acquired Valor’s
50% interest in a joint venture, Frontline P.C.B. Solutions Limited
Partnership (“Frontline”). We report our equity in the earnings or
losses of Frontline within operating income. We actively
participate in regular and periodic activities such as budgeting,
business planning, marketing and direction of research and
development projects. Accordingly, we do not exclude our share of
Frontline’s earnings or losses from our non-GAAP results as
management considers the joint venture to be core to our 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 jurisdictions in which we operate. This non-GAAP tax
rate eliminates the effects of non-recurring and period specific
items which are often attributable to acquisition decisions and can
vary in size and frequency and considers our US loss carryforwards
that have not been previously benefited. This 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, 2010 is (4)%, after
the consideration of period specific items. Without period specific
items of ($1.9) million, our GAAP tax rate is (10)%. Our full
fiscal year 2011 GAAP tax rate, inclusive of period specific items,
is projected to be 35%. 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 earnings
per share 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. In addition, if we have a
GAAP loss and non-GAAP net income, our non-GAAP results will not
reflect any projected GAAP tax benefits. Similarly, in the event we
were to have GAAP net income and a non-GAAP loss, our GAAP tax
expense would be replaced by a credit 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.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(In thousands, except earnings per share data)
Three Months Ended July 31, Six
Months Ended July 31, 2010 2009 2010
2009 Revenues: System and software $ 100,491 $
103,884 $ 197,941 $ 219,302 Service and support 87,443
78,737 170,570 157,094
Total revenues 187,934 182,621
368,511 376,396
Cost of revenues:
(1) System and software 5,237 9,511 9,191 14,400 Service and
support 22,746 20,518 45,066 41,721 Amortization of purchased
technology 3,560 2,928 7,129
5,876 Total cost of revenues 31,543
32,957 61,386 61,997
Gross margin 156,391 149,664
307,125 314,399
Operating
expenses: Research and development (2) 65,045 60,843 129,177
123,134 Marketing and selling (3) 74,634 71,430 148,286 148,031
General and administration (4) 23,223 21,798 45,722 45,222 Equity
in earnings of Frontline (5) (1,162 ) - (1,346 ) - Amortization of
intangible assets (6) 1,936 2,888 4,297 5,758 Special charges (7)
3,206 4,202 6,474
9,897 Total operating expenses 166,882
161,161 332,610 332,042
Operating loss (10,491 ) (11,497 ) (25,485 ) (17,643 ) Other
expense, net (8) (14 ) (356 ) (1,155 ) (258 ) Interest expense (9)
(4,727 ) (4,723 ) (9,054 ) (8,874 )
Loss before income tax (15,232 ) (16,576 ) (35,694 ) (26,775 )
Income tax expense (benefit) (10) (985 ) 4,690
1,578 7,447 Net loss $ (14,247 ) $
(21,266 ) $ (37,272 ) $ (34,222 ) Net loss per share: Basic $ (0.13
) $ (0.22 ) $ (0.35 ) $ (0.36 ) Diluted $ (0.13 ) $ (0.22 ) $ (0.35
) $ (0.36 ) Weighted average number of shares outstanding: Basic
107,629 94,853 105,717
94,514 Diluted 107,629 94,853
105,717 94,514 Refer to
following page for a description of footnotes.
MENTOR GRAPHICS CORPORATION
FOOTNOTES TO UNAUDITED CONDENSED 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,
2010 2009 2010 2009 (1) Cost of
revenues: Equity plan-related compensation $ 238 $ 470 $ 450 $
969 Amortization of purchased technology 3,560
2,928 7,129 5,876 $ 3,798 $
3,398 $ 7,579 $ 6,845
(2) Research and
development: Equity plan-related compensation $ 1,771 $
3,058 $ 4,209 $ 6,505
(3) Marketing and
selling: Equity plan-related compensation $ 1,313 $
2,391 $ 3,503 $ 4,928
(4) General and
administration: Equity plan-related compensation $ 1,781
$ 1,578 $ 3,522 $ 2,865
(5) Equity in
earnings of Frontline:
Amortization of purchased
technology and other identified intangible assets
$ 1,242 $ - $ 1,863 $ -
(6)
Amortization of intangible assets: Amortization of other
identified intangible assets $ 1,936 $ 2,888 $ 4,297
$ 5,758
(7) Special charges: Rebalance,
restructuring, and other costs $ 3,206 $ 4,202 $
6,474 $ 9,897
(8) Other expense, net: Equity
in losses of unconsolidated entities and impairment of investments
$ 1 $ 244 $ 271 $ 681
(9) Interest
expense: Amortization of debt discount $ 744 $ 684 $ 1,473 $
1,353 Premium (discount) and costs related to debt retirement
345 (106 ) 345 (354 ) $ 1,089
$ 578 $ 1,818 $ 999
(10) Income tax
expense (benefit): Non-GAAP income tax effects $ (1,139 ) $
4,391 $ 1,945 $ 5,458
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, 2010 2009 2010 2009
GAAP net loss $ (14,247 ) $ (21,266 ) $ (37,272 ) $ (34,222 )
Non-GAAP adjustments: Equity plan-related compensation: (1) Cost of
revenues 238 470 450 969 Research and development 1,771 3,058 4,209
6,505 Marketing and selling 1,313 2,391 3,503 4,928 General and
administration 1,781 1,578 3,522 2,865 Acquisition - related items:
Amortization of purchased assets Cost of revenues (2) 3,560 2,928
7,129 5,876 Amortization of intangible assets (3) 1,936 2,888 4,297
5,758 Frontline purchased technology and intangible assets (4)
1,242 - 1,863 - Special charges (5) 3,206 4,202 6,474 9,897 Other
income (expense), net (6) 1 244 271 681 Interest expense (7) 1,089
578 1,818 999 Non-GAAP income tax effects (8) (1,139 )
4,391 1,945 5,458 Total
of non-GAAP adjustments 14,998 22,728
35,481 43,936 Non-GAAP net income
(loss) $ 751 $ 1,462 $ (1,791 ) $ 9,714
GAAP weighted average shares (diluted) 107,629 94,853 105,717
94,514 Non-GAAP adjustment 2,040 387
- 13 Non-GAAP weighted average shares
(diluted) 109,669 95,240 105,717
94,527 GAAP net loss per share
(diluted) $ (0.13 ) $ (0.22 ) $ (0.35 ) $ (0.36 ) Non-GAAP
adjustments detailed above 0.14 0.24
0.33 0.46 Non-GAAP net income (loss)
per share (diluted) $ 0.01 $ 0.02 $ (0.02 ) $ 0.10
(1) Equity plan-related compensation expense.
(2) Amount represents amortization of purchased technology
resulting from acquisitions. Purchased intangible assets are
amortized over two to five years.
(3) 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.
(4) Amount represents amortization of purchased technology
and other identified intangible assets identified as part of the
fair value of the Frontline P.C.B. Solutions Limited Partnership
(Frontline) investment. Mentor Graphics acquired a 50% joint
venture in Frontline as a result of the Valor Computerized Systems,
Ltd. acquisition in the first quarter of fiscal 2011. The purchased
technology will be amortized over three years, other identified
intangible assets will be amortized over three to four years, and
are reflected in the income statement in the equity in earnings of
Frontline results. This expense is the same type as being adjusted
for in notes (2) and (3) above.
(5) Three months ended July
31, 2010: Special charges consist of (i) $1,860 of costs incurred
for employee rebalances which includes severance benefits, notice
pay, and outplacement services, (ii) $825 in advisory fees, (iii)
$247 related to the abandonment of excess leased facility space,
(iv) $220 in acquisition costs, and (v) $54 in other adjustments.
Three months ended July 31, 2009: Special charges consist of (i)
$1,599 of costs incurred for employee rebalances which includes
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 casualty loss, and (vi) $51 in other adjustments.
Six months ended July 31, 2010: Special charges consist of (i)
$3,449 of costs incurred for employee rebalances which includes
severance benefits, notice pay, and outplacement services, (ii)
$2,000 in advisory fees, (iii) $1,090 related to the abandonment of
excess leased facility space, (iv) $420 in acquisition costs, (v)
$(566) related to a casualty loss, and (vi) $81 in other
adjustments. Six months ended July 31, 2009: Special charges
consist of (i) $5,627 of costs incurred for employee rebalances
which includes 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 casualty loss, and (vi)
$51 in other adjustments.
(6) Three months ended July 31,
2010: Loss of $1 on investment accounted for under the equity
method of accounting. Three months ended July 31, 2009: Loss of
$244 on investment accounted for under the equity method of
accounting. Six months ended July 31, 2010: Loss of $271 on
investment accounted for under the equity method of accounting. Six
months ended July 31, 2009: Other income (expense), net consists
of: (i) equity losses of $568 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 of accounting.
(7) Three months ended July 31, 2010: $744 in amortization
of original issuance debt discount and $345 in premium on partial
redemption of the $110.0M convertible debt. Three months ended July
31, 2009: $684 in amortization of original issuance debt discount
and $(106) in discounts and unamortized debt costs related to a
partial redemption of the $110.0M convertible debt. Six months
ended July 31, 2010: $1,473 in amortization of original issuance
debt discount and $345 in premium on partial redemption of the
$110.0M convertible debt. Six months ended July 31, 2009: $1,353 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.
(8) 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 July 31, Six Months
Ended July 31, 2010 2009 2010 2009
GAAP gross margin $ 156,391 $ 149,664 $ 307,125 $ 314,399
Reconciling items to non-GAAP gross margin Equity plan-related
compensation 238 470 450 969 Amortization of purchased technology
3,560 2,928 7,129
5,876 Non-GAAP gross margin $ 160,189 $ 153,062
$ 314,704 $ 321,244
Three
Months Ended July 31, Six Months Ended July 31,
2010 2009 2010 2009 GAAP gross margin
as a percent of total revenues 83 % 82 % 83 % 84 % Non-GAAP
adjustments detailed above 2 % 2 % 2 %
1 % Non-GAAP gross margin as a percent of total revenues 85
% 84 % 85 % 85 %
Three Months
Ended July 31, Six Months Ended July 31, 2010
2009 2010 2009 GAAP operating expenses $
166,882 $ 161,161 $ 332,610 $ 332,042 Reconciling items to non-GAAP
operating expenses
Amortization of Frontline
purchased technology and other identified intangible assets
(1,242 ) - (1,863 ) - Equity plan-related compensation (4,865 )
(7,027 ) (11,234 ) (14,298 ) Amortization of other identified
intangible assets (1,936 ) (2,888 ) (4,297 ) (5,758 ) Special
charges (3,206 ) (4,202 ) (6,474 )
(9,897 ) Non-GAAP operating expenses $ 155,633 $ 147,044
$ 308,742 $ 302,089
Three
Months Ended July 31, Six Months Ended July 31,
2010 2009 2010 2009 GAAP operating loss
$ (10,491 ) $ (11,497 ) $ (25,485 ) $ (17,643 ) Reconciling items
to non-GAAP operating income
Amortization of Frontline
purchased technology and other identified intangible assets
1,242 - 1,863 - Equity plan-related compensation 5,103 7,497 11,684
15,267 Amortization of purchased intangible assets: Cost of
revenues 3,560 2,928 7,129 5,876 Amortization of intangible assets
1,936 2,888 4,297 5,758 Special Charges 3,206
4,202 6,474 9,897 Non-GAAP
operating income $ 4,556 $ 6,018 $ 5,962 $
19,155
Three Months Ended July 31,
Six Months Ended July 31, 2010 2009
2010 2009 GAAP operating loss as a percent of total
revenues -6 % -6 % -7 % -5 % Non-GAAP adjustments detailed above
8 % 9 % 9 % 10 % Non-GAAP operating
income as a percent of total revenues 2 % 3 %
2 % 5 %
Three Months Ended July 31,
Six Months Ended July 31, 2010 2009
2010 2009 GAAP other expense, net and interest
expense $ (4,741 ) $ (5,079 ) $ (10,209 ) $ (9,132 )
Reconciling items to non-GAAP
other income (expense), net and interest expense
Equity in losses of unconsolidated entities 1 244 271 568
Impairment of cost method investment - - - 113 Amortization of debt
discount and retirement costs 1,089 578
1,818 999 Non-GAAP other expense, net
and interest expense $ (3,651 ) $ (4,257 ) $ (8,120 ) $ (7,452 )
MENTOR GRAPHICS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands)
July 31,
January 31, 2010 2010 Assets
Current assets: Cash, cash equivalents, and short-term
investments $ 89,319 $ 99,343 Trade accounts receivable, net 88,654
110,839 Term receivables, short-term 182,857 178,911 Prepaid
expenses and other 34,793 29,629 Deferred income taxes 7,862
11,891 Total current assets 403,485
430,613
Property, plant, and equipment, net 130,663 121,795
Term receivables, long-term 125,953 164,898
Goodwill and
intangible assets, net 520,017 484,342
Other assets
51,214 21,393 Total assets $
1,231,332 $ 1,223,041
Liabilities and
Stockholders' Equity Current liabilities: Short-term
borrowings $ 8,938 $ 37,874 Current portion of notes payable 22,763
32,272 Accounts payable 14,478 9,985 Income taxes payable 1,763
3,971 Accrued payroll and related liabilities 49,992 77,008 Accrued
liabilities 38,512 44,122 Deferred revenue 156,781
153,965 Total current liabilities 293,227
359,197
Long-term notes payable 186,591 156,075
Deferred
revenue, long-term 9,453 9,534
Other long-term
liabilities 61,262 58,218 Total
liabilities 550,533 583,024
Stockholders' equity: Common stock 742,924 662,595
Accumulated deficit (86,014 ) (48,742 ) Accumulated other
comprehensive income 23,889 26,164
Total stockholders' equity 680,799 640,017
Total liabilities and stockholders' equity $
1,231,332 $ 1,223,041
MENTOR GRAPHICS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS AND SUPPLEMENTAL INFORMATION
(In thousands, except days sales outstanding)
Three Months Ended July 31, Six Months
Ended July 31, 2010 2009 2010 2009
Operating activities Net loss $ (14,247 ) $ (21,266 ) $
(37,272 ) $ (34,222 ) Depreciation and amortization (1) 15,187
14,737 29,577 30,800 Other adjustments to reconcile: Operating cash
7,886 4,894 12,601 15,114 Changes in working capital (21,679
) 21,818 9,889 7,521
Net cash provided by (used in) operating activities (12,853
) 20,183 14,795 19,213
Investing activities Net cash
used in investing activities (11,991 ) (11,354 ) (29,386 ) (16,077
)
Financing activities Net cash provided by (used in)
financing activities 13,876 (11,309 ) 4,321 (20,103 ) Effect
of exchange rate changes on cash and cash equivalents 555
(220 ) 246 (598 ) Net
change in cash and cash equivalents (10,413 ) (2,700 ) (10,024 )
(17,565 ) Cash and cash equivalents at beginning of period
99,729 78,777 99,340
93,642 Cash and cash equivalents at end of period $
89,316 $ 76,077 $ 89,316 $ 76,077
(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, $132 for the six months ended
July 31, 2010 and $26 for the six months ended July 31, 2009.
Other data: Capital expenditures $ 10,880
$ 6,398 $ 18,488 $ 10,968 Days sales
outstanding 130 128
MENTOR GRAPHICS CORPORATION
UNAUDITED SUPPLEMENTAL BOOKINGS AND REVENUE
INFORMATION
(Rounded to nearest 5%)
FY 2011 Fiscal year ended January 31,
2010 Fiscal year ended January 31, 2009 Product Group
Bookings (a) Q1 Q2 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Integrated Systems Design 20% 20%
20% 20% 20% 20% 20%
20% 15% 20% 25% 15%
20% IC
Design to Silicon 30% 35%
30% 40% 40% 35% 40%
40% 40%
30% 30% 40%
35% Scalable Verification 30% 25%
30% 20%
25% 15% 20%
20% 20% 20% 20% 30%
20% New &
Emerging Products 10% 10%
10% 10% 5% 20% 15%
10% 10%
20% 15% 10%
15% Services & Other (b) 10% 10%
10% 10% 10% 10% 5%
10% 15% 10% 10% 5%
10%
Total 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
FY 2011 Fiscal year ended January 31, 2010 Fiscal
year ended January 31, 2009 Product Group Revenue (b)
Q1 Q2 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR Integrated Systems Design 25% 30%
30% 20% 20%
30% 25%
25% 20% 20% 25% 20%
20% IC Design to Silicon
35% 30%
30% 45% 35% 30% 35%
35% 40% 30% 30% 35%
35% Scalable Verification 20% 20%
20% 20% 25% 20% 20%
25% 20% 25% 25% 30%
25% New & Emerging Products
10% 10%
10% 10% 10% 10% 15%
10% 10% 15% 10% 10%
10% Services & Other (b) 10% 10%
10% 5% 10% 10% 5%
5% 10%
10% 10% 5%
10% Total
100% 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% FY 2011
Fiscal year ended January 31, 2010 Fiscal year ended
January 31, 2009 Bookings by Geography Q1
Q2 YEAR Q1 Q2
Q3 Q4 YEAR Q1
Q2 Q3 Q4 YEAR
North America 45% 40%
45% 40% 55% 45% 40%
45% 40% 30%
40% 35%
35% Europe 20% 25%
20% 25% 25% 15% 25%
20% 35% 35% 35% 35%
35% Japan 15% 5%
10% 25%
5% 20% 15%
15% 15% 20% 10% 5%
15% Pac Rim 20%
30%
25% 10% 15% 20% 20%
20% 10% 15% 15% 25%
15%
Total 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
FY 2011 Fiscal year ended January 31, 2010
Fiscal year ended January 31, 2009 Revenue by
Geography Q1 Q2 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR North America 35% 40%
35% 40%
50% 40% 40%
45% 40% 35% 40% 40%
40% Europe 25% 25%
25% 20% 30% 25% 30%
25% 30% 30% 35% 35%
30%
Japan 20% 10%
15% 20% 5% 15% 15%
15% 20% 20% 10% 10%
15% Pac Rim 20% 25%
25% 20% 15%
20% 15%
15% 10% 15% 15%
15%
15% Total 100%
100% 100% 100% 100%
100% 100% 100%
100% 100% 100%
100% 100% FY 2011 Fiscal year
ended January 31, 2010 Fiscal year ended January 31,
2009 Bookings by Business Model (c) Q1
Q2 YEAR Q1 Q2
Q3 Q4 YEAR Q1
Q2 Q3 Q4 YEAR
Perpetual 40% 30%
35% 15% 25% 20% 10%
15% 20% 20% 20%
10%
15% Ratable 20% 15%
15% 15% 15% 15% 15%
15% 25% 20% 15% 10%
15% Up Front 40% 55%
50% 70% 60% 65% 75%
70% 55% 60% 65% 80%
70%
Total 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
FY 2011 Fiscal year ended January 31, 2010 Fiscal
year ended January 31, 2009 Revenue by Business Model
(c) Q1 Q2 YEAR Q1
Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Perpetual 20% 25%
25% 15% 25%
15% 10%
15% 20% 20% 20% 10%
15% Ratable 25% 15%
20% 10% 15% 15% 10%
15% 20% 20% 20% 10%
15% Up
Front 55% 60%
55% 75% 60% 70%
80%
70% 60% 60% 60% 80%
70% Total 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
100% (a) Product Group Bookings excludes support
bookings for all sub-flow categories. (b) Product Group Revenue
includes support revenue for each sub-flow category as appropriate.
(c) Bookings and Revenue by Business Model are System and Software
only.
MENTOR GRAPHICS CORPORATION
UNAUDITED 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 loss per share for the periods shown below:
Q3 FY11 FY11 Diluted GAAP net
income per share $ 0.08 $ 0.20 Non-GAAP Adjustments: Amortization
of purchased intangible assets (1) 0.03 0.14 Amortization of other
identified intangible assets (2) 0.02 0.06 Equity plan-related
compensation (3) 0.04 0.18 Special charges (4) 0.00 0.06 Other
income and interest expense (5) 0.01 0.03 Non-GAAP income tax
effects (6) (0.03 ) (0.02 ) Non-GAAP net income per
share $ 0.15 $ 0.65
(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 FY11 and Full Year FY11 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 Q3 FY11 and Full
Year FY11 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 legal fees, and
acquisition costs. The guidance for Q3 FY11 and Full Year FY11
assumes no additional special charges.
(5) Reflects
amortization of original issuance debt discount and equity in
losses on 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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