Mentor Graphics Corporation (NASDAQ: MENT) today announced
results for the fiscal third quarter ending October 31, 2010. For
the fiscal third quarter, the company reported revenues of $238.9
million, non-GAAP earnings per share of $.22, and GAAP earnings per
share of $.14.
“The strength of our third quarter was broad-based with bookings
up 60% over the year ago quarter,” said Walden C. Rhines, CEO and
chairman of Mentor Graphics. “Our strategy of focusing on areas of
differentiation rewarded us this quarter with strong growth in
emulation, printed circuit board design software, design for test,
physical verification and a number of our newer system-oriented
products like automotive networking. Our diversification also
helped drive the business with over 30% of new customers coming
from non-traditional segments. We remain confident that our
strategy will continue to drive earnings growth for the
company.”
During the quarter, the company launched new analysis capability
in the FloTHERM® thermal analysis tool, which allows designers to
easily find and correct bottlenecks in heat flow in a design. The
company’s embedded software division released Mentor Embedded
ReadyStart™ Platform, a new easy-to-use platform for rapid
development of embedded systems, and a version of the Inflexion
Platform™ graphical user interface for the Android™ platform.
Additionally, the embedded market analyst firm VisionMobile
reported that Mentor’s Nucleus® real-time operating system is the
market leader in handsets with over 2.3 billion copies shipped.
“The third quarter was a record on revenue, bookings and product
book-to-bill,” said Gregory K. Hinckley, president of Mentor
Graphics. “Despite some headwinds from currency and product mix, we
are confident that this momentum will continue into the fourth
quarter. As a result, we are raising guidance.”
Outlook
For the fiscal fourth quarter, the company expects revenue of
about $293 million, non-GAAP earnings per share of approximately
$.46, and GAAP earnings per share of about $.40. For the full
fiscal year 2011 ending January 31, 2011 the company sees revenue
in the range of $900 million, non-GAAP earnings per share of about
$.67, and GAAP earnings per share of approximately $.19.
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, semiconductor and systems
companies. Established in 1981, the company reported revenues over
the last 12 months of about $850 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, Mentor, FloTHERM and Nucleus are registered
trademarks and Inflexion Platform and ReadyStart are trademarks of
Mentor Graphics Corp. All other company names are the trademarks of
their respective owners.)
(Android is a trademark of Google Inc. Use of this trademark is
subject to Google permissions.)
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) the company’s ability to successfully offer products
and services that compete in the highly competitive EDA industry;
(ii) product bundling or discounting of products and services
by competitors; (iii) effects of foreign currency fluctuations on
the company’s business; (iv) changes in accounting or reporting
rules or interpretations; (v) the impact of tax audits, or
changes in the tax laws, regulations or enforcement practices;
(vi) effects of unanticipated shifts in product mix on gross
margin; and (vii) 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
and liquidity, 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 nine months ended October 31, 2010 is (12)%,
after the consideration of period specific items. Without period
specific items of ($2.3) million, our GAAP tax rate is (24)%. Our
full fiscal year 2011 GAAP tax rate, inclusive of period specific
items, is projected to be 26%. 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 October 31, Nine Months Ended
October 31, 2010 2009
2010 2009
Revenues: System and software $ 148,101 $ 106,344 $ 346,042
$ 325,646 Service and support 90,836 82,852
261,406 239,946 Total revenues
238,937 189,196 607,448
565,592
Cost of revenues: (1) System and
software 11,218 2,966 20,409 17,366 Service and support 24,445
21,414 69,511 63,135 Amortization of purchased technology
3,299 3,089 10,428 8,965
Total cost of revenues 38,962 27,469
100,348 89,466 Gross margin
199,975 161,727 507,100
476,126
Operating expenses: Research and
development (2) 70,727 64,293 199,904 187,427 Marketing and selling
(3) 82,603 73,093 230,889 221,124 General and administration (4)
23,396 22,820 69,118 68,042 Equity in earnings of Frontline (5)
(415 ) - (1,761 ) - Amortization of intangible assets (6) 1,445
2,796 5,742 8,554 Special charges (7) 1,578
5,993 8,052 15,890 Total
operating expenses 179,334 168,995
511,944 501,037
Operating income
(loss) 20,641 (7,268 ) (4,844 ) (24,911 ) Other expense, net
(8) (206 ) (1,004 ) (1,361 ) (1,262 ) Interest expense (9)
(4,324 ) (4,385 ) (13,378 ) (13,259 ) Income
(loss) before income tax 16,111 (12,657 ) (19,583 ) (39,432 )
Income tax expense (10) 854 14,377
2,432 21,824 Net income (loss) $ 15,257
$ (27,034 ) $ (22,015 ) $ (61,256 ) Net income (loss) per
share: Basic $ 0.14 $ (0.28 ) $ (0.21 ) $ (0.64 ) Diluted $
0.14 $ (0.28 ) $ (0.21 ) $ (0.64 ) Weighted average number
of shares outstanding: Basic 109,364 97,854
106,942 95,636 Diluted
112,139 97,854 106,942
95,636
Refer to following table 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 October
31, Nine Months Ended October 31, 2010
2009 2010
2009 (1) Cost of revenues: Equity plan-related
compensation $ 221 $ 349 $ 671 $ 1,318 Amortization of purchased
technology 3,299 3,089 10,428
8,965 $ 3,520 $ 3,438 $ 11,099
$ 10,283
(2) Research and development:
Equity plan-related compensation $ 1,798 $ 2,374 $
6,007 $ 8,879
(3) Marketing and
selling: Equity plan-related compensation $ 1,299 $
1,856 $ 4,802 $ 6,784
(4) General
and administration: Equity plan-related compensation $ 1,589
$ 1,130 $ 5,111 $ 3,995
(5)
Equity in earnings of Frontline:
Amortization of purchased technology and
other identified intangible assets
$ 1,242 $ - $ 3,105 $ -
(6)
Amortization of intangible assets:
Amortization of other identified
intangible assets
$ 1,445 $ 2,796 $ 5,742 $ 8,554
(7) Special charges: Rebalance, restructuring, and other
costs $ 1,578 $ 5,993 $ 8,052 $ 15,890
(8) Other expense, net:
Equity in losses of unconsolidated
entities and impairment of investments
$ - $ 170 $ 271 $ 851
(9)
Interest expense: Amortization of debt discount and bond
premium, net $ 753 $ 698 $ 2,226 $ 2,051 Premium (discount) and
costs related to debt retirement - -
345 (354 ) $ 753 $ 698 $ 2,571
$ 1,697
(10) Income tax expense:
Non-GAAP income tax effects $ (4,133 ) $ 13,391 $ (2,188 ) $
18,849
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, 2010
2009 2010 2009
GAAP net income (loss) $ 15,257 $ (27,034 ) $ (22,015 ) $
(61,256 ) Non-GAAP adjustments: Equity plan-related compensation:
(1) Cost of revenues 221 349 671 1,318 Research and development
1,798 2,374 6,007 8,879 Marketing and selling 1,299 1,856 4,802
6,784 General and administration 1,589 1,130 5,111 3,995
Acquisition - related items: Amortization of purchased assets Cost
of revenues (2) 3,299 3,089 10,428 8,965 Amortization of intangible
assets (3) 1,445 2,796 5,742 8,554
Frontline purchased technology and
intangible assets (4)
1,242 - 3,105 - Special charges (5) 1,578 5,993 8,052 15,890 Other
expense, net (6) - 170 271 851 Interest expense (7) 753 698 2,571
1,697 Non-GAAP income tax effects (8) (4,133 ) 13,391
(2,188 ) 18,849 Total of non-GAAP
adjustments 9,091 31,846 44,572
75,782 Non-GAAP net income $ 24,348 $
4,812 $ 22,557 $ 14,526 GAAP weighted
average shares (diluted) 112,139 97,854 106,942 95,636 Non-GAAP
adjustment - 2,042 2,239
656 Non-GAAP weighted average shares (diluted)
112,139 99,896 109,181
96,292 GAAP net income (loss) per share (diluted) $
0.14 $ (0.28 ) $ (0.21 ) $ (0.64 ) Non-GAAP adjustments detailed
above 0.08 0.33 0.42
0.79 Non-GAAP net income per share (diluted) $ 0.22
$ 0.05 $ 0.21 $ 0.15
(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
October 31, 2010: Special charges consist of (i) $1,191 of costs
incurred for employee rebalances which includes severance benefits,
notice pay, and outplacement services, (ii) $734 related to the
abandonment of excess leased facility space, (iii) $(513) in
acquisition costs, (iv) $83 in advisory fees, and (v) $83 in other
adjustments. 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. Nine
months ended October 31, 2010: Special charges consist of (i)
$4,640 of costs incurred for employee rebalances which includes
severance benefits, notice pay, and outplacement services, (ii)
$2,083 in advisory fees, (iii) $1,824 related to the abandonment of
excess leased facility space, (iv) $(566) related to a casualty
loss, (v) $(93) in acquisition costs , and (vi) $164 in other
costs. 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) $1,769 in acquisition costs,
(iv) $983 related to the abandonment of excess leased facility
space, (v) $566 related to a casualty loss, and (vi) $51 in other
costs.
(6) Three months ended October 31, 2009: Loss of $170
on investment accounted for under the equity method of accounting.
Nine months ended October 31, 2010: Loss of $271 on investment
accounted for under the equity method of accounting. Nine months
ended October 31, 2009: Other income (expense), net consists of:
(i) equity losses 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 of accounting.
(7) Three months ended October 31, 2010: $753 in
amortization of original issuance debt discount and bond premiums,
net. Three months ended October 31, 2009: $698 in amortization of
original issuance debt discount. Nine months ended October 31,
2010: $2,226 in amortization of original issuance debt discount and
bond premiums, net and $345 in premium on partial redemption of the
$110.0M convertible debt. 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.
(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 October 31, Nine Months Ended
October 31, 2010 2009
2010 2009 GAAP gross
margin $ 199,975 $ 161,727 $ 507,100 $ 476,126 Reconciling items to
non-GAAP gross margin Equity plan-related compensation 221 349 671
1,318 Amortization of purchased technology 3,299
3,089 10,428 8,965
Non-GAAP gross margin $ 203,495 $ 165,165 $ 518,199
$ 486,409
Three Months Ended October
31, Nine Months Ended October 31, 2010
2009 2010
2009 GAAP gross margin as a percent of total revenues
84 % 85 % 83 % 84 % Non-GAAP adjustments detailed above 1 %
2 % 2 % 2 % Non-GAAP gross margin as a percent
of total revenues 85 % 87 % 85 % 86 %
Three Months Ended October 31, Nine Months
Ended October 31, 2010 2009
2010 2009 GAAP
operating expenses $ 179,334 $ 168,995 $ 511,944 $ 501,037
Reconciling items to non-GAAP operating expenses
Amortization of Frontline purchased
technology and other identified intangible assets
(1,242 ) - (3,105 ) - Equity plan-related compensation (4,686 )
(5,360 ) (15,920 ) (19,658 ) Amortization of other identified
intangible assets (1,445 ) (2,796 ) (5,742 ) (8,554 ) Special
charges (1,578 ) (5,993 ) (8,052 )
(15,890 ) Non-GAAP operating expenses $ 170,383 $ 154,846
$ 479,125 $ 456,935
Three
Months Ended October 31, Nine Months Ended October 31,
2010 2009
2010 2009 GAAP operating income
(loss) $ 20,641 $ (7,268 ) $ (4,844 ) $ (24,911 ) Reconciling items
to non-GAAP operating income
Amortization of Frontline purchased
technology and other identified intangible assets
1,242 - 3,105 - Equity plan-related compensation 4,907 5,709 16,591
20,976 Amortization of purchased intangible assets: Cost of
revenues 3,299 3,089 10,428 8,965 Amortization of intangible assets
1,445 2,796 5,742 8,554 Special Charges 1,578
5,993 8,052 15,890 Non-GAAP
operating income $ 33,112 $ 10,319 $ 39,074 $
29,474
Three Months Ended October 31,
Nine Months Ended October 31, 2010
2009 2010
2009 GAAP operating income (loss) as a percent of
total revenues 9 % -4 % -1 % -4 % Non-GAAP adjustments detailed
above 5 % 9 % 7 % 9 % Non-GAAP
operating income as a percent of total revenues 14 %
5 % 6 % 5 %
Three Months Ended
October 31, Nine Months Ended October 31,
2010 2009 2010
2009 GAAP other expense, net and
interest expense $ (4,530 ) $ (5,389 ) $ (14,739 ) $ (14,521 )
Reconciling items to non-GAAP other income (expense), net and
interest expense Equity in losses of unconsolidated entities - 170
271 738 Impairment of cost method investment - - - 113 Amortization
of debt discount and retirement costs 753 698
2,571 1,697 Non-GAAP other
expense, net and interest expense $ (3,777 ) $ (4,521 ) $ (11,897 )
$ (11,973 )
MENTOR GRAPHICS
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 31, January 31,
2010 2010
Assets Current assets: Cash, cash equivalents, and
short-term investments $ 64,290 $ 99,343 Trade accounts receivable,
net 103,533 110,839 Term receivables, short-term 196,801 178,911
Prepaid expenses and other 38,942 29,629 Deferred income taxes
11,321 11,891 Total current
assets 414,887 430,613
Property, plant, and equipment, net
138,689 121,795
Term receivables, long-term 144,725 164,898
Goodwill and intangible assets, net 527,135 484,342
Other
assets 48,958 21,393 Total
assets $ 1,274,394 $ 1,223,041
Liabilities
and Stockholders' Equity Current liabilities: Short-term
borrowings $ 11,669 $ 37,874 Current portion of notes payable 2,000
32,272 Accounts payable 17,364 9,985 Income taxes payable 8,316
3,971 Accrued payroll and related liabilities 71,284 77,008 Accrued
liabilities 37,330 44,122 Deferred revenue 139,282
153,965 Total current liabilities 287,245
359,197
Long-term notes payable 207,078 156,075
Deferred
revenue, long-term 9,370 9,534
Other long-term
liabilities 61,425 58,218 Total
liabilities 565,118 583,024
Stockholders' equity: Common stock 749,211 662,595
Accumulated deficit (70,757 ) (48,742 ) Accumulated other
comprehensive income 30,822 26,164
Total stockholders' equity 709,276 640,017
Total liabilities and stockholders' equity $
1,274,394 $ 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 October 31, Nine Months
Ended October 31, 2010 2009
2010 2009
Operating activities Net income (loss) $ 15,257 $ (27,034 )
$ (22,015 ) $ (61,256 ) Depreciation and amortization (1) 13,596
14,452 43,173 45,252 Other adjustments to reconcile: Operating cash
(2,562 ) 519 11,239 15,633 Changes in working capital
(33,991 ) 25,804 (25,302 ) 33,325
Net cash provided by (used in) operating activities
(7,700 ) 13,741 7,095 32,954
Investing activities Net
cash used in investing activities (21,586 ) (3,824 ) (50,972 )
(19,901 )
Financing activities Net cash provided by
(used in) financing activities 2,555 (2,673 ) 6,876 (22,776 )
Effect of exchange rate changes on cash and cash equivalents
1,702 1,330 1,948
732 Net change in cash and cash equivalents (25,029 )
8,574 (35,053 ) (8,991 ) Cash and cash equivalents at beginning of
period 89,316 76,077 99,340
93,642 Cash and cash equivalents at end
of period $ 64,287 $ 84,651 $ 64,287 $ 84,651
(1) Depreciation and amortization
includes a write-off of note issuance costs in the amount of $132
for the nine months ended October 31, 2010 and $26 for the nine
months ended October 31, 2009.
Other data: Capital expenditures $ 18,281
$ 6,983 $ 36,769 $ 17,951 Days sales
outstanding 113 115
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 Q3 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Integrated Systems Design 20% 20% 20%
20% 20% 20% 20% 20%
20% 15% 20% 25% 15%
20% IC
Design to Silicon 30% 35% 30%
30% 40% 40% 35% 40%
40%
40% 30% 30% 40%
35% Scalable Verification 30% 25% 20%
25% 20% 25% 15% 20%
20% 20% 20% 20% 30%
20%
New & Emerging Products 10% 10% 25%
15% 10% 5% 20% 15%
10% 10% 20% 15% 10%
15% Services & Other (b) 10%
10% 5%
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% 100% FY 2011
Fiscal year ended January 31, 2010 Fiscal year ended
January 31, 2009 Product Group Revenue (b) Q1
Q2 Q3 YEAR Q1
Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Integrated Systems Design 25% 30% 25%
25% 20% 20% 30% 25%
25% 20% 20% 25% 20%
20% IC
Design to Silicon 35% 30% 25%
30% 45% 35% 30% 35%
35%
40% 30% 30% 35%
35% Scalable Verification 20% 20% 30%
20% 20% 25% 20% 20%
25% 20% 25% 25% 30%
25%
New & Emerging Products 10% 10% 15%
15% 10% 10% 10% 15%
10% 10% 15% 10% 10%
10% Services & Other (b) 10%
10% 5%
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% 100% FY 2011
Fiscal year ended January 31, 2010 Fiscal year ended
January 31, 2009 Bookings by Geography Q1
Q2 Q3 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR North America 45% 40% 45%
45% 40% 55% 45% 40%
45% 40% 30% 40% 35%
35% Europe 20% 25% 20%
20%
25% 25% 15% 25%
20% 35% 35% 35% 35%
35% Japan 15% 5%
15%
10% 25% 5% 20% 15%
15% 15% 20% 10% 5%
15%
Pac Rim 20% 30% 20%
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% 100% FY 2011
Fiscal year ended January 31, 2010 Fiscal year ended
January 31, 2009 Revenue by Geography Q1
Q2 Q3 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR North America 35% 40% 50%
40% 40% 50% 40% 40%
45% 40% 35% 40% 40%
40% Europe 25% 25% 25%
25%
20% 30% 25% 30%
25% 30% 30% 35% 35%
30% Japan 20% 10%
10%
15% 20% 5% 15% 15%
15% 20% 20% 10% 10%
15%
Pac Rim 20% 25% 15%
20% 20% 15%
20% 15%
15% 10% 15% 15%
15%
15% Total 100%
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 Q3 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Perpetual 40% 30% 15%
25% 15%
25% 20% 10%
15% 20% 20% 20% 10%
15% Ratable 20% 15%
5%
15% 15% 15% 15% 15%
15% 25% 20% 15% 10%
15%
Up Front 40% 55% 80%
60% 70% 60%
65% 75%
70% 55% 60% 65%
80%
70% Total 100%
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 Q3 YEAR Q1
Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Perpetual 20% 25% 25%
25% 15%
25% 15% 10%
15% 20% 20% 20% 10%
15% Ratable 25% 15%
10%
15% 10% 15% 15% 10%
15% 20% 20% 20% 10%
15% Up Front 55% 60% 65%
60% 75%
60% 70% 80%
70% 60% 60%
60% 80%
70% 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 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:
Q4 FY11 FY11
Diluted GAAP net income per share $0.40 $0.19 Non-GAAP Adjustments:
Amortization of purchased intangible assets (1) $0.03 0.17
Amortization of other identified intangible assets (2) $0.01 0.07
Equity plan-related compensation (3) $0.05 0.20 Special charges (4)
$0.00 0.07 Other expense, net and interest expense (5) $0.01 0.03
Non-GAAP income tax effects (6) ($0.04) (0.06) Non-GAAP net income
per share $0.46 $0.67
(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 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 Q4 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 Q4 FY11 and Full Year FY11
assumes no additional special charges.
(5) Reflects
amortization of original issuance debt discount and bond premium,
net, equity in losses of unconsolidated entities, and a premium on
the partial redemption of convertible debt. The guidance for Q4
FY11 and Full Year FY11 assumes no additional equity in losses of
unconsolidated entities or premium on the partial redemption of
convertible debt.
(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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