Mentor Graphics Corporation (NASDAQ:MENT) today announced
financial results for the company’s fiscal second quarter ended
July 31, 2011. The company reported revenues of $213.7 million,
non-GAAP earnings per share of $.11, and GAAP earnings per share of
$.04.
“Second quarter bookings were a record by a significant margin,
up 25% from the previous record for a second quarter. Earnings per
share were well ahead of guidance, further increasing our
confidence in our outlook for the year,” said Walden C. Rhines,
chairman and CEO of Mentor Graphics® Corporation. “Systems business
was a key driver of strength in the quarter. Traditional PCB design
software bookings were up nearly a third and bookings in new and
emerging products, led by the Capital electrical systems design
software, nearly tripled. Scalable verification, which is used by
both systems and IC customers, had bookings growth of 60%.”
During the quarter, the company expanded the Capital® electrical
systems design product suite with three new products, addressing
configuration complexity, harness manufacturing and vehicle
documentation and maintenance. In the multi-physics simulation
space, the company announced the new FloEFD™ for Siemens NX product
for computational fluid dynamics simulation. In embedded software,
Mentor introduced a unified embedded software debugging platform
from pre-silicon to final product, and the Mentor® Embedded
Sourcery™ CodeBench product, a next-generation, integrated
development environment based on the open-source GNU toolchain.
“Record bookings for a second quarter and continued strong cost
controls led to another excellent quarter for the company,” said
Gregory K. Hinckley, president of Mentor Graphics. “Leading
indicators of the business remain very strong, with new customers
up 15% in number and 35% in value over the previous second quarter.
We see no slowdown in EDA spending.”
Outlook
For the third quarter, the company expects revenues of about
$245 million, non-GAAP earnings per share of about $0.21, and GAAP
earnings per share of approximately $0.18. For the full year, the
company now expects revenues of approximately $1.004 billion,
non-GAAP earnings per share of about $1.03 and GAAP earnings per
share of approximately $0.68.
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, 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 and premium on
convertible debt, and the equity in income (loss) of unconsolidated
entities (except Frontline PCB Solutions Limited Partnership
(Frontline)), which management does not consider reflective of our
core operating business.
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:
- Identified intangible assets consist
primarily of purchased technology, backlog, trade names, customer
relationships, and employment agreements. Amortization charges for
our intangible assets can vary in frequency and amount due to the
timing and magnitude of acquisition transactions. We consider our
operating results without these charges when evaluating our core
performance due to the variability. 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 primarily consist of
restructuring costs incurred for employee terminations, including
severance and benefits, driven by modifications of business
strategy or business emphasis. Special charges may also include
expenses incurred related to potential acquisitions, excess
facility costs, and asset-related charges. 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.
- Equity plan-related compensation
expenses represent the fair value of all share-based payments to
employees, including grants of employee stock options and
restricted stock units. We do not consider equity plan-related
compensation expense in evaluating our manager’s performance
internally or our core operations in any given period.
- 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 and premium 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 and premium
on convertible debt to be a direct cost of operations.
- In connection with the Company’s
acquisition of Valor on March 18, 2010, we also acquired Valor’s
50% interest in Frontline, a joint venture. 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.
- Equity in earnings or losses of
unconsolidated subsidiaries, with the exception of our investment
in Frontline, represents our equity in the net income (loss) of a
common stock investment accounted for under the equity method. The
carrying amount of our investment is adjusted for our share of
earnings or losses of the investee. The amounts are excluded from
our non-GAAP results as we do not control the results of operations
for this investment and we do not participate in regular and
periodic operating activities; therefore, management does not
consider these businesses 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 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 U.S. 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, 2011 is 297%,
after the consideration of period specific items. Without period
specific items of ($5.1) million, our GAAP tax rate is (206%). Our
full fiscal year 2012 GAAP tax rate, inclusive of period specific
items, is projected to be 8%. 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 and
restricted stock units 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.
- 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.
About Mentor Graphics
Mentor Graphics Corporation 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 electronic, semiconductor and systems companies.
Established in 1981, the company reported revenues in the last
fiscal year of about $915 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 and Capital are registered trademarks
and FloEFD is a trademark of Mentor Graphics Corporation. Sourcery
is used under license from CodeSourcery, Inc. All other company
and/or product names are the trademarks and/or registered
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) weakness or recession in the US, EU, Japan,
China or other economies, including the possibility of a
“double-dip” recession; (ii) the company’s ability to
successfully offer products and services that compete in the highly
competitive EDA industry, including the risk of obsolescence for
our hardware products; (iii) 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; (iv) possible delayed or canceled customer orders
resulting from the business disruption and uncertainty of actions
of activist shareholders; (v) effects of the increasing volatility
of foreign currency fluctuations on the company’s business and
operating results; (vi) changes in accounting or reporting rules or
interpretations; (vii) the impact of tax audits by the IRS or
other taxing authorities, or changes in the tax laws, regulations
or enforcement practices where the company does business;
(viii) effects of unanticipated shifts in product mix on gross
margin; and (ix) effects of customer seasonal purchasing
patterns and the timing of significant orders may negatively or
positively impact the company’s quarterly results of operations,
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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data)
Three Months Ended July 31,
Six Months Ended July 31, 2011 2010
2011 2010 Revenues: System and software $
117,495 $ 100,491 $ 257,140 $ 197,941 Service and support
96,245 87,443 186,635
170,570 Total revenues 213,740 187,934
443,775 368,511
Cost of
revenues: (1) System and softwarea 14,294 7,977 30,371 14,620
Service and supporta 26,844 23,633 52,055 46,800 Amortization of
purchased technology 2,754 3,560
6,111 7,129 Total cost of revenuesa
43,892 35,170 88,537
68,549 Gross margina 169,848 152,764
355,238 299,962
Operating
expenses: Research and developmenta (2) 69,905 67,792 139,273
134,436 Marketing and sellinga (3) 75,758 72,720 153,682 144,544
General and administrationa (4) 17,348 18,763 34,133 37,042 Equity
in earnings of Frontline (5) (1,139 ) (1,162 ) (2,156 ) (1,346 )
Amortization of intangible assets (6) 1,455 1,936 3,065 4,297
Special charges (7) 1,677 3,206
6,224 6,474 Total operating expensesa
165,004 163,255 334,221
325,447
Operating income (loss)a 4,844 (10,491
) 21,017 (25,485 ) Other income (expense), net (8) 529 (14 ) 54
(1,155 ) Interest expense (9) (4,634 ) (4,727 )
(22,074 ) (9,054 ) Income (loss) before income tax
739 (15,232 ) (1,003 ) (35,694 ) Income tax expense (benefit) (10)
(3,595 ) (985 ) (2,984 ) 1,578
Net income (loss)a $ 4,334 $ (14,247 ) $ 1,981 $
(37,272 ) Net income (loss) per share: Basic $ 0.04 $ (0.13
) $ 0.02 $ (0.35 ) Diluted $ 0.04 $ (0.13 ) $ 0.02
$ (0.35 ) Weighted average number of shares outstanding:
Basic 110,027 107,629 110,888
105,717 Diluted 112,844
107,629 113,892 105,717 a
Certain items have been reclassified between cost of revenues and
operating expenses, and within operating expenses for the six
months ended July 31, 2011, and the three and six months ended July
31, 2010. These reclassifications were made to conform to the
current period presentation, more closely align with other
companies in our industry, and provide a clearer depiction of where
certain operating costs are being utilized. While these
reclassifications reduced gross margin, they had no impact on
operating income (loss) or net income (loss) for the six months
ended July 31, 2011, and the three and six months ended July 31,
2010. Additional discussion regarding the reclassifications will be
provided in our Quarterly Report on Form 10-Q for the quarter ended
July 31, 2011. 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,
2011 2010 2011 2010 (1) Cost of
revenues: Equity plan-related compensation $ 237 $ 238 $ 504 $
450 Amortization of purchased technology 2,754
3,560 6,111 7,129 $ 2,991 $
3,798 $ 6,615 $ 7,579
(2) Research and
development: Equity plan-related compensation $ 1,975 $
1,771 $ 4,114 $ 4,209
(3) Marketing and
selling: Equity plan-related compensation $ 1,413 $
1,313 $ 3,028 $ 3,503
(4) General and
administration: Equity plan-related compensation $ 2,204
$ 1,781 $ 3,863 $ 3,522
(5) Equity in
earnings of Frontline: Amortization of purchased technology and
other identified intangible assets $ 1,242 $ 1,242 $
2,484 $ 1,863
(6) Amortization of intangible
assets: Amortization of other identified intangible assets $
1,455 $ 1,936 $ 3,065 $ 4,297
(7)
Special charges: Rebalance, restructuring, and other costs $
1,677 $ 3,206 $ 6,224 $ 6,474
(8)
Other income (expense), net:
Equity in losses of unconsolidated
entities and impairment of investments
$ 52 $ 1 $ 52 $ 271
(9) Interest expense:
Amortization of debt discount and premium, net $ 1,228 $ 744 $
2,403 $ 1,473 Premium and costs related to debt retirement -
345 11,504 345 $ 1,228
$ 1,089 $ 13,907 $ 1,818
(10) Income
tax expense (benefit): Non-GAAP income tax effects $ (6,141 ) $
(1,139 ) $ (10,183 ) $ 1,945
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, 2011 2010 2011 2010
GAAP net income (loss) $ 4,334 $ (14,247 ) $ 1,981 $ (37,272 )
Non-GAAP adjustments: Equity plan-related compensation: (1) Cost of
revenues 237 238 504 450 Research and development 1,975 1,771 4,114
4,209 Marketing and selling 1,413 1,313 3,028 3,503 General and
administration 2,204 1,781 3,863 3,522 Acquisition - related items:
Amortization of purchased assets Cost of revenues (2) 2,754 3,560
6,111 7,129 Frontline purchased technology and intangible assets
(3) 1,242 1,242 2,484 1,863 Amortization of intangible assets (4)
1,455 1,936 3,065 4,297 Special charges (5) 1,677 3,206 6,224 6,474
Other income (expense), net (6) 52 1 52 271 Interest expense (7)
1,228 1,089 13,907 1,818 Non-GAAP income tax effects (8)
(6,141 ) (1,139 ) (10,183 ) 1,945 Total
of non-GAAP adjustments 8,096 14,998
33,169 35,481 Non-GAAP net income
(loss) $ 12,430 $ 751 $ 35,150 $ (1,791 )
GAAP weighted average shares (diluted) 112,844 107,629
113,892 105,717 Non-GAAP adjustment - 2,040
- - Non-GAAP weighted average
shares (diluted) 112,844 109,669
113,892 105,717 GAAP net income (loss)
per share (diluted) $ 0.04 $ (0.13 ) $ 0.02 $ (0.35 ) Non-GAAP
adjustments detailed above 0.07 0.14
0.29 0.33 Non-GAAP net income (loss)
per share (diluted) $ 0.11 $ 0.01 $ 0.31 $
(0.02 )
(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
)
Amount represents amortization of
purchased technology and other identified intangible assets
identified as part of the fair value of the Frontline PCB 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) above and (4)
below.
(4 ) Other identified intangible assets are amortized
to other operating expense over two to five years. Other identified
intangible assets include trade names, customer relationships, and
backlog which are the result of acquisition transactions.
(5
)
Three months ended July 31, 2011: Special
charges consist of (i) $1,207 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $736 in consulting fees associated with
our proxy contest, (iii) $202 related to the abandonment of excess
lease space, (iv) $(572) in acquisition costs, and (v) $104 in
other adjustments.
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) $220 in acquisition costs, (iv) $219
in lease restoration costs, (v) $28 related to the abandonment of
excess leased facility space, and (vi) $54 in other adjustments.
Six months ended July 31, 2011: Special charges consist of (i)
$3,838 in consulting fees associated with our proxy contest, (ii)
$2,354 of costs incurred for employee rebalances which includes
severance benefits, notice pay, and outplacement services, (iii)
$454 related to the abandonment of excess lease space, (iv) $(526)
in acquisition costs, and (v) $104 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) $502 related to the abandonment of excess leased
facility space, (iv) $420 in acquisition costs, (v) $588 in lease
restoration costs, (vi) $(566) related to a casualty loss, and
(vii) $81 in other adjustments.
(6 ) Three months
ended July 31, 2011: Loss of $52 on investment accounted for under
the equity method of accounting. Three months ended July 31, 2010:
Loss of $1 on investment accounted for under the equity method of
accounting. Six months ended July 31, 2011: Loss of $52 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.
(7 ) Three
months ended July 31, 2011: $1,228 in amortization of original
issuance debt discount. 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. Six months
ended July 31, 2011: $2,403 in amortization of original issuance
debt discount and bond premium, and $11,504 for the premium and
other costs related to the retirement of the 6.25% convertible
debentures and the term loan. Six months ended July 31, 2010:
$1,473 in amortization of original issuance debt discount and $345
in premium on partial redemption of the $110M 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, 2011 2010 2011
2010 GAAP gross margin $ 169,848 $ 152,764 $ 355,238 $
299,962 Reconciling items to non-GAAP gross margin: Equity
plan-related compensation 237 238 504 450 Amortization of purchased
technology 2,754 3,560 6,111
7,129 Non-GAAP gross margin $ 172,839 $
156,562 $ 361,853 $ 307,541
Three Months Ended July 31, Six Months Ended July 31,
2011 2010 2011 2010 GAAP gross margin
as a percent of total revenues 79 % 81 % 80 % 81 % Non-GAAP
adjustments detailed above 2 % 2 % 2 %
2 % Non-GAAP gross margin as a percent of total revenues 81
% 83 % 82 % 83 %
Three Months
Ended July 31, Six Months Ended July 31, 2011
2010 2011 2010 GAAP operating expenses $
165,004 $ 163,255 $ 334,221 $ 325,447 Reconciling items to non-GAAP
operating expenses: Equity plan-related compensation (5,592 )
(4,865 ) (11,005 ) (11,234 )
Amortization of Frontline purchased
technology and other identified intangible assets
(1,242 ) (1,242 ) (2,484 ) (1,863 ) Amortization of other
identified intangible assets (1,455 ) (1,936 ) (3,065 ) (4,297 )
Special charges (1,677 ) (3,206 ) (6,224 )
(6,474 ) Non-GAAP operating expenses $ 155,038 $
152,006 $ 311,443 $ 301,579
Three Months Ended July 31, Six Months Ended July 31,
2011 2010 2011 2010 GAAP operating
income (loss) $ 4,844 $ (10,491 ) $ 21,017 $ (25,485 ) Reconciling
items to non-GAAP operating income: Equity plan-related
compensation 5,829 5,103 11,509 11,684 Amortization of purchased
technology 2,754 3,560 6,111 7,129
Amortization of Frontline purchased
technology and other identified intangible assets
1,242 1,242 2,484 1,863 Amortization of other identified intangible
assets 1,455 1,936 3,065 4,297 Special Charges 1,677
3,206 6,224 6,474
Non-GAAP operating income $ 17,801 $ 4,556 $ 50,410
$ 5,962
Three Months Ended July
31, Six Months Ended July 31, 2011 2010
2011 2010 GAAP operating income (loss) as a percent
of total revenues 2 % -6 % 5 % -7 % Non-GAAP adjustments detailed
above 6 % 8 % 6 % 9 % Non-GAAP
operating income as a percent of total revenues 8 % 2
% 11 % 2 %
Three Months Ended July
31, Six Months Ended July 31, 2011 2010
2011 2010 GAAP other expense, net and interest
expense $ (4,105 ) $ (4,741 ) $ (22,020 ) $ (10,209 )
Reconciling items to non-GAAP other
expense, net and interest expense:
Equity in losses of unconsolidated entities 52 1 52 271
Amortization of debt discount and retirement costs 1,228
1,089 13,907 1,818
Non-GAAP other expense, net and interest expense $ (2,825 ) $
(3,651 ) $ (8,061 ) $ (8,120 )
MENTOR GRAPHICS
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31, January
31, 2011 2011 Assets Current
assets: Cash, cash equivalents, and short-term investments $
123,469 $ 133,113 Trade accounts receivable, net 91,299 153,733
Term receivables, short-term 185,321 193,342 Prepaid expenses and
other 38,667 37,124 Deferred income taxes 16,914
15,992 Total current assets 455,670 533,304
Property, plant, and equipment, net 142,007 139,340
Term
receivables, long-term 186,483 167,425
Goodwill and
intangible assets, net 535,364 541,697
Other assets
53,606 46,212 Total assets $
1,373,130 $ 1,427,978
Liabilities and
Stockholders' Equity Current liabilities: Short-term
borrowings $ 11,443 $ 15,544 Current portion of notes payable -
2,000 Accounts payable 12,393 16,724 Income taxes payable 2,018
5,517 Accrued payroll and related liabilities 49,851 109,173
Accrued liabilities 31,717 39,513 Deferred revenue 174,118
171,416 Total current liabilities
281,540 359,887
Long-term notes payable 212,027 207,348
Deferred revenue, long-term 12,662 13,953
Other long-term
liabilities 64,213 70,076 Total
liabilities 570,442 651,264
Stockholders' equity: Common stock 781,956 765,179
Accumulated deficit (18,177 ) (20,158 ) Accumulated other
comprehensive income 38,909 31,693
Total stockholders' equity 802,688 776,714
Total liabilities and stockholders' equity $
1,373,130 $ 1,427,978
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, 2011 2010 2011
2010 Operating activities Net income (loss) $ 4,334 $
(14,247 ) $ 1,981 $ (37,272 ) Depreciation and amortization (1)
13,779 15,187 36,190 29,577 Other adjustments to reconcile:
Operating cash 5,761 9,086 12,916 13,801 Changes in working capital
10,242 (22,879 ) (26,233 ) 8,689
Net cash provided by (used in) operating activities
34,116 (12,853 ) 24,854 14,795
Investing activities
Net cash used in investing activities (10,279 ) (11,991 ) (18,660 )
(29,386 )
Financing activities Net cash provided by
(used in) financing activities (17,662 ) 13,876 (17,409 ) 4,321
Effect of exchange rate changes on cash and cash equivalents
813 555 1,571 246
Net change in cash and cash equivalents 6,988 (10,413
) (9,644 ) (10,024 ) Cash and cash equivalents at beginning of
period 116,481 99,729 133,113
99,340 Cash and cash equivalents at end
of period $ 123,469 $ 89,316 $ 123,469 $
89,316
(1) Depreciation and
amortization includes a write-off of note issuance costs in the
amount of $8,010 for the six months ended July 31, 2011 and $132
for the six months ended July 31, 2010.
Other
data: Capital expenditures $ 10,279 $ 10,880 $
16,624 $ 18,488 Days sales outstanding 116
130
MENTOR GRAPHICS
CORPORATION
UNAUDITED
SUPPLEMENTAL BOOKINGS AND REVENUE INFORMATION
(Rounded to nearest 5%)
Fiscal Year
Ended January 31, 2012 Fiscal Year Ended January 31,
2011 Fiscal year ended January 31, 2010 Product Group
Bookings (a) Q1 Q2 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Integrated Systems Design 25% 25%
25% 15% 20% 20% 25%
20% 20% 20% 20% 20%
20% IC
Design to Silicon 15% 25%
20% 35% 40% 45% 30%
40% 45%
40% 45% 45%
45% Scalable Verification 35% 30%
30% 35%
25% 20% 30%
25% 20% 25% 15% 20%
20% New &
Emerging Products 10% 15%
15% 10% 5% 10% 10%
10% 10%
10% 15% 10%
10% Services & Other 15% 5%
10% 5% 10% 5% 5%
5% 5%
5% 5% 5%
5% Total
100% 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% Fiscal Year Ended
January 31, 2012 Fiscal Year Ended January 31, 2011
Fiscal year ended January 31, 2010 Product Group Revenue
(b) Q1 Q2 YEAR Q1
Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR Integrated Systems Design 20% 25%
25% 25% 30% 25% 30%
25% 20% 20% 30% 25%
25% IC
Design to Silicon 40% 25%
35% 40% 35% 35% 30%
35% 45%
40% 35% 40%
40% Scalable Verification 25% 30%
25% 20%
20% 30% 25%
25% 20% 25% 20% 25%
20% New &
Emerging Products 10% 10%
10% 5% 5% 5% 10%
5% 10% 10%
10% 5%
10% Services & Other 5% 10%
5% 10% 10% 5% 5%
10% 5%
5% 5% 5%
5% Total
100% 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% Fiscal Year Ended
January 31, 2012 Fiscal Year Ended January 31, 2011
Fiscal year ended January 31, 2010 Bookings by
Geography Q1 Q2 YEAR
Q1 Q2 Q3 Q4
YEAR Q1 Q2 Q3
Q4 YEAR North America 45% 40%
45% 45%
40% 45% 50%
45% 40% 55% 45% 40%
45% Europe 20% 30%
25% 20% 25% 20% 20%
20% 25% 25% 15% 25%
20%
Japan 15% 10%
10% 15% 5% 15% 15%
15% 25% 5% 20% 15%
15% Pac Rim 20% 20%
20% 20% 30%
20% 15%
20% 10% 15% 20%
20%
20% Total 100%
100% 100% 100% 100%
100% 100% 100%
100% 100% 100%
100% 100% Fiscal Year Ended January
31, 2012 Fiscal Year Ended January 31, 2011 Fiscal
year ended January 31, 2010 Revenue by Geography
Q1 Q2 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR North America 40% 45%
45% 35% 40% 50% 50%
45% 40% 50% 40% 40%
45% Europe 20% 20%
20% 25%
25% 25% 20%
25% 20% 30% 25% 30%
25% Japan 20% 15%
15% 20% 10% 10% 15%
10% 20% 5% 15% 15%
15% Pac
Rim 20% 20%
20% 20% 25% 15%
15%
20% 20% 15% 20% 15%
15% Total 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
100% Fiscal Year Ended January 31, 2012
Fiscal Year Ended January 31, 2011 Fiscal year ended
January 31, 2010 Bookings by Business Model (c)
Q1 Q2 YEAR Q1
Q2 Q3 Q4 YEAR
Q1 Q2 Q3 Q4
YEAR Perpetual 40% 20%
25% 40% 30% 15% 15%
25%
15% 25% 20% 10%
15% Ratable 20% 10%
15% 20% 15% 5% 5%
10% 15% 15% 15% 15%
15% Up Front 40% 70%
60% 40% 55% 80% 80%
65% 70% 60% 65% 75%
70%
Total 100% 100% 100%
100% 100% 100%
100% 100% 100% 100%
100% 100% 100%
Fiscal Year Ended January 31, 2012 Fiscal Year Ended
January 31, 2011 Fiscal year ended January 31, 2010
Revenue by Business Model (c) Q1 Q2
YEAR Q1 Q2 Q3
Q4 YEAR Q1 Q2
Q3 Q4 YEAR Perpetual 30%
25%
30% 20% 25% 25% 15%
20% 15% 25% 15% 10%
15% Ratable 10% 15%
10% 25% 15% 10% 10%
15%
10% 15% 15% 10%
15% Up Front 60% 60%
60% 55% 60% 65% 75%
65%
75% 60% 70% 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
The following table reconciles management's
estimates of the specific items excluded from GAAP in the
calculation of estimated non-GAAP net income per share for Q3'12
and fiscal 2012.
Estimated
Estimated Q3'12 FY12 Diluted GAAP net income
per share $ 0.18 $ 0.68 Non-GAAP Adjustments: Amortization of
purchased intangible assets (1) 0.02 0.08 Amortization of other
identified intangible assets (2) 0.02 0.09 Equity plan-related
compensation (3) 0.06 0.18 Special charges (4) - 0.06 Other
expense, net and interest expense (5) - 0.14 Non-GAAP income tax
effects (6) (0.07 ) (0.20 ) Diluted non-GAAP net
income per share $ 0.21 $ 1.03
(1 ) Excludes
amortization of purchased intangible assets resulting from
acquisition transactions. Purchased intangible assets are amortized
over two to five years.
(2 )
Excludes amortization of other identified
intangible assets including trade names, customer relationships,
and backlog resulting from acquisition transactions. Other
identified intangible assets are amortized over two to five years.
This line item also excludes amortization of purchased intangible
assets identified as part of the fair value of the Frontline PCB
Solutions Limited Partnership investment. The purchased technology
will be amortized over three years and other identified intangible
assets will be amortized over three to four years.
(3 ) Excludes equity plan-related compensation
expense.
(4 ) Excludes special charges consisting
primarily of consulting fees associated with our proxy contest,
costs incurred for employee rebalances (which includes severance
benefits, notice pay and outplacement services), facility closures,
and acquisition costs.
(5 ) Adjustment for fiscal
2012, reflects the amortization of original issuance debt discount
and premium for our 6.25% Convertible Subordinated Debentures due
2026, the amortization of original issuance debt discount for our
4.00% Convertible Subordinated Debentures due 2031, and charges
associated with the retirement of our 6.25% Convertible
Subordinated Debentures and Term Loan.
(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.
MENTOR GRAPHICS
CORPORATION
UNAUDITED
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL
MEASURES
(In millions, except percentages)
Estimated Twelve Months Ended January 31, FY
2012 GAAP operating income $ 107.8 Reconciling items to
non-GAAP operating income: Equity plan-related compensation 20.6
Amortization of purchased technology 9.6 Amortization of Frontline
purchased technology and other 4.9 identified intangible assets
Amortization of other identified intangible assets 5.7 Special
Charges 6.2 Non-GAAP operating income $ 154.8
Estimated Twelve Months Ended January 31, 2012
GAAP operating income as a percent of total revenues 11% Non-GAAP
adjustments detailed above 4% Non-GAAP operating income as a
percent of total revenues 15%
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