Mentor Graphics Corporation (NASDAQ: MENT) today announced
financial results for the company’s fiscal third quarter ended
October 31, 2013. The company reported revenues of $275.6 million,
non-GAAP earnings per share of $0.32, and GAAP earnings per share
of $0.20.
“Third-quarter results substantially exceeded our guidance and
reflect the continuing strength in our business,” said Walden C.
Rhines, chairman and CEO of Mentor Graphics. “Core EDA business
such as design to silicon and scalable verification, along with
strength in transportation, drove third quarter business.
Design-to-silicon growth was powered by the Calibre family of
physical verification and analysis tools and the Tessent
design-for-test products. Scalable verification strength, including
our Veloce2 emulator, stems from the ongoing industry move from
simulation to emulation for the largest integrated circuit designs.
Traditional integrated electrical design of wiring systems and
growth of GENIVI automotive applications drove transportation
strength in the quarter.”
During the quarter the company delivered three emulation
solutions to accelerate the verification of high-definition
multimedia interface (HDMI) version 2.0 products: the iSolve™
Multimedia for a “plug-and-play” hardware interface to the Veloce®
emulators; the Veloce VirtuaLAB Multimedia, supported by the
Testbench Xpress (TBX) co-modeling technology, for use in a pure
software-based environment; and a verification IP (VIP) solution.
Designers can now develop and stress-test their software and
hardware with billions of verification cycles before silicon is
available.
Mentor also announced the latest release of FloEFD™, its
award-winning computational fluid dynamics (CFD) product, with
advanced radiation modeling and multicore meshing capabilities. The
company also launched the Mentor® Embedded Hypervisor product for
in-vehicle infotainment systems, telematics, advanced driver
assistance systems and instrumentation. In other news, Mentor
Graphics® tools were included in TSMC’s reference flows for 3D-IC
and 16 nm FinFET process technology.
“Bookings were up 30% for the quarter and 60% year to date,”
said Gregory K. Hinckley, president of Mentor Graphics. “The third
quarter was our fourth consecutive quarter of a positive book to
bill. As a result of rigorous expense control, the fiscal year 2014
non-GAAP earnings growth rate is expected to be double the revenue
growth rate and we are on track to achieve our 20% non-GAAP
operating margin target. We see our technology, products and market
positions stronger now than at the beginning of the year. We look
to next year with optimism.”
Outlook
For the fourth quarter of fiscal 2014, the company expects
revenues of about $400 million, non-GAAP earnings per share of
about $0.90, and GAAP earnings per share that are approximately
$0.85. For the full fiscal year 2014, the company is maintaining
revenue expectations of approximately $1.155 billion and non-GAAP
earnings per share of about $1.59. Fiscal year 2014 GAAP earnings
per share are expected to be approximately $1.26.
Share Repurchase
In the third quarter of fiscal year 2014, the company used $10
million to repurchase approximately 440,000 shares at an average
price of $22.76 per share. The company has repurchased $174 million
of Mentor Graphics stock since March 2011. On August 21, 2013, the
company’s Board of Directors increased the share repurchase
authorization. The company has $90 million available under the
current share repurchase authorization.
Dividend
The company announced a quarterly dividend of $0.045 per share
on outstanding common stock. The dividend is payable on January 2,
2014 to shareholders of record as of the close of business on
December 10, 2013.
Fiscal Year Definition
Mentor Graphics Corporation’s 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 profit, operating
income, operating margin, net income, and earnings per share which
we refer to as non-GAAP gross profit, operating income, operating
margin, net income, and earnings 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 associated with the amortization of original issuance debt
discount on convertible debt, the equity in earnings or losses of
unconsolidated entities (except Frontline PCB Solutions Limited
Partnership (Frontline)), and the impact on basic and diluted
earnings per share of changes in the calculated redemption value of
noncontrolling interests, 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, and
customer relationships. 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 is in the first twelve
months following an acquisition.
- Special charges may consist of
restructuring costs incurred for employee terminations, including
severance and benefits, driven by modifications of business
strategy or business emphasis, as well as expenses incurred related
to certain litigation, 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, and purchases made as a result of the
employee stock purchase plan. We do not consider equity
plan-related compensation expense in evaluating our managers’
performance internally or our core operations in any given
period.
- Interest expense attributable to
amortization of the original issuance debt discount on convertible
debt is excluded. Management does not consider this charge as a
part of our core operating performance. We do not consider the
amortization of the original issuance debt discount on convertible
debt to be a direct cost of operations.
- Equity in earnings or losses of
unconsolidated entities represents our equity in the net income
(loss) of common stock investments accounted for under the equity
method. The carrying amounts of our investments are adjusted for
our share of earnings or losses of the investee. We report our
equity in the earnings or losses of investments in other income
(expense), net (with the exception of our investment in Frontline
as discussed below). The amounts are excluded from our non-GAAP
results as we do not control the results of operations for the
investments and we do not participate in regular and periodic
operating activities; therefore, management does not consider these
investments as a part of our core operating performance.
- The Company maintains a 50% interest in
Frontline, a joint venture. We report our equity in the earnings or
losses of Frontline within operating income. Although we do not
exert control, 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 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 nine months ended October 31, 2013 is 4%
after consideration of period specific items. Without period
specific items of $(4.6) million, our GAAP tax rate is 13%. Our
full fiscal year 2014 GAAP tax rate, inclusive of period specific
items, is projected to be 9%. 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.
- Our agreement with the owners of
noncontrolling interests in one of our subsidiaries gives them a
right to require us to purchase their interests at a future date
for a price based on a formula defined in the agreement. Under
GAAP, increases (or decreases to the extent they offset previous
increases) in the calculated redemption value of the noncontrolling
interests are recorded directly to retained earnings and therefore
do not affect net income. However, as required by GAAP, these
amounts are applied to increase or decrease the numerator in the
calculation of basic and diluted earnings per share. Management
does not consider fluctuations in the calculated redemption value
of noncontrolling interests to be relevant to our core operating
performance.
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,
restricted stock units, and employee stock purchase plan shares in
a loss situation.
Non-GAAP gross profit, operating income, operating margin, net
income, and earnings per share are supplemental measures of our
performance that are not 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 profit, operating income,
operating margin, net income, and earnings per share 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 also
facilitates comparison with other companies in our industry, which
use similar financial measures to supplement their GAAP results.
Non-GAAP net income 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 are:
- Amortization of intangible assets
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 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 evaluate our business to
determine whether any operations should be eliminated or curtailed
and engage in acquisition and assimilation activities as part of
our ongoing business. We therefore will continue to experience
special charges on a regular basis. These costs also directly
impact our available funds.
- Our stock incentive 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 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
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 nearly $1,090 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 Veloce are registered trademarks
and iSolve and FloEFD are trademarks of Mentor Graphics
Corporation. 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 in the United States or international
economies, and the potential adverse impact on the semiconductor
and electronics industries; (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) effects of the volatility of foreign currency
fluctuations on the company’s business and operating results; (v)
litigation; (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 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.
MENTOR GRAPHICS
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except earnings per share data)
Three Months Ended October 31,
Nine Months Ended October 31, 2013
2012 2013
2012 Revenues: System and software $
170,835 $ 166,301 $ 444,322 $ 455,614 Service and support
104,807 102,459 311,051
301,875 Total revenues 275,642 268,760
755,373 757,489
Cost of
revenues: (1) System and software 15,947 19,214 40,082 49,296
Service and support 29,396 29,290 88,380 86,834 Amortization of
purchased technology 729 1,759
2,648 6,092 Total cost of revenues
46,072 50,263 131,110
142,222 Gross profit 229,570 218,497
624,263 615,267
Operating
expenses: Research and development (2) 86,799 76,214 246,823
220,211 Marketing and selling (3) 85,746 84,673 244,664 243,493
General and administrationa (4) 18,917 16,965 52,452 51,702 Equity
in earnings of Frontline (5) (1,392 ) (381 ) (2,739 ) (1,630 )
Amortization of intangible assets (6) 1,440 1,242 4,650 4,547
Special chargesa (7) 4,688 1,975
12,570 6,406 Total operating expenses
196,198 180,688 558,420
524,729
Operating income 33,372 37,809 65,843 90,538
Other income (expense), net (8) 352 57 (879 ) (239 ) Interest
expense (9) (4,967 ) (4,652 ) (14,649 )
(13,983 ) Income before income tax 28,757 33,214 50,315 76,316
Income tax expense (benefit) (10) 3,634 1,148
1,864 (835 ) Net income 25,123 32,066
48,451 77,151 Less: Income (loss) attributable to noncontrolling
interest (11) (412 ) 1,425 (1,271 )
161 Net income attributable to Mentor Graphics
shareholders $ 25,535 $ 30,641 $ 49,722 $
76,990 Net income per share attributable to Mentor Graphics
shareholders: Basicb $ 0.21 $ 0.27 $ 0.40 $
0.70 Dilutedb $ 0.20 $ 0.27 $ 0.39 $
0.68 Weighted average number of shares outstanding: Basic
113,986 111,575 113,232
110,454 Diluted 117,078 114,721
116,395 113,584 aCertain
litigation costs have been reclassified from general and
administration to special charges within operating expenses for the
three and nine months ended October 31, 2012. These
reclassifications were made to conform to the current period
presentation. This reclassification had no impact on GAAP operating
expense, operating income or net income for the three and nine
months ended October 31, 2012. Additional discussion regarding the
reclassification will be provided in our Quarterly Report on Form
10-Q for the quarter ended October 31, 2013. bWe have
decreased the numerator of our basic and diluted earnings per share
calculation by $2,032 for the three months ended October 31, 2013
and by $3,913 for the nine months ended October 31, 2013 for the
adjustment to increase the noncontrolling interest with redemption
feature to its calculated redemption value at October 31, 2013,
recorded directly to retained earnings. For the three and nine
months ended October 31, 2012, we excluded a similar adjustment for
the calculation of basic and diluted earnings per share, as the
amount was not significant.
MENTOR GRAPHICS
CORPORATION
FOOTNOTES TO
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(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, 2013
2012 2013
2012 (1) Cost of revenues: Equity
plan-related compensation $ 520 $ 393 $ 1,438 $ 1,080 Amortization
of purchased technology 729 1,759
2,648 6,092 $ 1,249 $ 2,152
$ 4,086 $ 7,172
(2) Research and
development: Equity plan-related compensation $ 2,865 $
2,272 $ 8,018 $ 6,604
(3) Marketing
and selling: Equity plan-related compensation $ 1,998 $
1,644 $ 5,651 $ 4,818
(4) General
and administration: Equity plan-related compensation $ 2,043
$ 1,400 $ 6,162 $ 4,660
(5)
Equity in earnings of Frontline:
Amortization of purchased technology and
other identified intangible assets
$ 231 $ 1,242 $ 1,199 $ 3,726
(6) Amortization of intangible assets: Amortization of other
identified intangible assets $ 1,440 $ 1,242 $ 4,650
$ 4,547
(7) Special charges: Certain
litigation, rebalance, and other costs $ 4,688 $ 1,975
$ 12,570 $ 6,406
(8) Other income
(expense), net: Net income of unconsolidated entities $ (33 ) $
(38 ) $ (126 ) $ (110 )
(9) Interest expense:
Amortization of original issuance debt discount $ 1,441 $
1,342 $ 4,248 $ 3,955
(10) Income
tax expense (benefit): Non-GAAP income tax effects $ (3,961 ) $
(6,748 ) $ (14,587 ) $ (20,911 )
(11) Income (loss)
attributable to noncontrolling interest:
Amortization of intangible assets,
equity-plan related compensation, and income tax effects
$ (206 ) $ 96 $ (768 ) $ (506 )
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, 2013
2012 2013
2012 GAAP net income attributable to Mentor Graphics
shareholders $ 25,535 $ 30,641 $ 49,722 $ 76,990 Non-GAAP
adjustments: Equity plan-related compensation: (1) Cost of revenues
520 393 1,438 1,080 Research and development 2,865 2,272 8,018
6,604 Marketing and selling 1,998 1,644 5,651 4,818 General and
administration 2,043 1,400 6,162 4,660 Acquisition - related items:
Amortization of purchased assets Cost of revenues (2) 729 1,759
2,648 6,092 Frontline purchased technology and intangible assets
(3) 231 1,242 1,199 3,726 Amortization of intangible assets (4)
1,440 1,242 4,650 4,547 Special chargesa (5) 4,688 1,975 12,570
6,406 Other income (expense), net (6) (33 ) (38 ) (126 ) (110 )
Interest expense (7) 1,441 1,342 4,248 3,955 Non-GAAP income tax
effects (8) (3,961 ) (6,748 ) (14,587 ) (20,911 ) Noncontrolling
interest (9) (206 ) 96 (768 )
(506 ) Total of non-GAAP adjustments 11,755
6,579 31,103 20,361 Non-GAAP net
income attributable to Mentor Graphics shareholders $ 37,290
$ 37,220 $ 80,825 $ 97,351 GAAP and
Non-GAAP weighted average shares (diluted) 117,078
114,721 116,395 113,584
Net income per share attributable to Mentor Graphics
shareholders: GAAP (diluted) $ 0.20 $ 0.27 $ 0.39 $ 0.68
Noncontrolling interest adjustment (10) 0.02 - 0.03 - Non-GAAP
adjustments detailed above 0.10 0.05
0.27 0.18 Non-GAAP (diluted) $ 0.32
$ 0.32 $ 0.69 $ 0.86
aSee footnote a on last table for a
discussion of the reclassification of certain litigation costs to
Special charges.
(1) Equity plan-related compensation
expense is the fair value of all share-based payments to employees
for stock options and restricted stock units, and purchases made as
a result of the employee stock purchase plans.
(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 P.C.B. Solutions Limited
Partnership (Frontline) joint venture investment. Mentor Graphics
has a 50% interest in Frontline. The purchased technology was
amortized over three years from the March 2010 acquisition date,
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. This expense is the same type as being
adjusted for in note (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 October 31, 2013: Special charges consist of (i) $ 3,046 for
EVE litigation costs, (ii) $1,133 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, and (iii) $509 in other adjustments. Three
months ended October 31, 2012: Special charges consist of (i) $829
for EVE litigation costs, (ii) $612 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, and (iii) $534 in other adjustments. Nine
months ended October 31, 2013: Special charges consist of (i)
$8,217 for EVE litigation costs, (ii) $3,843 of costs incurred for
employee rebalances which includes severance benefits, notice pay,
and outplacement services, and (iii) $510 in other adjustments.
Nine months ended October 31, 2012: Special charges consist of (i)
$2,629 of costs incurred for employee rebalances which includes
severance benefits, notice pay, and outplacement services, (ii)
$2,606 for EVE litigation costs, and (iii) $1,171 in other
adjustments.
(6) Income from investment accounted for under
the equity method of accounting.
(7) Amortization of
original issuance debt discount.
(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.
(9) Adjustment for the impact
of amortization of intangible assets, equity plan-related
compensation, and income tax expense on noncontrolling interest.
(10) Non-GAAP EPS excludes from the numerator of our
earnings per share calculation the adjustment of the noncontrolling
interest to the calculated redemption value, recorded directly to
retained earnings.
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, 2013
2012 2013
2012 GAAP gross profit $ 229,570 $ 218,497 $ 624,263
$ 615,267 Reconciling items to non-GAAP gross profit: Equity
plan-related compensation 520 393 1,438 1,080 Amortization of
purchased technology 729 1,759
2,648 6,092 Non-GAAP gross profit $ 230,819
$ 220,649 $ 628,349 $ 622,439
Three Months Ended October 31, Nine Months Ended
October 31, 2013 2012
2013 2012
GAAP gross profit as a percent of total revenues 83.3 % 81.3 % 82.6
% 81.2 % Non-GAAP adjustments detailed above 0.4 %
0.8 % 0.6 % 1.0 % Non-GAAP gross profit as a percent
of total revenues 83.7 % 82.1 % 83.2 %
82.2 %
Three Months Ended October 31, Nine
Months Ended October 31, 2013
2012 2013
2012 GAAP operating expenses $ 196,198 $ 180,688 $
558,420 $ 524,729 Reconciling items to non-GAAP operating expenses:
Equity plan-related compensation (6,906 ) (5,316 ) (19,831 )
(16,082 ) Amortization of Frontline purchased technology and other
identified intangible assets (231 ) (1,242 ) (1,199 ) (3,726 )
Amortization of other identified intangible assets (1,440 ) (1,242
) (4,650 ) (4,547 ) Special chargesa (4,688 ) (1,975
) (12,570 ) (6,406 ) Non-GAAP operating expenses $
182,933 $ 170,913 $ 520,170 $ 493,968
Three Months Ended October 31, Nine Months
Ended October 31, 2013
2012 2013
2012 GAAP operating income $ 33,372 $ 37,809 $ 65,843
$ 90,538 Reconciling items to non-GAAP operating income: Equity
plan-related compensation 7,426 5,709 21,269 17,162 Amortization of
purchased technology 729 1,759 2,648 6,092 Amortization of
Frontline purchased technology and other identified intangible
assets 231 1,242 1,199 3,726 Amortization of other identified
intangible assets 1,440 1,242 4,650 4,547 Special Chargesa
4,688 1,975 12,570 6,406
Non-GAAP operating income $ 47,886 $ 49,736 $
108,179 $ 128,471
Three Months Ended
October 31, Nine Months Ended October 31,
2013 2012
2013 2012 GAAP operating
margin 12.1 % 14.1 % 8.7 % 12.0 % Non-GAAP adjustments detailed
above 5.3 % 4.4 % 5.6 % 5.0 % Non-GAAP
operating margin 17.4 % 18.5 % 14.3 %
17.0 %
Three Months Ended October 31, Nine Months Ended October
31, 2013 2012
2013 2012 GAAP
other expense, net and interest expense $ (4,615 ) $ (4,595 ) $
(15,528 ) $ (14,222 ) Reconciling items to non-GAAP other expense,
net and interest expense: Equity in earnings of unconsolidated
entities (33 ) (38 ) (126 ) (110 ) Amortization of original
issuance debt discount 1,441 1,342
4,248 3,955 Non-GAAP other expense, net
and interest expense $ (3,207 ) $ (3,291 ) $ (11,406 ) $ (10,377 )
aSee footnote a on last table for a
discussion of the reclassification of certain litigation costs to
Special charges.
MENTOR GRAPHICS
CORPORATION
UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEETS
(In thousands)
October 31, January 31,
2013 2013 Assets
Current assets: Cash, cash equivalents and short-term
investments $ 223,985 $ 223,783 Trade accounts receivable, net
124,240 178,351 Term receivables, short-term 244,763 233,894
Prepaid expenses and other 59,426 53,951 Deferred income taxes
9,286 14,973 Total current assets 661,700
704,952
Property, plant, and equipment, net 157,195 162,402
Term receivables, long-term 241,122 250,497
Goodwill and
intangible assets, net 558,922 557,770
Other assets
71,870 69,663 Total assets $ 1,690,809 $
1,745,284
Liabilities and Stockholders' Equity
Current liabilities: Short-term borrowings $ 1,896 $ 5,964
Accounts payable 14,104 20,906 Income taxes payable 5,615 9,180
Accrued payroll and related liabilities 70,732 101,354 Accrued and
other liabilities 39,318 40,662 Deferred revenue 194,748
233,759 Total current liabilities 326,413 411,825
Long-term notes payable 222,794 218,546
Deferred revenue,
long-term 16,102 17,755
Other long-term liabilities
44,670 50,981 Total liabilities 609,979
699,107
Noncontrolling interest with redemption
feature 15,343 12,698
Stockholders' equity:
Common stock 815,839 810,902 Retained earnings 227,747 197,178
Accumulated other comprehensive income 21,901 25,399
Total stockholders' equity 1,065,487 1,033,479
Total liabilities and stockholders' equity $ 1,690,809 $ 1,745,284
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, 2013
2012 2013
2012 Operating activities Net income $ 25,123
$ 32,066 $ 48,451 $ 77,151 Depreciation and amortization 13,279
13,189 39,407 40,201 Other adjustments to reconcile: Operating cash
5,702 4,117 23,106 14,310 Changes in working capital (15,237
) (30,887 ) (46,938 ) (78,790 ) Net
cash provided by operating activities 28,867 18,485 64,026 52,872
Investing activities Net cash used in investing
activities (11,025 ) (13,534 ) (32,482 ) (37,520 )
Financing activities Net cash provided by (used in)
financing activities (8,182 ) 7,936 (34,135 ) (136 ) Effect
of exchange rate changes on cash and cash equivalents 683
482 (1,285 ) (1,985 ) Net
change in cash and cash equivalents 10,343 13,369 (3,876 ) 13,231
Cash and cash equivalents at beginning of period 209,564
146,361 223,783 146,499
Cash and cash equivalents at end of period (a) $
219,907 $ 159,730 $ 219,907 $ 159,730
Other data: Capital expenditures $
7,545 $ 13,392 $ 21,366 $ 35,575 Days
sales outstanding 120 136
(a) The condensed consolidated balance sheet at October 31, 2013
includes $4,078 of short-term investments in the "Cash, cash
equivalents, and short-term investments" line item. $4,078 should
be deducted from that line item to reconcile to the amount of "Cash
and cash equivalents at end of period" presented in this statement
for the three and nine months ended October 31, 2013.
MENTOR GRAPHICS
CORPORATION
UNAUDITED
SUPPLEMENTAL BOOKINGS AND REVENUE INFORMATION
(Rounded to nearest 5%)
2014 2013
2012 Product Category Bookings (a) Q1
Q2 Q3 Year Q1 Q2 Q3
Q4 Year Q1 Q2 Q3 Q4
Year IC DESIGN TO SILICON 60% 35% 40% 45% 35% 25% 30% 35%
30% 20% 25% 60% 40% 40% SCALABLE VERIFICATION 15% 45% 25% 30% 15%
30% 20% 25% 25% 35% 30% 15% 35% 30% INTEGRATED SYSTEMS DESIGN 10%
10% 20% 15% 25% 25% 25% 25% 25% 25% 25% 15% 15% 15% NEW &
EMERGING MARKETS 5% 5% 5% 5% 5% 10% 15% 5% 10% 5% 10% 5% 5% 5%
SERVICES / OTHER 10% 5% 10% 5% 20% 10% 10% 10% 10% 15% 10% 5% 5%
10%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
100% 100% 100% 100%
2014 2013 2012
Product Category Revenue (b) Q1 Q2 Q3
Year Q1 Q2 Q3 Q4 Year
Q1 Q2 Q3 Q4 Year IC DESIGN TO
SILICON 35% 50% 35% 40% 40% 35% 25% 35% 35% 40% 25% 40% 45% 40%
SCALABLE VERIFICATION 20% 20% 25% 20% 25% 25% 30% 30% 25% 25% 30%
25% 25% 25% INTEGRATED SYSTEMS DESIGN 30% 20% 25% 25% 20% 25% 25%
20% 25% 20% 25% 25% 20% 20% NEW & EMERGING MARKETS 5% 5% 5% 5%
5% 5% 10% 5% 5% 5% 10% 5% 5% 5% SERVICES / OTHER 10% 5% 10% 10% 10%
10% 10% 10% 10% 10% 10% 5% 5% 10%
Total 100% 100% 100% 100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2014 2013 2012 Bookings by Geography
Q1 Q2 Q3 Year Q1 Q2
Q3 Q4 Year Q1 Q2 Q3
Q4 Year North America 35% 55% 60% 50% 35% 40% 50% 35%
40% 45% 45% 40% 50% 45% Europe 10% 15% 15% 15% 20% 35% 20% 30% 25%
20% 30% 15% 25% 20% Japan 10% 5% 5% 5% 10% 5% 5% 10% 10% 15% 5% 5%
10% 10% Pac Rim 45% 25% 20% 30% 35% 20% 25% 25% 25% 20% 20% 40% 15%
25%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
100% 100% 100% 100%
2014 2013 2012
Revenue by Geography Q1 Q2 Q3
Year Q1 Q2 Q3 Q4 Year
Q1 Q2 Q3 Q4 Year North America
45% 40% 50% 40% 50% 45% 50% 40% 45% 40% 50% 45% 35% 40% Europe 20%
20% 20% 20% 20% 20% 20% 30% 25% 25% 20% 25% 25% 25% Japan 10% 5%
10% 10% 10% 15% 10% 10% 10% 15% 10% 10% 5% 10% Pac Rim 25% 35% 20%
30% 20% 20% 20% 20% 20% 20% 20% 20% 35% 25%
Total 100% 100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2014 2013 2012 Bookings by Business
Model (c) Q1 Q2 Q3 Year Q1
Q2 Q3 Q4 Year Q1 Q2
Q3 Q4 Year Perpetual 15% 50% 20% 30% 25% 20%
20% 15% 20% 40% 20% 15% 25% 20% Term Ratable 10% 5% 5% 10% 25% 15%
10% 5% 10% 20% 10% 5% 5% 10% Term Up Front 75% 45% 75% 60% 50% 65%
70% 80% 70% 40% 70% 80% 70% 70%
Total 100% 100% 100% 100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2014 2013 2012 Revenue by Business Model
(c) Q1 Q2 Q3 Year Q1
Q2 Q3 Q4 Year Q1 Q2
Q3 Q4 Year Perpetual 20% 25% 20% 20% 20% 25%
25% 15% 20% 30% 25% 15% 15% 20% Term Ratable 10% 10% 5% 10% 10% 10%
10% 5% 10% 10% 10% 10% 5% 10% Term Up Front 70% 65% 75% 70% 70% 65%
65% 80% 70% 60% 65% 75% 80% 70%
Total 100% 100% 100% 100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (a)
Product Category Bookings excludes support bookings for all
sub-flow categories. (b) Product Category Revenue includes support
revenue for each sub-flow category as appropriate. (c) Bookings and
Revenue by Business Model are System and Software only (excludes
finance fee).
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 Q4'14 and fiscal year 2014.
Estimated Estimated Q4'14
FY'14 Diluted GAAP net income per share $ 0.85 $ 1.26
Non-GAAP Adjustments: Amortization of purchased intangible assets
(1) 0.01 0.03 Amortization of other identified intangible assets
(2) 0.02 0.06 Equity plan-related compensation (3) 0.07 0.25 Other
income (expense), net and interest expense (4) 0.01 0.05 Non-GAAP
income tax effects (5) (0.06 ) (0.19 ) Non-controlling interest (6)
- (0.01 ) Special Charges (7) - 0.11 Other (8) -
0.03 Non-GAAP net income per share $ 0.90 $
1.59
(1) Excludes amortization of purchased intangible assets
resulting from acquisitions. 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 P.C.B. 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
for the fair value of all share-based payments to employees for
stock options and restricted stock units, and purchases made as a
result of the employee stock purchase plans.
(4) Excludes
income from an investment accounted for under the equity method of
accounting, and amortization of original issuance debt discount.
(5) Non-GAAP income tax expense adjustment reflects the
application of our assumed normalized effective 17% tax rate,
instead of our GAAP tax rate, to our non-GAAP pre-tax income.
(6) Adjustment for the impact of amortization of intangible
assets, equity plan-related compensation, and income tax expense on
noncontrolling interest.
(7) Excludes special charges
consisting primarily of costs incurred for certain litigation
costs, employee rebalances (which includes severance benefits,
notice pay and outplacement services), facility closures, and
acquisition costs. Full year adjustment represents impact of actual
special charges for the nine months ended October 31, 2013, as we
do not provide guidance for special charges.
(8) Excludes
the adjustment to the calculated redemption value of the
noncontrolling interest, recorded directly to retained earnings.
Full year adjustment represents the impact of the adjustment to the
redemption value as of October 31, 2013, as we do not provide
guidance for this adjustment.
Mentor Graphics CorporationJoe Reinhart,
503-685-1462joe_reinhart@mentor.com
Mentor Graphics Corp. (NASDAQ:MENT)
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