Mentor Graphics Corporation (NASDAQ: MENT) today announced
financial results for the company’s fiscal second quarter ended
July 31, 2014. The company reported revenues of $260.2 million,
non-GAAP earnings per share of $0.23, and GAAP earnings per share
of $0.13.
“System design strength, particularly with automotive customers,
drove the second quarter with earnings solidly beating guidance,”
said Walden C. Rhines, chairman and CEO of Mentor Graphics. “The
automotive industry is in transition from mechanical to electronic
differentiation and the rate of change is accelerating. Electronic
content in vehicles is about 40 percent of the cost of a car. This
is yielding considerable opportunities for Mentor. Second quarter
automotive strength was broad, with orders for wire harness,
embedded software and AUTOSAR tools and products.”
During the quarter the company announced two acquisitions: XS
Embedded, which has automotive-grade software and hardware to
accelerate the start of production, and positions Mentor well to
address integration of advanced driver assistance systems, driver
information and infotainment; and Nimbic, Inc., whose leading 3D
electromagnetic simulation technology enhances the Mentor® IC
packaging design portfolio.
During the quarter Mentor also launched the MicRed® Industrial
Power Tester 1500A. This new hardware product tests the reliability
of power electronic components used in automobiles, trains, power
generators and converters, and renewable energy applications such
as wind turbines. In addition, the company announced the Questa®
PropGen formal-based automated verification solution; and the
Xpedition® Data Management product suite, the newest addition to
the Xpedition Enterprise platform for PCB systems design. Other
announcements covered several emulation solutions that accelerate
the verification of high-performance memory products used in mobile
multimedia devices and networking infrastructure; and an embedded
software solution for multi-core system-on-chip architectures which
combine two or more different types of microprocessors or
microcontrollers.
“The second quarter was strong for Mentor and as a result we
exceeded non-GAAP earnings guidance,” said Gregory K. Hinckley,
president of Mentor Graphics. “A four percent revenue upside to
guidance, along with continued attention to expense control, drove
an over 50 percent beat in earnings per share. Automotive had an
exceptional quarter, with record quarterly bookings three times the
level of last year and year-to-date bookings already equal to all
of fiscal 2014.”
Outlook
For the third quarter of fiscal 2015, the company expects
revenues of about $275 million, non- GAAP earnings per share of
about $0.21 and GAAP earnings per share of approximately $0.07. For
the full year fiscal 2015, the company expects revenues of about
$1.237 billion, non-GAAP earnings per share of about $1.75, and
GAAP earnings per share of approximately $1.37.
Dividend and Share Repurchase
The company announced a quarterly dividend of $0.05 per share.
The dividend is payable on September 30, 2014 to shareholders of
record as of the close of business on September 10, 2014.
During the quarter the company repurchased approximately 1.2
million shares for $25 million. Year to date the company has
repurchased 3.2 million shares for $70 million.
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 include expenses
related to certain litigation costs, employee severance,
acquisitions, excess facility costs, and other asset related
charges. Special charges are incurred based on particular facts and
circumstances and can vary in size and frequency. Litigation costs
classified as special charges consist of professional service fees
related to patent litigation involving us, EVE S.A., and Synopsys,
Inc. These costs are included in special charges because of their
unusual nature due to the significance in variability of timing and
amount. Restructuring costs included in special charges include
costs incurred for employee terminations, including severance and
benefits, driven by modification of business strategy or business
emphasis. Special charges are not ordinarily included in our annual
operating plan and related budget due to unpredictability, driven
in part by rapidly changing technology and the 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 six months ended July 31, 2014 is (22%) after
consideration of period specific items. Without period specific
items of ($3.2 million), our GAAP tax rate is 14%. Our full fiscal
year 2015 GAAP tax rate, inclusive of period specific items, is
projected to be 10%. 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 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.
Additionally, as part of our ongoing business, we engage in
acquisition and assimilation activities and patent litigation. 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 in excess of $1.15 billion. 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, MicRed, Questa, and Xpedition are
registered 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, the European Union,
China or other 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 applicable tax laws,
regulations or enforcement practices; (viii) effects of
unanticipated shifts in product mix on gross margin; and (ix)
effects of customer mergers or divestitures, 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 July 31, Six Months Ended July
31, 2014 2013
2014 2013 Revenues:
System and software $ 149,480 $ 150,203 $ 297,709 $ 273,487 Service
and support 110,753 103,013
214,675 206,244 Total revenues 260,233
253,216 512,384 479,731
Cost of revenues: (1) System and software 16,185
15,236 43,156 24,135 Service and support 30,903 28,909 60,014
58,984 Amortization of purchased technology 1,841
712 3,202 1,919 Total
cost of revenues 48,929 44,857
106,372 85,038 Gross profit 211,304
208,359 406,012 394,693
Operating expenses: Research and development (2)
87,542 80,307 171,993 160,024 Marketing and selling (3) 82,305
79,811 166,939 158,918 General and administration (4) 19,473 17,198
37,155 33,535 Equity in earnings of Frontline (5) (2,062 ) (950 )
(3,441 ) (1,347 ) Amortization of intangible assets (6) 2,026 1,556
3,776 3,210 Special charges (7) 5,108 3,859
11,034 7,882 Total operating
expenses 194,392 181,781 387,456
362,222
Operating income 16,912 26,578
18,556 32,471 Other income (expense), net (8) (104 ) (272 ) (362 )
(1,231 ) Interest expense (9) (4,807 ) (4,897 )
(9,392 ) (9,682 ) Income before income tax 12,001
21,409 8,802 21,558 Income tax benefit (10) (1,768 )
(2,338 ) (1,942 ) (1,770 ) Net income 13,769 23,747
10,744 23,328 Less: Loss attributable to noncontrolling interest
(11) (403 ) (235 ) (877 ) (859 ) Net
income attributable to Mentor Graphics shareholders $ 14,172
$ 23,982 $ 11,621 $ 24,187 Net income per
share attributable to Mentor Graphics shareholders: Basica $ 0.13
$ 0.19 $ 0.12 $ 0.20 Diluteda $ 0.13
$ 0.19 $ 0.11 $ 0.19 Weighted average
number of shares outstanding: Basic 113,868
112,988 114,396 112,851 Diluted
116,551 116,295 116,960
116,014 aWe have increased (decreased) the
numerator of our basic and diluted earnings per share calculation
for the adjustment of the noncontrolling interest with redemption
feature to its calculated redemption value, recorded directly to
retained earnings, as follows: $ 895 $ (2,349
) $ 1,562 $ (1,881 )
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 July 31, Six
Months Ended July 31, 2014
2013 2014 2013
(1) Cost of revenues: Equity plan-related
compensation $ 544 $ 458 $ 1,079 $ 918 Amortization of purchased
technology 1,841 712 3,202
1,919 $ 2,385 $ 1,170 $ 4,281
$ 2,837
(2) Research and development:
Equity plan-related compensation $ 3,311 $ 2,543 $
6,552 $ 5,153
(3) Marketing and
selling: Equity plan-related compensation $ 2,143 $
1,771 $ 4,321 $ 3,653
(4) General
and administration: Equity plan-related compensation $ 3,162
$ 2,505 $ 5,337 $ 4,119
(5)
Equity in earnings of Frontline: Amortization of purchased
technology and other identified intangible assets $ - $ 231
$ 116 $ 968
(6) Amortization of
intangible assets: Amortization of other identified intangible
assets $ 2,026 $ 1,556 $ 3,776 $ 3,210
(7) Special charges: Rebalance, restructuring,
certain litigation, and other costs $ 5,108 $ 3,859 $
11,034 $ 7,882
(8) Other income (expense),
net: Net income (loss) of unconsolidated entities $ 55 $
(42 ) $ 68 $ (93 )
(9) Interest expense:
Amortization of original issuance debt discount $ 1,521 $
1,416 $ 3,015 $ 2,807
(10) Income
tax benefit: Non-GAAP income tax effects $ (7,158 ) $ (8,529 )
$ (9,983 ) $ (10,626 )
(11) Loss attributable to
noncontrolling interest: Amortization of intangible assets,
equity-plan related compensation, and income tax effects $ (204 ) $
(169 ) $ (404 ) $ (562 )
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, 2014
2013 2014 2013
GAAP net income attributable to Mentor Graphics shareholders
$ 14,172 $ 23,982 $ 11,621 $ 24,187 Non-GAAP adjustments: Equity
plan-related compensation: (1) Cost of revenues 544 458 1,079 918
Research and development 3,311 2,543 6,552 5,153 Marketing and
selling 2,143 1,771 4,321 3,653 General and administration 3,162
2,505 5,337 4,119 Acquisition - related items: Amortization of
purchased assets Cost of revenues (2) 1,841 712 3,202 1,919
Frontline purchased technology and intangible assets (3) - 231 116
968 Amortization of intangible assets (4) 2,026 1,556 3,776 3,210
Special charges (5) 5,108 3,859 11,034 7,882 Other income
(expense), net (6) 55 (42 ) 68 (93 ) Interest expense (7) 1,521
1,416 3,015 2,807 Non-GAAP income tax effects (8) (7,158 ) (8,529 )
(9,983 ) (10,626 ) Noncontrolling interest (9) (204 )
(169 ) (404 ) (562 ) Total of non-GAAP adjustments
12,349 6,311 28,113
19,348 Non-GAAP net income attributable to Mentor
Graphics shareholders $ 26,521 $ 30,293 $ 39,734
$ 43,535 GAAP and non-GAAP weighted average
shares (diluted) 116,551 116,295
116,960 116,014 Net income per share
attributable to Mentor Graphics shareholders: GAAP (diluted) $ 0.13
$ 0.19 $ 0.11 $ 0.19 Noncontrolling interest adjustment (10) (0.01
) 0.02 (0.01 ) 0.02 Non-GAAP adjustments detailed above 0.11
0.05 0.24 0.17
Non-GAAP (diluted) $ 0.23 $ 0.26 $ 0.34 $ 0.38
(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 technology is 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 were 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
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, 2014: Special charges
consist of (i) $4,231 for EVE litigation costs, (ii) $575 of costs
incurred for employee rebalances which includes severance benefits,
notice pay, and outplacement services, and (iii) $302 in other
adjustments. Three months ended July 31, 2013: Special charges
consist of (i) $3,231 of EVE litigation costs, (ii) $631 of costs
incurred for employee rebalances which
severance benefits, notice pay, and
outplacement services, and (iii) $(3) in other adjustments.
Six months ended July 31, 2014: Special charges consist of (i)
$8,189 for EVE litigation costs, (ii) $1,700 of costs incurred for
employee rebalances which includes severance benefits, notice pay,
and outplacement services, and (iii) $1,145 in other adjustments.
Six months ended July 31, 2013: Special charges consist of (i)
$5,171 for EVE litigation costs, (ii) $2,710 of costs incurred for
employee rebalances which includes severance benefits, notice pay,
and outplacement services, and (iii) $1 in other adjustments.
(6) Amount represents income (loss) on investment accounted
for under the equity method of accounting.
(7) Amount
represents the 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 July 31, Six Months
Ended July 31, 2014 2013
2014 2013 GAAP
gross profit $ 211,304 $ 208,359 $ 406,012 $ 394,693 Reconciling
items to non-GAAP gross profit: Equity plan-related compensation
544 458 1,079 918 Amortization of purchased technology 1,841
712 3,202 1,919
Non-GAAP gross profit $ 213,689 $ 209,529 $ 410,293
$ 397,530
Three Months Ended July
31, Six Months Ended July 31, 2014
2013 2014
2013 GAAP gross profit as a percent of total revenues
81.2 % 82.3 % 79.2 % 82.3 % Non-GAAP adjustments detailed above
0.9 % 0.4 % 0.9 % 0.6 % Non-GAAP gross
profit as a percent of total revenues 82.1 % 82.7 %
80.1 % 82.9 %
Three Months Ended
July 31, Six Months Ended July 31, 2014
2013 2014
2013 GAAP operating expenses $ 194,392 $ 181,781 $
387,456 $ 362,222 Reconciling items to non-GAAP operating expenses:
Equity plan-related compensation (8,616 ) (6,819 ) (16,210 )
(12,925 ) Amortization of Frontline purchased technology and other
identified intangible assets - (231 ) (116 ) (968 ) Amortization of
other identified intangible assets (2,026 ) (1,556 ) (3,776 )
(3,210 ) Special charges (5,108 ) (3,859 )
(11,034 ) (7,882 ) Non-GAAP operating expenses $ 178,642
$ 169,316 $ 356,320 $ 337,237
Three Months Ended July 31, Six Months Ended July
31, 2014 2013
2014 2013 GAAP operating income
$ 16,912 $ 26,578 $ 18,556 $ 32,471 Reconciling items to non-GAAP
operating income: Equity plan-related compensation $ 9,160 $ 7,277
$ 17,289 $ 13,843 Amortization of purchased technology 1,841 712
3,202 1,919 Amortization of Frontline purchased technology and
other identified intangible assets - 231 116 968 Amortization of
other identified intangible assets 2,026 1,556 3,776 3,210 Special
charges 5,108 3,859
11,034 7,882 Non-GAAP operating income
$ 35,047 $ 40,213 $ 53,973 $ 60,293
Three Months Ended July 31, Six Months
Ended July 31, 2014 2013
2014 2013 GAAP
operating income as a percent of total revenues 6.5 % 10.5 % 3.6 %
6.8 % Non-GAAP adjustments detailed above 7.0 % 5.4 %
6.9 % 5.8 % Non-GAAP operating income as a percent of
total revenues 13.5 % 15.9 % 10.5 %
12.6 %
Three Months Ended July 31, Six
Months Ended July 31, 2014
2013 2014 2013
GAAP other income (expense), net and interest expense $
(4,911 ) $ (5,169 ) $ (9,754 ) $ (10,913 ) Reconciling items to
non-GAAP other income (expense), net and interest expense: Equity
in earnings of unconsolidated entities 55 (42 ) 68 (93 )
Amortization of original issuance debt discount 1,521
1,416 3,015 2,807
Non-GAAP other income (expense), net and interest expense $ (3,335
) $ (3,795 ) $ (6,671 ) $ (8,199 )
MENTOR GRAPHICS
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31,
January 31, 2014 2014
Assets Current assets: Cash, cash equivalents and
short-term investments $ 174,361 $ 297,312 Trade accounts
receivable, net 112,530 179,830 Term receivables, short-term
311,169 274,653 Prepaid expenses and other 65,570 64,658 Deferred
income taxes 10,107 13,656 Total current
assets 673,737 830,109
Property, plant, and equipment, net
158,474 160,165
Term receivables, long-term 236,743 270,365
Goodwill and intangible assets, net 650,879 571,843
Other
assets 73,397 71,627 Total assets $
1,793,230 $ 1,904,109
Liabilities and Stockholders'
Equity Current liabilities: Short-term borrowings $
3,640 $ 9,590 Accounts payable 11,360 21,548 Income taxes payable
372 3,365 Accrued payroll and related liabilities 51,548 102,848
Accrued and other liabilities 40,455 42,457 Deferred revenue
223,610 231,179 Total current liabilities 330,985
410,987
Long-term notes payable 227,276 224,261
Deferred
revenue, long-term 22,266 17,398
Other long-term
liabilities 49,566 50,690 Total current
liabilities 630,093 703,336
Noncontrolling interest with redemption feature 13,296
15,479
Stockholders' equity: Common Stock 802,352
838,939 Retained Earnings 329,264 327,552 Accumulated other
comprehensive income 18,025 18,803 Noncontrolling Interest
200 - Total Stockholder's equity 1,149,841 1,185,294
Total liabilities and stockholders' equity $ 1,793,230 $ 1,904,109
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,
2014 2013
2014 2013 Operating
activities Net income $ 13,769 $ 23,747 $ 10,744 $ 23,328
Depreciation and amortization 14,512 12,784 28,249 26,128 Other
adjustments to reconcile: Operating cash 11,298 6,594 17,820 17,404
Changes in working capital 9,944 (20,093 )
(18,251 ) (31,701 ) Net cash provided by
operating activities 49,523 23,032 38,562 35,159
Investing activities Net cash used in investing activities
(37,511 ) (6,299 ) (85,091 ) (21,457 )
Financing
activities Net cash used in financing activities (13,443 )
(4,545 ) (72,736 ) (25,953 ) Effect of exchange rate changes
on cash and cash equivalents (33 ) (1,004 )
304 (1,968 ) Net change in cash and cash
equivalents (1,464 ) 11,184 (118,961 ) (14,219 ) Cash and cash
equivalents at beginning of perioda 175,825
198,380 293,322 223,783
Cash and cash equivalents at end of period $ 174,361 $
209,564 $ 174,361 $ 209,564
Other data: Capital expenditures $ 7,145 $
9,411 $ 13,315 $ 13,821 Days sales outstanding
147 130 aThe condensed
consolidated balance sheet at January 31, 2014 includes $3,990 of
short-term investments in the "Cash, cash equivalents, and
short-term investments" line item. $3,990 should be deducted from
that line item to reconcile to the amount of "Cash and cash
equivalents at beginning of period" presented in this statement for
the six months ended July 31, 2014.
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 Q3'15 and fiscal year 2015.
Estimated Estimated Q3'15
FY'15 Diluted GAAP net income per share $ 0.07 $ 1.37
Non-GAAP Adjustments: Amortization of purchased technology (1) 0.02
0.06 Amortization of other identified intangible assets (2) 0.02
0.07 Equity plan-related compensation (3) 0.08 0.31 Special Charges
(4) - 0.09 Other income (expense), net and interest expense (5)
0.01 0.05 Non-GAAP income tax effects (6) 0.01 (0.18 )
Noncontrolling interest (7) - (0.01 ) Other (8) - (0.01 )
Diluted non-GAAP net income per share $ 0.21 $ 1.75
(1)
Excludes amortization of purchased technology resulting from
acquisitions. Purchased technology is 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.
(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 special
charges consisting primarily of costs incurred for certain
litigation costs, and employee rebalances, which includes severance
benefits, notice pay and outplacement services. Full year
adjustment represents the impact of actual special charges for the
six months ended July 31, 2014 as we do not provide guidance for
special charges.
(5) Excludes income (loss) from an
investment accounted for under the equity method of accounting, and
amortization of original issuance debt discount.
(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.
(7) Adjustment for
the impact of amortization of intangible assets, equity
plan-related compensation, and income tax expense on noncontrolling
interest. Full year adjustment represents the impact of the
adjustment for the six months ended July 31, 2014, as we do not
provide guidance for this adjustment.
(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 July 31, 2014, as we do not provide guidance
for this adjustment.
MENTOR GRAPHICS
CORPORATION
UNAUDITED
SUPPLEMENTAL BOOKINGS AND REVENUE INFORMATION
(Rounded to nearest 5%)
2015 2014 2013 Product Category Bookings
(a) Q1 Q2 Year Q1 Q2
Q3 Q4 Year Q1 Q2 Q3
Q4 Year IC DESIGN TO SILICON 20% 25% 20% 60% 35% 40%
30% 40% 35% 25% 30% 35% 30% SCALABLE VERIFICATION 25% 25% 25% 15%
45% 25% 30% 30% 15% 30% 20% 25% 25% INTEGRATED SYSTEMS DESIGN 30%
25% 30% 10% 10% 20% 30% 20% 25% 25% 25% 25% 25% NEW & EMERGING
MARKETS 10% 15% 10% 5% 5% 5% 5% 5% 5% 10% 15% 5% 10% SERVICES /
OTHER 15% 10% 15% 10% 5% 10% 5% 5% 20% 10% 10% 10% 10%
Total
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2015 2014 2013 Product Category
Revenue (b) Q1 Q2 Year Q1 Q2
Q3 Q4 Year Q1 Q2 Q3
Q4 Year IC DESIGN TO SILICON 25% 30% 25% 35% 50% 35%
35% 40% 40% 35% 25% 35% 35% SCALABLE VERIFICATION 35% 25% 30% 20%
20% 25% 30% 25% 25% 25% 30% 30% 25% INTEGRATED SYSTEMS DESIGN 25%
25% 25% 30% 20% 25% 25% 20% 20% 25% 25% 20% 25% NEW & EMERGING
MARKETS 5% 10% 10% 5% 5% 5% 5% 5% 5% 5% 10% 5% 5% SERVICES / OTHER
10% 10% 10% 10% 5% 10% 5% 10% 10% 10% 10% 10% 10%
Total 100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2015 2014 2013 Bookings by
Geography Q1 Q2 Year Q1 Q2
Q3 Q4 Year Q1 Q2 Q3
Q4 Year North America 50% 40% 45% 35% 55% 60% 40% 50%
35% 40% 50% 35% 40% Europe 15% 25% 20% 10% 15% 15% 30% 20% 20% 35%
20% 30% 25% Japan 15% 5% 10% 10% 5% 5% 10% 5% 10% 5% 5% 10% 10% Pac
Rim 20% 30% 25% 45% 25% 20% 20% 25% 35% 20% 25% 25% 25%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
100% 100%
2015 2014 2013 Revenue by
Geography Q1 Q2 Year Q1 Q2
Q3 Q4 Year Q1 Q2 Q3
Q4 Year North America 50% 45% 45% 45% 40% 50% 45% 45%
50% 45% 50% 40% 45% Europe 25% 20% 25% 20% 20% 20% 20% 20% 20% 20%
20% 30% 25% Japan 10% 10% 10% 10% 5% 10% 15% 10% 10% 15% 10% 10%
10% Pac Rim 15% 25% 20% 25% 35% 20% 20% 25% 20% 20% 20% 20% 20%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
100% 100%
2015 2014 2013
Bookings by Business Model (c) Q1 Q2
Year Q1 Q2 Q3 Q4 Year
Q1 Q2 Q3 Q4 Year Perpetual 35%
20% 25% 15% 50% 20% 10% 25% 25% 20% 20% 15% 20% Term Ratable 20%
10% 15% 10% 5% 5% 5% 5% 25% 15% 10% 5% 10% Term Up Front 45% 70%
60% 75% 45% 75% 85% 70% 50% 65% 70% 80% 70%
Total 100% 100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2015 2014 2013 Revenue by Business
Model (c) Q1 Q2 Year Q1 Q2
Q3 Q4 Year Q1 Q2 Q3
Q4 Year Perpetual 35% 30% 30% 20% 25% 20% 20% 20% 20%
25% 25% 15% 20% Term Ratable 10% 10% 10% 10% 10% 5% 5% 10% 10% 10%
10% 5% 10% Term Up Front 55% 60% 60% 70% 65% 75% 75% 70% 70% 65%
65% 80% 70%
Total 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 CorporationJoe Reinhart,
503-685-1462joe_reinhart@mentor.com
Mentor Graphics Corp. (NASDAQ:MENT)
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