"The electronics industry recovery seems to be well underway, and we are increasingly optimistic about the business environment in the coming year," said Walden C. Rhines, CEO and chairman of Mentor Graphics. "The company's focus on its product segments with number one market share, as well as investments in new product categories, continue to show strong results, as the average dollar value of renewals in the top ten contracts in the fiscal fourth quarter grew 25% over the prior contract values."
During the quarter, the company extended its Catapult® C Synthesis product to support the SystemC design language, allowing designers a richer set of choices in doing system level design. The company also launched its Tessent™ YieldInsight™ product, which allows customers to use integrated circuit production fault data to understand where those faults are physically located on the chip, thus allowing them to be corrected.
"Our strong emphasis on cost controls throughout fiscal 2010 has positioned us well," said Gregory K. Hinckley, president of Mentor Graphics. "An improving currency environment, good performance in our new and emerging product segment and recovery in our base business all point to a better year in fiscal 2011."
Outlook
For the fiscal first quarter ending April 30, 2010, the company expects revenues of approximately $180 million and break-even to a loss per share of $.05, on both a GAAP and non-GAAP basis.
For the full year fiscal 2011, ending January 31, 2011, the company expects revenues to grow around 5%.
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.
Adoption of Accounting Guidance for Convertible Debt
During the first quarter of fiscal 2010, Mentor Graphics adopted the Financial Accounting Standard Board's (FASB) new accounting guidance for accounting for convertible debt instruments that may be settled in cash upon conversion. This new guidance requires retroactive application to all prior periods reported. Accordingly, we have adjusted the applicable prior period balance sheets, statements of operations (including net income (loss) per share), and statements of cash flows to reflect the adjusted balance of the convertible notes and related items, and to record the amortization of the discount on the convertible notes as a non-cash interest expense. A reconciliation of our adjusted Consolidated Balance Sheets as of January 31, 2009, our adjusted Consolidated Statements of Operations, and our adjusted Consolidated Statements of Cash Flows for the three and twelve months ended January 31, 2009 prior to the adoption of the new accounting guidance is included with this release. Interest expense associated with the adoption of the guidance was $632 thousand for the three months ended January 31, 2009 and $2,450 thousand for the twelve months ended January 31, 2009. There was no impact to cash flows from operations.
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, in-process research and development, special charges, equity plan-related compensation expenses and charges, interest expense attributable to net retirement premiums or discounts on the early retirement of debt and associated debt issuance costs, interest expense associated with the amortization of debt discount on convertible debt, impairment of long-lived assets, impairment of cost method investments, and the equity in income or losses of unconsolidated entities, which management does not consider reflective of our core operating business.
Identified intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships, and employment agreements. In-process research and development charges generally represent products in development that had not reached technological feasibility at the time of acquisition. Special charges primarily consist of costs incurred for employee terminations due to a reduction of personnel resources driven by modifications of business strategy or business emphasis. Special charges may also include expenses incurred related to potential acquisitions, excess facility costs, asset-related charges, post-acquisition rebalance costs and restructuring costs, including severance and benefits. Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options. For purposes of comparability across other periods and against other companies in our industry, non-GAAP net income (loss) is adjusted by the amount of additional tax expense or benefit that we would accrue using a normalized effective tax rate applied to the non-GAAP results.
Management excludes from our non-GAAP measures certain recurring items to facilitate its review of the comparability of our core operating performance on a period-to-period basis because such items are not related to our ongoing core operating performance as viewed by management. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Management uses this view of our operating performance for purposes of comparison with our business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. More specifically, management adjusts for the excluded items for the following reasons:
-- Amortization charges for our intangible assets are inconsistent in
amount and frequency and are significantly impacted by the timing and
magnitude of our acquisition transactions. We therefore consider our
operating results without these charges when evaluating our core
performance. Generally, the most significant impact to inter-period
comparability of our net income (loss) is in the first twelve months
following an acquisition.
-- Prior to adopting the FASB's authoritative guidance on business
combinations in February 2009, in-process research and development was
expensed upon acquisition. These charges are largely disregarded as
acquisition decisions are made since they often result in charges that
vary significantly in size and amount. Management excludes these
charges when evaluating the impact of an acquisition transaction and
our ongoing performance.
-- 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 not ordinarily included in our
annual operating plan and related budget due the unpredictability of
economic trends and the rapidly changing technology and competitive
environment in our industry. We therefore exclude them when evaluating
our managers' performance internally.
-- We view equity plan-related compensation as a key element of our
employee retention and long-term incentives, not as an expense that we
use in evaluating core operations in any given period. Management also
believes this information is useful to investors to compare our
performance to the performance of other companies in our industry who
present non-GAAP results adjusted to exclude stock compensation
expense.
-- Interest expense attributable to net retirement premiums or discounts
on the early retirement of debt, the write-off of associated debt
issuance costs and the amortization of the debt discount on convertible
debt are excluded. Management does not consider these charges as a part
of our core operating performance. The early retirement of debt and the
associated debt issuance costs is not included in our annual operating
plan and related budget due to unpredictability of market conditions
which could facilitate an early retirement of debt. We do not consider
the amortization of the debt discount on convertible debt to be a
direct cost of operations. We also believe this presentation is more
useful to investors in comparing our performance to the performance of
other companies in our industry who present non-GAAP results adjusted
to exclude such items.
-- Impairment of cost method investments can occur when the fair value of
the investment is less than its cost. This can occur when there is a
significant deterioration in the investee's earnings performance,
significant adverse changes in the general market conditions of the
industry in which the investee operates, or indications that the
investee may no longer be able to conduct business. These charges are
inconsistent in amount and frequency. We therefore consider our
operating results without these charges when evaluating our core
performance.
-- Equity in income or losses of unconsolidated subsidiaries represents
the net income (losses) in an investment accounted for under the
equity method. The amounts represent our equity in the net income
(losses) of a common stock investment. The carrying amount of our
investment is adjusted for our share of earnings or losses of the
investee. The amounts are excluded as we do not control the results of
operations for these investments and management does not consider this
activity 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 tax jurisdictions in which we operate.
This non-GAAP weighted average tax 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 fiscal
year ended January 31, 2010 is (11%). The GAAP tax rate considers
certain mandatory and other non-scalable tax costs which may adversely
or beneficially affect our tax rate depending upon our level of
profitability in various jurisdictions.
In certain instances our GAAP results of operations may not be profitable when our corresponding non-GAAP results are profitable or vice versa. The number of shares on which our non-GAAP earnings per share is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options in a loss situation.
Non-GAAP gross margin, operating margin, and net income (loss) are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We present non-GAAP gross margin, operating margin, and net income (loss) because we consider them to be important supplemental measures of our operating performance and profitability trends, and because we believe they give investors useful information on period-to-period performance as evaluated by management. Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. Non-GAAP net income (loss) has limitations as an analytical tool, and therefore should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we expect to continue to incur expenses similar to the non-GAAP adjustments described above and exclusion of these items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Some of the limitations in relying on non-GAAP net income (loss) are:
-- Amortization of intangibles represents the loss in value as the
technology in our industry evolves, is advanced, or is replaced over
time. The expense associated with this loss in value is not included in
the non-GAAP net income (loss) presentation and therefore does not
reflect the full economic effect of the ongoing cost of maintaining our
current technological position in our competitive industry, which is
addressed through our research and development program.
-- We regularly engage in acquisition and assimilation activities as part
of our ongoing business and regularly evaluate our businesses to
determine whether any operations should be eliminated or curtailed. We
therefore will continue to experience special charges on a regular
basis. These costs also directly impact our available funds.
-- We perform impairment analyses on cost method investments when
triggering events occur and adjust the carrying value of assets when we
determine it to be necessary. Impairment charges could therefore be
incurred in any period.
-- Our stock option and stock purchase plans are important components of
our incentive compensation arrangements and will be reflected as
expenses in our GAAP results.
-- Our income tax expense (benefit) will be ultimately based on our GAAP
taxable income and actual tax rates in effect, which often differ
significantly from the 17% rate assumed in our non-GAAP presentation.
-- 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 (
(Mentor Graphics and Catapult are registered trademarks and Tessent and YieldInsight are trademarks of Mentor Graphics Corporation. All other company or product names are the registered trademarks or trademarks of their respective owners.)
Statements in this press release regarding the company's guidance for future periods constitute "forward-looking" statements based on current expectations within the meaning of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the company or industry results to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: (i) reductions in the spending on the company's products and services by its customers due to the current worldwide downturn, and the company's ability to appropriately reduce its expenses in response; (ii) the company's ability to successfully offer products and services that compete in the highly competitive EDA industry; (iii) product bundling or discounting of products and services by competitors, which could force the company to lower its prices; (iv) effects of the increasing volatility of foreign currency fluctuations on the company's business and operating results; (v) changes in accounting or reporting rules or interpretations; (vi) the impact of tax audits by the IRS or other taxing authorities, or changes in the tax laws, regulations or enforcement practices; (vii) effects of unanticipated shifts in product mix on gross margin; and (viii) effects of customer seasonal purchasing patterns and the timing of significant orders which may negatively or positively impact the company's quarterly results of operations, all as may be discussed in more detail under the heading "Risk Factors" in the company's most recent Form 10-K or Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. In addition, statements regarding guidance do not reflect potential impacts of mergers or acquisitions that have not been announced or closed as of the time the statements are made. Mentor Graphics disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements to reflect future events or developments.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data)
Three Months Ended Twelve Months Ended
January 31, January 31,
-------------------- --------------------
2010 2009 2010 2009
--------- --------- --------- ---------
Revenues:
System and software $ 153,847 $ 157,566 $ 479,493 $ 447,551
Service and support 83,288 85,072 323,234 341,550
--------- --------- --------- ---------
Total revenues 237,135 242,638 802,727 789,101
--------- --------- --------- ---------
Cost of revenues: (1)
System and software 5,226 4,583 22,592 17,787
Service and support 22,130 23,280 85,265 97,002
Amortization of purchased
technology 3,047 3,363 12,012 12,403
--------- --------- --------- ---------
Total cost of revenues 30,403 31,226 119,869 127,192
--------- --------- --------- ---------
Gross margin 206,732 211,412 682,858 661,909
--------- --------- --------- ---------
Operating expenses:
Research and development (2) 68,111 66,572 255,538 260,351
Marketing and selling (3) 82,585 91,338 303,709 317,473
General and administration (4) 24,170 23,545 91,638 95,038
Other general expense
(income), net 48 245 622 (24)
Amortization of intangible
assets (5) 2,630 3,014 11,184 11,113
Special charges (6) 5,444 1,789 21,334 16,888
Impairment of long-lived
assets (7) - 4,553 - 4,553
In-process research and
development (8) - - - 22,075
--------- --------- --------- ---------
Total operating
expenses 182,988 191,056 684,025 727,467
--------- --------- --------- ---------
Operating income (loss) 23,744 20,356 (1,167) (65,558)
Other income (expense),
net (9) 334 (319) (928) 4,510
Interest expense (10)(a) (4,287) (5,306) (17,546) (19,354)
--------- --------- --------- ---------
Income (loss) before income
tax 19,791 14,731 (19,641) (80,402)
Income tax expense
(benefit) (11) (19,576) (16,174) 2,248 10,850
--------- --------- --------- ---------
Net income (loss) $ 39,367 $ 30,905 $ (21,889) $ (91,252)
========= ========= ========= =========
Net income (loss) per
share:
Basic $ 0.40 $ 0.33 $ (0.23) $ (0.99)
========= ========= ========= =========
Diluted(b) $ 0.39 $ 0.33 $ (0.23) $ (0.99)
========= ========= ========= =========
Weighted average number of
shares outstanding:
Basic 98,970 92,859 96,474 91,829
========= ========= ========= =========
Diluted(b) 101,750 94,452 96,474 91,829
========= ========= ========= =========
Refer to following page for a description of footnotes.
(a) Interest expense for the three and twelve months ended January 31,
2009 presentation has been adjusted for the retrospective adoption
of the FASB's convertible debt accounting guidance.
(b) Diluted net income per share includes $125 and $278 of convertible
debt interest, net of tax added back to GAAP net income for the
three months ended January 31, 2010 and 2009, respectively. Diluted
weighted average number of shares outstanding includes the 1,379
and 1,543 corresponding dilutive shares for the three months ended
January 31, 2010 and 2009, respectively.
MENTOR GRAPHICS CORPORATION
FOOTNOTES TO UNAUDITED 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 Twelve Months Ended
January 31, January 31,
-------------------- --------------------
2010 2009 2010 2009
--------- --------- --------- ----------
(1) Cost of revenues:
Equity plan-related
compensation $ 300 $ 442 $ 1,618 $ 1,544
Prepaid royalty costs - - - 103
Amortization of purchased
technology 3,047 3,363 12,012 12,403
--------- --------- --------- ----------
$ 3,347 $ 3,805 $ 13,630 $ 14,050
========= ========= ========= ==========
(2) Research and development:
Equity plan-related
compensation $ 2,052 $ 3,175 $ 10,931 $ 12,005
========= ========= ========= ==========
(3) Marketing and selling:
Equity plan-related
compensation $ 1,622 $ 2,256 $ 8,406 $ 8,627
========= ========= ========= ==========
(4) General and administration:
Equity plan-related
compensation $ 1,209 $ 1,217 $ 5,204 $ 6,047
========= ========= ========= ==========
(5) Amortization of intangible
assets:
Amortization of other
identified intangible
assets $ 2,630 $ 3,014 $ 11,184 $ 11,113
========= ========= ========= ==========
(6) Special charges:
Rebalance, restructuring,
and other costs $ 5,444 $ 1,789 $ 21,334 $ 16,888
========= ========= ========= ==========
(7) Impairment of long-lived
assets:
Impairment of long-lived
assets $ - $ 4,553 $ - $ 4,553
========= ========= ========= ==========
(8) In-process research and
development:
In-process research and
development $ - $ - $ - $ 22,075
========= ========= ========= ==========
(9) Other income (expense), net:
Equity in losses of
unconsolidated entities
and impairment of
investments $ 257 $ 3,832 $ 1,108 $ 4,920
========= ========= ========= ==========
(10) Interest expense(a):
Amortization of debt
discount $ 713 $ 655 $ 2,764 $ 2,540
Debt retirement costs - - (354) -
--------- --------- --------- ----------
$ 713 $ 655 $ 2,410 $ 2,540
========= ========= ========= ==========
(11) Income tax expense
(benefit):
Income tax effects $ (25,877) $ (22,809) $ (7,028) $ 7,039
========= ========= ========= ==========
(a) Interest expense for the three and twelve months ended January 31,
2009 presentation has been adjusted for the retrospective adoption
of the FASB's convertible debt accounting guidance.
MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS
(In thousands, except earnings per share data)
Three Months Ended Twelve Months Ended
January 31, January 31,
-------------------- --------------------
2010 2009 2010 2009
--------- --------- --------- ---------
GAAP net income (loss)a $ 39,367 $ 30,905 $ (21,889) $ (91,252)
Non-GAAP adjustments:
Equity plan-related
compensation: (1)
Cost of revenues 300 442 1,618 1,544
Research and development 2,052 3,175 10,931 12,005
Marketing and selling 1,622 2,256 8,406 8,627
General and administration 1,209 1,217 5,204 6,047
System and software cost of
revenues (2) - - - 103
Acquisition - related items:
Amortization of purchased
assets
Cost of revenues (3) 3,047 3,363 12,012 12,403
Amortization of intangible
assets (4) 2,630 3,014 11,184 11,113
Impairment of long-lived
assets (5) - 4,553 - 4,553
In-process research and
development (6) - - - 22,075
Special charges (7) 5,444 1,789 21,334 16,888
Other income, net (8) 257 3,832 1,108 4,920
Interest expense (a)(9) 713 655 2,410 2,540
Income tax effects (10) (25,877) (22,809) (7,028) 7,039
--------- --------- --------- ---------
Total of non-GAAP adjustments (8,603) 1,487 67,179 109,857
--------- --------- --------- ---------
Non-GAAP net income(a) $ 30,764 $ 32,392 $ 45,290 $ 18,605
========= ========= ========= =========
GAAP weighted average shares
(diluted) 101,750 94,452 96,474 91,829
Non-GAAP adjustment - - 1,901 714
--------- --------- --------- ---------
Non-GAAP weighted average
shares (diluted)(b) 101,750 94,452 98,375 92,543
========= ========= ========= =========
GAAP net income (loss) per
share (diluted)(a,b) $ 0.39 $ 0.33 $ (0.23) $ (0.99)
Non-GAAP adjustments detailed
above (0.09) 0.02 0.70 1.19
--------- --------- --------- ---------
Non-GAAP net income per share
(diluted)(a,c) $ 0.30 $ 0.35 $ 0.47 $ 0.20
========= ========= ========= =========
(a) The three and twelve months ended January 31, 2009 presentations have
been adjusted for the retrospective adoption of the FASB's convertible
debt accounting guidance.
(b) Diluted net income per share includes $125 and $278 of convertible debt
interest, net of tax added back to GAAP net income for the three months
ended January 31, 2010 and 2009, respectively. Diluted weighted
average number of shares outstanding includes the 1,379 and 1,543
corresponding dilutive shares for the three months ended January 31,
2010 and 2009, respectively.
(c) Diluted non-GAAP net income per share for the twelve months ended
January 31, 2010 includes $633 of convertible debt interest, net of tax
added back to non-GAAP net income and 1,415 of corresponding diluted
weighted average number of shares outstanding. Diluted non-GAAP net
income per share for the twelve months ended January 31, 2009 did not
meet the threshold for dilution.
(1) Equity plan-related compensation expense.
(2) Amount represents the write-off of prepaid royalty amounts associated
with the closure of our Intellectual Property division.
(3) Amount represents amortization of purchased technology resulting from
acquisitions. Purchased intangible assets are amortized over two to
five years.
(4) Other identified intangible assets are amortized to other operating
expense over two to five years. Other identified intangible assets
include trade names, employment agreements, customer relationships,
and deferred compensation which are the result of acquisition
transactions.
(5) Amount represents write-off of fixed assets and purchased technology
associated with our emulation division.
(6) Twelve months ended January 31, 2009: Write-off of $8,090 for
in-process research and development related to the Ponte and Flomerics
acquisitions and $13,985 related to the acquisition of technology which
has not yet reached technological feasibility and provided no
alternative future uses. The technology is expected to be the basis for
a new offering in the Calibre product family once development is
completed.
(7) Three months ended January 31, 2010: Special charges consist of (i)
$1,717 of costs incurred for employee rebalances which includes
severance benefits, notice pay, and outplacement services, (ii) $1,547
related to the abandonment of excess leased facility space, (iii)
$1,175 in advisory fees, (iv) $405 related to an asset abandonment,
(v) $302 in lease restoration costs, and (vi) $298 in acquisition
costs. Three months ended January 31, 2009: Special charges consist of
(i) $1,190 in advisory fees and (ii) $599 of costs incurred for
employee rebalances which includes severance benefits, notice pay and
outplacement services. Twelve months ended January 31, 2010: Special
charges consist of (i) $10,713 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $4,700 in advisory fees, (iii) $2,530
relate to the abandonment of excess leased facility space, (iv) $2,067
in acquisition costs, (v) $566 related to a casualty loss, (vi) $405
related to an asset abandonment, (vii) $302 in lease restoration costs,
and (viii) $51 in other costs. Twelve months ended January 31, 2009:
Special charges consist of (i) $9,793 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $4,535 in advisory fees, (iii) $2,547
related to the abandonment of excess leased facility space, and (iv)
$13 in fixed asset write-offs related to the closure of our
Intellectual Property Division.
(8) Three months ended January 31, 2010: Loss of $257 on investment
accounted for under the equity method of accounting. Three months ended
January 31, 2009: Other income, net consists of: (i) loss of $344 on
investment accounted for under the equity method of accounting and (ii)
an impairment of $3,488 for investments accounted for under the cost
method. Twelve months ended January 31, 2010: Other income, net
consists of: (i) loss of $995 on investment accounted for under the
equity method of accounting and (ii) an impairment of $113 for an
investment accounted for under the cost method. Twelve months ended
January 31, 2009: Other income, net consists of: (i) loss of $1,432 on
investment accounted for under the equity method of accounting and (ii)
an impairment of $3,488 for investments accounted for under the cost
method.
(9) Three months ended January 31, 2010: $713 in amortization of original
issuance debt discount.
Three months ended January 31, 2009: $655 in amortization of original
issuance debt discount.
Twelve months ended January 31, 2010: $2,764 in amortization of
original issuance debt discount and $(354) in discounts and unamortized
debt costs related to a partial redemption of the $110.0M convertible
debt.
Twelve months ended January 31, 2009: $2,540 in amortization of
original issuance debt discount.
(10)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 Twelve Months Ended
January 31, January 31,
---------------------- ----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
GAAP gross margin $ 206,732 $ 211,412 $ 682,858 $ 661,909
Reconciling items to
non-GAAP gross margin
Equity plan-related
compensation 300 442 1,618 1,544
Prepaid royalty costs - - - 103
Amortization of purchased
technology 3,047 3,363 12,012 12,403
---------- ---------- ---------- ----------
Non-GAAP gross margin $ 210,079 $ 215,217 $ 696,488 $ 675,959
========== ========== ========== ==========
Three Months Ended Twelve Months Ended
January 31, January 31,
---------------------- ----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
GAAP gross margin as a
percent of total revenues 87% 87% 85% 84%
Non-GAAP adjustments
detailed above 2% 2% 2% 2%
---------- ---------- ---------- ----------
Non-GAAP gross margin as a
percent of total revenues 89% 89% 87% 86%
========== ========== ========== ==========
Three Months Ended Twelve Months Ended
January 31, January 31,
---------------------- ----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
GAAP operating expenses $ 182,988 $ 191,056 $ 684,025 $ 727,467
Reconciling items to
non-GAAP operating
expenses
Equity plan-related
compensation (4,883) (6,648) (24,541) (26,679)
Amortization of other
identified intangible
assets (2,630) (3,014) (11,184) (11,113)
Special charges (5,444) (1,789) (21,334) (16,888)
Impairment of long-lived
assets - (4,553) - (4,553)
In-process research and
development - - - (22,075)
---------- ---------- ---------- ----------
Non-GAAP operating expenses $ 170,031 $ 175,052 $ 626,966 $ 646,159
========== ========== ========== ==========
Three Months Ended Twelve Months Ended
January 31, January 31,
---------------------- ----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
GAAP operating income
(loss) $ 23,744 $ 20,356 $ (1,167) $ (65,558)
Reconciling items to
non-GAAP operating income
Equity plan-related
compensation 5,183 7,090 26,159 28,223
Prepaid royalty costs - - - 103
Amortization of purchased
intangible assets:
Cost of revenues 3,047 3,363 12,012 12,403
Amortization of
intangible assets 2,630 3,014 11,184 11,113
Special Charges 5,444 1,789 21,334 16,888
Impairment of long-lived
assets - 4,553 - 4,553
In-process research and
development - - - 22,075
---------- ---------- ---------- ----------
Non-GAAP operating income $ 40,048 $ 40,165 $ 69,522 $ 29,800
========== ========== ========== ==========
Three Months Ended Twelve Months Ended
January 31, January 31,
---------------------- ----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
GAAP operating income
(loss) as a percent of
total revenues 10% 8% 0% -8%
Non-GAAP adjustments
detailed above 7% 9% 9% 12%
---------- ---------- ---------- ----------
Non-GAAP operating income
(loss) as a percent of
total revenues 17% 17% 9% 4%
========== ========== ========== ==========
Three Months Ended Twelve Months Ended
January 31, January 31,
---------------------- ----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
GAAP other income, net and
interest expense(a) $ (3,953) $ (5,625) $ (18,474) $ (14,844)
Reconciling items to
non-GAAP other income, net
and interest expense
Equity in losses of
unconsolidated entities 257 344 1,108 1,432
Impairment of cost method
investments - 3,488 - 3,488
Amortization of debt
discount and retirement
costs 713 655 2,410 2,540
---------- ---------- ---------- ----------
Non-GAAP other income, net
and interest expense(a) $ (2,983) $ (1,138) $ (14,956) $ (7,384)
========== ========== ========== ==========
(a) The three and twelve months ended January 31, 2009 presentations have
been adjusted for the retrospective adoption of the FASB's convertible
debt accounting guidance.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, January 31,
2010 2009(a)
----------- -----------
Assets
Current assets:
Cash, cash equivalents, and short-term
investments $ 99,343 $ 95,639
Trade accounts receivable, net 110,839 133,719
Term receivables, short-term 178,911 139,133
Prepaid expenses and other 29,629 39,146
Deferred income taxes 11,891 10,163
----------- -----------
Total current assets 430,613 417,800
Property, plant, and equipment, net 121,795 100,991
Term receivables, long-term 164,898 146,682
Goodwill and intangible assets, net 484,342 480,956
Other assets 21,393 39,641
----------- -----------
Total assets $ 1,223,041 $ 1,186,070
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 37,874 $ 36,998
Current portion of notes payable 32,272 -
Accounts payable 9,985 10,197
Income taxes payable 3,971 5,340
Accrued payroll and related liabilities 77,008 62,453
Accrued liabilities 44,122 46,034
Deferred revenue 153,965 155,098
----------- -----------
Total current liabilities 359,197 316,120
Long-term notes payable 156,075 188,170
Deferred revenue, long-term 9,534 16,890
Other long-term liabilities 58,218 78,445
----------- -----------
Total liabilities 583,024 599,625
----------- -----------
Stockholders' equity:
Common stock 662,595 602,064
Accumulated deficit (48,742) (26,853)
Accumulated other comprehensive income 26,164 11,234
----------- -----------
Total stockholders' equity 640,017 586,445
----------- -----------
Total liabilities and stockholders' equity $ 1,223,041 $ 1,186,070
=========== ===========
(a) The consolidated balance sheet as of January 31, 2009 has been adjusted
for the retrospective adoption of the FASB's convertible debt
accounting guidance.
MENTOR GRAPHICS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS AND SUPPLEMENTAL
INFORMATION
(In thousands, except days sales outstanding)
Three Months Ended Twelve Months Ended
January 31, January 31,
-------------------- --------------------
2010 2009 2010 2009
--------- --------- --------- ---------
Operating activities
Net income (loss)(a) $ 39,367 $ 30,905 $ (21,889) $ (91,252)
Depreciation and amortization
(a)(1) 14,432 15,727 59,684 60,054
Other adjustments to reconcile:
Operating cash 21,755 5,029 37,388 48,458
Changes in working capital (70,619) (34,058) (37,294) 5,412
--------- --------- --------- ---------
Net cash provided by operating
activities 4,935 17,603 37,889 22,672
Investing activities
Net cash used in investing
activities (30,037) (8,064) (49,938) (90,078)
Financing activities
Net cash provided by financing
activities 39,718 4,384 16,942 44,510
Effect of exchange rate changes
on cash and cash equivalents 73 2,126 805 (1,388)
--------- --------- --------- ---------
Net change in cash and cash
equivalents 14,689 16,049 5,698 (24,284)
Cash and cash equivalents at
beginning of period 84,651 77,593 93,642 117,926
--------- --------- --------- ---------
Cash and cash equivalents at
end of period $ 99,340 $ 93,642 $ 99,340 $ 93,642
========= ========= ========= =========
(a) The three and twelve months ended January 31, 2009 presentations have
been adjusted for the retrospective adoption of the FASB's convertible
debt accounting guidance.
(1) Depreciation and amortization includes a write-off of note issuance
costs in the amount of $26 for the twelve months ended January 31,
2010.
Other data:
Capital expenditures $ 28,446 $ 6,552 $ 46,397 $ 40,402
========= ========= ========= =========
Days sales outstanding 110 101
========= =========
MENTOR GRAPHICS CORPORATION
UNAUDITED SUPPLEMENTAL BOOKINGS AND REVENUE INFORMATION
(Rounded to nearest 5%)
Fiscal year ended January 31, 2010
======================================
Product Group Bookings (a) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Integrated Systems Design 20% 20% 20% 20% 20%
IC Design to Silicon 40% 40% 35% 40% 40%
Scalable Verification 20% 25% 15% 20% 20%
New & Emerging Products 10% 5% 20% 15% 10%
Services & Other (b) 10% 10% 10% 5% 10%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2010
======================================
Product Group Revenue (b) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Integrated Systems Design 20% 20% 30% 25% 25%
IC Design to Silicon 45% 35% 30% 35% 35%
Scalable Verification 20% 25% 20% 20% 25%
New & Emerging Products 10% 10% 10% 15% 10%
Services & Other (b) 5% 10% 10% 5% 5%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2010
======================================
Bookings by Geography Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
North America 40% 55% 45% 40% 45%
Europe 25% 25% 15% 25% 20%
Japan 25% 5% 20% 15% 15%
Pac Rim 10% 15% 20% 20% 20%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2010
======================================
Revenue by Geography Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
North America 40% 50% 40% 40% 45%
Europe 20% 30% 25% 30% 25%
Japan 20% 5% 15% 15% 15%
Pac Rim 20% 15% 20% 15% 15%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2010
======================================
Bookings by Business Model (c) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Perpetual 15% 25% 20% 10% 15%
Ratable 15% 15% 15% 15% 15%
Up Front 70% 60% 65% 75% 70%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2010
======================================
Revenue by Business Model (c) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Perpetual 15% 25% 15% 10% 15%
Ratable 10% 15% 15% 10% 15%
Up Front 75% 60% 70% 80% 70%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2009
======================================
Product Group Bookings (a) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Integrated Systems Design 15% 20% 25% 15% 20%
IC Design to Silicon 40% 30% 30% 40% 35%
Scalable Verification 20% 20% 20% 30% 20%
New & Emerging Products 10% 20% 15% 10% 15%
Services & Other (b) 15% 10% 10% 5% 10%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2009
======================================
Product Group Revenue (b) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Integrated Systems Design 20% 20% 25% 20% 20%
IC Design to Silicon 40% 30% 30% 35% 35%
Scalable Verification 20% 25% 25% 30% 25%
New & Emerging Products 10% 15% 10% 10% 10%
Services & Other (b) 10% 10% 10% 5% 10%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2009
======================================
Bookings by Geography Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
North America 40% 30% 40% 35% 35%
Europe 35% 35% 35% 35% 35%
Japan 15% 20% 10% 5% 15%
Pac Rim 10% 15% 15% 25% 15%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2009
======================================
Revenue by Geography Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
North America 40% 35% 40% 40% 40%
Europe 30% 30% 35% 35% 30%
Japan 20% 20% 10% 10% 15%
Pac Rim 10% 15% 15% 15% 15%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2009
======================================
Bookings by Business Model (c) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Perpetual 20% 20% 20% 10% 15%
Ratable 25% 20% 15% 10% 15%
Up Front 55% 60% 65% 80% 70%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2009
======================================
Revenue by Business Model (c) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Perpetual 20% 20% 20% 10% 15%
Ratable 20% 20% 20% 10% 15%
Up Front 60% 60% 60% 80% 70%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2008
======================================
Product Group Bookings (a) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Integrated Systems Design 15% 20% 20% 15% 20%
IC Design to Silicon 40% 35% 30% 40% 35%
Scalable Verification 20% 25% 20% 20% 25%
New & Emerging Products 15% 15% 20% 20% 15%
Services & Other (b) 10% 5% 10% 5% 5%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2008
======================================
Product Group Revenue (b) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Integrated Systems Design 20% 20% 25% 20% 20%
IC Design to Silicon 40% 40% 25% 30% 35%
Scalable Verification 20% 20% 25% 30% 25%
New & Emerging Products 10% 15% 15% 15% 15%
Services & Other (b) 10% 5% 10% 5% 5%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2008
======================================
Bookings by Geography Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
North America 50% 40% 45% 30% 40%
Europe 25% 30% 15% 30% 25%
Japan 10% 10% 20% 20% 15%
Pac Rim 15% 20% 20% 20% 20%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2008
======================================
Revenue by Geography Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
North America 50% 55% 40% 40% 45%
Europe 25% 20% 25% 30% 25%
Japan 15% 10% 20% 15% 15%
Pac Rim 10% 15% 15% 15% 15%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2008
======================================
Bookings by Business Model (c) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Perpetual 30% 25% 30% 10% 20%
Ratable 20% 20% 10% 10% 15%
Up Front 50% 55% 60% 80% 65%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Fiscal year ended January 31, 2008
======================================
Revenue by Business Model (c) Q1 Q2 Q3 Q4 YEAR
====== ====== ====== ====== ======
Perpetual 25% 20% 20% 15% 20%
Ratable 15% 15% 20% 10% 15%
Up Front 60% 65% 60% 75% 65%
------ ------ ------ ------ ------
Total 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 IMPACT OF ACCOUNTING CHANGE
(In thousands)
Impact of Retrospective Adoption of FASB's Convertible Debt Accounting
Guidance on the Unaudited Consolidated Statement of Operations:
Three months ended January 31, 2009
----------------------------------------
Prior to Effect of
Adoption Change As Adjusted
------------ ------------ ------------
Operating income $ 20,356 - $ 20,356
Other expense, net (319) - (319)
Interest expense (4,674) (632) (5,306)
------------ ------------ ------------
Income before income tax 15,363 (632) 14,731
Income tax benefit (16,174) - (16,174)
------------ ------------ ------------
Net income $ 31,537 $ (632) $ 30,905
============ ============ ============
Basic net income per share $ 0.34 $ (0.01) $ 0.33
============ ============ ============
Diluted net income per share $ 0.34 $ (0.01) $ 0.33
============ ============ ============
Twelve months ended January 31, 2009
----------------------------------------
Prior to Effect of
Adoption Change As Adjusted
------------ ------------ ------------
Operating loss $ (65,558) - $ (65,558)
Other income, net 4,510 - 4,510
Interest expense (16,904) (2,450) (19,354)
------------ ------------ ------------
Loss before income tax (77,952) (2,450) (80,402)
Income tax expense 10,850 - 10,850
------------ ------------ ------------
Net loss $ (88,802) $ (2,450) $ (91,252)
============ ============ ============
Basic and diluted net loss
per share $ (0.97) $ (0.02) $ (0.99)
============ ============ ============
Impact of Retrospective Adoption of FASB's Convertible Debt Accounting
Guidance on the Unaudited Consolidated Balance Sheet:
Prior to Effect of
As of January 31, 2009 Adoption Change As Adjusted
------------ ------------ ------------
Assets
Current assets:
Cash, cash equivalents and
short-term investments $ 95,639 $ - $ 95,639
Trade accounts receivable,
net 133,719 - 133,719
Term receivables, short-term 139,133 - 139,133
Prepaid expenses and other 39,236 (90) 39,146
Deferred income taxes 10,163 - 10,163
------------ ------------ ------------
Total current assets 417,890 (90) 417,800
Property, plant, and
equipment 100,991 - 100,991
Term receivables, long-term 146,682 - 146,682
Goodwill and intangible
assets, net 480,956 - 480,956
Other assets 39,918 (277) 39,641
------------ ------------ ------------
Total assets $ 1,186,437 $ (367) $ 1,186,070
============ ============ ============
Liabilities and Stockholders'
Equity
Total current liabilities $ 316,120 $ - $ 316,120
Long-term notes payable 201,102 (12,932) 188,170
Deferred revenue, long-term 16,890 - 16,890
Other long-term liabilities 78,445 - 78,445
------------ ------------ ------------
Total liabilities 612,557 (12,932) 599,625
------------ ------------ ------------
Stockholders' equity:
Common stock 580,298 21,766 602,064
Accumulated deficit (17,652) (9,201) (26,853)
Accumulated other
comprehensive income 11,234 - 11,234
------------ ------------ ------------
Total stockholders' equity 573,880 12,565 586,445
------------ ------------ ------------
Total liabilities and
stockholders' equity $ 1,186,437 $ (367) $ 1,186,070
============ ============ ============
MENTOR GRAPHICS CORPORATION
UNAUDITED IMPACT OF ACCOUNTING CHANGE
(In thousands)
Impact of Retrospective Adoption of FASB's Convertible Debt Accounting
Guidance on the Unaudited Consolidated Statement of Cash Flows:
Three months ended January 31, 2009
----------------------------------------
Prior to Effect of
Adoption Change As Adjusted
------------ ------------ ------------
Operating Cash Flows:
Net income $ 31,537 $ (632) $ 30,905
Depreciation and
amortization 15,095 632 15,727
Other adjustments to
reconcile:
Operating cash 5,029 - 5,029
Changes in working capital (34,058) - (34,058)
------------ ------------ ------------
Net cash provided by
operating activities 17,603 - 17,603
Investing Cash Flows:
Net cash used in investing
activities (8,064) - (8,064)
Financing Cash Flows:
Net cash provided by
financing activities 4,384 - 4,384
Effect of exchange rate
changes on cash and cash
equivalents 2,126 - 2,126
------------ ------------ ------------
Net change in cash and cash
equivalents 16,049 - 16,049
Cash and cash equivalents at
the beginning of the period 77,593 - 77,593
------------ ------------ ------------
Cash and cash equivalents at
the end of the period $ 93,642 $ - $ 93,642
============ ============ ============
Twelve months ended January 31, 2009
----------------------------------------
Prior to Effect of
Adoption Change As Adjusted
------------ ------------ ------------
Operating Cash Flows:
Net loss $ (88,802) $ (2,450) $ (91,252)
Depreciation and
amortization 57,604 2,450 60,054
Other adjustments to
reconcile:
Operating cash 48,458 - 48,458
Changes in working capital 5,412 - 5,412
------------ ------------ ------------
Net cash provided by
operating activities 22,672 - 22,672
Investing Cash Flows:
Net cash used in investing
activities (90,078) - (90,078)
Financing Cash Flows:
Net cash provided by
financing activities 44,510 - 44,510
Effect of exchange rate
changes on cash and cash
equivalents (1,388) - (1,388)
------------ ------------ ------------
Net change in cash and cash
equivalents (24,284) - (24,284)
Cash and cash equivalents at
the beginning of the period 117,926 - 117,926
------------ ------------ ------------
Cash and cash equivalents at
the end of the period $ 93,642 $ - $ 93,642
============ ============ ============
MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP
EARNINGS PER SHARE GUIDANCE
The following table reconciles management's estimates of the specific items
excluded from GAAP in the calculation of expected non-GAAP loss per share
for the periods shown below:
Q1 FY11
--------------
GAAP net loss per share $ (0.05)
Non-GAAP Adjustments:
Amortization of purchased intangible assets (1) 0.03
Amortization of other identified intangible assets (2) 0.02
Equity plan-related compensation (3) 0.04
Special charges (4) 0.00
Other income and interest expense (5) 0.01
Income tax effects (6) (0.10)
--------------
Non-GAAP net loss per share $ (0.05)
==============
(1) Excludes amortization of purchased intangible assets resulting from
acquisition transactions. Purchased intangible assets are amortized
over two to five years. The guidance for Q1 FY11 assumes no additional
acquisitions.
(2) Excludes amortization of other identified intangible assets including
trade names, employment agreements, and customer relationships, and
deferred compensation resulting from acquisition transactions. Other
identified intangible assets are amortized over two to five years. The
guidance for Q1 FY11 assumes no additional acquisitions.
(3) Excludes equity plan-related compensation expense.
(4) Excludes special charges consisting primarily of costs incurred for
facility closures, employee rebalances, (which includes severance
benefits, notice pay and outplacement services), advisory fees, and
acquisition costs. The guidance for Q1 FY11 assumes no additional
special charges.
(5) Reflects amortization of original issuance debt discount and equity in
losses of an equity method investment.
(6) Non-GAAP income tax expense adjustment reflects the application of our
assumed normalized effective 17% tax rate, instead of our GAAP tax
rate, to our GAAP pre-tax income and the application of the 17% tax
rate to our non-GAAP adjustments.
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For more information, please contact: Ry Schwark Media Contact 503.685.1660 Email Contact Joe Reinhart Investor Contact 503.685.1462 Email Contact