Mentor Graphics Reports Annual and Fiscal Fourth Quarter Results

WILSONVILLE, OR -- (MARKET WIRE) -- Mar 04, 2010 -- Mentor Graphics Corporation (NASDAQ: MENT) today announced results for the fiscal fourth quarter and full year ending January 31, 2010. For the full year, the company reported revenues of $802.7 million, up 2% from fiscal 2009, non-GAAP earnings per share more than doubling to $.47, and a GAAP loss per share of $.23, down from a loss per share of $.99 the prior year. For the fiscal fourth quarter, the company reported revenues of $237.1 million, non-GAAP earnings per share of $.30, and GAAP earnings per share of $.39.

"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."


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

--  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

--    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.

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