Mentor Graphics Reports 7.3% Growth in Annual Revenues

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS

(In thousands, except earnings per share data)
         
Three Months Ended January 31, Twelve Months Ended January 31,
  2013     2012     2013     2012  
GAAP net income attributable to Mentor Graphics shareholders $ 61,746 $ 57,820 $ 138,736 $ 83,872
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues 449 312 1,529 1,065
Research and development 2,602 2,084 9,206 8,203
Marketing and selling 1,836 1,481 6,654 5,874
General and administration 1,648 1,158 6,308 6,516
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2) 1,709 1,924 7,801 9,796
Frontline purchased technology and intangible assets (3) 1,242 1,242 4,968 4,968
Amortization of intangible assets (4) 1,368 1,544 5,915 5,905
Special charges (5) 2,514 5,786 6,314 13,174
Other income (expense), net (6) (18 ) 40 (128 ) (1,392 )
Interest expense (7) 1,367 1,272 5,322 16,429
Non-GAAP income tax effects (8) (10,019 ) (9,817 ) (30,487 ) (27,050 )
Noncontrolling interest (9)   (193 )   (151 )   (699 )   (151 )
Total of non-GAAP adjustments   4,505     6,875     22,703     43,337  
Non-GAAP net income attributable to Mentor Graphics shareholders $ 66,251   $ 64,695   $ 161,439   $ 127,209  
 
GAAP and Non-GAAP weighted average shares (diluted)   115,167     112,122     114,017     112,915  
 
Net income per share attributable to Mentor Graphics shareholders:
GAAP (diluted) $ 0.49 $ 0.52 $ 1.17 $ 0.74
Noncontrolling interest adjustment (10) 0.05 - 0.05 -
Non-GAAP adjustments detailed above   0.04     0.06     0.20     0.39  
Non-GAAP (diluted) $ 0.58   $ 0.58   $ 1.42   $ 1.13  
                     
(1 ) Equity plan-related compensation expense is the fair value of all share-based payments to employees for stock options and restricted stock units, and purchases made as a result of the employee stock purchase plans.
(2 ) Amount represents amortization of purchased technology resulting from acquisitions. Purchased intangible assets are amortized over two to five years.
(3 ) Amount represents amortization of purchased technology and other identified intangible assets identified as part of the fair value of the Frontline P.C.B. Solutions Limited Partnership (Frontline) investment. The purchased technology will be amortized over three years, other identified intangible assets will be amortized over three to four years, and are reflected in the income statement in the equity in earnings of Frontline. This expense is the same type as being adjusted for in note (2) above and (4) below.
(4 ) Other identified intangible assets are amortized to other operating expense over two to five years. Other identified intangible assets include trade names, customer relationships, and backlog which are the result of acquisition transactions.
(5 ) Three months ended January 31, 2013: Special charges consist of (i) $1,387 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services and (ii) $1,127 in other adjustments.
Three months ended January 31, 2012: Special charges consist of (i) $4,856 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $99 of costs related to consulting fees associated with our proxy contest, and (iii) $831 in other adjustments.
Twelve months ended January 31, 2013: Special charges consist of (i) $4,016 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services and (ii) $2,298 in other adjustments.
Twelve months ended January 31, 2012: Special charges consist of (i) $8,437 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $4,066 of costs related to consulting fees associated with our proxy contest, and (iii) $671 in other adjustments.
(6 ) Amount represents income (loss) on investments accounted for under the equity method of accounting. The twelve months ended January 31, 2012 also includes a gain of $(1,519) resulting from a change from an equity method investment to a controlling interest.
(7 ) Amount represents the amortization of original issuance debt discount. The amount for the twelve months ended January 31, 2012 also includes $11,504 for the premium and other costs related to the retirement of the 6.25% convertible debentures and the term loan.
(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 ) The numerator of our GAAP diluted earnings per share calculation has been reduced by $5,272 for both the three and twelve months ended January 31, 2013 for the accumulated adjustment of the noncontrolling interest with redemption feature to its calculated redemption value at January 31, 2013, recorded directly to retained earnings. We do not consider the adjustment to redemption feature part of our core operations and accordingly the amount has been adjusted for the non-GAAP presentation.
 

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