Mentor Graphics Reports Fiscal Fourth Quarter 2008 Results


-- Management supplementally considers performance without the impact of equity plan-related compensation charges and 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. We view equity plan-related compensation as a key element of our employee retention and long-term incentives, not as an expense that should be an element of evaluating core operations in any given period. We therefore exclude these charges for purposes of evaluating our core 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 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 year ended January 31, 2008 is 49%. 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.

Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. However, non-GAAP net income (loss) has limitations as an analytical tool, and you should not consider this measure 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 purchased intangibles, though not directly affecting our current cash position, 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 therefore we will continue to experience special charges and merger and acquisition charges on a regular basis. These costs also directly impact our available funds.

-- 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 for the foreseeable future under SFAS 123R.

-- 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, may calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure.

About Mentor Graphics

Mentor Graphics Corporation (NASDAQ: MENT) 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 electronics and semiconductor companies. Established in 1981, the company reported revenues over the last 12 months of over $850 million and employs approximately 4,350 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/.

Mentor Graphics, Veloce, and Catapult C are registered trademarks and Olympus is a trademark of Mentor Graphics. 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 section 21E of the Securities Exchange Act of 1934, as amended. These 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 the forward-looking statements. Such factors include, among others, the following: (i) the company's ability to successfully offer products and services in the highly competitive EDA industry; (ii) product bundling or discounting by competitors, which could force the company to lower its prices or offer other more favorable terms to customers; (iii) reductions in spending on the company's products by its customers due to cyclical downturns; (iv) weakness in the US or other economies; (v) foreign currency fluctuations; (vi) changes in accounting or reporting rules or interpretations; (vii) the impact of tax audits by taxing authorities, or changes in the tax laws, regulations or enforcement practices; (viii) effects of unanticipated shifts in product mix on gross margin; and (ix) effects of customer seasonal purchasing patterns and the timing of significant orders 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
                               ------------------- -------------------
                               Jan. 31,  Dec. 31,  Jan. 31,  Dec. 31,
                                          2008            2006            2008            2006
                                                              ---------  ---------  ---------  ---------
Revenues:
    System  and  software(a)              $201,135    $171,638    $555,297    $498,088
    Service  and  support                        83,685        77,988      324,435      304,751
                                                              ---------  ---------  ---------  ---------
        Total  revenues                            284,820      249,626      879,732      802,839
                                                              ---------  ---------  ---------  ---------
Cost  of  revenues:  (1)
    System  and  software                          8,365          5,532        24,913        18,070
    Service  and  support                        26,011        21,283        95,714        83,405
    Amortization  of  purchased
      technology                                          1,955          3,328          9,468        13,270
                                                              ---------  ---------  ---------  ---------
        Total  cost  of  revenues              36,331        30,143      130,095      114,745
                                                              ---------  ---------  ---------  ---------
        Gross  margin                                248,489      219,483      749,637      688,094
                                                              ---------  ---------  ---------  ---------
Operating  expenses:
    Research  and  development  (2)      60,577        56,357      249,269      227,161
    Marketing  and  selling  (3)            87,152        84,366      309,431      292,863
    General  and  administration,
      and  other  (4)(a)                            25,744        25,734        96,786        93,366
    Amortization  of  intangible
      assets  (5)                                          2,575          1,249          8,936          4,664
    Special  charges  (6)                          4,988              635        10,148          7,147
    In-process  research  and
      development  (7)                                        -          2,260          4,100          2,440
                                                              ---------  ---------  ---------  ---------
        Total  operating  expenses        181,036      170,601      678,670      627,641
                                                              ---------  ---------  ---------  ---------
Operating  income                                  67,453        48,882        70,967        60,453
    Other  income,  net  (8)(a)                1,264          1,987          5,225          7,015
    Interest  expense  (9)                      (5,152)      (6,157)    (20,264)    (29,560)
                                                              ---------  ---------  ---------  ---------
    Income  before  income  taxes          63,565        44,712        55,928        37,908
    Income  tax  expense  (10)                27,841        13,730        27,157        10,704
                                                              ---------  ---------  ---------  ---------
        Net  income                                  $  35,724    $  30,982    $  28,771    $  27,204
                                                              =========  =========  =========  =========
    Net  income  per  share:
        Basic                                            $      0.40    $      0.37    $      0.33    $      0.33
                                                              =========  =========  =========  =========
        Diluted(b)                                  $      0.39    $      0.36    $      0.32    $      0.33
                                                              =========  =========  =========  =========
    Weighted  average  number  of  shares
      outstanding:
        Basic                                                89,978        83,020        88,086        81,303
                                                              =========  =========  =========  =========
        Diluted(b)                                      92,490        86,974        89,981        82,825
                                                              =========  =========  =========  =========

Refer  to  following  page  for  a  description  of  footnotes.

    (a)  Interest  income  on  term  receivables  was  reclassified  from  Other
      income,  net  to  System  and  software  revenues.  Accelerated  interest
      income  and  interest  expense  on  factored  accounts  receivable  was
      reclassified  from  Other  income,  net  to  General  and  administration,
      and  other.  The  reclassification  is  reflected  in  the  presentation
      for  the  current  and  prior  periods.

    (b)  Diluted  net  income  per  share  includes  $419  and  $656  of
      convertible  debt  interest,  net  of  tax  added  back  to  GAAP  net  income
      for  the  three  months  ended  January  31,  2008  and  December  31,  2006,
      respectively.  Diluted  weighted  average  number  of  shares  outstanding
      includes  the  1,549  and  2,351  corresponding  dilutive  shares  for  the
      three  months  ended  January  31,  2008  and  December  31,  2006,
      respectively.

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
                                                              -------------------  -------------------
                                                              Jan.  31,    Dec.  31,    Jan.  31,    Dec.  31,
                                                                    2008            2006            2008            2006
                                                              ---------  ---------  ---------  ---------
(1)  Cost  of  revenues:
            Equity  plan-related
              compensation                        $        322    $        290    $        964    $        943
            Amortization  of
              purchased  intangible
              assets                                          1,955          3,328          9,468        13,270
                                                              ---------  ---------  ---------  ---------
                                                              $    2,277    $    3,618    $  10,432    $  14,213
                                                              =========  =========  =========  =========
(2)  Research  and  development:
            Equity  plan-related
              compensation                        $    2,702    $    1,774    $    7,881    $    5,940
                                                              =========  =========  =========  =========

(3)  Marketing  and  selling:
            Equity  plan-related
              compensation                        $    1,847    $    1,451    $    5,525    $    4,791
                                                              =========  =========  =========  =========

(4)  General  and
  administration,  and  other:
            Equity  plan-related
              compensation                        $    1,120    $        563    $    4,107    $    1,923
                                                              =========  =========  =========  =========

(5)  Amortization  of  intangible
  assets:
            Amortization  of
              purchased  intangible
              assets                                    $    2,575    $    1,249    $    8,936    $    4,664
                                                              =========  =========  =========  =========

(6)  Special  charges:
            Rebalance  and
              restructuring  costs          $    4,988    $        635    $  10,148    $    7,147
                                                              =========  =========  =========  =========

(7)  In-process  research  and
  development:
            In-process  research  and
              development                          $            -    $    2,260    $    4,100    $    2,440
                                                              =========  =========  =========  =========

(8)  Other  income,  net:
            Investment  earnout
              payment  receipt                  $            -    $            -    $            -    $      (895)
                                                              =========  =========  =========  =========

(9)  Interest  expense:
            Debt  retirement  costs        $        612    $        998    $    1,064    $    7,225
                                                              =========  =========  =========  =========

(10)  Income  tax  expense:
            Income  tax  effects              $  14,294    $    3,996    $    8,776    $  (3,807)
                                                              =========  =========  =========  =========
 


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