Exhibit 99.1
Mentor Graphics Announces Third Quarter Results;
Reaffirms 2005 and 2006 Guidance
WILSONVILLE, Ore.--(BUSINESS WIRE)--Oct. 20, 2005--Mentor Graphics
Corporation (Nasdaq:MENT) today announced record revenue for a third
quarter of $164.8 million. Earnings were break-even on a GAAP basis,
and $0.04 on a non-GAAP basis. Bookings increased to the highest level
ever for a third quarter, and were up about 15% on both a year-on-year
and a sequential basis.
"The expected Calibre rebound resulted in a strong booking quarter
for Mentor. Bookings for our Design-to-Silicon family of tools were up
about 50% sequentially and nearly double the third quarter of 2004,"
said Walden C. Rhines, CEO and chairman of Mentor Graphics. "Calibre
usage continues to expand. For the third quarter, average dollar value
of Calibre family bookings was up 60% versus the third quarter of
2004."
During the quarter, the company introduced enhancements to its
wire harness product line, as well as launching its new full
automotive design flow. The automotive products, including the Volcano
product line, acquired in the second quarter of 2005, performed well
in the quarter. Volcano won its first order from a major Chinese auto
manufacturer. In addition, more than 40 customers purchased Mentor's
advanced verification solution, Questa, which was launched in the
second quarter of 2005.
"We saw positive signs of growth in demand from customers in the
quarter. Four of our top ten transactions were renewals, and these
deals grew in both absolute dollars and units," said Gregory K.
Hinckley, president of Mentor Graphics. "Three years ago when these
deals were signed, the market looked bleak and customer demand was
down. As these deals are coming up for renewal, we believe our
customers' businesses are in much better shape and demand is up.
However, while the third quarter booking trend is positive compared to
the prior year, total year-to-date bookings still lag the first nine
months of 2004 due to first half weakness."
Revenue by region was 35% Americas, 35% Europe, 15% Japan and 15%
Pacific Rim. By product line, revenue was 30% Design-to-Silicon, 30%
scalable verification, 25% integrated system design and 15% new and
emerging products.
Term bookings were 55% of total, perpetual was 35%, and
subscription was 10%. Top ten accounts were 45% of total bookings,
unchanged from the third quarter of 2004.
GAAP Results
On a GAAP basis, net income was $0.2 million for the third quarter
of 2005, or $0.00 per share, compared to a net loss of $5.7 million,
or ($0.08) per share for the same period in 2004.
Net loss on a GAAP basis for the nine months ended September 30,
2005 was $11.1 million, or ($0.14) per share, compared to a net loss
of $36.4 million, or ($0.51) per share for the same period in 2004.
Non-GAAP Results
On a non-GAAP basis, net income was $3.4 million for the third
quarter of 2005, or $0.04 per share, compared to net income of $3.0
million, or $0.04 per share for the same period in 2004.
Non-GAAP net loss for the nine months ended September 30, 2005 was
$4.0 million, or ($0.05) per share as compared to net income of $18.0
million, or $0.24 per share for the same period in 2004.
2005 and 2006 Guidance
Mentor reaffirms its previous full year 2005 and 2006 guidance.
For 2005, Mentor expects revenue of approximately $700 million,
GAAP earnings per share of $0.08 and non-GAAP earnings per share of
approximately $0.40, all within previously guided ranges.
For the fourth quarter, Mentor expects revenue of approximately
$216 million, GAAP earnings per share of $0.22 and non-GAAP earnings
per share of $0.42.
For 2006, Mentor continues to expect revenue of approximately $755
million, GAAP earnings per share of $0.30 and non-GAAP earnings per
share of approximately $0.50, representing, respectively, 8%, 275% and
25% growth from 2005. Mentor is not providing guidance per quarter for
2006 at this time.
For the fourth quarter non-GAAP earnings per share estimate, the
dilutive impact from Mentor's convertible debt of approximately
($0.02) has been included. For all other earnings per share guidance,
the convertible debt is anti-dilutive, and therefore was excluded from
the calculations.
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 net income (loss), which we refer to as
non-GAAP net income (loss). This measure is generally based on the
revenues of our product, maintenance and services business operations
and the costs of those operations, 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. Non-GAAP net income (loss) consists of net
income (loss) excluding amortization of intangible assets, merger and
acquisition charges, special charges and charges and gains which
management does not consider reflective of our core operating
business. Intangible assets consist primarily of purchased technology,
backlog, trade names, customer relationships, employment agreements
and stock options issued in connection with acquisitions. Merger and
acquisition charges represent in-process research and development
charges related to products in development that had not reached
technological feasibility at the time of acquisition. Special charges
consist of post-acquisition restructuring costs including severance
and benefits, excess facilities and asset-related charges, and also
include strategic reallocations or reductions of personnel resources.
In addition, 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 taxes or tax benefit that the
company would accrue using a normalized effective tax rate applied to
the non-GAAP results. In addition, during the nine months ended
September 30, 2005, a $4.75 million purchase of technology that had
not yet reached technological feasibility, a $957 thousand gain on the
sale of a building and a $469 thousand gain on investment earnout
income were excluded as management does not consider these
transactions a part of its core operating performance. During the nine
months ended September 30, 2004, investment earnout and holdback
income of $745 thousand were also excluded.
Non-GAAP net income (loss) is a supplemental measure of our
performance that is not required by, or presented in accordance with,
GAAP. Moreover, it should not be considered as an alternative to net
income, operating income or any other performance measure derived in
accordance with GAAP, or as an alternative to cash flow from operating
activities or as a measure of our liquidity. We present non-GAAP net
income (loss) because we consider it an important supplemental measure
of our performance.
Management excludes from its non-GAAP net income (loss) certain
recurring items to facilitate its review of the comparability of the
company's core operating performance on a period to period basis
because such items are not related to the company's ongoing core
operating performance as viewed by management. Management uses this
view of its operating performance for purposes of comparison with its
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 the company's
acquisition transactions. We therefore consider our operating
results without these charges when evaluating our core
performance. Generally, the most significant impact to the
company's net income (loss) is in the first twelve months
following the acquisition.
-- Special charges are primarily severance related and are due to
the company's reallocation or reduction of personnel resources
driven by modifications of business strategy or business
emphasis and by assimilation of acquired businesses. These
costs are originated based on the particular facts and
circumstances of business decisions and can vary in size.
Special charges also include excess facility and asset-related
restructuring charges. These charges are not specifically
included in the company's annual operating plan and related
budget due to the rapidly changing technology and competitive
environment in our industry. We therefore exclude them when
evaluating our managers' performance internally.
-- Merger and acquisition charges are in-process R&D charges,
which are largely disregarded as acquisition decisions are
made and which 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.
-- 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
the company's 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 the company operates assuming current year forecasted
geographic business mix. This rate is subject to change as the
geographic business mix and statutory tax rates and their
effect on the weighted average tax rate differ over time. Our
GAAP tax rate for the nine months ended September 30, 2005 is
52% and assumes a pre-tax profit for the year overall
resulting in a tax benefit in our 2005 nine month GAAP
results. This tax rate is substantially impacted by minor
changes in forecasted earnings as pre-tax income for the year
is currently projected to be near break-even, which
exacerbates the effect of certain mandatory payments in some
jurisdictions on our overall expected tax rate. Our adjustment
for tax related items in 2005 applies this normalized rate to
our non-GAAP pre-tax loss, and thereby reduces the unusually
large benefit for taxes reflected in our GAAP results. Our
adjustment for tax-related items in 2004 primarily reflects
the elimination of the additional tax charge associated with a
one-time intercompany tax dividend of $120 million, in
addition to the tax impact of other previously described
non-GAAP adjustments.
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 the company expects 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, though not directly affecting our
current cash position, represent 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.
-- The company regularly engages in acquisition and assimilation
activities as part of its 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 available funds of the company.
-- The company's income tax expense (benefit) will be ultimately
based on its GAAP taxable income and actual tax rates in
effect, which may 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.
Investors and potential investors are encouraged to review the
reconciliation of non-GAAP financial measures contained within this
press release with our net income (loss), which is our most directly
comparable GAAP financial results. We compensate for the limitations
of our use of non-GAAP financial measures by relying primarily on our
GAAP results and using non-GAAP financial measures only
supplementally. For more information, see the consolidated statements
of operations contained in this press release.
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 about
$700 million and employs approximately 3,950 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, Calibre and Catapult C are registered trademarks
and Questa and Scalable Verification are trademarks of Mentor Graphics
Corporation.
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. 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) the Company's ability to successfully offer products
and services that compete in the highly competitive EDA industry
including the risk that the Company's technology, products or
inventory become obsolete; (ii) reductions in spending on EDA tools by
the Company's customers due to cyclical downturns or initiatives to
increase profitability, (iii) 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) changes in
accounting or reporting rules or interpretations, limitations on
repatriation of earnings, licensing and intellectual property rights
protection; (v) changes in tax laws, regulations or enforcement
practices where the Company does business; (vi) effects of the
increasing volatility of foreign currency fluctuations on the
Company's business and operating results; (vii) effects of
unanticipated shifts in product mix on gross margin and unanticipated
shifts in geographic mix on the overall tax rate, (viii) effects of
customer seasonal purchasing patterns and the timing of significant
orders may negatively or positively impact the Company's quarterly
results of operations, (ix) the Company's ability to successfully
integrate and manage its acquisitions, all as may be discussed in more
detail under the heading "Factors That May Affect Future Results and
Financial Condition" 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
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data - Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2005 2004 2005 2004
------------ -------- -------- --------
Revenues:
System and software $ 91,492 $ 89,933 $264,427 $282,545
Service and support 73,317 72,027 219,552 213,462
--------- -------- -------- --------
Total revenues 164,809 161,960 483,979 496,007
--------- -------- -------- --------
Cost of revenues:
System and software 3,166 2,615 12,729 11,800
Service and support 19,596 20,320 59,843 59,494
Amortization of purchased
technology 3,076 2,672 8,489 7,642
--------- -------- -------- --------
Total cost of
revenues 25,838 25,607 81,061 78,936
--------- -------- -------- --------
Gross margin 138,971 136,353 402,918 417,071
--------- -------- -------- --------
Operating expenses:
Research and development 51,563 50,990 159,066 147,695
Marketing and selling 64,728 63,304 197,627 191,055
General and administration 19,883 18,120 57,343 55,430
Amortization of intangible
assets 1,059 916 3,153 2,488
Special charges (48) 507 2,529 4,370
Merger and acquisition
related charges - 7,290 750 7,650
--------- -------- -------- --------
Total operating
expenses 137,185 141,127 420,468 408,688
--------- -------- -------- --------
Operating income (loss)
1,786 (4,774) (17,550) 8,383
Other income, net 4,144 2,479 10,601 5,699
Interest expense (5,461) (4,755) (16,130) (13,781)
--------- -------- -------- --------
Income (loss) before
income taxes 469 (7,050) (23,079) 301
Income tax expense (benefit) 310 (1,304) (12,009) 36,665
--------- -------- -------- --------
Net income
(loss) $ 159 $ (5,746) $(11,070)$(36,364)
========= ======== ======== ========
Net income (loss) per
share:
Basic $ - $ (0.08) $ (0.14)$ (0.51)
========= ======== ======== ========
Diluted $ - $ (0.08) $ (0.14)$ (0.51)
========= ======== ======== ========
Weighted average number
of shares outstanding:
Basic 79,135 73,213 78,440 71,045
========= ======== ======== ========
Diluted 80,077 73,213 78,440 71,045
========= ======== ======== ========
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Three Months Ended
September 30, 2005
GAAP Adjustments Non-GAAP
-----------------------------------
Revenues:
System and software $ 91,492 $ - $ 91,492
Service and support 73,317 - 73,317
-------- -------- --------
Total revenues 164,809 - 164,809
-------- -------- --------
Cost of revenues:
System and software 3,166 - 3,166
Service and support 19,596 - 19,596
Amortization of purchased
technology 3,076 (3,076) (1) -
-------- -------- --------
Total cost of
revenues 25,838 (3,076) 22,762
-------- -------- --------
Gross margin 138,971 3,076 142,047
-------- -------- --------
Gross margin
percentage 84.3% 86.2%
-------- --------
Operating expenses:
Research and development 51,563 - 51,563
Marketing and selling 64,728 - 64,728
General and administration 19,883 - 19,883
Amortization of intangible assets 1,059 (1,059) (2) -
Special charges (48) 48 (3) -
-------- -------- --------
Total operating
expenses 137,185 (1,011) 136,174
-------- -------- --------
Operating income 1,786 4,087 5,873
Other income, net 4,144 (469) (4) 3,675
Interest expense (5,461) - (5,461)
-------- -------- --------
Income before income taxes 469 3,618 9,591 4,087
Income tax expense 310 385 (5) 695
-------- -------- --------
Net income $ 159 $ 3,233 $ 3,392
======== ======== ========
Net income per share:
Basic $ - $ 0.04
======== ========
Diluted $ - $ 0.04
======== ========
Weighted average number of
shares outstanding:
Basic 79,135 79,135
======== ========
Diluted 80,077 80,077
======== ========
(1) Amortization of purchased technology acquired in 16 separate
acquisition transactions, three of which were completed in the
last twelve months. Purchased technology is amortized over two to
five years.
(2) Amortization of other identified intangible assets including
tradenames, employment agreements, customer relationships and
deferred compensation acquired in eight separate acquisition
transactions, three of which were completed in the last twelve
months. Other identified intangible assets are amortized over two
to five years.
(3) Special charges consist of a $550 reversal of previously recorded
non-cancellable lease payments related to a facility in North
America due to an increase in the expected sublease income
substantially offset by costs of $415 incurred for employee
rebalances. These rebalance costs included severance benefits,
notice pay and outplacement services. In addition, $87 represents
other costs incurred to restructure the organization other than
employee rebalances and excess leased facility costs.
(4) Investment earnout payment received related to a sale of stock in
2003.
(5) Non-GAAP income tax expense adjustment is based upon the
assumption of a normalized effective rate of 17% on non-GAAP
income (loss) before income taxes.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Three Months Ended
September 30, 2004
GAAP Adjustments Non-GAAP
-----------------------------------
Revenues:
System and software $ 89,933 $ - $ 89,933
Service and support 72,027 - 72,027
-------- --------- --------
Total revenues 161,960 - 161,960
-------- --------- --------
Cost of revenues:
System and software 2,615 - 2,615
Service and support 20,320 - 20,320
Amortization of purchased
technology 2,672 (2,672) (1) -
-------- --------- --------
Total cost of
revenues 25,607 (2,672) 22,935
-------- --------- --------
Gross margin 136,353 2,672 139,025
-------- --------- --------
Gross margin
percentage 84.2% 85.8%
-------- --------
Operating expenses:
Research and development 50,990 - 50,990
Marketing and selling 63,304 - 63,304
General and administration 18,120 - 18,120
Amortization of intangible assets 916 (916) (2) -
Special charges 507 (507) (3) -
Merger and acquisition related
charges 7,290 (7,290) (4) -
-------- --------- --------
Total operating
expenses 141,127 (8,713) 132,414
-------- --------- --------
Operating income (loss)
(4,774) 11,385 6,611
Other income, net 2,479 (745) (5) 1,734
Interest expense (4,755) - (4,755)
-------- --------- --------
Income (loss) before income
taxes (7,050) 10,640 3,590
Income tax expense (benefit) (1,304) 1,914 (6) 610
-------- --------- --------
Net income (loss) $ (5,746) $ 8,726 $ 2,980
======== ========= ========
Net income (loss) per share:
Basic $ (0.08) $ 0.04
======== ========
Diluted $ (0.08) $ 0.04
======== ========
Weighted average number of
shares outstanding:
Basic 73,213 73,213
======== ========
Diluted 73,213 75,048
======== ========
(1) Amortization of purchased technology acquired in twelve separate
acquisition transactions, five of which were completed in the last
twelve months. Purchased technology is amortized over two to five
years.
(2) Amortization of other identified intangible assets including
tradenames, employment agreements, customer relationships and
deferred compensation acquired in seven separate acquisition
transactions, three of which were completed in the last twelve
months. Other identified intangible assets are amortized over
two to five years.
(3) Special charges primarily consist of $534 in costs incurred for
employee rebalances, which included severance benefits, notice pay
and outplacement services, partially offset by a $27 reversal of
previously recorded non-cancellable lease payments related to a
facility due to an increase in the estimated expected sublease
income.
(4) Merger and acquisition related charges consist of an in-process
R&D charge related to the acquisitions of 0-In and Palmchip.
(5) Investment earnout and holdback payments received related to a
sale of stock in 2003.
(6) Non-GAAP income tax expense adjustment is based upon the
assumption of a normalized effective rate of 17% on non-GAAP
income (loss) before income taxes.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Nine Months Ended
September 30, 2005
GAAP Adjustments Non-GAAP
--------------------------------
Revenues:
System and software $264,427 $ - $264,427
Service and support 219,552 - 219,552
-------- --------- --------
Total revenues 483,979 - 483,979
-------- --------- --------
Cost of revenues:
System and software 12,729 - 12,729
Service and support 59,843 - 59,843
Amortization of purchased
technology 8,489 (8,489)(1) -
-------- --------- --------
Total cost of revenues 81,061 (8,489) 72,572
-------- --------- --------
Gross margin 402,918 8,489 411,407
-------- --------- --------
Gross margin percentage 83.3% 85.0%
-------- --------
Operating expenses:
Research and development 159,066 (4,750)(2) 154,316
Marketing and selling 197,627 - 197,627
General and administration 57,343 - 57,343
Amortization of intangible assets 3,153 (3,153)(3) -
Special charges 2,529 (2,529)(4) -
Merger and acquisition related
charges 750 (750)(5) -
-------- --------- --------
Total operating
expenses 420,468 (11,182) 409,286
-------- --------- --------
Operating income (loss) (17,550) 19,671 2,121
Other income, net 10,601 (1,426)(6) 9,175
Interest expense (16,130) - (16,130)
-------- --------- --------
Loss before income taxes (23,079) 18,245 (4,834)
Income tax expense (benefit) (12,009) 11,187 (7) (822)
-------- --------- --------
Net loss $(11,070) $ 7,058 $ (4,012)
======== ========= ========
Net loss per share:
Basic $ (0.14) $ (0.05)
======== ========
Diluted $ (0.14) $ (0.05)
======== ========
Weighted average number of
shares outstanding:
Basic 78,440 78,440
======== ========
Diluted 78,440 78,440
======== ========
(1) Amortization of purchased technology acquired in 16 separate
acquisition transactions, three of which were completed in the
last twelve months. Purchased technology is amortized over two
to five years.
(2) A charge of $4,750 for a purchase of technology that had not
reached technological feasibility. This technology will be the
basis for a new offering in the Calibre product family which is
expected to be introduced in 2006.
(3) Amortization of other identified intangible assets including
tradenames, employment agreements, customer relationships and
deferred compensation acquired in eight separate acquisition
transactions, three of which were completed in the last twelve
months. Other identified intangible assets are amortized over two
to five years.
(4) Special charges consist of (i) $2,763 of costs incurred for
employee rebalances, which included severance benefits, notice pay
and outplacement services, (ii) a $550 reversal of previously
recorded non-cancellable lease payments related to a facility in
North America due to an increase in the expected sublease income,
(iii) a $91 charge for the abandonment of excess leased facility
space, and (iv) $225 in other costs incurred to restructure the
organization other than employee rebalances and excess leased
facility costs.
(5) Merger and acquisition related charges consist of in-process R&D
charges related to the acquisitions of Volcano Communications
Technologies AB and Aptix Corporation.
(6) Investment earnout payment received related to a sale of stock in
2003 and the gain on sale of a building in the first quarter of
2005.
(7) Non-GAAP income tax expense adjustment is based upon the
assumption of a normalized effective rate of 17% on non-GAAP
income (loss) before income taxes.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Nine Months Ended September 30, 2004
GAAP Adjustments Non-GAAP
--------- ----------- ----------
Revenues:
System and software $282,545 $ - $ 282,545
Service and support 213,462 - 213,462
-------- --------- ---------
Total revenues 496,007 - 496,007
-------- --------- ---------
Cost of revenues:
System and software 11,800 - 11,800
Service and support 59,494 - 59,494
Amortization of purchased
technology 7,642 (7,642) (1) -
-------- --------- ---------
Total cost of revenues 78,936 (7,642) 71,294
-------- --------- ---------
Gross margin 417,071 7,642 424,713
-------- --------- ---------
Gross margin percentage 84.1% 85.6%
-------- ---------
Operating expenses:
Research and development 147,695 - 147,695
Marketing and selling 191,055 - 191,055
General and administration 55,430 - 55,430
Amortization of intangible
assets 2,488 (2,488) (2) -
Special charges 4,370 (4,370) (3) -
Merger and acquisition related
charges 7,650 (7,650) (4) -
-------- --------- ---------
Total operating expenses 408,688 (14,508) 394,180
-------- --------- ---------
Operating income 8,383 22,150 30,533
Other income, net 5,699 (745) (5) 4,954
Interest expense (13,781) - (13,781)
-------- --------- ---------
Income before income taxes 301 21,405 21,706
Income tax expense (benefit) 36,665 (32,975) (6) 3,690
-------- --------- ---------
Net income (loss) $(36,364) $ 54,380 $ 18,016
======== ========= =========
Net income (loss) per share:
Basic $ (0.51) $ 0.24
======== =========
Diluted $ (0.51) $ 0.24
======== =========
Weighted average number of
shares outstanding:
Basic 71,045 71,045
======== =========
Diluted 71,045 74,181
======== =========
(1) Amortization of purchased technology acquired in 12 separate
acquisition transactions, five of which were completed in the last
twelve months. Purchased technology is amortized over two to five
years.
(2) Amortization of other identified intangible assets including
tradenames, employment agreements, customer relationships and
deferred compensation acquired in seven separate acquisition
transactions, three of which were completed in the last twelve
months. Other identified intangible assets are amortized over two
to five years.
(3) Special charges consist of (i) $1,998 in adjustments primarily
related to previously recorded non-cancellable lease payments
related to facilities in North America and Europe as a result of a
reduction in the estimated expected sublease income, (ii) $1,997
in costs incurred for employee rebalances, which included
severance benefits, notice pay and outplacement services, and
(iii) $375 which represent other costs incurred to restructure the
organization other than employee rebalances and excess leased
facility costs.
(4) Merger and acquisition related charges consist of an in-process
R&D charge related to the acquisitions of 0-In and Palmchip and
Project Technology Inc.
(5) Investment earnout and holdback payments received related to a
sale of stock in 2003.
(6) Non-GAAP income tax expense adjustment is based upon the
assumption of a normalized effective rate of 17% on non-GAAP
income (loss) before income taxes.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE
DILUTED NET EARNINGS PER SHARE
(In thousands, except earnings per share data-Unaudited)
The following table reconciles the specific items excluded from GAAP
in the calculation of non-GAAP earnings per share for the periods
shown below:
Q4 2005 2005 2006
-------- ------- -------
Diluted GAAP net earnings per share $ 0.22 $ 0.08 $ 0.30
Amortization of purchased technology (1) 0.05 0.15 0.15
Amortization of intangible assets (2) 0.01 0.05 0.05
Special charges (3) - 0.04 -
Merger and acquisition related charges (4) - 0.01 -
Purchased technology (5) - 0.06 -
Other income and expense (6) - (0.01) -
Income tax adjustment (7) 0.16 0.02 -
Dilutive effect of convertible debt (8) (0.02) - -
------- ------- -------
Diluted non-GAAP net earnings per share $ 0.42 $ 0.40 $ 0.50
======= ======= =======
(1) Excludes amortization of purchased technology acquired in 16
separate acquisition transactions. Purchased technology is
amortized over two to five years. The guidance for Q4 2005 and
2006 do not assume any new acquisition transactions.
(2) Excludes amortization of other identified intangible assets
including tradenames, employment agreements, customer
relationships and deferred compensation acquired in ten separate
acquisition transactions. Other identified intangible assets are
amortized over two to five years. The guidance for Q4 2005 and
2006 do not assume any new acquisition transactions.
(3) Excludes special charges consisting primarily of costs incurred
for employee rebalances, which included severance benefits, notice
pay and outplacement services, partially offset by a reversal of
previously recorded non-cancelable lease payments related to a
facility in North America due to an increase in the estimated
expected sublease income. The guidance for Q4 2005 and 2006 do
not assume any new special charges.
(4) Excludes merger and acquisition related charges consisting of in-
process R&D charges related to the acquisitions of Volcano
Communications Technologies AB and Aptix Corporation. The
guidance for Q4 2005 and 2006 do not assume any new merger and
acquisition related charges.
(5) Excludes a charge for the purchase of technology that had not
reached technological feasibility. This technology will be the
basis for a new offering in the Calibre product family which is
expected to be introduced in 2006. GAAP and non-GAAP results for
2006 will not include these costs. The guidance for Q4 2005 and
2006 do not assume any new purchases of technology.
(6) Excludes investment earnout income related to a sale of stock in
2003. In addition, the 2005 guidance includes the gain on the sale
of a building which occurred in Q1 2005. The guidance for Q4 2005
and 2006 assumes no additional investment earnout income or gain
or losses outside the normal course of business.
(7) Non-GAAP income tax expense adjustment is based upon the
assumption of a normalized effective rate of 17% on non-GAAP
income (loss) before income taxes.
(8) For purposes of calculating earnings per share, fourth quarter
non-GAAP earnings are expected to reach a level which would
require the inclusion of the dilutive effect of shares
attributable to convertible debt in shares assumed outstanding,
partly offset by an add back to income for interest expense and
other debt related costs.
MENTOR GRAPHICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands - Unaudited)
As of As of
September 30, December 31,
2005 2004
- ------------------------------------------ ------------- ------------
Assets
Current assets:
Cash, cash equivalents and short-term
investments $ 102,098 $ 94,287
Trade accounts receivable, net 79,145 116,858
Term receivables, short-term 129,367 125,832
Prepaid expenses and other 28,842 28,457
Deferred income taxes 9,424 10,298
---------- ----------
Total current assets 348,876 375,732
Property, plant and equipment, net 79,567 91,224
Term receivables, long-term 117,408 139,146
Intangibles, net 383,169 374,144
Other assets 37,141 41,661
---------- ----------
Total assets $ 966,161 $ 1,021,907
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 7,210 $ 9,632
Accounts payable 13,312 18,037
Income taxes payable 18,845 35,299
Accrued payroll and related liabilities 54,442 81,709
Accrued liabilities 34,484 37,098
Deferred revenue 106,599 103,336
---------- ----------
Total current liabilities 234,892 285,111
Long-term notes payable 282,577 283,983
Other long-term liabilities 16,705 19,098
---------- ----------
Total liabilities 534,174 588,192
---------- ----------
Stockholders' equity:
Common stock 381,359 363,455
Deferred compensation - (508)
Retained earnings 28,647 39,717
Accumulated other comprehensive income 21,981 31,051
---------- ----------
Total stockholders' equity 431,987 433,715
---------- ----------
Total liabilities and stockholders'
equity $ 966,161 $ 1,021,907
========== ==========
MENTOR GRAPHICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------
2005 2004 2005 2004
---------- ---------- -------- --------
Operating Cash Flows:
Net income (loss) $ 159 $ (5,746) $ (11,070) $ (36,364)
Depreciation and
amortization 11,043 11,465 33,128 32,278
Other adjustments to
reconcile operating
cash (967) 1,185 (2,434) 34,110
Changes in working
capital 681 14,463 5,712 7,137
---------- ---------- -------- --------
Net cash provided by
operating activities 10,916 21,367 25,336 37,161
Net cash used in
investing activities (26,116) (27,060) (46,131) (50,289)
Net cash provided by
financing activities 7,662 5,931 13,836 20,015
Effect of exchange rate
changes on cash and cash
equivalents 755 4 (1,936) (49)
---------- ---------- -------- --------
Net change in cash
and cash equivalents (6,783) 242 (8,895) 6,838
Cash and cash equivalents
at beginning of period 65,804 74,929 67,916 68,333
---------- ---------- -------- --------
Cash and cash
equivalents at end of
period, excluding
short-term
investments $ 59,021 $ 75,171 $ 59,021 $ 75,171
========== ========== ======== ========
MENTOR GRAPHICS CORPORATION
SUPPLEMENTAL FINANCIAL AND OTHER INFORMATION
(In thousands, except for days sales outstanding -Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
Geographic Revenue:
Americas $61,702 $68,653 $203,901 $216,575
37.4% 42.4% 42.1% 43.7%
Europe $54,583 $47,637 $140,616 $134,757
33.1% 29.4% 29.1% 27.2%
Japan $22,989 $31,337 $ 79,074 $ 98,490
14.0% 19.4% 16.3% 19.8%
Pac Rim $25,535 $14,333 $ 60,388 $ 46,185
15.5% 8.8% 12.5% 9.3%
Other Data:
Capital expenditures $ 4,682 $ 7,887 $ 17,259 $ 16,833
Days sales outstanding 114 117 - -
CONTACT: Mentor Graphics Corporation
Dennis Weldon, 503-685-1462
dennis_weldon@mentor.com
or
Ryerson Schwark, 503-685-1462
ry_schwark@mentor.com