Exhibit 99.1
Mentor Graphics Announces Record Fourth Quarter Revenue and Bookings
WILSONVILLE, Ore.--(BUSINESS WIRE)--Jan. 26, 2006--Mentor Graphics
Corporation (Nasdaq:MENT) today announced record fourth quarter
revenue of $221.3 million, up 3% from the prior fourth quarter.
Diluted earnings per share were $.19 on a GAAP basis and $.42 on a
non-GAAP basis. Bookings were up more than 5% from the fourth quarter
of 2004.
"We were pleased to see continued growth in bookings in the fourth
quarter of 2005, especially considering the tough comparison to last
year's fourth quarter growth of more than 35%," said Walden C. Rhines,
chairman and CEO of Mentor Graphics. "Renewals showed strong growth,
with contract values up nearly 30% over prior contract levels.
Mentor's book-to-bill ratio was positive for the year, and the fourth
quarter was the highest quarterly book-to-bill ratio since 1996."
Three of the four major product categories set new quarterly and
annual bookings records. Compared to the fourth quarter of 2004,
bookings grew 50% in Integrated Systems Design, 15% in IC Design to
Silicon and 20% in New and Emerging.
Mentor's new Questa(TM) verification platform, launched in May,
saw rapid customer adoption with over a thousand seats installed by
the fourth quarter. TestKompress(R) bookings more than doubled during
the year, while automotive products grew 40%. Strength in FPGA-related
products like synthesis and I/O Designer(TM) helped provide increased
bookings in the Integrated Systems Design product category. Calibre(R)
resolution enhancement technology continued to expand with annual
bookings growth of 25%. Calibre Design-for-Manufacturing (DFM)
bookings grew 1000% over 2004 and materially improved fourth quarter
2005 results.
Two new Calibre DFM products and the company's automotive solution
were launched during the fourth quarter of 2005 and performed well.
YieldAssist(TM) had more than $1 million in bookings, while Calibre
OPCverify(TM) had $5 million in bookings. Mentor's automotive solution
was adopted at Shanghai Motors, one of the largest manufacturers of
automobiles in the world. The resulting orders were the largest Mentor
Graphics has ever received from China.
North America and Europe both saw strength in the quarter with
bookings up 20% over the fourth quarter of 2004. Japan was weaker with
bookings down 35%, while the Pacific Rim bookings dropped 5% over the
year ago levels.
Split of revenue by geography was 45% North America, 35% Europe,
10% Japan, and 10% Pacific Rim.
"During the quarter, we examined several opportunities for savings
to fuel our investment in high growth opportunities like Calibre
Design-for-Manufacturing, Electronic System Level (ESL) tools, and
automotive," said Gregory K. Hinckley, president of Mentor Graphics.
"As a result of this review, we took steps which will conclude in the
first quarter to reduce cost and headcount in our Intellectual
Property business."
Special charges of $4.2 million were restructuring related.
Guidance
Based upon selective cost reduction programs, the company is
raising non-GAAP earnings per share guidance for the full year 2006.
For the first quarter of 2006, the company expects revenue of
approximately $170 million, a GAAP loss per share of $.06 and
approximately breakeven non-GAAP earnings per share.
For full year 2006, Mentor Graphics expects revenue of about $755
million, GAAP earnings per share of $.18 and non-GAAP earnings per
share of approximately $.55.
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, equity plan-related compensation
expenses 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. 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 twelve months ended December 31, 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 an
$800 thousand gain on investment earnout income were excluded as
management does not consider these transactions a part of its core
operating performance. During the twelve months ended December 31,
2004, investment earnout and holdback income of $1,403 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 on going 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
inter-period comparability of 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.
-- Equity-plan related compensation expenses are non-cash
expenses that are inconsistent in amount and frequency from
period to period that depend on the timing of the grant of
stock options and varying levels of participation in the
company's stock purchase plan. We therefore exclude these
charges for purposes of evaluating our core performance as
well as with respect to evaluating any potential acquisition.
-- 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. This non-GAAP tax 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 twelve months ended
December 31, 2005 is 63%. This tax rate was substantially
impacted by our pre-tax income for the year being near
break-even, which exacerbates the effect of certain mandatory
payments in some jurisdictions on our overall tax rate. Our
adjustment for tax related items in 2005 applies this
normalized rate to our non-GAAP pre-tax income, and thereby
reduces the unusually large provision 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 inter-company 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 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 FAS 123(R).
-- 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.
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 4,000 people worldwide.
Corporate headquarters are located at 8005 S.W. Boeckman Road,
Wilsonville, Oregon 97070-7777. World Wide Web site:
http://www.mentor.com/.
TestKompress is a registered trademark and Questa, I/O Designer,
Calibre OPCverify and YieldAssist 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.
The company is currently in discussions with its external auditors
on an emerging accounting issue related to Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The company hedges future cash flows in certain
jurisdictions where it has long or short positions in key foreign
currencies, namely the Japanese Yen, the Euro and the British Pound
Sterling. The fair value of the related hedge instruments as of
December 31, 2005 is a net unrealized gain. If the conclusion related
to this emerging issue is different than our current position, the
impact on our financial results for 2005 is expected to be in the
range of neutral to a positive 3 cents per share. A conclusion on this
matter is expected in the next week.
MENTOR GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data - Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------------------------
2005 2004 2005 2004
-------- -------- --------- --------
Revenues:
System and software $145,837 $140,127 $ 410,264 $422,672
Service and support 75,433 74,822 294,985 288,284
-------- -------- --------- --------
Total revenues 221,270 214,949 705,249 710,956
-------- -------- --------- --------
Cost of revenues:
System and software 5,305 4,839 18,034 16,639
Service and support 21,196 20,800 81,039 80,294
Amortization of purchased
technology 3,150 2,982 11,639 10,624
-------- -------- --------- --------
Total cost of
revenues 29,651 28,621 110,712 107,557
-------- -------- --------- --------
Gross margin 191,619 186,328 594,537 603,399
-------- -------- --------- --------
Operating expenses:
Research and development 53,610 54,594 212,676 202,289
Marketing and selling 77,319 76,126 274,946 267,181
General and administration 19,491 18,825 76,834 74,255
Amortization of intangible
assets 1,080 1,098 4,233 3,586
Special charges 4,248 4,843 6,777 9,213
Merger and acquisition related
charges - 50 750 7,700
-------- -------- --------- --------
Total operating
expenses 155,748 155,536 576,216 564,224
-------- -------- --------- --------
Operating income 35,871 30,792 18,321 39,175
Other income, net 6,197 2,689 16,798 8,388
Interest expense (7,366) (4,838) (23,496) (18,619)
-------- -------- --------- --------
Income before income taxes 34,702 28,643 11,623 28,944
Income tax expense 19,287 12,829 7,278 49,494
-------- -------- --------- --------
Net income (loss) $ 15,415 $ 15,814 $ 4,345 $(20,550)
======== ======== ========= ========
Net income (loss) per share:
Basic $ 0.19 $ 0.21 $ 0.06 $ (0.28)
======== ======== ========= ========
Diluted $ 0.19 $ 0.20 $ 0.05 $ (0.28)
======== ======== ========= ========
Weighted average number of
shares outstanding:
Basic 79,202 76,354 78,633 72,381
======== ======== ========= ========
Diluted 80,144 78,426 80,133 72,381
======== ======== ========= ========
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Three Months Ended
December 31, 2005
GAAP Adjustments Non-GAAP
-----------------------------------
Revenues:
System and software $145,837 $ - $145,837
Service and support 75,433 - 75,433
-------- -------- --------
Total revenues 221,270 - 221,270
-------- -------- --------
Cost of revenues:
System and software 5,305 - 5,305
Service and support 21,196 - 21,196
Amortization of purchased
technology 3,150 (3,150)(1) -
-------- -------- --------
Total cost of
revenues 29,651 (3,150) 26,501
-------- -------- --------
Gross margin 191,619 3,150 194,769
-------- -------- --------
Gross margin
percentage 86.6% 88.0%
-------- --------
Operating expenses:
Research and development 53,610 - 53,610
Marketing and selling 77,319 - 77,319
General and administration 19,491 - 19,491
Amortization of intangible assets 1,080 (1,080)(2) -
Special charges 4,248 (4,248)(3) -
-------- -------- --------
Total operating
expenses 155,748 (5,328) 150,420
-------- -------- --------
Operating income 35,871 8,478 44,349
Other income, net 6,197 (331)(4) 5,866
Interest expense (7,366) - (7,366)
-------- -------- --------
Income before income taxes 34,702 8,147 42,849
Income tax expense 19,287 (12,003)(5) 7,284
-------- -------- --------
Net income $ 15,415 $ 20,150 $ 35,565
======== ======== ========
Net income per share:
Basic $ 0.19 $ 0.45
======== ========
Diluted $ 0.19 $ 0.42
======== ========
Weighted average number of
shares outstanding:
Basic 79,202 79,202
======== ========
Diluted 80,144 12,070 (6) 92,214
======== ======== ========
(1) Amortization of purchased technology acquired in 17 separate
acquisition transactions, three of which were completed in the
twelve months ended December 31, 2005. Purchased technology is
amortized over two to five years.
(2) Amortization of other identified intangible assets including trade
names, employment agreements and customer relationships acquired
in 11 separate acquisition transactions, four 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 costs incurred related to the
discontinuation of a product line in the fourth quarter of 2005.
The total costs of this product line discontinuation were $2,290
which include (i) $1,151 of severance benefits, notice pay, and
outplacement services related to employee rebalances, (ii) $936
for the abandonment of excess leased facility space, and (iii)
$203 for other costs related to the discontinued product line. In
addition, special charges include (i) $1,242 incurred for
severance benefits, notice pay and outplacement services related
to employee rebalances, (ii) $551 for the abandonment of excess
leased facilities space in North America, (iii) $165 for other
costs incurred to restructure the organization.
(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 before income taxes.
(6) Dilutive shares related to the company's convertible debt as
required by EITF 04-8. In calculating non-GAAP diluted net
income per share, $3,069, representing the after-tax interest and
amortization on the company's convertible debt, is added back to
non-GAAP net income.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Three Months Ended
December 31, 2004
GAAP Adjustments Non-GAAP
-----------------------------------
Revenues:
System and software $140,127 $ - $140,127
Service and support 74,822 - 74,822
-------- -------- --------
Total revenues 214,949 - 214,949
-------- -------- --------
Cost of revenues:
System and software 4,839 - 4,839
Service and support 20,800 - 20,800
Amortization of purchased
technology 2,982 (2,982)(1) -
-------- -------- --------
Total cost of
revenues 28,621 (2,982) 25,639
-------- -------- --------
Gross margin 186,328 2,982 189,310
-------- -------- --------
Gross margin
percentage 86.7% 88.1%
-------- --------
Operating expenses:
Research and development 54,594 - 54,594
Marketing and selling 76,126 - 76,126
General and administration 18,825 - 18,825
Amortization of intangible assets 1,098 (1,098)(2) -
Special charges 4,843 (4,843)(3) -
Merger and acquisition related
charges 50 (50)(4) -
-------- -------- --------
Total operating
expenses 155,536 (5,991) 149,545
-------- -------- --------
Operating income 30,792 8,973 39,765
Other income, net 2,689 (658)(5) 2,031
Interest expense (4,838) - (4,838)
-------- -------- --------
Income before income taxes 28,643 8,315 36,958
Income tax expense 12,829 (6,546)(6) 6,283
-------- -------- --------
Net income $ 15,814 $ 14,861 $ 30,675
======== ======== ========
Net income per share:
Basic $ 0.21 $ 0.40
======== ========
Diluted $ 0.20 $ 0.38
======== ========
Weighted average number of
shares outstanding:
Basic 76,354 76,354
======== ========
Diluted 78,426 12,099 (7) 90,525
======== ======== ========
(1) Amortization of purchased technology acquired in 13 separate
acquisition transactions, five of which were completed in the
twelve months ended December 31, 2004. Purchased technology is
amortized over two to five years.
(2) Amortization of other identified intangible assets including
trade names, employment agreements, customer relationships and
deferred compensation acquired in six 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 $3,658 in costs incurred
for employee rebalances, which included severance benefits, notice
pay and outplacement services, partially offset by a $52 net
reversal related to the decision to utilize space that was
previously abandoned. In addition, the company incurred $1,237 in
costs related to additional funding for a defined benefit pension
plan liability the company acquired as a result of an acquisition
in 1999.
(4) Merger and acquisition related charges consist of an in-process
R&D charge related to the acquisition of VeSys.
(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 before income taxes.
(7) Dilutive shares related to the company's convertible debt as
required by EITF 04-8. In calculating non-GAAP diluted net income
per share, $3,682, representing the after-tax interest and
amortization on the company's convertible debt, is added back to
non-GAAP net income.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Twelve Months Ended
December 31, 2005
GAAP Adjustments Non-GAAP
----------------------------------
Revenues:
System and software $ 410,264 $ - $ 410,264
Service and support 294,985 - 294,985
--------- --------- ---------
Total revenues 705,249 - 705,249
--------- --------- ---------
Cost of revenues:
System and software 18,034 - 18,034
Service and support 81,039 - 81,039
Amortization of purchased
technology 11,639 (11,639)(1) -
--------- --------- ---------
Total cost of
revenues 110,712 (11,639) 99,073
--------- --------- ---------
Gross margin 594,537 11,639 606,176
--------- --------- ---------
Gross margin
percentage 84.3% 86.0%
--------- ---------
Operating expenses:
Research and development 212,676 (4,750)(2) 207,926
Marketing and selling 274,946 - 274,946
General and administration 76,834 - 76,834
Amortization of intangible assets 4,233 (4,233)(3) -
Special charges 6,777 (6,777)(4) -
Merger and acquisition related
charges 750 (750)(5) -
--------- --------- ---------
Total operating
expenses 576,216 (16,510) 559,706
--------- --------- ---------
Operating income 18,321 28,149 46,470
Other income, net 16,798 (1,757)(6) 15,041
Interest expense (23,496) - (23,496)
--------- --------- ---------
Income before income taxes 11,623 26,392 38,015
Income tax expense 7,278 (815)(7) 6,463
--------- --------- ---------
Net loss $ 4,345 $ 27,207 $ 31,552
========= ========= =========
Net income per share:
Basic $ 0.06 $ 0.40
========= =========
Diluted $ 0.05 $ 0.39
========= =========
Weighted average number of
shares outstanding:
Basic 78,633 78,633
========= =========
Diluted 80,133 80,133
========= =========
(1) Amortization of purchased technology acquired in 17 separate
acquisition transactions, three of which were completed in the
twelve months ended December 31, 2005. 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
trade names, employment agreements, customer relationships and
deferred compensation acquired in 11 separate acquisition
transactions, four 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 costs incurred related to the
discontinuation of a product line in the fourth quarter of 2005.
The total costs of this product line discontinuation were $2,290
which include (i) $1,151 of severance benefits, notice pay, and
outplacement services related to employee rebalances, (ii) $936
for the abandonment of excess leased facility space, and (iii)
$203 for other costs related to the discontinued product line. In
addition, special charges consist of (i) $4,005 of costs incurred
for employee rebalances in other areas of the company, which
included severance benefits, notice pay and outplacement services,
(ii) $642 for charges for the abandonment of excess leased
facilities space in North America, (iii) $390 in other costs
incurred to restructure the organization, and (iv) 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.
(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 of $800 received related to a sale of
stock in 2003 and a $957 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 before income taxes.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)
Twelve Months Ended
December 31, 2004
GAAP Adjustments Non-GAAP
---------------------------------
Revenues:
System and software $422,672 $ - $ 422,672
Service and support 288,284 - 288,284
-------- --------- ---------
Total revenues 710,956 - 710,956
-------- --------- ---------
Cost of revenues:
System and software 16,639 - 16,639
Service and support 80,294 - 80,294
Amortization of purchased
technology 10,624 (10,624)(1) -
-------- --------- ---------
Total cost of
revenues 107,557 (10,624) 96,933
-------- --------- ---------
Gross margin 603,399 10,624 614,023
-------- --------- ---------
Gross margin
percentage 84.9% 86.4%
-------- ---------
Operating expenses:
Research and development 202,289 - 202,289
Marketing and selling 267,181 - 267,181
General and administration 74,255 - 74,255
Amortization of intangible assets 3,586 (3,586)(2) -
Special charges 9,213 (9,213)(3) -
Merger and acquisition related
charges 7,700 (7,700)(4) -
-------- --------- ---------
Total operating
expenses 564,224 (20,499) 543,725
-------- --------- ---------
Operating income 39,175 31,123 70,298
Other income, net 8,388 (1,403)(5) 6,985
Interest expense (18,619) - (18,619)
-------- --------- ---------
Income before income taxes 28,944 29,720 58,664
Income tax expense 49,494 (39,521)(6) 9,973
-------- --------- ---------
Net income (loss) $(20,550) $ 69,241 $ 48,691
======== ========= =========
Net income (loss) per share:
Basic $ (0.28) $ 0.67
======== =========
Diluted $ (0.28) $ 0.65
======== =========
Weighted average number of
shares outstanding:
Basic 72,381 72,381
======== =========
Diluted 72,381 75,397
======== =========
(1) Amortization of purchased technology acquired in 13 separate
acquisition transactions, five of which were completed in the
twelve months ended December 31, 2004. Purchased technology is
amortized over two to five years.
(2) Amortization of other identified intangible assets including
trade names, 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) $1,946 in adjustments primarily
related to previously recorded non-cancelable lease payments
related to a facility in North America as a result of a reduction
in the estimated expected sublease income, (ii) $5,655 in costs
incurred for employee rebalances, which included severance
benefits, notice pay and outplacement services, and (iii) $1,612
which primarily represents costs related to additional funding for
a defined benefit pension plan liability the company acquired as a
result of an acquisition in 1999.
(4) Merger and acquisition related charges consist of an in-process
R&D charge related to the acquisitions of 0-In, Palmchip, Project
Technology and VeSys.
(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 before income taxes.
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE
DILUTED NET EARNINGS PER SHARE
(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:
Q1 2006 2006
-------- -------
Diluted GAAP net earnings per share $ (0.06)$ 0.18
Amortization of purchased technology (1) 0.03 0.13
Amortization of intangible assets (2) 0.01 0.05
Estimated impact of stock compensation expense (3) 0.03 0.12
Shares used in calculation of net earnings per share
(4) 0.01 -
Income tax adjustment (5) (0.02) 0.07
------- -------
Diluted non-GAAP net earnings per share $ 0.00 $ 0.55
======= =======
(1) Excludes amortization of purchased technology acquired in 20
separate acquisition transactions. Purchased technology is amortized
over two to five years. The guidance for Q1 2006 and 2006 do not
assume any new acquisition transactions.
(2) Excludes amortization of other identified intangible assets
including trade names, employment agreements and customer
relationships acquired in 11 separate acquisition transactions.
Other identified intangible assets are amortized over two to five
years. The guidance for Q1 2006 and 2006 do not assume any new
acquisition transactions.
(3) Excludes the expense related to stock options and employee stock
purchase plans as required with the adoption of FAS 123R, effective
Q1 2006.
(4) Shares used in the calculation of diluted GAAP net earnings per
share are expected to be the same as shares used in the calculation
of diluted non-GAAP earnings per share except when the Company
reports a GAAP loss and a non-GAAP income, or GAAP income and a non-
GAAP loss. For Q1 2006 guidance, basic shares outstanding are used
for diluted GAAP earnings per share and diluted shares outstanding
are used for diluted non-GAAP earnings per share.
(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
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands - Unaudited)
As of As of
December 31, December 31,
2005 2004 (1)
- ----------------------------------------------------------------------
Assets
Current assets:
Cash, cash equivalents and short-term
investments $ 114,410 $ 94,287
Trade accounts receivable, net 101,593 116,858
Term receivables, short-term 133,273 125,832
Prepaid expenses and other 30,778 28,457
Deferred income taxes 13,127 8,351
---------- ---------------
Total current assets 393,181 373,785
Property, plant and equipment, net 81,374 91,224
Term receivables, long-term 131,676 139,146
Intangibles, net 381,125 374,144
Other assets 34,631 34,336
---------- ---------------
Total assets $1,021,987 $ 1,012,635
========== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 11,858 $ 9,632
Accounts payable 15,268 18,037
Income taxes payable 38,278 26,027
Accrued payroll and related liabilities 73,405 81,709
Accrued liabilities 29,363 37,098
Deferred revenue 106,453 103,336
---------- ---------------
Total current liabilities 274,625 275,839
Long-term notes payable 282,188 283,983
Other long-term liabilities 16,825 19,098
---------- ---------------
Total liabilities 573,638 578,920
---------- ---------------
Stockholders' equity:
Common stock 381,962 363,455
Deferred compensation - (508)
Retained earnings 44,062 39,717
Accumulated other comprehensive income 22,325 31,051
---------- ---------------
Total stockholders' equity 448,349 433,715
---------- ---------------
Total liabilities and
stockholders' equity $1,021,987 $ 1,012,635
========== ===============
- ----------------------------------------------------------------------
(1) Certain reclassifications have been made for 2004 to conform with
the 2005 presentation.
MENTOR GRAPHICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
-----------------------------------------
2005 2004 (1) 2005 2004 (1)
--------- ---------- ---------- --------
Operating Cash Flows:
Net income (loss) $ 15,415 $ 15,814 $ 4,345 $(20,550)
Depreciation and
amortization 10,941 11,442 44,069 43,720
Other adjustments to
reconcile operating
cash (9,915) 18,475 (12,349) 52,585
Changes in working capital 1,197 (42,310) 8,191 (35,173)
--------- ---------- ---------- --------
Net cash provided by
operating activities 17,638 3,421 44,256 40,582
Net cash used in investing
activities (7,866) (10,609) (55,279) (60,898)
Net cash provided by (used
in) financing activities 5,082 (668) 18,918 19,347
Effect of exchange rate
changes on cash and cash
equivalents 778 601 (1,158) 552
--------- ---------- ---------- --------
Net change in cash and cash
equivalents 15,632 (7,255) 6,737 (417)
Cash and cash equivalents at
beginning of period 59,021 75,171 67,916 68,333
--------- ---------- ---------- --------
Cash and cash equivalents at
end of period, excluding
short-term investments $ 74,653 $ 67,916 $ 74,653 $ 67,916
========= ========== ========== ========
(1) Certain reclassifications have been made for 2004 to conform with
the 2005 presentation.
- ----------------------------------------------------------------------
MENTOR GRAPHICS CORPORATION
SUPPLEMENTAL FINANCIAL AND OTHER INFORMATION
(In thousands, except for days sales outstanding -Unaudited)
Three Months Twelve Months
Ended Ended
December 31, December 31,
---------------------------------------------
2005 2004 2005 2004
---------- ---------- ---------- -----------
Geographic Revenue:
Americas $ 100,653 $ 90,336 $ 304,554 $ 306,911
45% 42% 43% 43%
Europe $ 74,431 $ 64,660 $ 215,047 $ 199,417
34% 30% 31% 28%
Japan $ 20,227 $ 32,617 $ 99,301 $ 131,107
9% 15% 14% 19%
Pac Rim $ 25,959 $ 27,336 $ 86,347 $ 73,521
Other Data: 12% 13% 12% 10%
Capital expenditures $ 8,584 $ 7,590 $ 25,843 $ 24,423
Days sales
outstanding 96 102 - -
CONTACT: Mentor Graphics
Ryerson Schwark, 503-685-1462
ry_schwark@mentor.com
or
Dennis Weldon, 503-685-1462
dennis_weldon@mentor.com