Mentor Graphics Reports Fiscal Third Quarter Results and Announces Dividend

Business Wire

WILSONVILLE, Ore.--(BUSINESS WIRE)--

Mentor Graphics Corporation (MENT) today announced financial results for the company’s fiscal third quarter ended October 31, 2013. The company reported revenues of $275.6 million, non-GAAP earnings per share of $0.32, and GAAP earnings per share of $0.20.

“Third-quarter results substantially exceeded our guidance and reflect the continuing strength in our business,” said Walden C. Rhines, chairman and CEO of Mentor Graphics. “Core EDA business such as design to silicon and scalable verification, along with strength in transportation, drove third quarter business. Design-to-silicon growth was powered by the Calibre family of physical verification and analysis tools and the Tessent design-for-test products. Scalable verification strength, including our Veloce2 emulator, stems from the ongoing industry move from simulation to emulation for the largest integrated circuit designs. Traditional integrated electrical design of wiring systems and growth of GENIVI automotive applications drove transportation strength in the quarter.”

During the quarter the company delivered three emulation solutions to accelerate the verification of high-definition multimedia interface (HDMI) version 2.0 products: the iSolve™ Multimedia for a “plug-and-play” hardware interface to the Veloce® emulators; the Veloce VirtuaLAB Multimedia, supported by the Testbench Xpress (TBX) co-modeling technology, for use in a pure software-based environment; and a verification IP (VIP) solution. Designers can now develop and stress-test their software and hardware with billions of verification cycles before silicon is available.

Mentor also announced the latest release of FloEFD™, its award-winning computational fluid dynamics (CFD) product, with advanced radiation modeling and multicore meshing capabilities. The company also launched the Mentor® Embedded Hypervisor product for in-vehicle infotainment systems, telematics, advanced driver assistance systems and instrumentation. In other news, Mentor Graphics® tools were included in TSMC’s reference flows for 3D-IC and 16 nm FinFET process technology.

“Bookings were up 30% for the quarter and 60% year to date,” said Gregory K. Hinckley, president of Mentor Graphics. “The third quarter was our fourth consecutive quarter of a positive book to bill. As a result of rigorous expense control, the fiscal year 2014 non-GAAP earnings growth rate is expected to be double the revenue growth rate and we are on track to achieve our 20% non-GAAP operating margin target. We see our technology, products and market positions stronger now than at the beginning of the year. We look to next year with optimism.”

Outlook

For the fourth quarter of fiscal 2014, the company expects revenues of about $400 million, non-GAAP earnings per share of about $0.90, and GAAP earnings per share that are approximately $0.85. For the full fiscal year 2014, the company is maintaining revenue expectations of approximately $1.155 billion and non-GAAP earnings per share of about $1.59. Fiscal year 2014 GAAP earnings per share are expected to be approximately $1.26.

Share Repurchase

In the third quarter of fiscal year 2014, the company used $10 million to repurchase approximately 440,000 shares at an average price of $22.76 per share. The company has repurchased $174 million of Mentor Graphics stock since March 2011. On August 21, 2013, the company’s Board of Directors increased the share repurchase authorization. The company has $90 million available under the current share repurchase authorization.

Dividend

The company announced a quarterly dividend of $0.045 per share on outstanding common stock. The dividend is payable on January 2, 2014 to shareholders of record as of the close of business on December 10, 2013.

Fiscal Year Definition

Mentor Graphics Corporation’s fiscal year runs from February 1 to January 31. The fiscal year is dated by the calendar year in which the fiscal year ends. As a result, the first three fiscal quarters of any fiscal year will be dated with the next calendar year, rather than the current calendar year.

Discussion of Non-GAAP Financial Measures

Mentor Graphics’ management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted gross profit, operating income, operating margin, net income, and earnings per share which we refer to as non-GAAP gross profit, operating income, operating margin, net income, and earnings per share, respectively. These non-GAAP measures are derived from the revenues of our product, maintenance, and services business operations and the costs directly related to the generation of those revenues, such as cost of revenue, research and development, sales and marketing, and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. These non-GAAP measures exclude amortization of intangible assets, special charges, equity plan-related compensation expenses, interest expense associated with the amortization of original issuance debt discount on convertible debt, the equity in earnings or losses of unconsolidated entities (except Frontline PCB Solutions Limited Partnership (Frontline)), and the impact on basic and diluted earnings per share of changes in the calculated redemption value of noncontrolling interests, which management does not consider reflective of our core operating business.

Management excludes from our non-GAAP measures certain recurring items to facilitate its review of the comparability of our core operating performance on a period-to-period basis because such items are not related to our ongoing core operating performance as viewed by management. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Management uses this view of our operating performance for purposes of comparison with our business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. More specifically, management adjusts for the excluded items for the following reasons:

  • Identified intangible assets consist primarily of purchased technology, backlog, trade names, and customer relationships. Amortization charges for our intangible assets can vary in frequency and amount due to the timing and magnitude of acquisition transactions. We consider our operating results without these charges when evaluating our core performance due to the variability. Generally, the most significant impact to inter-period comparability of our net income is in the first twelve months following an acquisition.
  • Special charges may consist of restructuring costs incurred for employee terminations, including severance and benefits, driven by modifications of business strategy or business emphasis, as well as expenses incurred related to certain litigation, potential acquisitions, excess facility costs, and asset-related charges. Special charges are incurred based on the particular facts and circumstances of acquisition and restructuring decisions and can vary in size and frequency. These charges are excluded as they are not ordinarily included in our annual operating plan and related budget due to the unpredictability of economic trends and the rapidly changing technology and competitive environment in our industry. We therefore exclude them when evaluating our managers' performance internally.
  • Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options and restricted stock units, and purchases made as a result of the employee stock purchase plan. We do not consider equity plan-related compensation expense in evaluating our managers’ performance internally or our core operations in any given period.
  • Interest expense attributable to amortization of the original issuance debt discount on convertible debt is excluded. Management does not consider this charge as a part of our core operating performance. We do not consider the amortization of the original issuance debt discount on convertible debt to be a direct cost of operations.
  • Equity in earnings or losses of unconsolidated entities represents our equity in the net income (loss) of common stock investments accounted for under the equity method. The carrying amounts of our investments are adjusted for our share of earnings or losses of the investee. We report our equity in the earnings or losses of investments in other income (expense), net (with the exception of our investment in Frontline as discussed below). The amounts are excluded from our non-GAAP results as we do not control the results of operations for the investments and we do not participate in regular and periodic operating activities; therefore, management does not consider these investments as a part of our core operating performance.
  • The Company maintains a 50% interest in Frontline, a joint venture. We report our equity in the earnings or losses of Frontline within operating income. Although we do not exert control, we actively participate in regular and periodic activities such as budgeting, business planning, marketing and direction of research and development projects. Accordingly, we do not exclude our share of Frontline’s earnings or losses from our non-GAAP results as management considers the joint venture to be core to our operating 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 jurisdictions in which we operate. This non-GAAP tax rate eliminates the effects of non-recurring and period specific items which are often attributable to acquisition decisions and can vary in size and frequency and considers our U.S. loss carryforwards that have not been previously benefited. This 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 nine months ended October 31, 2013 is 4% after consideration of period specific items. Without period specific items of $(4.6) million, our GAAP tax rate is 13%. Our full fiscal year 2014 GAAP tax rate, inclusive of period specific items, is projected to be 9%. The GAAP tax rate considers certain mandatory and other non-scalable tax costs which may adversely or beneficially affect our tax rate depending upon our level of profitability in various jurisdictions.
  • Our agreement with the owners of noncontrolling interests in one of our subsidiaries gives them a right to require us to purchase their interests at a future date for a price based on a formula defined in the agreement. Under GAAP, increases (or decreases to the extent they offset previous increases) in the calculated redemption value of the noncontrolling interests are recorded directly to retained earnings and therefore do not affect net income. However, as required by GAAP, these amounts are applied to increase or decrease the numerator in the calculation of basic and diluted earnings per share. Management does not consider fluctuations in the calculated redemption value of noncontrolling interests to be relevant to our core operating performance.

In certain instances our GAAP results of operations may not be profitable when our corresponding non-GAAP results are profitable or vice versa. The number of shares on which our non-GAAP earnings per share is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares in a loss situation.

Non-GAAP gross profit, operating income, operating margin, net income, and earnings per share are supplemental measures of our performance that are not presented in accordance with GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We present non-GAAP gross profit, operating income, operating margin, net income, and earnings per share because we consider them to be important supplemental measures of our operating performance and profitability trends, and because we believe they give investors useful information on period-to-period performance as evaluated by management. Non-GAAP net income also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. Non-GAAP net income has limitations as an analytical tool, and therefore should not be considered 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 are:

  • Amortization of intangible assets 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 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 evaluate our business to determine whether any operations should be eliminated or curtailed and engage in acquisition and assimilation activities as part of our ongoing business. We therefore will continue to experience special charges on a regular basis. These costs also directly impact our available funds.
  • Our stock incentive and stock purchase plans are important components of our incentive compensation arrangements and will be reflected as expenses in our GAAP results.
  • Our income tax expense 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. In addition, if we have a GAAP loss and non-GAAP net income, our non-GAAP results will not reflect any projected GAAP tax benefits. Similarly, in the event we were to have GAAP net income and a non-GAAP loss, our GAAP tax expense would be replaced by a credit in our non-GAAP presentation.
  • Other companies, including other companies in our industry, calculate non-GAAP net income differently than we do, limiting its usefulness as a comparative measure.

About Mentor Graphics

Mentor Graphics Corporation 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 electronic, semiconductor and systems companies. Established in 1981, the company reported revenues in the last fiscal year of nearly $1,090 million. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/.

(Mentor Graphics, Mentor and Veloce are registered trademarks and iSolve and FloEFD are trademarks of Mentor Graphics Corporation. All other company and/or product names are the trademarks and/or registered 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 the Securities Exchange Act of 1934. 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) weakness in the United States or international economies, and the potential adverse impact on the semiconductor and electronics industries; (ii) the company’s ability to successfully offer products and services that compete in the highly competitive EDA industry, including the risk of obsolescence for our hardware products; (iii) product bundling or 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) effects of the volatility of foreign currency fluctuations on the company’s business and operating results; (v) litigation; (vi) changes in accounting or reporting rules or interpretations; (vii) the impact of tax audits by the IRS or other taxing authorities, or changes in the tax laws, regulations or enforcement practices where the company does business; (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 which 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 CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except earnings per share data)
           
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
Revenues:
System and software $ 170,835 $ 166,301 $ 444,322 $ 455,614
Service and support   104,807     102,459     311,051     301,875  
Total revenues   275,642     268,760     755,373     757,489  
Cost of revenues: (1)
System and software 15,947 19,214 40,082 49,296
Service and support 29,396 29,290 88,380 86,834
Amortization of purchased technology   729     1,759     2,648     6,092  
Total cost of revenues   46,072     50,263     131,110     142,222  
Gross profit   229,570     218,497     624,263     615,267  
Operating expenses:
Research and development (2) 86,799 76,214 246,823 220,211
Marketing and selling (3) 85,746 84,673 244,664 243,493
General and administrationa (4) 18,917 16,965 52,452 51,702
Equity in earnings of Frontline (5) (1,392 ) (381 ) (2,739 ) (1,630 )
Amortization of intangible assets (6) 1,440 1,242 4,650 4,547
Special chargesa (7)   4,688     1,975     12,570     6,406  
Total operating expenses   196,198     180,688     558,420     524,729  
Operating income 33,372 37,809 65,843 90,538
Other income (expense), net (8) 352 57 (879 ) (239 )
Interest expense (9)   (4,967 )   (4,652 )   (14,649 )   (13,983 )
Income before income tax 28,757 33,214 50,315 76,316
Income tax expense (benefit) (10)   3,634     1,148     1,864     (835 )
Net income 25,123 32,066 48,451 77,151
Less: Income (loss) attributable to noncontrolling interest (11)   (412 )   1,425     (1,271 )   161  
Net income attributable to Mentor Graphics
shareholders $ 25,535   $ 30,641   $ 49,722   $ 76,990  
Net income per share attributable to Mentor Graphics
shareholders:
Basicb $ 0.21   $ 0.27   $ 0.40   $ 0.70  
Dilutedb $ 0.20   $ 0.27   $ 0.39   $ 0.68  
Weighted average number of shares outstanding:
Basic   113,986     111,575     113,232     110,454  
Diluted   117,078     114,721     116,395     113,584  
 
aCertain litigation costs have been reclassified from general and administration to special charges within operating expenses for the three and nine months ended October 31, 2012. These reclassifications were made to conform to the current period presentation. This reclassification had no impact on GAAP operating expense, operating income or net income for the three and nine months ended October 31, 2012. Additional discussion regarding the reclassification will be provided in our Quarterly Report on Form 10-Q for the quarter ended October 31, 2013.
 
bWe have decreased the numerator of our basic and diluted earnings per share calculation by $2,032 for the three months ended October 31, 2013 and by $3,913 for the nine months ended October 31, 2013 for the adjustment to increase the noncontrolling interest with redemption feature to its calculated redemption value at October 31, 2013, recorded directly to retained earnings. For the three and nine months ended October 31, 2012, we excluded a similar adjustment for the calculation of basic and diluted earnings per share, as the amount was not significant.
 
     

MENTOR GRAPHICS CORPORATION

FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands)
   
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 October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
(1) Cost of revenues:
Equity plan-related compensation $ 520 $ 393 $ 1,438 $ 1,080
Amortization of purchased technology   729     1,759     2,648     6,092  
$ 1,249   $ 2,152   $ 4,086   $ 7,172  
 
(2) Research and development:
Equity plan-related compensation $ 2,865   $ 2,272   $ 8,018   $ 6,604  
 
(3) Marketing and selling:
Equity plan-related compensation $ 1,998   $ 1,644   $ 5,651   $ 4,818  
 
(4) General and administration:
Equity plan-related compensation $ 2,043   $ 1,400   $ 6,162   $ 4,660  
 
(5) Equity in earnings of Frontline:

Amortization of purchased technology and other identified intangible assets

$ 231   $ 1,242   $ 1,199   $ 3,726  
 
(6) Amortization of intangible assets:
Amortization of other identified intangible assets $ 1,440   $ 1,242   $ 4,650   $ 4,547  
 
(7) Special charges:
Certain litigation, rebalance, and other costs $ 4,688   $ 1,975   $ 12,570   $ 6,406  
 
(8) Other income (expense), net:
Net income of unconsolidated entities $ (33 ) $ (38 ) $ (126 ) $ (110 )
 
(9) Interest expense:
Amortization of original issuance debt discount $ 1,441   $ 1,342   $ 4,248   $ 3,955  
 
(10) Income tax expense (benefit):
Non-GAAP income tax effects $ (3,961 ) $ (6,748 ) $ (14,587 ) $ (20,911 )
 
(11) Income (loss) attributable to noncontrolling interest:

Amortization of intangible assets, equity-plan related compensation, and income tax effects

$ (206 ) $ 96   $ (768 ) $ (506 )
 
 

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS

(In thousands, except earnings per share data)
         
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP net income attributable to Mentor Graphics shareholders $ 25,535 $ 30,641 $ 49,722 $ 76,990
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues 520 393 1,438 1,080
Research and development 2,865 2,272 8,018 6,604
Marketing and selling 1,998 1,644 5,651 4,818
General and administration 2,043 1,400 6,162 4,660
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2) 729 1,759 2,648 6,092
Frontline purchased technology and intangible assets (3) 231 1,242 1,199 3,726
Amortization of intangible assets (4) 1,440 1,242 4,650 4,547
Special chargesa (5) 4,688 1,975 12,570 6,406
Other income (expense), net (6) (33 ) (38 ) (126 ) (110 )
Interest expense (7) 1,441 1,342 4,248 3,955
Non-GAAP income tax effects (8) (3,961 ) (6,748 ) (14,587 ) (20,911 )
Noncontrolling interest (9)   (206 )   96     (768 )   (506 )
Total of non-GAAP adjustments   11,755     6,579     31,103     20,361  
Non-GAAP net income attributable to Mentor Graphics shareholders $ 37,290   $ 37,220   $ 80,825   $ 97,351  
 
GAAP and Non-GAAP weighted average shares (diluted)   117,078     114,721     116,395     113,584  
 
Net income per share attributable to Mentor Graphics shareholders:
GAAP (diluted) $ 0.20 $ 0.27 $ 0.39 $ 0.68
Noncontrolling interest adjustment (10) 0.02 - 0.03 -
Non-GAAP adjustments detailed above   0.10     0.05     0.27     0.18  
Non-GAAP (diluted) $ 0.32   $ 0.32   $ 0.69   $ 0.86  
 

aSee footnote a on last table for a discussion of the reclassification of certain litigation costs to Special charges.

                       
(1) Equity plan-related compensation expense is the fair value of all share-based payments to employees for stock options and restricted stock units, and purchases made as a result of the employee stock purchase plans.
(2) Amount represents amortization of purchased technology resulting from acquisitions. Purchased intangible assets are amortized over two to five years.
(3) Amount represents amortization of purchased technology and other identified intangible assets identified as part of the fair value of the Frontline P.C.B. Solutions Limited Partnership (Frontline) joint venture investment. Mentor Graphics has a 50% interest in Frontline. The purchased technology was amortized over three years from the March 2010 acquisition date, other identified intangible assets will be amortized over three to four years, and are reflected in the income statement in the equity in earnings of Frontline. This expense is the same type as being adjusted for in note (2) above and (4) below.
(4) Other identified intangible assets are amortized to other operating expense over two to five years. Other identified intangible assets include trade names, customer relationships, and backlog which are the result of acquisition transactions.
(5) Three months ended October 31, 2013: Special charges consist of (i) $ 3,046 for EVE litigation costs, (ii) $1,133 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, and (iii) $509 in other adjustments.
Three months ended October 31, 2012: Special charges consist of (i) $829 for EVE litigation costs, (ii) $612 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, and (iii) $534 in other adjustments.
Nine months ended October 31, 2013: Special charges consist of (i) $8,217 for EVE litigation costs, (ii) $3,843 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, and (iii) $510 in other adjustments.
Nine months ended October 31, 2012: Special charges consist of (i) $2,629 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $2,606 for EVE litigation costs, and (iii) $1,171 in other adjustments.
(6) Income from investment accounted for under the equity method of accounting.
(7) Amortization of original issuance debt discount.
(8) Non-GAAP income tax expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-GAAP pre-tax income.
(9) Adjustment for the impact of amortization of intangible assets, equity plan-related compensation, and income tax expense on noncontrolling interest.
(10) Non-GAAP EPS excludes from the numerator of our earnings per share calculation the adjustment of the noncontrolling interest to the calculated redemption value, recorded directly to retained earnings.
 
 

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES

(In thousands, except percentages)
         
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP gross profit $ 229,570 $ 218,497 $ 624,263 $ 615,267
Reconciling items to non-GAAP gross profit:
Equity plan-related compensation 520 393 1,438 1,080
Amortization of purchased technology   729     1,759     2,648     6,092  
Non-GAAP gross profit $ 230,819   $ 220,649   $ 628,349   $ 622,439  
 
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP gross profit as a percent of total revenues 83.3 % 81.3 % 82.6 % 81.2 %
Non-GAAP adjustments detailed above   0.4 %   0.8 %   0.6 %   1.0 %
Non-GAAP gross profit as a percent of total revenues   83.7 %   82.1 %   83.2 %   82.2 %
 
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP operating expenses $ 196,198 $ 180,688 $ 558,420 $ 524,729
Reconciling items to non-GAAP operating expenses:
Equity plan-related compensation (6,906 ) (5,316 ) (19,831 ) (16,082 )
Amortization of Frontline purchased technology and other identified intangible assets
(231 ) (1,242 ) (1,199 ) (3,726 )
Amortization of other identified intangible assets (1,440 ) (1,242 ) (4,650 ) (4,547 )
Special chargesa   (4,688 )   (1,975 )   (12,570 )   (6,406 )
Non-GAAP operating expenses $ 182,933   $ 170,913   $ 520,170   $ 493,968  
 
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP operating income $ 33,372 $ 37,809 $ 65,843 $ 90,538
Reconciling items to non-GAAP operating income:
Equity plan-related compensation 7,426 5,709 21,269 17,162
Amortization of purchased technology 729 1,759 2,648 6,092
Amortization of Frontline purchased technology and other identified intangible assets
231 1,242 1,199 3,726
Amortization of other identified intangible assets 1,440 1,242 4,650 4,547
Special Chargesa   4,688     1,975     12,570     6,406  
Non-GAAP operating income $ 47,886   $ 49,736   $ 108,179   $ 128,471  
 
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP operating margin 12.1 % 14.1 % 8.7 % 12.0 %
Non-GAAP adjustments detailed above   5.3 %   4.4 %   5.6 %   5.0 %
Non-GAAP operating margin   17.4 %   18.5 %   14.3 %   17.0 %
 

 

Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
GAAP other expense, net and interest expense $ (4,615 ) $ (4,595 ) $ (15,528 ) $ (14,222 )
Reconciling items to non-GAAP other expense, net
and interest expense:
Equity in earnings of unconsolidated entities (33 ) (38 ) (126 ) (110 )
Amortization of original issuance debt discount   1,441     1,342     4,248     3,955  
Non-GAAP other expense, net and interest expense $ (3,207 ) $ (3,291 ) $ (11,406 ) $ (10,377 )
 

aSee footnote a on last table for a discussion of the reclassification of certain litigation costs to Special charges.

 
 

MENTOR GRAPHICS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)
 
 
October 31, January 31,
  2013   2013
 
Assets
Current assets:
Cash, cash equivalents and short-term investments $ 223,985 $ 223,783
Trade accounts receivable, net 124,240 178,351
Term receivables, short-term 244,763 233,894
Prepaid expenses and other 59,426 53,951
Deferred income taxes   9,286   14,973
 
Total current assets 661,700 704,952
Property, plant, and equipment, net 157,195 162,402
Term receivables, long-term 241,122 250,497
Goodwill and intangible assets, net 558,922 557,770
Other assets   71,870   69,663
 
Total assets $ 1,690,809 $ 1,745,284
 
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 1,896 $ 5,964
Accounts payable 14,104 20,906
Income taxes payable 5,615 9,180
Accrued payroll and related liabilities 70,732 101,354
Accrued and other liabilities 39,318 40,662
Deferred revenue   194,748   233,759
 
Total current liabilities 326,413 411,825
Long-term notes payable 222,794 218,546
Deferred revenue, long-term 16,102 17,755
Other long-term liabilities   44,670   50,981
Total liabilities   609,979   699,107
 
Noncontrolling interest with redemption feature 15,343 12,698
 
Stockholders' equity:
Common stock 815,839 810,902
Retained earnings 227,747 197,178
Accumulated other comprehensive income   21,901   25,399
Total stockholders' equity   1,065,487   1,033,479
 
Total liabilities and stockholders' equity $ 1,690,809 $ 1,745,284
 
 

MENTOR GRAPHICS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS AND SUPPLEMENTAL INFORMATION

(In thousands, except days sales outstanding)
         
 
Three Months Ended October 31, Nine Months Ended October 31,
  2013       2012     2013       2012  
Operating activities
Net income $ 25,123 $ 32,066 $ 48,451 $ 77,151
Depreciation and amortization 13,279 13,189 39,407 40,201
Other adjustments to reconcile:
Operating cash 5,702 4,117 23,106 14,310
Changes in working capital   (15,237 )   (30,887 )   (46,938 )   (78,790 )
 
Net cash provided by operating activities 28,867 18,485 64,026 52,872
 
Investing activities
Net cash used in investing activities (11,025 ) (13,534 ) (32,482 ) (37,520 )
 
Financing activities
Net cash provided by (used in) financing activities (8,182 ) 7,936 (34,135 ) (136 )
 
Effect of exchange rate changes on cash and cash equivalents   683     482     (1,285 )   (1,985 )
 
Net change in cash and cash equivalents 10,343 13,369 (3,876 ) 13,231
Cash and cash equivalents at beginning of period   209,564     146,361     223,783     146,499  
 
Cash and cash equivalents at end of period (a) $ 219,907   $ 159,730   $ 219,907   $ 159,730  
 
 
 
Other data:
Capital expenditures $ 7,545   $ 13,392   $ 21,366   $ 35,575  
Days sales outstanding   120     136  
 
 
(a) The condensed consolidated balance sheet at October 31, 2013 includes $4,078 of short-term investments in the "Cash, cash equivalents, and short-term investments" line item. $4,078 should be deducted from that line item to reconcile to the amount of "Cash and cash equivalents at end of period" presented in this statement for the three and nine months ended October 31, 2013.
 
 

MENTOR GRAPHICS CORPORATION

UNAUDITED SUPPLEMENTAL BOOKINGS AND REVENUE INFORMATION

(Rounded to nearest 5%)
   
2014 2013 2012
Product Category Bookings (a) Q1 Q2 Q3 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
IC DESIGN TO SILICON 60% 35% 40% 45% 35% 25% 30% 35% 30% 20% 25% 60% 40% 40%
SCALABLE VERIFICATION 15% 45% 25% 30% 15% 30% 20% 25% 25% 35% 30% 15% 35% 30%
INTEGRATED SYSTEMS DESIGN 10% 10% 20% 15% 25% 25% 25% 25% 25% 25% 25% 15% 15% 15%
NEW & EMERGING MARKETS 5% 5% 5% 5% 5% 10% 15% 5% 10% 5% 10% 5% 5% 5%
SERVICES / OTHER 10% 5% 10% 5% 20% 10% 10% 10% 10% 15% 10% 5% 5% 10%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 
2014 2013 2012
Product Category Revenue (b) Q1 Q2 Q3 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
IC DESIGN TO SILICON 35% 50% 35% 40% 40% 35% 25% 35% 35% 40% 25% 40% 45% 40%
SCALABLE VERIFICATION 20% 20% 25% 20% 25% 25% 30% 30% 25% 25% 30% 25% 25% 25%
INTEGRATED SYSTEMS DESIGN 30% 20% 25% 25% 20% 25% 25% 20% 25% 20% 25% 25% 20% 20%
NEW & EMERGING MARKETS 5% 5% 5% 5% 5% 5% 10% 5% 5% 5% 10% 5% 5% 5%
SERVICES / OTHER 10% 5% 10% 10% 10% 10% 10% 10% 10% 10% 10% 5% 5% 10%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 
 
2014 2013 2012
Bookings by Geography Q1 Q2 Q3 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
North America 35% 55% 60% 50% 35% 40% 50% 35% 40% 45% 45% 40% 50% 45%
Europe 10% 15% 15% 15% 20% 35% 20% 30% 25% 20% 30% 15% 25% 20%
Japan 10% 5% 5% 5% 10% 5% 5% 10% 10% 15% 5% 5% 10% 10%
Pac Rim 45% 25% 20% 30% 35% 20% 25% 25% 25% 20% 20% 40% 15% 25%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 
2014 2013 2012
Revenue by Geography Q1 Q2 Q3 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
North America 45% 40% 50% 40% 50% 45% 50% 40% 45% 40% 50% 45% 35% 40%
Europe 20% 20% 20% 20% 20% 20% 20% 30% 25% 25% 20% 25% 25% 25%
Japan 10% 5% 10% 10% 10% 15% 10% 10% 10% 15% 10% 10% 5% 10%
Pac Rim 25% 35% 20% 30% 20% 20% 20% 20% 20% 20% 20% 20% 35% 25%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 
 
2014 2013 2012
Bookings by Business Model (c) Q1 Q2 Q3 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Perpetual 15% 50% 20% 30% 25% 20% 20% 15% 20% 40% 20% 15% 25% 20%
Term Ratable 10% 5% 5% 10% 25% 15% 10% 5% 10% 20% 10% 5% 5% 10%
Term Up Front 75% 45% 75% 60% 50% 65% 70% 80% 70% 40% 70% 80% 70% 70%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 
 
2014 2013 2012
Revenue by Business Model (c) Q1 Q2 Q3 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Perpetual 20% 25% 20% 20% 20% 25% 25% 15% 20% 30% 25% 15% 15% 20%
Term Ratable 10% 10% 5% 10% 10% 10% 10% 5% 10% 10% 10% 10% 5% 10%
Term Up Front 70% 65% 75% 70% 70% 65% 65% 80% 70% 60% 65% 75% 80% 70%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 
 
(a) Product Category Bookings excludes support bookings for all sub-flow categories.
(b) Product Category Revenue includes support revenue for each sub-flow category as appropriate.
(c) Bookings and Revenue by Business Model are System and Software only (excludes finance fee).
 
   

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP

EARNINGS PER SHARE

 
The following table reconciles management's estimates of the specific items excluded from GAAP in the calculation of estimated non-GAAP net income per share for Q4'14 and fiscal year 2014.
 
 
Estimated Estimated
Q4'14 FY'14
Diluted GAAP net income per share $ 0.85 $ 1.26
Non-GAAP Adjustments:
Amortization of purchased intangible assets (1) 0.01 0.03
Amortization of other identified intangible assets (2) 0.02 0.06
Equity plan-related compensation (3) 0.07 0.25
Other income (expense), net and interest expense (4) 0.01 0.05
Non-GAAP income tax effects (5) (0.06 ) (0.19 )
Non-controlling interest (6) - (0.01 )
Special Charges (7) - 0.11
Other (8)   -     0.03  
Non-GAAP net income per share $ 0.90   $ 1.59  
             
 
(1) Excludes amortization of purchased intangible assets resulting from acquisitions. Purchased intangible assets are amortized over two to five years.
(2) Excludes amortization of other identified intangible assets including trade names, customer relationships, and backlog resulting from acquisition transactions. Other identified intangible assets are amortized over two to five years. This line item also excludes amortization of purchased intangible assets identified as part of the fair value of the Frontline P.C.B. Solutions Limited Partnership investment. The purchased technology will be amortized over three years and other identified intangible assets will be amortized over three to four years.
(3) Excludes equity plan-related compensation expense for the fair value of all share-based payments to employees for stock options and restricted stock units, and purchases made as a result of the employee stock purchase plans.
(4) Excludes income from an investment accounted for under the equity method of accounting, and amortization of original issuance debt discount.
(5) Non-GAAP income tax expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-GAAP pre-tax income.
(6) Adjustment for the impact of amortization of intangible assets, equity plan-related compensation, and income tax expense on noncontrolling interest.
(7) Excludes special charges consisting primarily of costs incurred for certain litigation costs, employee rebalances (which includes severance benefits, notice pay and outplacement services), facility closures, and acquisition costs. Full year adjustment represents impact of actual special charges for the nine months ended October 31, 2013, as we do not provide guidance for special charges.
(8) Excludes the adjustment to the calculated redemption value of the noncontrolling interest, recorded directly to retained earnings. Full year adjustment represents the impact of the adjustment to the redemption value as of October 31, 2013, as we do not provide guidance for this adjustment.

Contact:
Mentor Graphics Corporation
Joe Reinhart, 503-685-1462
joe_reinhart@mentor.com

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