8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): January 27, 2005

MAGMA DESIGN AUTOMATION, INC.

(Exact name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of incorporation)

000-33213	77-0454924
(Commission File Number)	(I.R.S. Employer Identification Number)

5460 Bayfront Plaza, Santa Clara, California	95054
(Address of principal executive offices)	(Zip Code)

(408) 565-7500

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On January 27, 2005, Magma Design Automation, Inc. (“Magma”) issued a press release reporting its financial results for the three months ended December 31, 2004. The press release includes Magma’s balance sheet as of December 31, 2004, a presentation of Magma’s historical statement of operations prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and a presentation prepared on an adjusted pro forma basis (including non-GAAP financial measures). It also includes Magma’s projected earnings per share on a GAAP and an adjusted pro forma basis. Magma’s pro forma adjustments to GAAP results exclude the effects of non-cash amortization of developed technology, amortization of intangibles, in-process research and development charges, non-cash amortization of deferred stock-based compensation, miscellaneous restructuring and marketing expenses, charges associated with impairment of investments and the tax effects of pro forma adjustments. The impact of these adjustments is quantified in the reconciliation tables included with the press release, which is furnished as Exhibit 99.1 and incorporated by reference herein.

Magma has provided its pro forma financial information in order to enhance the user’s overall understanding of Magma’s financial performance and prospects. Magma believes that this pro forma information provides useful information to investors by excluding the effect of expenses that are required to be recorded under GAAP that Magma does not believe are indicative of Magma’s core operating results. In addition, because Magma has historically provided pro forma results to the investment community, Magma believes that including this information provides consistency in its financial reporting. However, these pro forma results should be considered supplemental to, and not a substitute for or superior to, Magma’s results prepared in accordance with GAAP, which are included in its press release.

Item 9.01. Financial Statements and Exhibits.

(c) Exhibits.

The following exhibit is furnished herewith:

Exhibit No.	Description
99.1	Press Release issued January 27, 2005.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	MAGMA DESIGN AUTOMATION, INC.
Dated: January 27, 2005	By:	/s/    GREGORY C. WALKER
		Gregory C. Walker
		Senior Vice President- Finance and
		Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release issued January 27, 2005.

EX-99.1

Exhibit 99.1

News Release

CONTACTS:

Magma Design Automation Inc.

Milan G. Lazich

Vice President, Corporate Marketing

(408) 565-7706

milan.lazich@magma-da.com

Magma Reports Record Revenue and EPS for Third Quarter

Revenue of $37.3 million and Pro Forma EPS of $0.20

SANTA CLARA, Calif., Jan. 27, 2005 — Magma Design Automation Inc. (Nasdaq: LAVA), a provider of chip design solutions, today announced financial results for its fiscal 2005 third quarter, ended Dec. 31, 2004.

Magma reported record revenue of $37.3 million for the quarter, compared to $31.1 million for the quarter ended Dec. 31, 2003, an increase of 20 percent.

In accordance with generally accepted accounting principles (GAAP), Magma reported a net loss for the quarter of $(0.7) million, or $(0.02) per share (basic and diluted), compared to net income of $3.8 million, or $0.09 per share (diluted), for the quarter ended Dec. 31, 2003. Magma also reported record pro forma net income of $8.4 million and record pro forma earnings per share (EPS) of $0.20 (diluted) for the third quarter of fiscal 2005, compared to pro forma net income of $6.9 million and pro forma EPS of $0.16 (diluted) for the third quarter of fiscal 2004, an increase of 22 percent. Pro forma net income excludes amortization of developed technology, miscellaneous restructuring and marketing expenses, amortization of intangibles, amortization of deferred stock compensation, impairment of investment, in-process research and development charges and tax effects of pro forma adjustments.

For the nine-month period ended Dec. 31, 2004, Magma reported revenue of $110.3 million, compared to $79.7 million for the nine-month period ended Dec. 31, 2003, an increase of 38 percent. In

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Magma Reports Record Revenue and EPS for Third Quarter Page  2

accordance with GAAP, Magma reported net loss for the recently completed nine-month period of $(3.0) million, or $(0.09) per share (basic and diluted), compared to net income of $7.2 million, or $0.18 per share (diluted), for the nine-month period ended Dec. 31, 2003. Magma reported pro forma net income of $23.7 million, or $0.56 per share (diluted), for the nine-month period ended Dec. 31, 2004. This compares to pro forma net income of $18.1 million, or $0.44 per share (diluted), for the nine-month period ended Dec. 31, 2003, an increase of 31 percent.

Magma provides pro forma financial information to assist investors in understanding the company’s operating results and business trends. Pro forma financial data is not prepared in accordance with GAAP, and should not be viewed as an alternative to GAAP financial information. Our pro forma financial data may be materially different from pro forma measures used by other companies.

A reconciliation of our pro forma financial information to the most closely comparable GAAP financial measures is included in this press release.

“Our third quarter continued Magma’s growth in revenue for the ninth consecutive quarter,” said Rajeev Madhavan, chairman and CEO of Magma. “During the next several quarters we expect to announce new products that will further enhance our leadership over our competitors and enable us to continue that growth.”

Business Outlook

Magma’s performance in terms of orders, revenue and EPS in its quarter ended Dec. 31, 2004 was within the target ranges established during Magma’s Oct. 28, 2004 earnings call. For Magma’s fiscal 2005 fourth quarter, ending March 31, 2005, the company expects total revenue in the range of $39 million to $42 million, pro forma EPS in the range of $0.18 to $0.22 and GAAP EPS in the range of $0.00 to $0.04. A schedule showing a reconciliation of the pro forma business outlook to GAAP outlook is included in this release.

Consistent with company practice of providing financial guidance at the time of each quarterly earnings announcement, Chief Financial Officer Greg Walker will discuss Magma’s business outlook during the company’s live earnings call at 1:30 p.m. PST today. More detailed information on the company’s business outlook is available in the “Financial Disclosure Supplement” document available in the Investor Relations section of the Magma website at http://investor.magma-da.com/home.cfm.

The business outlook targets set forth in this press release and on Magma’s website represent the company’s expectations only as of the date of publication and should not be viewed as a statement about Magma’s expectations after this date. Although this information will remain available on Magma’s website for reference purposes, its continued availability does not indicate that the company is reaffirming or confirming its continued validity. By publishing this guidance, Magma has not assumed any additional obligation to update this information on any date after its publication today.

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Magma Reports Record Revenue and EPS for Third Quarter Page  3

Conference Call

Magma will discuss the financial results for the recently completed quarter, including guidance going forward, during a live earnings call today at 1:30 p.m. PST (4:30 p.m. EST). The call will be available live by both webcast and telephone. To listen live via webcast, visit the Investor Relations section of Magma’s website at http://investor.magma-da.com/home.cfm. To listen live via telephone, call either of the numbers below:

U.S. & Canada:            (800) 661-8947, conference ID #3274289

Elsewhere:                    (706) 634-2358, conference ID #3274289

Following completion of the call, a webcast replay of the call will be available at http://investor.magma-da.com/home.cfm through Feb. 3, 2005. Those without Internet access may listen to a replay of the call by telephone through Feb. 3 by calling:

U.S. & Canada:            (800) 642-1687, conference ID #3274289

Elsewhere:                    (706) 645-9291, conference ID #3274289

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which include statements in the “Business Outlook” section and quotations from Magma’s executives, are subject to risks and uncertainties that could cause actual results to differ materially from Magma’s current expectations. Factors that could cause or contribute to such differences include, but are not limited to: increasing competition in the EDA market; higher-than-anticipated costs in connection with recent patent litigation with Synopsys; Magma’s ability to successfully integrate recently acquired businesses and technologies; the impact of economic slowdown in our customers’ markets; any delay of customer orders or failure of customers to renew licenses; weaker-than-anticipated sales of the company’s products and services; difficulties managing the company’s expanding operations; the ability to continue to deliver competitive products to customers to help them get their products to market; and changes in accounting rules. Further discussion of these and other potential risk factors may be found in Magma’s public filings with the Securities and Exchange Commission (www.sec.gov). Magma undertakes no additional obligation to update these forward-looking statements.

About Magma

Magma provides leading software for designing highly complex integrated circuits while maximizing Quality of Results with respect to area, timing and power, and at the same time reducing overall design

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Magma Reports Record Revenue and EPS for Third Quarter Page  4

cycles and costs. Magma provides a complete RTL-to-GDSII design flow that includes prototyping, synthesis, place & route, and signal and power integrity chip design capabilities in a single executable, offering “The Fastest Path from RTL to Silicon”^™. Magma’s software also includes products for advanced physical synthesis and architecture development tools for programmable logic devices (PLDs); capacitance extraction; and characterization and modeling. The company’s stock trades on Nasdaq under the ticker symbol LAVA. Visit Magma Design Automation on the Web at www.magma-da.com.

Magma is a registered trademark, and “The Fastest Path from RTL to Silicon” is a trademark, of Magma Design Automation. All other product and company names are trademarks and registered trademarks of their respective companies.

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Magma Reports Record Revenue and EPS for Third Quarter Page  5

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	December 31, 2004			March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	28,201		$	72,684
Restricted cash		4,044			2,662
Short-term investments		8,994			—
Accounts receivable, net		31,761			34,237
Prepaid expenses and other current assets		7,457			9,588
Total current assets		80,457			119,171
Property and equipment, net		22,169			15,196
Intangibles, net		75,132			62,793
Goodwill		41,500			33,529
Long-term investments		88,793			78,158
Other assets		6,941			5,628
Total assets	$	314,992		$	314,475
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,979		$	1,658
Accrued expenses		19,941			19,132
Deferred revenue, current		18,982			19,947
Total current liabilities		40,902			40,737
Convertible subordinated notes		150,000			150,000
Deferred tax liabilities		—			5,102
Other long-term liabilities		2,047			897
Total non-current liabilities		152,047			155,999
Total liabilities		192,949			196,736
Stockholders’ equity:
Common stock		3			3
Additional paid-in capital		235,122			226,586
Deferred stock-based compensation		(692	)		(718	)
Accumulated deficit		(110,030	)		(107,063	)
Accumulated other comprehensive loss		(2,360	)		(1,069	)
Total stockholders’ equity		122,043			117,739
Total liabilities and stockholders’ equity	$	314,992		$	314,475

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Magma Reports Record Revenue and EPS for Third Quarter Page  6

MAGMA DESIGN AUTOMATION, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

IMPACT OF PRO FORMA ADJUSTMENTS ON REPORTED NET INCOME

(in thousands, except per share data)

(Unaudited)

	For the Three Months Ended December 31, 2004										For the Three Months Ended December 31, 2003
	As Reported			Adjustments				As Adjusted			As Reported			Adjustments				As Adjusted
Revenue:
Licenses	$	31,663		$	—			$	31,663		$	27,472		$	—			$	27,472
Services		5,643			—				5,643			3,580			—				3,580
Total revenue		37,306			—				37,306			31,052							31,052
Cost of revenue		5,579			(1,623	)	A,D		3,956			4,741			(1,029	)	A,D		3,712
Gross profit		31,727			1,623				33,350			26,311			1,029				27,340
Operating expenses:
Research and development		10,223			(1,161	)	C,D		9,062			7,510			(157	)	C,D		7,353
In-process research and development		355			(355	)	F		—			200			(200	)	F		—
Sales and marketing		11,043			236		B		11,279			10,038							10,038
General and administrative		4,576							4,576			2,961							2,961
Amortization of intangible assets		4,680			(4,680	)	C		—			584			(584	)	C		—
Amortization of stock-based compensation		362			(362	)	D		—			923			(923	)	D		—
Restructuring charge		259			(259	)	B		—			—							—
Total operating expenses		31,498			(6,581	)			24,917			22,216			(1,864	)			20,352
Operating income		229			8,204				8,433			4,095			2,893				6,988
Interest and other income, net:
Interest income		551							551			691							691
Interest expense		(249	)						(249	)		(404	)						(404	)
Other income, net		473			352		E		825			379			278		E		657
Interest and other income, net		775			352				1,127			666			278				944
Income before income taxes		1,004			8,556				9,560			4,761			3,171				7,932
Income tax provision		(1,723	)		566		G		(1,157	)		(1,000	)						(1,000	)
Net income (loss)	$	(719	)	$	9,122			$	8,403		$	3,761		$	3,171			$	6,932
Earnings (net loss) per share – basic	$	(0.02	)					$	0.25		$	0.12						$	0.22
Earnings (net loss) per share – diluted	$	(0.02	)					$	0.20		$	0.09						$	0.16
Shares used in calculation:
Basic		33,829							33,829			32,184							32,184
Diluted		33,829							41,749			42,035							42,035

A Amortization of developed technology

B Miscellaneous restructuring and marketing expenses

C Amortization of intangibles

D Amortization of deferred stock-based compensation

E Impairment of investments

F In-process research and development charges

G Tax effect of pro forma adjustments

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Magma Reports Record Revenue and EPS for Third Quarter Page  7

MAGMA DESIGN AUTOMATION, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

IMPACT OF PRO FORMA ADJUSTMENTS ON REPORTED NET INCOME

(in thousands, except per share data)

(Unaudited)

	For the Nine Months Ended December 31, 2004										For the Nine Months Ended December 31, 2003
	As Reported			Adjustments				As Adjusted			As Reported			Adjustments				As Adjusted
Revenue:
Licenses	$	93,830		$	—			$	93,830		$	70,826		$	—			$	70,826
Services		16,433			—				16,433			8,856			—				8,856
Total revenue		110,263			—				110,263			79,682							79,682
Cost of revenue		16,131			(4,367	)	A,D		11,764			11,879			(1,917	)	A,D		9,962
Gross profit		94,132			4,367				98,499			67,803			1,917				69,720
Operating expenses:
Research and development		30,316			(2,843	)	C,D		27,473			18,537			(358	)	C,D		18,179
In-process research and development		4,364			(4,364	)	F		—			200			(200	)	F		—
Sales and marketing		33,989			(108	)	B		33,881			25,441							25,441
General and administrative		11,656							11,656			7,798							7,798
Amortization of intangible assets		13,248			(13,248	)	C		—			584			(584	)	C		—
Amortization of stock-based compensation		936			(936	)	D		—			6,656			(6,656	)	D		—
Restructuring charge		698			(698	)	B		—			—							—
Total operating expenses		95,207			(22,197	)			73,010			59,216			(7,798	)			51,418
Operating income		(1,075	)		26,564				25,489			8,587			9,715				18,302
Interest and other income (expense):
Interest income		1,660							1,660			1,934							1,934
Interest expense		(746	)						(746	)		(727	)						(727	)
Other income (expense), net		(731	)		1,016		E		285			45			1,100		E		1,145
Interest and other income, net		183			1,016				1,199			1,252			1,100				2,352
Income before income taxes		(892	)		27,580				26,688			9,839			10,815				20,654
Income tax provision		(2,075	)		(867	)	G		(2,942	)		(2,590	)						(2,590	)
Net income (loss)	$	(2,967	)	$	26,713			$	23,746		$	7,249		$	10,815			$	18,064
Earnings (net loss) per share – basic	$	(0.09	)					$	0.70		$	0.23						$	0.57
Earnings (net loss) per share – diluted	$	(0.09	)					$	0.56		$	0.18						$	0.44
Shares used in calculation:
Basic		33,742							33,742			31,438							31,438
Diluted		33,742							42,317			41,075							41,075

A Amortization of developed technology

B Miscellaneous restructuring and marketing expenses

C Amortization of intangibles

D Amortization of deferred stock-based compensation

E Impairment of investments

F In-process research and development charges

G Tax effect of pro forma adjustments

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Magma Reports Record Revenue and EPS for Third Quarter Page  8

MAGMA DESIGN AUTOMATION, INC.

AS OF DECEMBER 31, 2004

IMPACT OF PRO FORMA ADJUSTMENTS ON FORWARD-LOOKING DILUTED NET INCOME

(LOSS) PER SHARE

(Unaudited)

	Quarter Ending March 31, 2005
GAAP diluted net income per share	$0.00 to $0.04
Amortization of intangibles	$0.01
Amortization of acquired technology	$0.16
Amortization of deferred stock compensation	$0.01
Pro Forma diluted net income per share	$0.18 to $0.22

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