10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________ 

FORM 10-Q

___________________________________________ 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2016

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 1-34795

 ___________________________________________ 

MENTOR GRAPHICS CORPORATION

(Exact name of registrant as specified in its charter)

___________________________________________ 

Oregon	93-0786033
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
8005 SW Boeckman Road, Wilsonville, Oregon	97070-7777
(Address of principal executive offices)	(Zip Code)

(503) 685-7000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former

fiscal year, if changed since last report)

___________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large Accelerated Filer	x	Accelerated Filer	¨
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock, no par value, outstanding as of August 26, 2016: 108,155,975

MENTOR GRAPHICS CORPORATION

Index to Form 10-Q

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended July 31, 2016 and 2015	5
	Condensed Consolidated Balance Sheets as of July 31, 2016 and January 31, 2016	6
	Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2016 and 2015	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
SIGNATURES		48

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Mentor Graphics Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended July 31,						Six months ended July 31,
	2016			2015			2016			2015
In thousands, except per share data
Revenues:
System and software	$	133,755		$	162,201		$	240,459		$	318,132
Service and support	120,589			118,861			241,524			235,073
Total revenues	254,344			281,062			481,983			553,205
Cost of revenues:
System and software	15,330			13,049			23,662			26,673
Service and support	32,513			31,420			65,261			64,989
Amortization of purchased technology	1,787			1,794			3,572			3,652
Total cost of revenues	49,630			46,263			92,495			95,314
Gross profit	204,714			234,799			389,488			457,891
Operating expenses:
Research and development	93,402			89,053			184,538			178,568
Marketing and selling	83,911			84,741			168,170			169,692
General and administration	19,227			18,670			36,762			36,633
Equity in earnings of Frontline	(1,041		)	(1,351		)	(1,677		)	(2,221		)
Amortization of intangible assets	1,520			2,234			3,074			4,453
Special charges	1,445			2,186			4,436			39,163
Total operating expenses	198,464			195,533			395,303			426,288
Operating income (loss):	6,250			39,266			(5,815		)	31,603
Other income	638			187			1,527			529
Interest expense	(5,690		)	(4,772		)	(9,828		)	(9,466		)
Income (loss) before income tax	1,198			34,681			(14,116		)	22,666
Income tax expense (benefit)	(2,239		)	4,071			(4,117		)	2,559
Net income (loss)	3,437			30,610			(9,999		)	20,107
Less: Loss attributable to noncontrolling interest	—			(602		)	—			(1,220		)
Net income (loss) attributable to Mentor Graphics shareholders	$	3,437		$	31,212		$	(9,999	)	$	21,327
Net income (loss) per share:
Basic	$	0.03		$	0.27		$	(0.09	)	$	0.18
Diluted	$	0.03		$	0.26		$	(0.09	)	$	0.18
Weighted average number of shares outstanding:
Basic	107,374			116,584			108,215			116,296
Diluted	109,874			119,368			108,215			118,986
Cash dividends declared per common share	$	0.055		$	0.055		$	0.110		$	0.110

See accompanying notes to unaudited condensed consolidated financial statements.

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Mentor Graphics Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three months ended July 31,						Six months ended July 31,
	2016			2015			2016			2015
In thousands
Net income (loss)	$	3,437		$	30,610		$	(9,999	)	$	20,107
Other comprehensive income (loss), net of tax:
Change in accumulated translation adjustment	(4,165		)	(4,777		)	4,321			(4,160		)
Change in unrealized gain (loss) on derivative instruments	(7		)	420			23			359
Change in pension liability	(28		)	(2		)	(25		)	(4		)
Other comprehensive income (loss)	(4,200		)	(4,359		)	4,319			(3,805		)
Comprehensive income (loss)	(763		)	26,251			(5,680		)	16,302
Less amounts attributable to the noncontrolling interest:
Net loss	—			(602		)	—			(1,220		)
Change in accumulated translation adjustment	—			(8		)	—			42
Comprehensive loss attributable to the noncontrolling interest	—			(610		)	—			(1,178		)
Comprehensive income (loss) attributable to Mentor Graphics shareholders	$	(763	)	$	26,861		$	(5,680	)	$	17,480

See accompanying notes to unaudited condensed consolidated financial statements.

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Mentor Graphics Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

As of	July 31, 2016			January 31, 2016
In thousands
Assets
Current assets:
Cash and cash equivalents	$	265,796		$	334,826
Trade accounts receivable, net of allowance for doubtful accounts of $3,207 as of July 31, 2016 and $3,826 as of January 31, 2016	384,392			493,209
Other receivables	18,115			23,120
Inventory	17,853			24,762
Prepaid expenses and other	39,591			22,550
Total current assets	725,747			898,467
Property, plant, and equipment, net of accumulated depreciation of $365,398 as of July 31, 2016 and $348,597 as of January 31, 2016	191,543			182,092
Term receivables	226,268			268,657
Goodwill	608,536			606,842
Intangible assets, net of accumulated amortization of $232,518 as of July 31, 2016 and $225,818 as of January 31, 2016	30,880			37,446
Other assets	76,443			70,860
Total assets	$	1,859,417		$	2,064,364
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings	$	4,752		$	33,449
Accounts payable	9,623			16,740
Income taxes payable	5,430			3,966
Accrued payroll and related liabilities	44,916			73,371
Accrued and other liabilities	34,461			37,059
Deferred revenue	232,440			258,725
Total current liabilities	331,622			423,310
Notes payable (Note 6)	244,029			240,076
Deferred revenue	31,509			18,303
Income tax liability	18,721			25,116
Other long-term liabilities	26,689			37,130
Total liabilities	652,570			743,935
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, no par value, 300,000 shares authorized as of July 31, 2016 and January 31, 2016; 108,141 shares issued and outstanding as of July 31, 2016 and 114,934 shares issued and outstanding as of January 31, 2016	712,367			818,683
Retained earnings	511,261			522,846
Accumulated other comprehensive loss	(16,781		)	(21,100		)
Total stockholders’ equity	1,206,847			1,320,429
Total liabilities and stockholders’ equity	$	1,859,417		$	2,064,364

See accompanying notes to unaudited condensed consolidated financial statements.

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Mentor Graphics Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended July 31,
	2016			2015
In thousands
Operating Cash Flows:
Net income (loss)	$	(9,999	)	$	20,107
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property, plant, and equipment	18,936			17,721
Amortization of intangible assets, debt costs and other	10,898			12,439
Stock-based compensation	22,427			20,864
Deferred income taxes	1,838			2,350
Changes in other long-term liabilities	(982		)	(1,874		)
Equity in income of unconsolidated entities, net of dividends received	868			740
Other	40			(713		)
Changes in operating assets and liabilities, net of effect of acquired businesses:
Trade accounts receivable, net	109,747			101,651
Prepaid expenses and other	(9,094		)	(6,302		)
Term receivables, long-term	42,781			35,138
Accounts payable and accrued liabilities	(39,529		)	(66,818		)
Income taxes receivable and payable	(4,418		)	(5,082		)
Deferred revenue	(14,007		)	(35,409		)
Net cash provided by operating activities	129,506			94,812
Investing Cash Flows:
Proceeds from sale of building	—			2,068
Purchases of property, plant, and equipment	(25,617		)	(17,036		)
Acquisitions of businesses and equity interests, net	(4,959		)	(7,200		)
Net cash used in investing activities	(30,576		)	(22,168		)
Financing Cash Flows:
Proceeds from issuance of common stock	17,312			19,347
Repurchase of common stock	(146,050		)	—
Payments related to tax withholding on vesting of share based awards	(5		)	(5		)
Dividends paid	(11,766		)	(12,772		)
Net decrease in short-term borrowing	(3,810		)	(6,232		)
Repayments of revolving credit facility	(25,000		)	—
Repayments of other borrowings	(1,489		)	(6,925		)
Net cash used in financing activities	(170,808		)	(6,587		)
Effect of exchange rate changes on cash and cash equivalents	2,848			(891		)
Net change in cash and cash equivalents	(69,030		)	65,166
Cash and cash equivalents at the beginning of the period	334,826			230,281
Cash and cash equivalents at the end of the period	$	265,796		$	295,447

See accompanying notes to unaudited condensed consolidated financial statements.

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Mentor Graphics Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

All numerical dollar and share references are in thousands, except for per share and conversion rate data.

1.General

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP) and reflect all material normal recurring adjustments. However, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the condensed consolidated financial statements include adjustments necessary for a fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Any changes in estimates will be reflected in the financial statements in future periods.

The condensed consolidated financial statements include our financial statements and those of our wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

2.Recent Accounting Pronouncements

Recently Adopted Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, as part of their simplification initiative to improve the accounting for share-based payments to employees. The new standard affects several aspects of the accounting for share-based payments. It requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement when awards vest or are exercised. Cash flows associated with excess tax benefits are no longer classified as cash flows from financing activities but will be classified as operating activities, consistent with other income tax cash flows. The standard also allows for additional employee tax withholding on the exercise or release of awards, without triggering liability classification of the award. Additionally, when we withhold shares for tax-withholding purposes and in-turn pay cash for taxes on behalf of an employee, the cash payment is classified as a financing activity in our statement of cash flows. Finally, the standard allows an accounting policy election for the treatment of forfeitures of stock based awards. Companies can elect to continue to estimate forfeitures expected to occur, or account for forfeitures as they occur. This standard is effective for us in the first quarter of fiscal year 2018, with early adoption permitted.

We early adopted the new standard effective February 1, 2016. The primary impact to our financial statements was the recognition of $48,605 in deferred tax assets associated with excess tax benefits offset by a valuation allowance of $38,425 and a cumulative-effect adjustment of $10,180 to retained earnings as of January 31, 2016. We have elected to continue to estimate forfeitures that are expected to occur when estimating the amount of compensation expense to record in each accounting period.

We have retrospectively applied to all periods presented in our statements of cash flows, the presentation of excess tax benefits and cash paid for employee taxes where shares were withheld. As a result of this election excess tax benefits will be reclassified from financing activities to operating activities and cash paid for shares withheld will be reclassified from operating activities to financing activities. The net impact on previously reported results is as follows:

Six months ended July 31, 2015	As originally reported			As Adjusted
Net cash provided by operations	$	94,807		$	94,812
Net cash used in financing activities	$	(6,582	)	$	(6,587	)

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. This standard eliminates the requirement for an acquirer to retrospectively account for adjustments made to provisional amounts recognized in a business combination. The standard requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the

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adjustments are identified. Changes in depreciation, amortization, and any other income effects resulting from the adjustments to provisional amounts, should be computed as of the acquisition date. The standard requires that an entity present separately, by line item, the amounts included in current-period earnings that would have been recorded in previous reporting periods, if the adjustments to provisional amounts had been recognized on the acquisition date. We adopted this standard beginning February 1, 2016. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40),Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer accounts for fees related to the software license element consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer accounts for the arrangement as a service contract. An arrangement would contain a software license element if both: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. We adopted this standard beginning February 1, 2016 on a prospective basis. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Issued Pronouncements not yet Adopted

Revenue Recognition

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients. This ASU amends narrow aspects of Topic 606 in ASU 2014-09, Revenue from Contracts with Customers, related to the assessment of collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. Practical expedients are provided in the ASU to simplify the transition to the new standard.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. This ASU clarifies guidance in ASU 2014-09, Revenue from Contracts with Customers related to identifying performance obligations and licensing implementation. This ASU is expected to: (i) reduce the cost and complexity of applying the guidance on identifying promised goods or services; (ii) improve guidance on criteria in assessing whether promises to transfer goods and services are separately identifiable; and (iii) improve the operability and understandability of the licensing implementation guidance.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers(Topic 606), Principal versus Agent Considerations. This ASU amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies that the analysis must determine whether the entity controls the specified goods or services before they are transferred to the customer.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to be entitled to in exchange for the transfer of goods and services to customers. This ASU requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU also requires qualitative and quantitative disclosure about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard permits one of two methods for adoption: (i) retrospectively to each prior reporting period presented, with the ability to utilize certain practical expedients; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, including additional disclosures. We have not yet selected a transition method.

We are evaluating the effect that each of these ASUs will have on our consolidated financial statements and related disclosures. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted beginning in the first quarter of fiscal year 2018.

Other

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU changes how companies measure and recognize credit losses for various financial assets. This ASU will require companies to use an expected credit loss model to recognize estimated credit losses expected to occur over the remaining life of the financial assets rather than the current incurred credit loss model methodology. This revised guidance is applicable to our trade and term receivables. We will be required to implement this guidance in the first quarter of

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fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases(Topic 842). This ASU requires a lessee to recognize in the statement of financial position a liability to make lease payments, and a right-of-use asset representing its right to use the underlying asset for the lease term. We will be required to implement this guidance in the first quarter of fiscal year 2020. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In September 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU provides guidance on management's responsibility in evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide related disclosures if required. Evaluation is required every reporting period, including interim periods. We will be required to implement this guidance in thefourth quarter of fiscal year 2017. Early adoption is permitted. This update is not expected to have a material impact on our consolidated financial statements.

3.Fair Value Measurement

The following table presents information about financial liabilities measured at fair value on a recurring basis:

	Fair Value		Level 1		Level 2		Level 3
Contingent consideration at July 31, 2016	$	2,366	$	—	$	—	$	2,366
Contingent consideration at January 31, 2016	$	3,749	$	—	$	—	$	3,749

The FASB's authoritative guidance for the hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. The fair value hierarchy consists of the following three levels:

• Level 1—Quoted prices for identical instruments in active markets;

• Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and

• Level 3—One or more significant inputs to the valuation model are unobservable.

In connection with certain acquisitions, payment of a portion of the purchase price is contingent typically upon the acquired business’ achievement of certain revenue goals. The short-term portion of the total recorded contingent consideration is included in accrued and other liabilities and the long-term portion of the total recorded contingent consideration is included in other long-term liabilities on our condensed consolidated balance sheet. The following table summarizes the total recorded contingent consideration:

As of	July 31, 2016		January 31, 2016
Contingent consideration, short-term	$	1,043	$	1,460
Contingent consideration, long-term	1,323		2,289
Total contingent consideration	$	2,366	$	3,749

We have estimated the fair value of our contingent consideration as the present value of the expected payments over the term of the arrangements. The fair value measurement of our contingent consideration as of July 31, 2016 encompasses the following significant unobservable inputs (Level 3):

Unobservable Inputs	Range
Total estimated contingent consideration	$84	-	$2,935
Discount rate	9.5%	-	15.0%
Timing of cash flows (in years)	0	-	2

Changes in the fair value of our contingent consideration are primarily driven by changes in the estimated amount and timing of payments, resulting from changes in the forecasted revenues of the acquired businesses. Significant changes in any of the inputs in isolation could result in a fluctuation in the fair value measurement of contingent consideration. Changes in fair value are recognized in special charges in our condensed consolidated statement of operations in the period in which the change is identified.

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The following table summarizes contingent consideration activity:

Balance as of January 31, 2016	$	3,749
Payments	(1,475		)
Changes in fair value	34
Interest accretion	58
Balance as of July 31, 2016	$	2,366

The following table summarizes the fair value and carrying value of our 4.00% Convertible Subordinated Debentures (4.00% Debentures):

As of	July 31, 2016		January 31, 2016
Fair value of notes payable	$	276,978	$	255,487
Carrying value of notes payable	$	238,841	$	234,888

We based the fair value of our 4.00% Debentures on the quoted market price at the balance sheet date. Our notes are not actively traded and the quoted market price is derived from observable inputs including our stock price, stock volatility, and interest rate (Level 2). We believe the carrying value of other notes payable of $5,188 at July 31, 2016 and January 31, 2016 approximated fair value. Of the total carrying value of notes payable, none was classified as current on our condensed consolidated balance sheet as of July 31, 2016 and January 31, 2016. See additional discussion of notes payable in Note 6. “Notes Payable.”

The carrying amounts of cash equivalents, trade accounts receivable, net, term receivables, short-term borrowings, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments or because amounts have been appropriately discounted.

During the quarter ended July 31, 2016, we acquired a non-marketable equity security which was accounted for using the cost method of accounting. Our cost method investments are reported at cost net of impairment losses. The carrying amount of the non-marketable equity security was $3,000 at July 31, 2016. Investments accounted for under the cost method of accounting are measured and recorded at fair value when identified events or changes in circumstances have a significant adverse effect on the fair value of the investments. When these events or changes in circumstances occur, these investments are classified as Level 3 because they are valued using significant unobservable inputs. We periodically review our cost method investments for these types of events or changes in circumstances.

4.Term Receivables and Trade Accounts Receivable

We have long-term installment receivables that are attributable to multi-year, multi-element term license sales agreements. Balances for term agreements that are due within one year of the balance sheet date are included in trade accounts receivable, net and balances that are due more than one year from the balance sheet date are included in term receivables, long-term. We discount the total product portion of the agreements to reflect the interest component of the transaction. We amortize the interest component of the transaction, to system and software revenues over the period in which payments are made and balances are outstanding, using the effective interest method. We determine the discount rate at the outset of the arrangement based upon the current credit rating of the customer. We reset the discount rate periodically considering changes in prevailing interest rates but do not adjust previously discounted balances.

Term receivable and trade accounts receivable balances were as follows:

As of	July 31, 2016		January 31, 2016
Trade accounts receivable	$	88,094	$	176,021
Term receivables, short-term	$	296,298	$	317,188
Term receivables, long-term	$	226,268	$	268,657

Trade accounts receivable include billed amounts whereas term receivables, short-term are comprised of unbilled amounts. Term receivables, short-term represent the portion of long-term installment agreements that are due within one year of the balance sheet date. Billings for term agreements typically occur thirty days prior to the contractual due date, in accordance with individual contract installment terms. Term receivables, long-term represent unbilled amounts which are scheduled to be billed beyond one year from the balance sheet date.

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We perform a credit risk assessment of all customers using the Standard & Poor’s (S&P) credit rating as our primary credit-quality indicator. The S&P credit ratings are based on the most recent S&P score available at the time of assessment. For customers that do not have an S&P credit rating, we base our credit risk assessment on results provided in the customers’ most recent financial statements at the time of assessment. We determine whether or not to extend credit to these customers based on the results of our internal credit assessment, thus mitigating our risk of loss.

The credit risk assessment for our long-term receivables was as follows:

As of	July 31, 2016		January 31, 2016
S&P credit rating:
AAA+ through BBB-	$	164,331	$	195,764
BB+ and lower	32,900		22,520
	197,231		218,284
Internal credit assessment	29,037		50,373
Total long-term term receivables	$	226,268	$	268,657

We maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectibility of our trade accounts receivable based on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer’s operating results, financial position, or credit rating, we record a specific reserve for bad debt to reduce the related receivable to the amount believed to be collectible. We also record unspecified reserves for bad debt for all other customers based on a variety of factors including length of time the receivables are past due, the financial health of customers, the current business environment, and historical experience. If these factors change or circumstances related to specific customers change, we adjust the estimates of the recoverability of receivables resulting in either additional selling expense or a reduction in selling expense in the period the determination is made.

The following shows the change in allowance for doubtful accounts:

Allowance for doubtful accounts	Beginning balance		Expense adjustment			Other deductions(1)			Ending  balance
Six months ended July 31, 2016	$	3,826	$	(875	)	$	256		$	3,207
Six months ended July 31, 2015	$	4,217	$	(597	)	$	(9	)	$	3,611

(1)Specific account write-offs and foreign exchange.

We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $29,543 for the six months ended July 31, 2016 compared to $27,562 for the six months ended July 31, 2015. Amounts collected from customers on accounts receivable previously sold on a non-recourse basis to financial institutions are included in short-term borrowings on the balance sheet. These amounts are remitted to the financial institutions in the month following quarter-end.

5.Short-Term Borrowings

Short-term borrowings consisted of the following:

As of	July 31, 2016		January 31, 2016
Senior revolving credit facility	$	—	$	25,000
Collections of previously sold accounts receivable	3,761		7,568
Other borrowings	991		881
Short-term borrowings	$	4,752	$	33,449

We have a syndicated, senior, unsecured, revolving credit facility which expires on January 9, 2020.

The revolving credit facility has a maximum borrowing capacity of $125,000. As stated in the revolving credit facility, we have the option to pay interest based on:

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(i) London Interbank Offered Rate (LIBOR) with varying maturities commensurate with the borrowing period we select, plus a spread of between 2.00% and 2.50% based on a pricing grid tied to a financial covenant, or

(ii) A base rate plus a spread of between 1.00% and 1.50%, based on a pricing grid tied to a financial covenant.

As a result of these interest rate options, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates.

Commitment fees are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40% based on a pricing grid tied to a financial covenant.

This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our common stock over the term of the facility to $200,000 plus 70% of our cumulative consolidated net income (loss) for periods ending after February 1, 2016.

We were in compliance with all financial covenants as of July 31, 2016. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.

6.Notes Payable

Notes payable consist of the following:

As of	July 31, 2016		January 31, 2016
4.00% Debentures	$	238,841	$	234,888
Other	5,188		5,188
Notes payable	$	244,029	$	240,076

Our 4.00% Debentures are due in 2031, but we may be required to repay them earlier under the conversion and redemption provisions described below.

4.00% Debentures

In April 2011, we issued $253,000 of 4.00% Debentures in a private placement pursuant to the SEC Rule 144A under the Securities Act of 1933. Interest on the 4.00% Debentures is payable semi-annually in April and October. The 4.00% Debentures are unsecured obligations.

Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 50.3389 shares of our common stock (equivalent to a conversion price of $19.87 per share). The initial conversion rate for the 4.00% Debentures was 48.6902 shares of our common stock for each one thousand dollars in principal amount (equivalent to a conversion price of $20.54 per share). The conversion rate is adjusted because we declare and pay quarterly cash dividends, beginning in the first quarter of fiscal year 2014.

The 4.00% Debentures are convertible, under certain circumstances, into shares of our common stock at the conversion rate noted above. The circumstances for conversion include:

• The market price of our common stock exceeding 120% of the conversion price, or $23.84 per share as of July 31, 2016, for at least 20 of the last 30 trading days in the previous fiscal quarter;

• A call for redemption of the 4.00% Debentures;

• Specified distributions to holders of our common stock;

• If a fundamental change, such as a change of control, occurs;

• During the two months prior to, but not on, the maturity date; or

• The market price of the 4.00% Debentures declining to less than 98% of the value of the common stock into which the 4.00% Debentures are convertible.

Upon conversion of any 4.00% Debentures, a holder will receive:

(i) Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and

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(ii) Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.

As of July 31, 2016, the if-converted value of the 4.00% Debentures to the note holders exceeded the principal amount by $19,032.

As of July 31, 2016, none of the conditions allowing the holders of the 4.00% Debentures to convert the 4.00% Debentures into shares of our common stock were met. The determination of whether or not the 4.00% Debentures are convertible is performed at each balance sheet date and may change from quarter to quarter.

Effective April 5, 2016, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices, expressed as a percentage of principal plus any accrued and unpaid interest:

Period	Redemption Price
Beginning on April 5, 2016 and ending on March 31, 2017	101.143	%
Beginning on April 1, 2017 and ending on March 31, 2018	100.571	%
On April 1, 2018 and thereafter	100.000	%

The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, our repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.

The 4.00% Debentures contain a conversion feature allowing for settlement of the debt in cash upon conversion, therefore we separately account for the implied liability and equity components of the 4.00% Debentures. The principal amount, unamortized debt discount, unamortized debt issuance costs, net carrying amount of the liability component, and carrying amount of the equity component of the 4.00% Debentures are as follows:

As of	July 31, 2016			January 31, 2016
Principal amount	$	252,957		$	252,957
Unamortized debt discount	(12,530		)	(16,007		)
Unamortized debt issuance costs	(1,586		)	(2,062		)
Net carrying amount of the liability component	$	238,841		$	234,888
Equity component, net of debt issuance costs	$	42,518		$	42,518

The unamortized debt discount and debt issuance costs amortize to interest expense using the effective interest method through March 2018.

We recognized the following amounts in interest expense in the condensed consolidated statement of income related to the 4.00% Debentures:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Interest expense at the contractual interest rate	$	2,530	$	2,530	$	5,059	$	5,060
Amortization of debt discount	$	1,754	$	1,633	$	3,477	$	3,237
Amortization of debt issuance costs	$	238	$	238	$	476	$	476

The effective interest rate on the 4.00% Debentures was 7.25% for the six months ended July 31, 2016 and 2015.

Other Notes Payable

In February 2015, we issued a subordinated note payable as part of a business combination. The principal amount of $3,188 was outstanding as of July 31, 2016. The note bears interest at a rate of 4.0% and is due in full on February 25, 2019.

In September 2015, we issued a subordinated note payable as part of a business combination. The principal amount of $2,000 was outstanding as of July 31, 2016. The note bears interest at a rate of 4.0% and is due in full on September 8, 2018.

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7.Commitments and Contingencies

Indemnifications

Our license and services agreements generally include a limited indemnification provision for claims from third parties relating to our intellectual property (IP). The indemnification is generally limited to the amount paid by the customer, a multiple of the amount paid by the customer, or a set cap. As of July 31, 2016, we were not aware of any material liabilities arising from these indemnification obligations.

Legal Proceedings

From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to IP rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.

In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.

In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in the U.S. District Court for the Northern District of California, alleging that our Veloce^® family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent and Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys has appealed the decisions by both the district court and the U.S. Patent and Trademark Office.

In June 2013, Synopsys also filed a claim against us in the U.S District Court for the District of Oregon, similarly alleging that our Veloce family of products infringed on two additional Synopsys U.S. patents. These claims have been dismissed, and have been appealed.

We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.

On October 10, 2014, the jury in our patent lawsuit filed in the U.S. District Court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36,000 as well as certain royalties. As of July 31, 2016, nothing has been included in our financial results for this award. Synopsys has filed an appeal.

On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.

In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which sought compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. A Japanese appeals court has ratified that verdict.

We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus no liability has been established nor has a range of loss been disclosed.

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8.Stockholders' Equity

Dividends

The following table summarizes dividends declared since the beginning of fiscal year 2016:

Declaration Date	Record Date	Payment Date	Per Share Amount		Total Amount
Fiscal Year 2017
8/18/2016	9/19/2016	9/30/2016		$0.055
5/19/2016	6/10/2016	6/30/2016		$0.055		$5,886
3/3/2016	3/10/2016	3/31/2016		$0.055		$5,880
Fiscal Year 2016
11/19/2015	12/15/2015	1/4/2016		$0.055		$6,326
8/20/2015	9/10/2015	9/30/2015		$0.055		$6,491
5/22/2015	6/10/2015	6/30/2015		$0.055		$6,389
2/26/2015	3/10/2015	3/31/2015		$0.055		$6,383

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.

9.Stock-Based Compensation

Stock Option and Stock Plans

Our 2010 Omnibus Incentive Plan (Incentive Plan) is administered by the Compensation Committee of our Board of Directors and permits accelerated vesting of outstanding options, restricted stock units, restricted stock awards, and other equity incentives upon the occurrence of certain changes in control of our company. Stock options and time-based restricted stock units under the Incentive Plan are generally expected to vest over four years. Stock options have an expiration date of ten years from the date of grant and an exercise price no less than the fair market value of the shares on the date of grant. Performance-based restricted stock units vest after three years and include goals for operating income margin. We estimate forfeitures based on our historical forfeiture rates. The source of shares issued under the Incentive Plan is new shares. We have not issued any options since fiscal year 2013. Our current equity strategy is to grant restricted stock units rather than options to ensure that we deliver value to our employees when there is volatility in the market.

Employee Stock Purchase Plans

We have an employee stock purchase plan (ESPP) for U.S. employees and an ESPP for certain foreign subsidiary employees. The ESPPs provide for six-month offerings commencing on January 1 and July 1 of each year with purchases on June 30 and December 31 of each year. Each eligible employee may purchase up to six thousand shares of stock on each purchase date (subject to a plan limit on the total fair market value) at prices no less than 85% of the lesser of the fair market value of the shares on the offering date or on the purchase date.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense recognized:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Cost of revenues	$	781	$	608	$	1,492	$	1,316
Operating expenses:
Research and development	4,567		3,800		8,890		8,118
Marketing and selling	2,846		2,366		5,701		4,846
General and administration	3,732		3,812		6,344		6,584
Equity plan-related compensation expense	$	11,926	$	10,586	$	22,427	$	20,864

10.Net Income (Loss) Per Share

We compute basic net income (loss) per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of common shares issuable upon

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vesting of restricted stock units, exercise of stock options and ESPP purchase rights, and conversion of the 4.00% Debentures using the treasury stock method.

The following provides the computation of basic and diluted net income (loss) per share:

	Three months ended July 31,					Six months ended July 31,
	2016		2015			2016			2015
Net income (loss) attributable to Mentor Graphics shareholders	$	3,437	$	31,212		$	(9,999	)	$	21,327
Adjustment to redemption value of noncontrolling interest with redemption feature	—		(144		)	—			125
Adjusted net income (loss) attributable to Mentor Graphics shareholders	$	3,437	$	31,068		$	(9,999	)	$	21,452
Weighted average common shares used to calculate basic net income (loss) per share	107,374		116,584			108,215			116,296
Potentially dilutive common shares	2,500		2,784			—			2,690
Weighted average common and potentially dilutive common shares used to calculate diluted net income (loss) per share	109,874		119,368			108,215			118,986
Net income (loss) per share attributable to Mentor Graphics shareholders:
Basic net income (loss) per share	$	0.03	$	0.27		$	(0.09	)	$	0.18
Diluted net income (loss) per share	$	0.03	$	0.26		$	(0.09	)	$	0.18

We have adjusted the numerator of our basic and diluted net income per share calculation for the three and six months ended July 31, 2015 for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings.

The effect of the conversion of the 4.00% Debentures was anti-dilutive for the three and six months ended July 31, 2016 and 2015 and therefore excluded from the computation of diluted net income (loss) per share. The conversion feature of the 4.00% Debentures, which allows for settlement in cash or a combination of cash and common stock, is further described in Note 6. “Notes Payable.”

The following details the adjustments to net income (loss) excluded from the computation of diluted net income (loss) per share:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures	$	2,074	$	2,075	$	2,074	$	2,075

The following details shares excluded from the computation of diluted net income (loss) per share:

	Three months ended July 31,		Six months ended July 31,
	2016	2015	2016	2015
Shares of common stock for restricted stock units	28	—	2,265	11
Shares of common stock for stock options	—	—	1,249	—
Shares of common stock for ESPP purchase rights	742	—	776	572
Shares of common stock for convertible debt	756	2,825	205	2,489
Total anti-dilutive shares excluded	1,526	2,825	4,495	3,072

The restricted stock units, stock options, ESPP purchase rights, and the 4.00% Debentures were determined to be anti-dilutive either because we incurred a net loss for the period or as a result of applying the treasury stock method.

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11.Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss, net of tax effects:

As of	July 31, 2016			January 31, 2016
Foreign currency translation adjustment	$	(16,692	)	$	(21,013	)
Unrealized loss on derivatives	(13		)	(36		)
Pension liability	(76		)	(51		)
Total accumulated other comprehensive loss	$	(16,781	)	$	(21,100	)

During the first six months of fiscal years 2017 and 2016, there were no significant amounts reclassified to net income from accumulated other comprehensive loss related to foreign currency translation adjustment, cash flow hedges or pension plans.

12.Special Charges

The following is a summary of the components of special charges:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Employee severance and related costs	$	442	$	840	$	2,530	$	10,703
Litigation costs	556		944		1,363		2,519
Voluntary early retirement program	—		—		—		25,435
Other costs, net	447		402		543		506
Total special charges	$	1,445	$	2,186	$	4,436	$	39,163

Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.

We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 and 110 employees elected to participate. The costs presented here are for severance benefits.

Employee severance and related costs include severance benefits and notice pay. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.

Approximately 79% of the employee severance and related costs for the six months ended July 31, 2016 were paid during the period. We expect to pay the remainder during the fiscal year ending January 31, 2017. Substantially all of the employee severance and related costs for the six months ended July 31, 2015 were paid during the fiscal year ending January 31, 2016. There were no significant modifications to the amount of those charges.

Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, EVE, and Synopsys regarding emulation technology.

Accrued special charges are included in accrued and other liabilities in the condensed consolidated balance sheets. The following table shows changes in accrued special charges during the six months ended July 31, 2016:

	Accrued special charges as of		Charges during the six months ended		Payments during the six months ended			Accrued special charges as of
	January 31, 2016		July 31, 2016		July 31, 2016			July 31, 2016
Employee severance and related costs	$	1,935	$	2,530	$	(3,550	)	$	915
Litigation costs	311		1,363		(626		)	1,048
Other costs, net	760		543		(763		)	540
Total accrued special charges	$	3,006	$	4,436	$	(4,939	)	$	2,503

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13.Income Taxes

The provision for income taxes was as follows:

	Three months ended July 31,						Six months ended July 31,
	2016			2015			2016			2015
Income tax expense (benefit)	$	(2,239	)	$	4,071		$	(4,117	)	$	2,559
Effective tax rate	(186.9		)%	11.7		%	29.2		%	11.3		%

Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full fiscal year and record adjustments in each quarter. Such adjustments consider period specific items and, when applicable, a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.

Our effective tax rate is 29.2% for the six months ended July 31, 2016, after the inclusion of $(1,576) in net favorable period specific items. For our full fiscal year forecast, we project an 18.0% effective tax rate. This rate is inclusive of period specific items recognized through July 31,2016. Our projected rate for the full fiscal year differs from tax computed at the U.S. federal statutory rate of 35.0% primarily due to:

• The benefit of lower tax rates on earnings of foreign subsidiaries;

• Net reduction in liabilities for uncertain tax positions; and

• Forecasted utilization of net operating loss carryforwards, foreign tax credit carryforwards, and research and experimentation credit carryforwards for which no tax benefit has been recognized.

These differences are partially offset by:

• Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to account for the impact of future repatriations; and

• Withholding taxes.

Actual results may differ significantly from our current projections. Further, our effective tax rate could fluctuate considerably on a quarterly basis and could be significantly affected to the extent our actual mix of earnings among individual jurisdictions is different than our expectations.

We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. In addition, we record deferred tax assets for net operating loss carryforwards and tax credit carryforwards. We calculate the deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized. We have determined that it is uncertain whether our U.S. entity will generate sufficient taxable income to fully utilize tax credit carryforwards. Accordingly, we recorded a valuation allowance against those deferred tax assets for which realization does not meet the more likely than not standard. We have established valuation allowances related to certain foreign deferred tax assets based on historical losses as well as future expectations in certain jurisdictions. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

As of July 31,2016, we had a liability of $24,151 for income taxes associated with uncertain income tax positions. Of this liability, $5,430 was classified as short-term liabilities in income taxes payable in our condensed consolidated balance sheet as we generally anticipate the settlement of such liabilities will require payment of cash within the next twelve months. The remaining $18,721 of income tax associated with uncertain tax positions was classified as long-term liabilities. Certain liabilities may result in the reduction of deferred tax assets rather than settlement in cash. We are not able to reasonably estimate the timing of any cash payments required to settle the long-term liabilities and do not believe that the ultimate settlement of these liabilities will materially affect our liquidity.

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14.Supplemental Cash Flow Information

The following provides information concerning supplemental disclosures of cash flow activities:

	Six months ended July 31,
	2016		2015
Cash paid, net for:
Interest	$	6,892	$	5,966
Income taxes	$	5,900	$	5,693

15.Segment Reporting

Our Chief Operating Decision Makers (CODMs), which consist of the Chief Executive Officer and the President, review our consolidated results within one operating segment. In making operating decisions, our CODMs primarily consider consolidated financial information accompanied by disaggregated revenue information by geographic region.

We eliminate all intercompany revenues in computing revenues by geographic regions. Revenues related to operations in the geographic regions were as follows:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Revenues:
United States	$	106,460	$	115,598	$	189,680	$	244,789
Europe	47,590		69,520		102,464		115,839
Japan	23,580		15,524		61,512		36,941
Pacific Rim	74,142		77,458		123,109		147,587
Other	2,572		2,962		5,218		8,049
Total revenues	$	254,344	$	281,062	$	481,983	$	553,205

For the three months ended July 31, 2016, one customer accounted for approximately 11.0% of our total revenues. For the three months ended July 31, 2015, one customer accounted for approximately 24.0% of our total revenues. For the six months ended July 31, 2016, no customer accounted for 10.0% or more of our total revenues. For the six months ended July 31, 2015, one customer accounted for approximately 14.0% of our total revenues.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, numerical references are in millions, except for percentages, per share data, and conversion rate data.

Overview

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this Form 10-Q. Certain discussions below contain forward-looking statements. These statements are predictions based upon our current expectations about future trends and events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. In particular, we refer you to the risks discussed in Part II, Item 1A. “Risk Factors” and in our other Securities and Exchange Commission filings, which identify important risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this Form 10-Q. We do not intend, and undertake no obligation, to update these forward-looking statements.

The Company

We are a supplier of electronic design automation (EDA) tools — advanced computer software and emulation hardware systems used to automate the design, analysis, and testing of complex electro-mechanical systems, electronic hardware, and embedded systems software in electronic systems and components. We market our products and services worldwide, primarily to large companies in the communications, computer, consumer electronics, semiconductor, networking, military and aerospace, multimedia, and transportation industries. Through the diversification of our customer base among these various customer markets, we attempt to reduce our exposure to fluctuations within each market. We sell and license our products through our direct sales force and a channel of distributors and sales representatives. In addition to our corporate offices in Wilsonville, Oregon, we have sales, support, research and development, and professional service offices worldwide.

We generally focus on products and design platforms where we have or believe we can attain leading market share. Part of this approach includes developing new applications and exploring new markets where EDA companies have not generally participated. We believe this strategy leads to a more diversified product and customer mix and can help reduce the volatility of our business and our risk as a creditor, while increasing our potential for growth.

We derive system and software revenues primarily from the sale of term software license contracts, which are typically three to four years in length. We generally recognize revenue for these arrangements upon product delivery at the beginning of the license term. Larger enterprise-wide customer contracts, which are approximately 50% or more of our system and software revenue, drive the majority of our period-to-period revenue variances. We identify term licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily include short-term term licenses as well as other term licenses where we provide the customer with rights to unspecified or unreleased future products. For these reasons, the timing of large contract renewals, customer circumstances, and license terms are the primary drivers of revenue changes from period to period, with revenue changes also being driven by new contracts and additional purchases under existing contracts, to a lesser extent.

The EDA industry is competitive and is characterized by very strong leadership positions in specific segments of the EDA market. These strong leadership positions can be maintained for significant periods of time as the software can be difficult to master and customers are disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from areas in which we are the leader. We expect to continue our strategy of developing high quality tools with number one market share potential, rather than being a broad-line supplier with undifferentiated product offerings. This strategy allows us to focus investment in areas where customer needs are greatest and where we have the opportunity to build significant market share.

Our products and services are dependent to a large degree on new design projects initiated by customers in the integrated circuit (IC) and electronics system industries. These industries can be cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, wide fluctuations in product supply and demand, and industry consolidation. Furthermore, extended economic downturns can result in reduced funding for development due to downsizing and other business restructurings. These pressures are offset by the need for the development and introduction of next generation products once an economic recovery occurs.

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Known Trends and Uncertainties Impacting Future Results of Operations

Our revenue has historically fluctuated quarterly and has generally been the highest in the fourth quarter of our fiscal year due to our customers’ corporate calendar year-end spending trends and the timing of contract renewals.

Ten accounts make up approximately 50% of our receivables as of July 31, 2016, including both short and long-term balances. We have not experienced and do not presently expect to experience collection issues with these customers.

Net of reserves, we have no material receivables greater than 60 days past due (net of cash based revenue invoices), and continue to experience no difficulty in factoring our high quality receivables.

Bad debt expense recorded for the first six months of fiscal year 2017 was not material. However, we do have exposures within our receivables portfolio to customers with weak credit ratings. These receivable balances could have a material adverse effect on earnings in any given quarter, should significant additional allowances for doubtful accounts be necessary. However, as discussed in Note 4. “Term Receivables and Trade Accounts Receivable” in Part I, Item 1. “Financial Statements”, we regularly evaluate the collectibility of our trade accounts receivable and record specific and general reserves for bad debt as necessary.

Bookings during the first six months of fiscal year 2017decreased approximately 5% compared to the first six months of fiscal year 2016 primarily due to fewer large contract renewals. Bookings are the value of executed orders during a period for which revenue has been or will be recognized within six months for software products and emulation hardware systems, and within twelve months for professional services and training. Ten customers accounted for approximately 45% of total bookings for the first six months of fiscal year 2017 and fiscal year 2016. The number of new customers during the first six months of fiscal year 2017decreased approximately 5% compared to the first six months of fiscal year 2016.

Product Development

During the first six months of fiscal year 2017, we continued to execute our strategy of focusing on technical challenges encountered by customers, as well as building upon our well-established product families. We believe that customers, faced with leading-edge design challenges in creating new products, generally choose the best EDA products in each category to build their design environment. Through both internal development and strategic acquisitions, we have focused on areas where we believe we can build a leading market position or extend an existing leading market position.

We believe that the development and commercialization of EDA software tools is generally a three to five year process with limited customer adoption and sales in the first years of tool availability. Once tools are adopted, however, their life spans tend to be long. During the first six months of fiscal year 2017, we introduced both new products and upgrades to existing products.

Critical Accounting Policies

We base our discussion and analysis of our financial condition and results of operations upon our condensed consolidated financial statements which have been prepared in accordance with United States (U.S.) generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an on-going basis. We base our estimates on historical experience, current facts, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues, costs, and expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

We believe that the accounting for revenue recognition, valuation of accounts receivable, income taxes, business combinations, goodwill, intangible assets, long-lived assets, special charges, and stock-based compensation are the critical accounting estimates and judgments used in the preparation of our condensed consolidated financial statements. For further discussion of our critical accounting policies, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in Part II of our Annual Report on Form 10-K for the year ended January 31, 2016.

RESULTS OF OPERATIONS

Revenues and Gross Profit

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	Three months ended July 31,								Six months ended July 31,
	2016			Change		2015			2016			Change		2015
System and software revenues	$	133.8		(18	)%	$	162.2		$	240.5		(24	)%	$	318.1
System and software gross profit	$	116.6		(21	)%	$	147.4		$	213.2		(26	)%	$	287.8
Gross profit percent	87		%			91		%	89		%			90		%
Service and support revenues	$	120.6		1	%	$	118.9		$	241.5		3	%	$	235.1
Service and support gross profit	$	88.1		1	%	$	87.4		$	176.3		4	%	$	170.1
Gross profit percent	73		%			74		%	73		%			72		%
Total revenues	$	254.4		(9	)%	$	281.1		$	482.0		(13	)%	$	553.2
Total gross profit	$	204.7		(13	)%	$	234.8		$	389.5		(15	)%	$	457.9
Gross profit percent	80		%			84		%	81		%			83		%

System and Software

	Three months ended July 31,						Six months ended July 31,
	2016		Change		2015		2016		Change		2015
Upfront license revenues	$	104.1	(19	)%	$	128.8	$	184.2	(28	)%	$	256.6
Ratable license revenues	29.7		(11	)%	33.4		56.3		(8	)%	61.5
Total system and software revenues	$	133.8	(18	)%	$	162.2	$	240.5	(24	)%	$	318.1

We derive system and software revenues from the sale of licenses of software products and emulation hardware systems, including finance fee revenues from our long-term installment receivables resulting from term product sales. Upfront license revenues consist of perpetual licenses and term licenses for which we recognize revenue upon product delivery at the start of a license term. We identify licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily consist of short-term term licenses and finance fees from the accretion of the discount on long-term installment receivables.

Ten customers accounted for approximately 55% of system and software revenues for the three months ended July 31, 2016 and 40% for the six months ended July 31, 2016 compared to approximately 65% for the three months ended July 31, 2015 and 50% for the six months ended July 31, 2015.

System and software revenues decreased $28.4 for the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The effect of acquisitions completed in fiscal years 2017 and 2016 on system and software revenues for the three months ended July 31, 2016 was not material. The decrease in software license revenues was primarily due to the timing of contract renewals.

System and software revenues decreased $77.6 for the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The effect of acquisitions completed in fiscal years 2017 and 2016 on fiscal year 2017 system and software revenues was $0.8, which is a $5.4 decrease in system and software revenues from acquisitions compared to the six months ended July 31, 2015. Software license revenues decreased $60.8 driven by the timing of contract renewals, with the remaining decrease primarily due to a first quarter decrease in sales of emulation hardware systems.

For the three months ended July 31, 2016, one customer accounted for 11% of total revenues. For the six months ended July 31, 2016, no single customer accounted for 10% or more of total revenues. For the three months ended July 31, 2015, one customer accounted for 24% of total revenues. For the six months ended July 31, 2015, one customer accounted for 14% of total revenues.

System and software gross profit percent was lower for the three months ended July 31, 2016 compared to the three months ended July 31, 2015 primarily due to the decrease in software product revenues.

Service and Support

We derive service and support revenues from software and hardware post-contract maintenance or support services and professional services, which includes consulting, training, and other services. Professional services are lower margin offerings which are staffed according to fluctuations in demand. Support services operate under a less variable cost structure.

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Service and support revenues increased $1.7 for the three months ended July 31, 2016 compared to the three months ended July 31, 2015. Consulting and training revenues increased $4.5 primarily due to increased customer demand for services and support revenues increased $1.7 resulting from an increase in our installed base. These increases were offset by a $4.6 decrease in service and support revenues from acquisitions compared to the three months ended July 31, 2015.

Service and support revenues increased $6.4 for the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The effect of acquisitions completed in fiscal year 2016 on service and support revenues for the six months ended July 31, 2016 was $0.6, which is a $9.1 decrease in service and support revenues from acquisitions compared to the six months ended July 31, 2015. This decrease was offset by a $10.6 increase in consulting and training revenues primarily due to increased customer demand for services and a $4.8 increase in support revenues resulting from an increase in our installed base.

Geographic Revenues Information

Revenues by Geography

	Three months ended July 31,						Six months ended July 31,
	2016		Change		2015		2016		Change		2015
North America	$	109.1	(8	)%	$	118.6	$	194.9	(23	)%	$	252.9
Europe	47.6		(32	)%	69.5		102.5		(11	)%	115.8
Japan	23.6		52	%	15.5		61.5		67	%	36.9
Pacific Rim	74.1		(4	)%	77.5		123.1		(17	)%	147.6
Total revenues	$	254.4	(9	)%	$	281.1	$	482.0	(13	)%	$	553.2

The increase in revenues in Japan and the decrease in revenues in Europe for the three months ended July 31, 2016 compared to the three months ended July 31, 2015 were primarily due to the timing of contract renewals. The increase in revenues in Japan and the decrease in revenues in North America and Pacific Rim for the six months ended July 31, 2016 compared to the six months ended July 31, 2015 were primarily due to the timing of contract renewals.

We recognize additional revenues in periods when the U.S. dollar weakens in value against foreign currencies. Conversely, we recognize lower revenues in periods when the U.S. dollar strengthens in value against foreign currencies. For the three months ended July 31, 2016, approximately 35% of European and approximately 70% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. For the six months ended July 31, 2016, approximately 35% of European and approximately 85% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. Foreign currency had an immaterial impact on revenue for the three and six months ended July 31, 2016 compared to the three and six months ended July 31, 2015.

For additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see discussion in Part I, “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

Revenues by Category

We segregate revenues into five categories of similar products and services. Each category includes both product and related support revenues. Revenues for each category as a percent of total revenues are as follows (percentages rounded to the nearest 5%):

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Revenues:
IC Design to Silicon	40	%	40	%	35	%	40	%
Scalable Verification	25	%	25	%	20	%	25	%
Integrated Systems Design	20	%	20	%	20	%	20	%
New and Emerging Markets	5	%	5	%	10	%	5	%
Services and Other	10	%	10	%	15	%	10	%
Total revenues	100	%	100	%	100	%	100	%

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Operating Expenses

	Three months ended July 31,								Six months ended July 31,
	2016			Change		2015			2016			Change		2015
Research and development	$	93.4		5	%	$	89.1		$	184.5		3	%	$	178.6
Marketing and selling	83.9			(1	)%	84.7			168.2			(1	)%	169.7
General and administration	19.3			3	%	18.7			36.8			1	%	36.6
Equity in earnings of Frontline	(1.1		)	(21	)%	(1.4		)	(1.7		)	(23	)%	(2.2		)
Amortization of intangible assets	1.6			(27	)%	2.2			3.1			(30	)%	4.4
Special charges	1.4			(36	)%	2.2			4.4			(89	)%	39.2
Total operating expenses	$	198.5		2	%	$	195.5		$	395.3		(7	)%	$	426.3

Selected Operating Expenses as a Percentage of Total Revenues

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Research and development	37	%	32	%	38	%	32	%
Marketing and selling	33	%	30	%	35	%	31	%
General and administration	8	%	7	%	8	%	7	%
Total selected operating expenses	78	%	69	%	81	%	70	%

We incur a substantial portion of our operating expenses outside the U.S. in various foreign currencies. We recognize additional operating expense in periods when the U.S. dollar weakens in value against foreign currencies and lower operating expenses in periods when the U.S. dollar strengthens in value against foreign currencies. We experienced favorable currency movements in total operating expenses of approximately $1.1 for the three months ended July 31, 2016 compared to the three months ended July 31, 2015, and approximately $3.6 for the six months ended July 31, 2016 compared to the six months ended July 31, 2015, primarily due to movements in the British pound, Indian rupee, and Russian ruble. The impact of these currency movements is reflected in the changes in operating expenses detailed below.

Research and Development

Research and development expenses increased by $4.3 for the three months ended July 31, 2016 compared to the three months ended July 31, 2015 and $5.9 for the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The components of these changes are summarized as follows:

	Change
	Three Months Ended			Six Months Ended
Salaries, variable compensation, and benefits expenses	$	3.5		$	5.1
Supplies and equipment	0.8			1.8
Expenses associated with acquired businesses	0.6			1.2
Research and development tax credits	(0.4		)	(1.3		)
Other expenses	(0.2		)	(0.9		)
Total change in research and development expenses	$	4.3		$	5.9

Marketing and Selling

Marketing and selling expenses decreased by $(0.8) for the three months ended July 31, 2016 compared to the three months ended July 31, 2015 and $(1.5) for the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The components of these changes are summarized as follows:

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	Change
	Three Months Ended			Six Months Ended
Emulation demonstration inventory amortization	$	(2.0	)	$	(2.1	)
Salaries, variable compensation, and benefits expenses	2.1			1.6
Other expenses	(0.9		)	(1.0		)
Total change in marketing and selling expenses	$	(0.8	)	$	(1.5	)

General and Administration

There were no significant changes within general and administration expenses, which increased by $0.6 for the three months ended July 31, 2016 compared to the three months ended July 31, 2015 and $0.2 for the six months ended July 31, 2016 compared to the six months ended July 31, 2015.

Special Charges

	Three months ended July 31,						Six months ended July 31,
	2016		Change		2015		2016		Change		2015
Employee severance and related costs	$	0.4	(50	)%	$	0.8	$	2.5	(77	)%	$	10.7
Litigation costs	0.6		(40	)%	1.0		1.4		(46	)%	2.6
Voluntary early retirement program	—		—	%	—		—		(100	)%	25.4
Other costs, net	0.4		—	%	0.4		0.5		—	%	0.5
Total special charges	$	1.4	(36	)%	$	2.2	$	4.4	(89	)%	$	39.2

Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.

We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 and 110 employees elected to participate. The costs presented here are for severance benefits.

Employee severance and related costs include severance benefits and notice pay. These charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.

Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), and Synopsys, Inc. regarding emulation technology.

Provision for Income Taxes

	Three months ended July 31,							Six months ended July 31,
	2016			Change		2015		2016			Change		2015
Income tax expense (benefit)	$	(2.2	)	(154	)%	$	4.1	$	(4.1	)	(258	)%	$	2.6

Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. The provision considers that a significant amount of our earnings are in certain foreign operations, including our Irish subsidiaries. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full fiscal year, and record adjustments in each quarter. Such adjustments consider period specific items and, when applicable, a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.

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	Three months ended July 31,						Six months ended July 31,
	2016			2015			2016			2015
Effective tax rate	(187		)%	12		%	29		%	11		%
Net period specific items benefit	$	(2.5	)	$	(1.9	)	$	(1.6	)	$	(1.6	)
Effective tax rate without period specific items	18		%	17		%	18		%	18		%

For the six months ended July 31, 2016, we have a 29% effective tax rate with period specific items. This current period effective tax rate differs from our effective tax rate for the six months ended July 31, 2015 due to favorable period specific items generally increasing the tax rate in periods with losses and reducing the effective tax rate in periods with profit, as well as the variability in the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates.

For our full fiscal year forecast, we have projected an 18% effective tax rate. This rate is inclusive of period specific items recognized through July 31, 2016. Our projected rate differs from tax computed at the U.S. federal statutory rate of 35% primarily due to:

• The benefit of lower tax rates on earnings of foreign subsidiaries;

• Net reduction in liabilities for uncertain tax positions; and

• Forecasted utilization of net operating loss carryforwards, foreign tax credit carryforwards, and research and experimentation credit carryforwards for which no tax benefit has been recognized.

These differences are partially offset by:

• Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to account for the impact of future repatriations; and

• Withholding taxes.

We adopted a new accounting standard related to the accounting for stock-based compensation during the six months ended July 31, 2016 that required all income tax effects of stock-based awards to be recognized in our condensed consolidated statement of operations as the awards vest or are settled.  For further discussion regarding new accounting standards, see Note 2. “Recent Accounting Pronouncements” in Part I, Item 1. “Financial Statements.”

We have not provided for U.S. income taxes on the undistributed earnings of our foreign subsidiaries to the extent they are considered permanently reinvested outside the U.S. Where the earnings of our foreign subsidiaries are not treated as permanently reinvested, we have accrued for U.S. income taxes on those earnings in our tax provision.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations varies from jurisdiction to jurisdiction. In some cases, it may be extended or be unlimited. Furthermore, net operating loss and tax credit carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such net operating losses and tax credits originated. Our larger jurisdictions generally provide for a statute of limitations from three to five years. For U.S. federal income tax purposes, the tax years which remain open for examination are fiscal years 2013 and forward, although net operating loss and tax credit carryforwards from all years are subject to examination and adjustment for three years following the year in which they were utilized. We are currently under examination in various jurisdictions. The examinations are in different stages and timing of their resolution is difficult to predict. The statute of limitations remains open for years on or after fiscal year 2012 in Ireland and Israel, fiscal year 2011 in Japan, fiscal year 2013 in France, and fiscal year 2009 in India. However, in France and India, the statute of limitations has been extended two years and seven years, respectively, due to open audit processes.

We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities even though we believe that the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves quarterly and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarifications of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective tax rate.

Our tax position in the U.S. could be impacted by the U.S. Tax Court opinion issued on July 27, 2015 in Altera Corp. v. Commissionerwhich invalidates part of a Treasury Regulation requiring stock based compensation to be included in any

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qualified intercompany cost sharing arrangement. For the six months ended July 31, 2016, no impact has been recorded due to the uncertainties with respect to the ultimate resolution of this case. This case has been appealed to the U.S. Court of Appeals.We are in the process of determining the impact, if any, the Altera ongoing dispute would have on our financial statements in future periods should there be a resolution of the Altera judicial process.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements applicable to us is discussed in Note 2 “Recent Accounting Pronouncements” in Part I, Item 1. “Financial Statements.”

LIQUIDITY AND CAPITAL RESOURCES

Our primary ongoing cash requirements are for product development, operating activities, capital expenditures, repurchases of common stock, dividends, debt service, and acquisition opportunities that may arise. Our primary sources of liquidity are cash generated from operations and borrowings on our revolving credit facility.

We currently have access to sufficient funds for domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings for use in U.S. operations. As of July 31, 2016, we have cash totaling $245.5 held by our foreign subsidiaries. A significant portion of our cash held by our foreign subsidiaries is accessible without a significant cash tax cost as the repatriation of foreign earnings will be sheltered from U.S. federal tax by tax credits. To the extent our foreign earnings are not permanently reinvested, we have provided for the tax consequences that would ensue upon their repatriation. In the event funds which are treated as permanently reinvested are repatriated, we will be required to accrue and pay additional taxes to repatriate these funds.

On February 23, 2016 we paid an intercompany dividend from foreign subsidiaries of $150,000. As the earnings associated with these funds were not treated as permanently reinvested, any U.S. tax consequences had already been included in our tax provision in prior periods.

To date, we have experienced no loss or lack of access to our invested cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

At any point in time, we have significant balances in operating accounts that are with individual third-party financial institutions, which may exceed the Federal Deposit Insurance Corporation insurance limits or other regulatory insurance program limits. We monitor daily the cash balances in our operating accounts and adjust them as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.

We anticipate that the following will be sufficient to meet our working capital needs on a short-term (twelve months or less) and a long-term (more than twelve months) basis:

• Current cash balances;

• Anticipated cash flows from operating activities, including the effects of selling and financing customer term receivables;

• Amounts available under existing revolving credit facilities; and

• Other available financing sources, such as the issuance of debt or equity securities.

We have experienced no difficulties to date in raising debt. However, capital markets can be volatile, and we cannot assure that we will be able to raise debt or equity capital on acceptable terms, if at all.

Cash Flow Information

	Six months ended July 31,
	2016			2015
Cash provided by operating activities	$	129.5		$	94.8
Cash used in investing activities	$	(30.6	)	$	(22.2	)
Cash used in financing activities	$	(170.8	)	$	(6.6	)

Operating Activities

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Cash flows from operating activities consist of our net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities.

Trade Accounts and Term Receivables

Our cash flows from operating activities are significantly influenced by the payment terms on our license agreements and by our sales of qualifying accounts receivable. Our customers’ inability to fulfill payment obligations could adversely affect our cash flow. We monitor our accounts receivable portfolio for customers with low or declining credit ratings and increase our collection efforts when necessary. Trade accounts and term receivables consisted of the following:

As of	July 31, 2016		January 31, 2016
Trade accounts receivable, net	$	384.4	$	493.2
Term receivables, short-term (included in trade accounts receivable on the balance sheet)	$	296.3	$	317.2
Term receivables, long-term	$	226.3	$	268.7
Average days sales outstanding including the short-term portion of term receivables	136		132
Average days sales outstanding in trade accounts receivable, excluding the short-term portion of term receivables	31		47

The increase in the average days sales outstanding, including the short-term portion of term receivables, as of July 31, 2016 was primarily due to a decrease in revenues in the second quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016. The decrease in the average days sales outstanding, excluding the short-term portion of term receivables, as of July 31, 2016 was primarily due to a decrease in accounts receivable in the second quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016.

Term receivables are attributable to multi-year term license sales agreements. We include amounts for term agreements that are due within one year in trade accounts receivable, net, on our balance sheet and balances that are due in more than one year in term receivables, long-term. We use term agreements as a standard business practice and have a history of successfully collecting under the original payment terms without making concessions on payments, products, or services. Total term receivables were $522.6 as of July 31, 2016 compared to $585.8 as of January 31, 2016.

We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $29.5 for the six months ended July 31, 2016 compared to $27.6 for the six months ended July 31, 2015. We continue to have no difficulty in factoring receivables and continue to evaluate the economics of the sale of accounts receivable. We have not set a target for the sale of accounts receivables for the remainder of fiscal year 2017.

Accrued Payroll and Related Liabilities

As of	July 31, 2016		January 31, 2016
Accrued payroll and related liabilities	$	44.9	$	73.4

The decrease in accrued payroll and related liabilities as of July 31, 2016 compared to January 31, 2016 was primarily due to incentive payments made during fiscal year 2017 on fiscal year 2016 year-end accruals. We generally experience higher accrued payroll and related liability balances at year-end primarily due to increased commission accruals associated with an increase in revenues in the fourth quarter. Additionally, we generally experience an increase in variable compensation at year-end due to the full year achievement of results.

Investing Activities

Cash used in investing activities for the six months ended July 31, 2016 primarily consisted of cash paid for capital expenditures.

Expenditures for property, plant, and equipment were $25.6 for the six months ended July 31, 2016 compared to $17.0 for the six months ended July 31, 2015. The expenditures for property, plant, and equipment for the six months ended July 31, 2016 were primarily a result of spending on information technology and infrastructure improvements within facilities. We expect total capital expenditures for property, plant, and equipment for fiscal year 2017 to be approximately $60.0. We plan to finance these capital expenditures using cash on hand.

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During the six months ended July 31, 2016, we had $5.0 of expenditures for acquisitions of businesses and equity interests, compared to $7.2 during the six months ended July 31, 2015. We plan to finance future business acquisitions through cash and possible common stock issuances. The cash expected to be utilized includes cash on hand, cash generated from operating activities, and borrowings on our revolving credit facility.

Financing Activities

For the six months ended July 31, 2016, cash used in financing activities consisted primarily of the repurchase of common stock, repayments on the revolving credit facility, the payment of dividends, a net decrease in short-term borrowings , and repayments of other borrowings partially offset by proceeds received from the employee stock purchase plan (ESPP) purchase and exercises of stock options.

During the six months ended July 31, 2016, we paid a quarterly dividend of $0.055 per share of outstanding common stock for a total of $11.8. On August 18, 2016, we announced a quarterly dividend of $0.055 per share of outstanding common stock, payable on September 30, 2016 to shareholders of record as of the close of business on September 19, 2016. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.

We currently have a share repurchase program, approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock. We did not repurchase any shares of common stock under the repurchase program during the six months ended July 31, 2016 or 2015. As of July 31, 2016, $90.0 remained available for purchase under the program. During the six months ended July 31, 2016, we repurchased 8.1 shares of common stock for $146.1 in a single transaction that was not part of our repurchase program.

The terms of our revolving credit facility limit the combination of the amount of our common stock we can repurchase and the amount of dividends we can pay over the term of the facility to $200.0 plus 70% of our cumulative consolidated net income (loss) for periods after February 1, 2016. An additional $35.2 is available for common stock purchases or dividend payments under this limit as of July 31, 2016.

During the six months ended July 31, 2016 we paid $25.0 on our revolving credit facility. Repayments of other borrowings during the six months ended July 31, 2016 consisted of deferred payments for consideration related to prior year acquisitions.

Other Factors Affecting Liquidity and Capital Resources

4.00% Convertible Subordinated Debentures due 2031

In April 2011, we issued $253.0 of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures). Interest on the 4.00% Debentures is payable semi-annually in April and October.

Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 50.3389 shares of our common stock (equivalent to a conversion price of $19.87 per share). The events that permit conversion are described in Note 6. “Notes Payable” in Part I, Item 1. “Financial Statements.”

Upon conversion of any 4.00% Debentures, a holder will receive:

(i) Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and

(ii) Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.

We believe that current cash balances, cash generated from our operating activities in future periods, access to our revolving credit facility, and additional financing arrangements will be sufficient to service any conversion of the 4.00% Debentures; however, future changes in our cash position; cash flows from operating, investing and financing activities; general business levels; and our access to additional financing, may impact our ability to settle the amount payable to the holders of any 4.00% Debentures that are converted.

Effective April 5, 2016, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices expressed as a percentage of principal, plus any accrued and unpaid interest:

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Period	Redemption Price
Beginning on April 5, 2016 and ending on March 31, 2017	101.143	%
Beginning on April 1, 2017 and ending on March 31, 2018	100.571	%
On April 1, 2018 and thereafter	100.000	%

The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, the repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.

For further information on the 4.00% Debentures, see Note 6. “Notes Payable” in Part I, Item 1. “Financial Statements.”

Revolving Credit Facility

We have a syndicated, senior, unsecured, revolving credit facility with a maximum borrowing capacity of $125.0, which expires on January 9, 2020. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates. Additionally, commitment fees can vary as they are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40%.

We had no borrowings against the revolving credit facility as of July 31, 2016 and 2015.

This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility.

We were in compliance with all financial covenants as of July 31, 2016. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.

For further information on our revolving credit facility, see Note 5. “Short-Term Borrowings” in Part I, Item 1. “Financial Statements.”

OUTLOOK FOR FISCAL YEAR 2017

We expect revenues for the third quarter of fiscal year 2017 to be approximately $310 with diluted earnings per share for the same period of approximately $0.30. For the full fiscal year 2017, we expect revenues to be approximately $1,215 with diluted earnings per share of approximately $1.19.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Unless otherwise indicated, all numerical references in tables are in millions, except interest rates and contract rates.

Interest Rate Risk

We are exposed to interest rate risk primarily through our investment portfolio, short-term borrowings, and notes payable.

We place our investments in instruments that meet high quality credit standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issuer and type of instrument. We do not expect any material loss with respect to our investment portfolio.

The table below presents the carrying amount and related weighted-average fixed interest rates for our investment portfolio. The carrying amount approximates fair value as of July 31, 2016.

Principal (notional) amounts in United States dollars	Carrying Amount		Average Fixed Interest Rate
Cash equivalents - fixed rate	$	173.5	0.52%

We have convertible subordinated debentures with a principal balance of $253.0 outstanding with a fixed interest rate of 4.00% as of July 31, 2016 and July 31, 2015. Generally, interest rate changes for fixed rate debt affect the fair value of the debt but do not affect future earnings or cash flow.

We have a syndicated, senior, unsecured, revolving credit facility, which expires on January 9, 2020. Borrowings under the revolving credit facility are permitted to a maximum of $125.0. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates. We had no outstanding balance against this revolving credit facility as of July 31, 2016 and July 31, 2015. Generally, interest rate changes for variable interest rate debt do not affect fair value, but do affect future earnings and cash flow. For further information on our revolving credit facility, see Note 5. “Short-Term Borrowings” in Part I, Item 1. “Financial Statements.”

We had other short-term borrowings of $1.0 outstanding as of July 31, 2016 and July 31, 2015 with variable rates based on market indexes.

Foreign Currency Risk

We transact business in various foreign currencies and have established a program to hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Our derivative instruments consist of short-term foreign currency exchange contracts, with a duration period of a year or less. We enter into contracts with counterparties who are major financial institutions and, as such we do not expect material losses as a result of defaults by our counterparties. We do not hold or issue derivative financial instruments for speculative or trading purposes.

We enter into foreign currency forward contracts to protect against currency exchange risk associated with expected future cash flows. Our practice is to hedge a majority of our existing material foreign currency transaction exposures, which generally represent the excess of expected euro denominated expenses over expected euro denominated revenues, and the excess of Japanese yen denominated revenues over expected Japanese yen denominated expenses. We also enter into foreign currency forward contracts to protect against currency exchange risk associated with existing monetary assets and liabilities.

The following table provides volume information about our foreign currency forward program. The information is provided in United States dollar equivalent amounts. The table presents the gross notional amounts at contract exchange rates and the weighted average contractual foreign currency exchange rates. These forward contracts mature within the next twelve months.

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As of	July 31, 2016			January 31, 2016
	Gross Notional Amount		Weighted Average Contract Rate	Gross Notional Amount		Weighted Average Contract Rate
Forward Contracts:
Indian rupee	$	68.8	67.43	$	31.6	67.96
Euro	49.0		0.90	41.5		0.92
Korean won	25.7		1,139.08	10.0		1,214.17
Japanese yen	25.7		105.67	28.6		118.09
Israeli shekel	12.0		3.85	19.3		3.95
British pound	9.1		0.75	11.0		0.70
Chinese yuan	8.2		6.70	4.6		6.60
Other (1)	24.3		—	26.7		—
Total forward contracts	$	222.8		$	173.3

⁽¹⁾  Other includes the Canadian dollar, Armenian dram, Swiss franc, Danish krone, Taiwan dollar, Russian ruble, Norwegian krone, Polish zloty, Hungarian forint, Romanian new leu, Chilean peso, Swedish krona, Singapore dollar.

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Item 4. Controls and Procedures

(1) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is accurately recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

(2) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended July 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Legal Proceedings

From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to intellectual property (IP) rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.

In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.

Synopsys, Inc. and Emulation and Verification Engineering S.A. and EVE-USA, Inc.

In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in the United States (U.S.) District Court for the Northern District of California, alleging that our Veloce^® family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent and Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys has appealed the decisions by both the district court and the U.S. Patent and Trademark Office.

In June 2013, Synopsys also filed a claim against us in the U.S. District Court for the District of Oregon, similarly alleging that our Veloce family of products infringed on two additional Synopsys U.S. patents. These claims have been dismissed, and have been appealed.

We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.

On October 10, 2014, the jury in our patent lawsuit filed in the U.S. District Court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36 million as well as certain royalties. As of July 31, 2016 nothing has been included in our financial results for this award. Synopsys has filed an appeal.

On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.

In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which sought compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. A Japanese appeals court has ratified that verdict.

We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus no liability has been established nor has a range of loss been disclosed.

Securities Class Action and Shareholder Derivative Lawsuits

On March 18, 2016, a purported securities class action lawsuit, Haroutunian v. Mentor Graphics, was filed in the U.S. District Courtfor the District ofOregon against the company and three executive officers alleging violations of federal securities laws. The complaint alleges that the company and certain of our officers made material misstatements and omissions in press releases, Securities and Exchange Commission filings and analyst conference calls concerning the company's business

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prospects and financial projections that artificially inflated the price of the company’s stock. The lead plaintiff has been appointed and plaintiff's amended complaint was filed with the court on August 10, 2016. A class of plaintiffs has not been certified by the court. On April 22, 2016, a related shareholder derivative lawsuit was filed in Multnomah County Circuit Court in Oregon, Aransu v. Rhines, against the company’s board of directors at the time, certain executive officers and the company as a nominal defendant. The complaint alleges that the directors and officers breached their fiduciary duties to the company, were unjustly enriched, wasted corporate assets and committed insider selling. The shareholder derivative lawsuit generally alleges the same facts as the securities class action. The parties have agreed to stay proceedings in the Aransu lawsuit, pending the determination of certain issues or occurrence of certain events in the Haroutunian lawsuit. The complaints do not request a specific amount of damages and we are unable to predict the outcome of these suits.

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Item 1A. Risk Factors.

The forward-looking statements contained under “Outlook for Fiscal Year 2017” in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all other statements contained in this report that are not statements of historical fact including without limitation statements containing the words “believes,” “expects,” “projections,” and words of similar meaning, constitute forward-looking statements that involve a number of risks and uncertainties that are difficult to predict. Moreover, from time to time, we may issue other forward-looking statements. Forward-looking statements regarding financial performance in future periods, including the statements under “Outlook for Fiscal Year 2017”, do not reflect potential impacts of mergers or acquisitions or other significant transactions or events that have not been announced as of the time the statements are made. Actual outcomes and results may differ materially from what is expressed or forecast in forward-looking statements. We disclaim any obligation to update forward-looking statements to reflect future events or revised expectations. Our business faces many risks, and set forth below are some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors.

Weakness in the United States and international economies may harm our business.

Our revenue levels are generally dependent on the level of technology capital spending, which includes worldwide expenditures for electronic design automation (EDA) software, hardware, and consulting services. Periods of economic uncertainty arising out of concerns such as weakness in the European Union relating to debt issues or political instability, slowing growth in China, and the continuing weakness of the Japanese economy can adversely affect our customers. In addition, an unusual consolidation has been occurring in the semiconductor industry worldwide. As a result, customers may postpone decisions to license or purchase our products, reduce their spending, or be less able or willing to make payment obligations, any of which could adversely affect our business. In addition, significant customer payment defaults or bankruptcies could materially harm our business.

We are subject to the cyclical nature of the integrated circuit and electronics systems industries.

Purchases of our products and services are highly dependent upon new design projects initiated by customers in the integrated circuit (IC) and electronics systems industries. These industries are highly cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. The increasing complexity of ICs and resulting increase in costs to design and manufacture ICs have in recent years led to fewer design starts, which could reduce demand for our products. In addition, the IC and electronics systems industries regularly experience significant downturns, often connected with, or in anticipation of, maturing product cycles within such companies or a decline in general economic conditions. These downturns could cause diminished demand for our products and services. The current slowdown in smartphone and personal computer sales appears to be adversely affecting our semiconductor customers.

Our business could be negatively impacted as a result of merger and acquisition activity by our customers.

Like many industries, the semiconductor and electronics industries are subject to mergers, acquisitions and divestitures, and our customers or parts of their business may acquire or be acquired by other customers. Merger and acquisition activity in the semiconductor industry was unusually strong during 2015 and has remained strong in 2016. This activity appears to be the result of semiconductor companies, experiencing slower sales in their existing market segments, desiring to broaden the scope of their businesses and to spread the rising costs of product development and use of advanced technologies across a larger organization. Increasing consolidation could result in fewer customers in these industries or the loss of some customers to competitors, or reduced customer spending on software and services due to redundancies or stronger customer negotiating power, which could have an adverse effect on our business and future revenues.

Our forecasts of our revenues and earnings outlook may be inaccurate.

Our revenues, particularly new hardware and software license revenues, are difficult to forecast. We use a “pipeline” system, a common industry practice, to forecast revenues and trends in our business. Sales personnel monitor the status of potential business and estimate when a customer will make a purchase decision, the dollar amount of the sale, and the products or services to be sold. These estimates are aggregated periodically to generate a sales pipeline. Our pipeline estimates may prove to be unreliable either in a particular quarter or over a longer period of time, in part because the “conversion rate” of the pipeline into contracts can be very difficult to estimate and requires management judgment. A variation in the conversion rate could cause us to plan or budget incorrectly and materially adversely impact our business or our planned results of operations. In particular, a slowdown in customer spending or weak economic conditions generally can reduce the conversion rate in a particular quarter as purchasing decisions are delayed, reduced in amount, or canceled. The conversion rate can also be affected by the tendency of some of our customers to postpone negotiating the terms of a transaction until the end of a fiscal quarter

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anticipating they will obtain more favorable terms. This may result in failure to agree to terms within the fiscal quarter and cause expected revenue to slip into a subsequent quarter.

Our business could be impacted by fluctuations in quarterly results of operations due to customer seasonal purchasing patterns, the timing of significant orders, and the mix of licenses, products, and services purchased by our customers.

We have experienced, and may continue to experience, varied quarterly operating results. Various factors affect our quarterly operating results and some of these are not within our control, including customer demand and the timing of significant orders. We typically experience seasonality in demand for our products due to the purchasing cycles of our customers, with revenues in the fourth quarter generally being the highest. If planned contract renewals are delayed or the average size of renewed contracts is smaller than we anticipate, we could fail to meet our own and investors’ expectations, which could have a material adverse impact on our stock price.

Our revenues are also affected by the mix of transaction types in which we recognize revenues in different ways as required by accounting rules: as payments become due and payable, on a cash basis, ratably over the license term, or at the beginning of the license term. A shift in the license mix toward increased ratable, due and payable, and/or cash-based revenue recognition could result in increased deferral of revenues to future periods and would decrease current revenues, which could result in us not meeting near-term revenue expectations.

The gross margin on our software is greater than that for our hardware systems, software support, and professional services. Therefore, our gross margin may vary as a result of the mix of products and services sold. We also have a significant amount of fixed or relatively fixed costs, such as employee costs and purchased technology amortization, and costs which are committed in advance and can only be adjusted periodically. As a result, a small failure to reach planned revenues would likely have a relatively large negative effect on resulting earnings. If anticipated revenues do not materialize as expected, our gross margin and operating results could be materially adversely impacted.

We face intense price competition in the EDA industry.

Price competition in the EDA industry is intense, which can lead to, among other things, price reductions, longer selling cycles, lower product margins, loss of market share, and additional working capital requirements. If our competitors offer significant discounts on certain products, we may need to lower our prices or offer other favorable terms to compete successfully. Any such changes would likely reduce margins and could materially adversely impact our operating results. Any broad-based changes to our prices and pricing policies could cause new license and service revenues to decline or be delayed as the sales force implements and our customers adjust to the new pricing policies. Some of our competitors may bundle certain software or hardware products with other more desirable products at low prices or no marginal cost for promotional purposes as a long-term pricing strategy, or engage in predatory pricing. These practices could significantly reduce demand for our products or limit our pricing.

We currently compete primarily with two large companies: Synopsys, Inc. (Synopsys) and Cadence Design Systems, Inc. (Cadence). We also compete with smaller companies with focused product portfolios and manufacturers of electronic devices and semiconductor equipment that have acquired or internally developed their own EDA products.

Emulation technology is complex and difficult to develop; inaccurate forecasts of customer demand for existing and new emulation products may adversely affect our results.

Designing, developing, and introducing new emulation products is a complicated process. The development process for our emulation products requires a high level of innovation. After the development phase, we must be able to forecast customer demand and manufacture next generation products with features, capacity and performance desired by customers in sufficient volumes to meet this demand in a cost effective manner. Our manufacturing model, in which our emulation products generally are not built until after customer orders have been forecast, may from time to time experience delays in delivering products to customers in a timely manner. These delays could cause our customers to purchase emulation products from our competitors. Customers may also delay purchases of existing products in anticipation of our next generation product releases or those of our competitors. We may be unable to minimize this impact by anticipating and managing the addition of, and transition to, new generations of emulation hardware. Conversely, if we manufacture emulation products in anticipation of future sales which do not timely occur, we may hold excess inventory with associated risks of product obsolescence.

We may experience difficulty in manufacturing our emulation hardware.

We currently use one manufacturer to assemble our hardware emulation products and purchase some components from a single supplier. We may be exposed to delays in production and delivery of our emulation products due to delays in receiving components or manufacturing constraints; components rejected that do not meet our standards; components with latent defects; low yields of ICs, subassemblies, or printed circuit boards (PCBs); or other delays in the manufacturing process. For single

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source parts we purchase for our emulation products, there can be no assurance that if a supplier cannot deliver, a second source can be found on a timely basis. Our reliance on sole suppliers may also result in reduced control over product pricing and quality. Natural disasters such as weather or earthquakes may adversely affect the supply of components, sub-assemblies or shipment of final products.

Foreign currency fluctuations may have an adverse impact on our operating results.

We typically generate more than half of our revenues from customers outside the United States (U.S.) and we generate approximately 40% of our expenses outside the U.S. While most of our international sales are denominated in U.S. dollars, our international operating expenses are typically denominated in foreign currencies. Significant changes in currency exchange rates, particularly in the Japanese yen and the euro, could have an adverse impact on our operating results.

Our international operations involve risks that could increase our expenses, adversely affect our operating results, and require increased time and attention of our management.

Our international operations subject us to risks in addition to those we face in our domestic operations, including longer receivable collection periods; issues relating to complying with complex customs regulations and paying customs duties and value added taxes; changes in a specific country’s or region’s economic or political conditions; trade protection measures; trade sanctions, such as those imposed on Russia by the U.S. and the European Union; local labor laws; import or export licensing requirements; anti-corruption, anti-bribery, and other similar laws; loss or modification of exemptions for taxes and tariffs; limitations on repatriation of earnings; and difficulties with licensing and protecting our intellectual property (IP) rights. If we violate laws related to our business, we could be subject to penalties, fines, or other sanctions and could be prohibited or restricted from doing business in one or more countries.

Integrated circuit and printed circuit board technology evolves rapidly.

The complexity of ICs, PCBs, and electrical systems continues to rapidly increase. In response to this increasing complexity, new design tools and methodologies must be invented or acquired quickly to remain competitive. If we fail to quickly respond to new technological developments, our products could become obsolete or uncompetitive, which could materially adversely impact our business.

We may have to replace emulation components under warranty or under support contracts.

Our emulation hardware products are complex and despite pre-shipment testing, some defects may only appear after the products are put into use under operating conditions, including longer-term, continuous use at high capacities. As a result, customers may experience failures requiring us to replace components under warranty or as part of our customer support obligations, thus increasing our costs and reducing availability of components for other sales.

Errors or defects in our products and services could expose us to liability.

Our customers use our products and services in designing and developing products that involve a high degree of technological complexity and have unique specifications. Due to the complexity of the systems and products with which we work, some of our products can be adequately tested only when put to full use in the marketplace. As a result, our customers or their end users may discover errors or defects in our software, or the products or systems designed with or manufactured using our software may not operate as expected. Errors or defects could result in:

• Loss of current customers and market share, and loss of or delay in revenue;

• Failure to attract new customers or achieve market acceptance;

• Diversion of development resources to resolve problems resulting from errors or defects;

• Disputes with customers relating to such errors or defects, which could result in litigation or other concessions; and

• Increased support or service costs.

In addition, we include limited amounts of third-party technology in our products and we rely on those third parties to provide support services to us. Failure of those third parties to provide necessary support services could materially adversely impact our business.

Long sales cycles and delay in customer completion of projects make the timing of our revenues difficult to predict.

We have a long sales cycle. A lengthy customer evaluation and approval process is generally required due to the complexity and expense associated with our products and services. Consequently, we may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenues and may prevent

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us from pursuing other opportunities. Purchases of our products and services are sometimes discretionary and may be delayed if customers postpone approval or commencement of projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles, or timing of competitive evaluation processes. Long sales cycles for our hardware products may subject us to risks over which we have limited control, including insufficient, excess, or obsolete inventory, variations in inventory valuation, and fluctuations in quarterly operating results.

Any loss of our leadership position in certain categories of the EDA market could harm our business.

The industry in which we compete is characterized by very strong leadership positions in specific categories of the EDA market. For example, one company may have a large percentage of sales in the physical verification category of the market while another may have a similarly strong position in mixed-signal simulation. These strong leadership positions can be maintained for significant periods of time as the software is difficult to master and customers are disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from niche areas in which we are the leader. Conversely, it is difficult for us to achieve significant profits in niche areas where other companies are the leaders. If for any reason we lose our leadership position in an important niche, our business could be materially adversely impacted.

Conflict minerals regulations may adversely impact our ability to conduct our business.

The Securities and Exchange Commission (SEC) has adopted disclosure rules for companies that use conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold) in their products, with substantial supply chain verification requirements if the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These requirements could affect the sourcing, availability, and pricing of materials used in our hardware products as well as the companies we use to manufacture our products and their components. As a result, there may only be a limited pool of suppliers who provide conflict-free metals, and we cannot provide assurance that we will be able to obtain products in sufficient quantities or at competitive prices. The costs of complying with these laws could adversely affect our current or future business.

Pre-announcing products may adversely impact current sales.

We or our competitors sometimes pre-announce or provide "road maps" of the expected availability of new hardware or software products or product features. Such pre-announcements, whether offered by the pre-announcing company or its competitors, can result in customers canceling or deferring orders for currently offered products anticipating that currently offered products may be uncompetitive or lacking in features or performance. In the case of hardware products, slowing sales may cause inventories to increase or become obsolete, resulting in the need to discount or reduce production of current products.

We derive a substantial portion of our revenues from relatively few product groups.

We derive a substantial portion of our revenues from sales of relatively few product groups and related support services. As a result, any factor adversely affecting sales of these products, including product release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could harm our operating results.

Accounting rules governing revenue recognition are complex and periodically change.

The accounting rules governing revenue recognition are complex and are revised periodically. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles (GAAP). This rule is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to receive for goods and services provided to customers. The rule defines a five step process for revenue recognition, making it possible for more judgment and estimation within the revenue recognition process than is required under existing U.S. GAAP. Currently, we will be required to implement this guidance in the first quarter of fiscal year 2019. The standard permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting. Implementation of this new standard could have a significant effect on our reported financial results.

We may have additional tax liabilities.

Significant judgments and estimates are required in determining the provision for income taxes including the determination of research and development incentives and other credits and other tax liabilities worldwide. Our tax expense may be impacted if

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our intercompany transactions, which are required to be computed on an arm’s-length basis, are successfully challenged by tax authorities. The application of transfer pricing involves subjectivity, with a variety of application between countries. Transfer pricing disputes are especially common in certain countries, and on specific types of transactions such as business and IP transfers and management fees, and are increasingly resulting in litigation. Additionally, our tax expense could be impacted if a tax authority successfully asserted that we, or one of our subsidiaries, has a taxable presence in a country where a member of our group is not currently filing. Increasingly, tax authorities are asserting that foreign companies have unreported taxable presences, and various authorities are either evaluating or adjusting their laws and practices to lower the threshold for a taxable presence in conjunction with the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project.

Our tax expense could be impacted by the applicability of withholding taxes on software licenses, services, and related intercompany transactions in certain jurisdictions. In determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service (IRS) and other local or foreign tax authorities. The tax authorities in many of the countries where we do business regularly examine our income and other tax returns, and the ultimate outcome of these tax audits or other examinations cannot be predicted with certainty.

U.S. income taxes and foreign withholding taxes have not been provided for on undistributed earnings of certain of our non-U.S. subsidiaries to the extent that such earnings are considered to be indefinitely reinvested in the operations of those subsidiaries. A change in our decision concerning the amount of historical foreign earnings not considered indefinitely reinvested could increase our effective tax rate.

Forecasting our income tax rate is complex and subject to uncertainty.

The computation of income tax expense (benefit) is complex as it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under U.S. GAAP. Income tax expense (benefit) for interim quarters is based on a forecast of our global tax rate, including a separate determination for entities, if any, with losses for which no tax benefit is obtained. This forecast contains numerous assumptions and includes forward looking financial projections, such as the expectations of profit and loss by jurisdiction. Various items cannot be accurately forecast and future events may be treated as discrete to the period in which they occur. Our income tax rate can be materially impacted, for example, by the geographical mix of our profits and losses; changes in our business, such as internal restructuring and acquisitions; changes in tax laws and accounting guidance, and other regulatory, legislative or judicial developments; tax audit determinations; changes in our tax positions; changes in our intent and capacity to permanently reinvest foreign earnings; changes to our transfer pricing practices; tax deductions attributed to equity compensation; and changes in our valuation allowance for deferred tax assets. For these reasons, our overall global tax rate may be materially different from our forecast.

Certain tax policy efforts, including the OECD’s BEPS Project, the European Commission’s state aid investigations, and other initiatives could have a material effect on the taxation of international businesses, particularly companies with global IP and supply chain structures, and companies which publish software. Furthermore, many of the countries where we are subject to taxes, including the U.S., are independently evaluating their tax policies and we may see significant changes in legislation and regulations concerning taxation. Certain countries, such as the United Kingdom with its Diverted Profits Tax, have already enacted legislation which could affect international businesses, and other countries have become more aggressive in their approach to audits and enforcement of their applicable tax laws. Such changes, to the extent they are brought into tax legislation, regulations, policies, or practices, could increase our effective tax rates in various countries where we have operations and our overall tax rate could be materially affected, impacting our operating results, cash flows and financial condition.

There are limitations on the effectiveness of controls.

We do not expect that disclosure controls or internal control over financial reporting will prevent all errors and all fraud or that our policies and procedures can prevent all violations of the law by our employees, contractors, or agents. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that our control system will detect all errors and instances of fraud, if any, or prevent our employees, contractors, or agents from breaching or circumventing our policies or violating laws and regulations. Failure of our control systems to prevent error and fraud or violations of the law could materially adversely impact us.

We are subject to changing corporate governance regulations that impact compliance costs and risks of noncompliance.

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Rules and regulations set out by various governmental and self-regulatory organizations in the U.S. such as the SEC, NASDAQ, the Financial Industry Regulatory Authority, and the FASB, as well as in other worldwide locations where we operate, are continually evolving in scope and complexity which makes compliance increasingly difficult and uncertain. The increase in costs to develop awareness and comply with such evolving rules and regulations as well as any risk of noncompliance could adversely impact us.

We may not realize revenues as a result of our investments in research and development.

We incur substantial expense to develop new products. Research and development activities are often performed over long periods of time. These efforts may not result in successful product offerings because of changes in market conditions, competitive product offerings, advancements in technology or our failure to successfully develop products based on that research and development activity. As a result, we could realize little or no revenues related to our investment in research and development.

We may acquire other companies and may not successfully integrate them.

We have acquired numerous businesses and are frequently in discussions with potential acquisition candidates, and we may acquire other businesses in the future. While we generally analyze potential transactions before committing to them, we cannot provide assurance that any completed transaction will result in long-term benefits to us or our shareholders or that we will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after we acquire another business, it could materially adversely impact us:

• Difficulties in combining previously separate businesses into a single unit;

• The substantial diversion of management’s attention from ongoing business when integrating the acquired business;

• The failure to realize anticipated benefits, such as cost savings and increases in revenues;

• The failure to retain key personnel of the acquired business;

• Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering, and customer support areas;

• Unanticipated costs;

• Unanticipated liabilities or litigation in connection with or as a result of an acquisition, including claims from terminated employees, customers, or third parties;

• Adverse impacts on existing relationships with suppliers and customers; and

• Failure to understand and compete effectively in markets in which we have limited experience.

Acquired businesses may not perform as projected, which could result in impairment of acquisition-related intangible assets. Additional challenges include integration of sales channels, training and education of the sales force for new product offerings, integration of product development efforts, integration of systems of internal controls, and integration of information systems. Accordingly, in any acquisition there will be uncertainty as to the achievement and timing of projected synergies, cost savings, and sales levels for acquired products. All of these factors could impair our ability to forecast, meet revenues and earnings targets, and effectively manage our business for long-term growth.

Our competitors may acquire technology or other companies that impact our business.

Our competitors may acquire technology or companies offering competing or complementary product offerings which could adversely impact our ability to compete. A competitor may be able to deliver better or broader product offerings, offer better pricing, or otherwise make it more desirable for our customers to buy more of the tools in their design flow after the acquisition. In addition, our competitors may purchase companies or technology that we had an interest in acquiring, which could limit our expansion into certain market segments. Similarly, our competitors may purchase companies or technology on which we have a dependency resulting from our having bundled the acquired software with our products for licensing to customers or our use of the acquired software in our research and development environment.

Customer payment defaults could adversely affect our timing of revenue recognition.

We use fixed-term license agreements as standard business practices with customers we believe are creditworthy. These multi-year, multi-element term license agreements have payments spread over the license term and are typically about three years in length for semiconductor companies and about four years in length for IC foundries and military and aerospace companies. The complexity of these agreements tends to increase the risk of non-collectibility from customers that can arise for a variety of reasons including ability to pay, product dissatisfaction, and disputes. If we are unable to collect under these agreements, our

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results of operations could be materially adversely impacted. We have a history of successfully collecting under the original payment terms of fixed-term license agreements without making concessions on payments, products, or services. If we no longer had a history of collecting without providing concessions on the terms of the agreements, U.S. GAAP would require revenue to be recognized as the payments become due and payable over the license term. This change could have a material adverse impact on our near-term results.

We may not adequately protect our proprietary rights or we may fail to obtain software or other intellectual property licenses.

Our success depends, in large part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks, trade secret laws, licenses, and restrictive agreements to establish and protect our proprietary rights in technology and products. Despite precautions we take to protect our IP, we cannot provide assurance that third parties will not challenge, invalidate, or circumvent these protections. The companies in the EDA industry, as well as entities and persons outside the industry, continue to obtain patents at a rapid rate. We cannot predict if any of these patents will cover any of our products. In addition, many of these entities have substantially larger patent portfolios than we have. As a result, we may on occasion be forced to engage in costly patent litigation to protect our rights or defend our customers’ rights. We may also need to settle these claims on terms that are unfavorable; such settlements could result in the payment of significant damages or royalties, or force us to stop selling or redesign one or more products. We cannot provide assurance that the rights granted under our patents will provide us with a competitive advantage, that patents will be issued on any of our pending applications, or that future patents will be sufficiently broad to protect our technology. In addition, recent U.S. court decisions have weakened the enforceability of patents for software-related inventions, which make up a large portion of our patent portfolio. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent as U.S. law protects these rights in the U.S. In addition, despite the actions we take to limit piracy, other parties regularly illegally copy and use our products, which results in lost revenue.

Some of our products include software or other IP licensed from third parties, and we may have to seek new licenses or renew existing licenses for software and other IP in the future. Failure to obtain software or other IP licenses or rights from third parties on favorable terms could materially adversely impact us.

Alice court ruling could have a negative effect on the validity of some of our U.S. patents.

On June 19, 2014, the U.S. Supreme Court issued a significant decision in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, in which the Court tightened the standard for patentability of software inventions. The Court stated that if a person has an idea so abstract that it cannot be patented, simply tying it to a "generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention." Many commentators believe the Alice decision is another in a line of cases intended to limit the use of poor quality software patents. In any event, the Alice decision will provide accused infringers of software patents new arguments to challenge the validity of such patents. At this time, the effects of the Alice decision are still being assessed by patent holders, attorneys, the U.S. Patent and Trademark Office and courts. The Alice decision and related U.S. Supreme Court decisions could potentially have a negative effect on the validity of some of our U.S. patents.

Intellectual property infringement actions may harm our business.

Patent holders are making increasing efforts to monetize their patent portfolios. IP infringement claims against us directly, or where we contractually must defend our customers, could result in costly litigation and consume significant time of employees and management. In addition, IP litigation could harm our business, due to damage awards, payment of legal fees, an obligation to refund license fees to a customer or forgo receipt of future customer payments, the need to license technology on what might be unfavorable business terms, injunctions that could stop or delay future shipments, or the need to redesign our technology. For example, we are currently engaged in patent infringement litigation involving Emulation and Verification Engineering S.A., EVE-USA, Inc., and Synopsys. Further information regarding these lawsuits is contained in Part II, Item 1. "Legal Proceedings".

Our use of open source software could negatively impact our ability to sell our products and may subject us to unanticipated obligations.

The products, services or technologies we acquire, license, provide or develop may incorporate or use open source software. We monitor and restrict our use of open source software in an effort to avoid unintended consequences, such as reciprocal license grants, patent retaliation clauses, and the requirement to license our products at no cost. Nevertheless, we may be subject to unanticipated obligations regarding our products which incorporate open source software.

Our failure to attract and retain key employees may harm us.

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We depend on the efforts and abilities of our senior management, our research and development staff, and a number of other key management, sales, support, technical, and services personnel. Competition for experienced, high-quality personnel is intense, and we cannot provide assurance that we can continue to recruit and retain such personnel. Our failure to hire and retain such personnel could impair our ability to develop new products and manage our business effectively.

We have global sales and research and development offices in parts of the world that are not as politically stable as the United States.

We have global sales and research and development offices, some of which are in parts of the world that are not as politically stable as the U.S. In particular, approximately 15% of our workforce, and a larger percentage of our engineers, are located in our offices in Armenia, Egypt, Israel, Morocco, Pakistan, and Russia which are subject to disruption or closure from time to time. As a result, we may face a greater risk of business interruption as a result of potential unrest, terrorist acts, or military conflicts than businesses located domestically. This could have a material adverse effect on product delivery and our research and development operations.

Our business is subject to the risk of natural disasters.

We have sales and research and development offices worldwide which may be adversely affected by weather, earthquakes, or other natural disasters. If a natural disaster occurs at or near any of our offices, our operations may be interrupted, which could adversely impact our business and results of operations. In addition, if a natural disaster impacts a significant number of our customers, our business and results of operations could be adversely impacted.

If our information technology security measures are breached, our information systems may be perceived as being insecure, which could harm our business and reputation.

Our products and services involve the storage and transmission of proprietary information owned by us and our customers. We have sales and research and development offices throughout the world. Our operations are dependent upon the connectivity of our operations worldwide. Despite our security measures, our information technology and infrastructure may be vulnerable to breach by cyber-attacks, errors or malicious actions by employees or contractors, or other disruptions that could result in unauthorized disclosure of sensitive information and could significantly interfere with our business operations. Breaches of our security measures could expose us to a risk of loss or misuse of this information, adverse publicity, violations of privacy laws, and litigation. Because techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, with the use of "cloud" services in our business, despite our attempts to validate the security of such services, proprietary information may be misappropriated by third parties. If there is an actual or perceived breach of our security, or the security of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to our reputation or our business, lose existing customers or increase the difficulty of gaining new customers.

Our revolving credit facility has financial and non-financial covenants, and default of any covenant could materially adversely impact us.

Our bank revolving credit facility imposes operating restrictions on us in the form of financial and non-financial covenants. Financial covenants include adjusted quick ratio, tangible net worth, leverage ratio, senior leverage ratio, and minimum cash and accounts receivable ratio. If we were to fail to comply with the financial covenants and did not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility. The declaration of an event of default could have a material adverse effect on our financial condition. We could also find it difficult to obtain other bank lines or credit facilities on comparable terms.

We have a substantial level of indebtedness.

As of July 31, 2016, we had $263.0 million of outstanding indebtedness, which includes principal of $253.0 million of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures), $5.2 million in other notes payable, and $4.8 million in short-term borrowings. This level of indebtedness among other things could:

• Make it difficult for us to satisfy payment obligations on our debt;

• Make it difficult for us to incur additional indebtedness or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions, or general corporate purposes;

• Limit our flexibility in planning for or reacting to changes in our business;

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• Reduce funds available for use in our operations;

• Make us more vulnerable in the event of a downturn in our business; and

• Place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.

We may also be unable to borrow funds as a result of an inability of financial institutions to lend due to restrictive lending policies and/or institutional liquidity concerns.

Our 4.00% Debentures are convertible under certain circumstances at a conversion price as of July 31, 2016 of $19.87 per share (as adjusted for the effect of cash dividends and other applicable items). These circumstances include the market price of our common stock exceeding 120% of the conversion price, or $23.84 per share as of July 31, 2016, for at least 20 of the last 30 trading days of the previous fiscal quarter. If any of the holders elect to convert their debentures, we are required to pay cash for at least the principal amount of any converted debentures and cash or shares for the excess of the value of the converted shares over the principal amount. If holders of a significant amount of our 4.00% Debentures elect to convert, we could have difficulty paying the amount due upon conversion, which would have a material adverse impact on our liquidity and financial condition. However, the market value of the 4.00% Debentures has exceeded and likely will continue to exceed the value that would be received on conversion, and we believe it is unlikely at this time that a significant amount of our 4.00% Debentures would be converted, if conversion was available.

If we experience a decline in revenues, we could have difficulty paying amounts due on our indebtedness. Any default under our indebtedness could have a material adverse impact on our business, operating results, and financial condition.

Our stock price could become more volatile, and your investment could lose value.

All of the factors discussed in this “Risk Factors” section could affect our stock price. The timing of announcements in the public market regarding new products, product enhancements, or technological advances by our competitors or us, and any announcements by us or by our competitors of acquisitions, major transactions, or management changes could also affect our stock price. Our stock price is subject to speculation in the press and the analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock, our credit ratings, and market trends unrelated to our performance. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.

Our business could be negatively affected as a result of actions of activist shareholders.

Responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations, and diverting the attention of management and our employees. The perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners.

Ability to pay dividends.

We currently declare and pay quarterly cash dividends on our common stock. Any future payment of cash dividends will depend upon our financial condition, earnings, available cash, cash flow, and other factors our board of directors deems relevant. Our revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility of $200 million plus 70% of our cumulative net income (loss) for periods ending after February 1, 2016. In addition, our board may decrease or discontinue payment of dividends at any time, which could cause the market price of our stock to decline.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information regarding repurchases of our common stock by us during the three months ended July 31, 2016:

Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced programs	Maximum dollar value of shares that may yet be purchased under the programs
May 1 - May 31, 2016	—	$	—	—	$	90,000,045
June 1 - June 30, 2016	—	$	—	—	$	90,000,045
July 1 - July 31, 2016	—	$	—	—	$	90,000,045
	—	$	—	—

On June 12, 2014, we announced a share repurchase program approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock over a three-year period. The repurchase that occurred in February 2016 was a single transaction that was excluded from our share repurchase program.

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Item 6. Exhibits

10.A	2010 Omnibus Incentive Plan, as amended.
31.1	Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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 thereunto duly authorized.

Dated: August 30, 2016	MENTOR GRAPHICS CORPORATION (Registrant)
	/S/ GREGORY K. HINCKLEY
	Gregory K. Hinckley
	President, Chief Financial Officer

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EX-10.A

Exhibit 10.A

Mentor Graphics Corporation

2010 Omnibus Incentive Plan

Article 1. Establishment, Purpose, and Duration

1.1    Establishment. Mentor Graphics Corporation, an Oregon corporation (hereinafter referred to as the “Company”), establishes an incentive compensation plan to be known as the Mentor Graphics Corporation 2010 Omnibus Incentive Plan (hereinafter referred to as the “Plan”), as set forth in this document. This Plan permits the issuance of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Deferred Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards. This Plan shall become effective upon stockholder approval and shall remain in effect as provided in Section 1.3 hereof.

1.2    Purpose of this Plan. The purpose of this Plan is to provide a means whereby Employees, Non-employee Directors, and Third Party Service Providers of the Company develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. A further purpose of this Plan is to provide a means through which the Company may attract and retain able individuals to become Employees, Non-employee Directors or Third Party Service Providers of the Company. This Plan is intended to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the Company are of importance can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company.

1.3    Duration of this Plan. Unless sooner terminated as provided herein, this Plan shall terminate on March 10, 2020; provided, however, that the term of this Plan shall be extended for ten years following any action by the Board approving an increase in the number of Shares available for issuance under the Plan, which action is subsequently approved within 12 months by the stockholders. After this Plan is terminated, no Awards may be granted but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and this Plan’s terms and conditions.

Article 2. Definitions

Whenever used in this Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized.

2.1    “Affiliate” shall mean any corporation or other entity (including, but not limited to, a partnership or a limited liability company) that is affiliated with the Company through an interest of more than fifty percent (50%) by reason of stock or equity ownership or otherwise, and is designated as an Affiliate for purposes of this Plan by the Committee.

2.2    “Annual Award Limit” or “Annual Award Limits” have the meaning set forth in Section 4.3.

2.3    “Award” means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Deferred Stock Units, Performance Shares, Performance Units, Cash-Based Awards or Other Stock-Based Awards, in each case subject to the terms of this Plan.

2.4    “Award Agreement” means either (i) a written or electronic agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award granted under this Plan, including any amendment or modification thereof, or (ii) a written or electronic statement issued by the Company to a Participant describing the terms and provisions of such Award, including any amendment or modification thereof. The Committee may modify the Company’s Award process from time to time in its sole discretion, including by providing for the use of electronic, internet or other non-paper Award Agreements, and the use of electronic, internet or other non-paper means for the acceptance thereof and actions thereunder by a Participant.

2.5    “Beneficial Owner” or “Beneficial Ownership” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

2.6    “Board” or “Board of Directors” means the Board of Directors of the Company.

2.7    “Cash-Based Awards” means an Award, denominated in cash, granted to a Participant as described in Article 10.

2.8    “Change of Control” means a situation where any of the following events occur:

(a)    Acquisition of Stock by Third Party. The acquisition by any Person of Beneficial Ownership of 40% or more of either the then-outstanding shares of common stock of the Company or the Outstanding Voting Securities; provided, however, that, for purposes of this Section 2.8(a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary of the Company;

(b)    Change in Board of Directors. Individuals who, as of the Grant Date of an Award, constitute the Board, and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two thirds of the directors then still in office who were directors on the Grant Date or whose election or nomination for election was previously so approved (collectively, the “Continuing Directors”), cease for any reason to constitute at least a majority of the members of the Board;

(c)    Corporate Transactions. The effective date of a reorganization, merger or consolidation of the Company (a “Business Combination”), in each case, unless immediately following such Business Combination: (i) all or substantially all of the Persons who were Beneficial Owners of Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 51% of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction either owns the Company or all or substantially all of the Company’s assets either directly or through one or more Subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Voting Securities; (ii) no Person (excluding any corporation resulting from such Business Combination) is the Beneficial Owner, directly or indirectly, of 40% or more of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation except to the extent that such ownership existed prior to such Business Combination; and (iii) at least a majority of the board of directors of the corporation resulting from such Business Combination were Continuing Directors at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination;

(d)    Liquidation. The approval by the shareholders of the Company of a complete liquidation of the Company or an agreement or series of agreements for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than factoring the Company’s current receivables or escrows due (or, if such approval is not required, the decision by the Board to proceed with such a liquidation, sale or disposition in one transaction or a series of related transactions); or

(e)    Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar or successor item on any similar or successor schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company is then subject to such reporting requirement.

2.9    “Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time. For purposes of this Plan, references to sections of the Code shall be deemed to include references to any applicable regulations and any successor or similar provision.

2.10    “Committee” means the Compensation Committee of the Board or another committee appointed by the Board to administer the Plan. Each member of the Compensation Committee or any other such committee must be an “independent director” under NASDAQ rules, an “outside director” for purposes of Code Section 162(m), and a “non-employee director” under Rule 16b-3(b)(3) under the Exchange Act, as such requirements may change from time to time.

2.11    “Company” means Mentor Graphics Corporation, an Oregon corporation, and any successor thereto as provided in Article 19 herein.

2.12    “Covered Employee” means any Employee who is or may become a “Covered Employee,” as defined in Code Section 162(m), and who is designated, either as an individual Employee or class of Employees, by the Committee within the shorter of (i) ninety (90) days after the beginning of the Performance Period, or (ii) twenty-five percent (25%) of the Performance Period has elapsed, as a “Covered Employee” under this Plan for such applicable Performance Period.

2.13    “Deferred Stock Unit” means an Award granted to a Participant pursuant to Article 8 giving the Participant a contractual right to receive a stated number of Shares or, if provided by the Committee on the Grant Date, cash equal to the Fair Market Value of such Shares, under the Plan at the end of a specified period of time or upon the occurrence of a specified event.

2.14    “Director” means any individual who is a member of the Board of Directors of the Company.

2.15    “Employee” means any individual performing services for the Company, an Affiliate, or a Subsidiary and designated as an employee of the Company, the Affiliate, or the Subsidiary on the payroll records. An Employee shall not include any individual during any period he or she is classified or treated by the Company, Affiliate, or Subsidiary as a contingent worker, independent contractor, consultant, or any employee of a franchise, master distributor, employment, consulting, or temporary agency or any other entity other than the Company, Affiliate, or Subsidiary, without regard to whether such individual is subsequently determined to have been, or is subsequently retroactively reclassified as a employee of the Company, Affiliate, or Subsidiary during such period. An individual shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company for purposes protected under law including, without limitation, medical leave, leave to care for a family member, maternity- paternity- or adoptive leave, leave for military service or leave to participate in mandatory legal process or (ii) transfers or Company-initiated relocations between locations of the Company or between the Company, any Affiliates, or any Subsidiaries. For purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the commencement of such leave, any Incentive Stock Option held by a Participant shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonqualified Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

2.16    “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

2.17    “Fair Market Value” or “FMV” means

(a)    A price of a Share that is based on the opening, closing, actual, high, low, or average selling prices of a Share reported on any established stock exchange or national market system including without limitation the New York Stock Exchange and the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System on the applicable date, the preceding trading day, the next succeeding trading day, or an average of trading days, as determined by the Committee in its discretion. Unless the Committee determines otherwise, Fair Market Value on any day shall be deemed to be equal to the closing price of a Share of the Company’s common stock on NASDAQ on that day or, if that day is not a trading day, on the prior trading day.

(b)    If Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the mean between the high bid and low asked prices for a Share on the day of determination or, if that day is not a trading day, the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable.

(c)    In the event Shares are not publicly traded at the time a determination of their value is required to be made hereunder, the price of a Share as determined by the Committee in such manner as it deems appropriate.

2.18    “Grant Date” means the date an Award is granted to a Participant pursuant to the Plan.

2.19    “Grant Price” means the price established at the time of grant of an SAR pursuant to Article 7, used to determine whether there is any payment due upon exercise of the SAR.

2.20    “Incentive Stock Option” or “ISO” means an Option to purchase Shares granted under Article 6 to an Employee and that is designated as an Incentive Stock Option and that is intended to meet the requirements of Code Section 422, or any successor provision.

2.21    “Non-employee Director” means a Director who is not an Employee.

2.22    “Nonqualified Stock Option” or “NQSO” means an Option that is not intended to meet the requirements of Code Section 422, or that otherwise does not meet such requirements.

2.23    “Option” means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6.

2.24    “Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.

2.25    “Other Stock-Based Award” means an equity-based or equity-related Award not otherwise described by the terms of this Plan, granted pursuant to Article 10.

2.26    “Outstanding Voting Securities” shall mean the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors.

2.27    “Participant” means any eligible individual as set forth in Article 5 to whom an Award is granted.

2.28    “Performance-Based Compensation” means compensation under an Award that is intended to satisfy the requirements of Code Section 162(m) for certain performance-based compensation paid to Covered Employees. Notwithstanding the foregoing, nothing in this Plan is intended nor shall be construed to mean that an Award which does not satisfy the requirements for performance-based compensation under Code Section 162(m) does not constitute performance-based compensation for other purposes, including Code Section 409A.

2.29    “Performance Measures” means measures, as described in Article 12, on which the performance goals are based and which are approved by the Company’s stockholders pursuant to this Plan in order to qualify Awards as Performance-Based Compensation.

2.30    “Performance Period” means the period of time during which the performance goals must be met in order to determine the degree of payout and/or vesting with respect to an Award.

2.31    “Performance Share” means an Award under Article 9 and subject to the terms of this Plan, denominated in Shares, the value of which at the time it is payable is determined as a function of the extent to which corresponding performance goals, as described in Article 12, have been achieved.

2.32    “Performance Unit” means an Award under Article 9 and subject to the terms of this Plan, denominated in units, the value of which at the time it is payable is determined as a function of the extent to which corresponding performance goals, as described in Article 12, have been achieved.

2.33    “Period of Restriction” means the period, if any, when Restricted Stock, Restricted Stock Units or Deferred Stock Units are subject to a substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), as provided in Article 8.

2.34    “Person” shall have the meaning ascribed to such term in Section 3(a) (9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof.

2.35    “Plan” means the Mentor Graphics Corporation 2010 Omnibus Incentive Plan.

2.36    “Plan Year” means the Company’s fiscal year that begins February 1 and ends January 31.

2.37     “Prior Plans” means the Mentor Graphics Corporation 1982 Stock Option Plan, the Mentor Graphics Corporation Nonqualified Stock Option Plan, the Mentor Graphics Corporation 1986 Stock Plan and the Mentor Graphics Corporation 1987 Non-Employee Directors’ Stock Plan.

2.38     “Restricted Stock” means an Award granted to a Participant pursuant to Article 8 under which Shares are actually issued to the Participant on the Grant Date, subject to forfeiture or repurchase during the Period of Restriction.

2.39    “Restricted Stock Unit” means an Award granted to a Participant pursuant to Article 8, except no Shares are actually issued to the Participant on the Grant Date.

2.40    “Share” means a share of common stock of the Company.

2.41     “Stock Appreciation Right” or “SAR” means an Award, designated as an SAR, pursuant to the terms of Article 7.

2.42    “Subsidiary” means any corporation or other entity, whether domestic or foreign, in which the Company has or obtains, directly or indirectly, an interest of more than fifty percent (50%) by reason of stock ownership or otherwise.

2.43    “Third Party Service Provider” means any consultant, agent, advisor, or independent contractor who is a natural person and who renders services to the Company, a Subsidiary, or an Affiliate that (a) are not in connection with the offer and sale of the Company’s securities in a capital raising transaction, and (b) do not directly or indirectly promote or maintain a market for the Company’s securities.

Article 3. Administration

3.1    General. The Committee shall be responsible for administering this Plan, subject to this Article 3 and the other provisions of this Plan. The Committee may employ attorneys, consultants, accountants, agents, and other individuals, any of whom may be an Employee, and the Committee, the Company, and its officers and Directors shall be entitled to rely upon the advice, opinions, or valuations

of any such individuals. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participants, the Company, and all other interested individuals.

3.2    Authority of the Committee. Subject to any express limitations set forth in the Plan, including, without limitation, the requirements to obtain stockholder approval, the Committee shall have full and exclusive discretionary power and authority to take such actions as it deems necessary and advisable with respect to the administration of the Plan including, but not limited to, the following:

(a)    To determine from time to time which of the persons eligible under the Plan shall be granted Awards, when and how each Award shall be granted, what type or combination of types of Awards shall be granted, the provisions of each Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Shares pursuant to an Award;

(b)    To construe and interpret the Plan and Awards granted under it, and to establish, amend, and revoke rules and regulations for its administration. The Committee, in the exercise of this power, may correct any defect, omission, or inconsistency in the Plan or in an Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective;

(c)    To approve forms of Award Agreements for use under the Plan;

(d)    To determine Fair Market Value of a Share in accordance with Section 2.17 of the Plan;

(e)    To amend the Plan or any Award Agreement as provided in the Plan;

(f)    To adopt sub-plans and/or special provisions applicable to Awards regulated by the laws of a jurisdiction other than and outside of the United States. Such sub-plans and/or special provisions may take precedence over other provisions of the Plan, but unless otherwise superseded by the terms of such sub-plans and/or special provisions, the provisions of the Plan shall govern;

(g)    To authorize any person to execute on behalf of the Company any instrument required to grant an Award previously granted by the Committee;

(h)    To determine whether Awards will be settled in Shares, cash, or in any combination;

(i)    To determine whether Awards will be adjusted for dividend equivalents, meaning a credit, made at the discretion of the Committee, to the account of a Participant in an amount equal to the cash dividends paid on one Share for each Share represented by an Award held by such Participant;

(j)    To establish a program whereby Participants designated by the Committee may reduce compensation otherwise payable in cash in exchange for Awards under the Plan;

(k)    Subject to Section 17.1(b), to authorize a program permitting eligible Participants to surrender outstanding Awards in exchange for newly granted Awards;

(l)    To impose such restrictions, conditions, or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by the Participant of any Shares, including, without limitation, (i) restrictions under an insider trading policy and (ii) restrictions as to the use of a specified brokerage firm for such resales or other transfers; and

(m)    To provide, either at the time an Award is granted or by subsequent action, that an Award shall contain as a term thereof, a right, either in tandem with the other rights under the Award or as an alternative thereto, of the Participant to receive, without payment to the Company, a number of Shares, cash or a combination thereof, the amount of which is determined by reference to the value of Shares.

Article 4. Shares Subject to this Plan and Maximum Awards

4.1    Number of Shares Authorized and Available for Awards. Subject to adjustment as provided in Section 4.4 of the Plan, the maximum number of Shares authorized and available for issuance under the Plan shall be 15,700,000 plus the number of Shares subject to outstanding stock options or restricted stock units under the Prior Plans as of the date of stockholder approval of this Plan that thereafter expire or terminate without issuance of the Shares. In connection with approving this Plan, the Board of Directors has approved a resolution that, effective upon receipt of stockholder approval of this Plan, any Shares available for issuance under the Prior Plans that are not subject to outstanding awards under the Prior Plans will no longer be available for issuance under the Prior Plans.

4.2    Shares Available for Issuance. Shares covered by an Award shall be counted as used only to the extent they are issued. Any Shares related to Awards under this Plan or under Prior Plans that terminate by expiration, forfeiture (including through repurchase

of the Shares at original cost), cancellation, or otherwise without the issuance of the Shares, or are settled in cash in lieu of Shares, or are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not involving Shares, shall be available again for grant under this Plan. In addition, any Shares that are not issued or delivered as a result of the net settlement of an outstanding SAR or Optionunder this Plan or Prior Plans, and any Shares withheld or used to pay the Option Price or withholding taxes related to an outstanding Awardunder this Plan or Prior Plans, shall be available again for grant under this Plan. Cash-Based Awards, Performance Units and any other Awards that are not settled by issuance of Shares shall not reduce the Shares available for issuance under the Plan.

4.3    Annual Award Limits. No Participant may be granted Options or SARs under the Plan for more than an aggregate of 1,000,000 Shares in a Plan Year, as may be adjusted pursuant to Section 4.4. The maximum dollar amount payable under all Performance Unit Awards and Cash-Based Awards that are intended to qualify as Performance-Based Compensation plus the maximum value of Shares under all Performance Share Awards and Other Stock-Based Awards that are intended to qualify as Performance-Based Compensation, in the aggregate, granted to any one Participant in any one Plan Year shall not exceed $5,000,000; for this purpose, the value of Shares shall be the FMV of the Shares on the Grant Date of the applicable Award.

4.4    Adjustments in Authorized Shares. Adjustment in authorized Shares available for issuance under the Plan or under an outstanding Award and adjustments in Annual Award Limits shall be subject to the following provisions:

(a)    In the event of any corporate event or transaction (including, but not limited to, a change in the Shares of the Company or the capitalization of the Company) such as a merger, consolidation, reorganization, recapitalization, separation, partial or complete liquidation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, combination of Shares, exchange of Shares, dividend in kind, or other like change in capital structure, number of outstanding Shares or distribution (other than normal cash dividends) to stockholders of the Company, or any similar corporate event or transaction, the Committee, in order to prevent dilution or enlargement of Participants’ rights under this Plan, shall substitute or adjust, as applicable, the number and kind of Shares that may be issued under this Plan or under particular forms of Awards, the number and kind of Shares subject to outstanding Awards, the Option Price or Grant Price applicable to outstanding Awards, the Annual Award Limits, and other value determinations applicable to outstanding Awards; provided that the Committee, in its sole discretion, shall determine the methodology or manner of making such substitution or adjustment. The Committee, in its sole discretion, may also make appropriate adjustments in the terms of any Awards under this Plan to reflect such changes or distributions and may modify any other terms of outstanding Awards, including modifications of performance goals and changes in the length of Performance Periods.

(b)    The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under this Plan.

(c)    Subject to the provisions of Article 17 and notwithstanding anything else herein to the contrary, without affecting the number of Shares reserved or available hereunder, the Committee may authorize the issuance or assumption of benefits either under this Plan or outside of this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with the rules under Code Sections 422, 424 and 409A, as and where applicable.

Article 5. Eligibility and Participation

5.1    Eligibility. Individuals eligible to participate in this Plan include all Employees, Non-employee Directors, and Third Party Service Providers.

5.2    Actual Participation. Subject to the provisions of this Plan, the Committee may, from time to time, select from all eligible individuals, those individuals to whom Awards shall be granted and shall determine, in its sole discretion, the nature of, any and all terms permissible by law, and the amount of each Award.

Article 6. Stock Options

6.1    Grant of Options. Subject to the terms and provisions of this Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee, in its sole discretion.

6.2    Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the maximum duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an Option shall become vested and exercisable, and such other provisions as the Committee shall determine which are not inconsistent with the terms of this Plan. The Award Agreement also shall specify whether the Option is intended to be an ISO or an NQSO.

6.3    Option Price. The Option Price for each grant of an Option under this Plan shall be determined by the Committee in its sole discretion and shall be specified in the Award Agreement; provided, however, the Option Price must be at least equal to one hundred percent (100%) of the FMV of a Share as of the Option’s Grant Date.

6.4    Term of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant; provided, however, no Option shall be exercisable later than the tenth (10^th) anniversary date of its grant.

6.5    Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which terms and restrictions need not be the same for each grant or for each Participant.

6.6    Payment. Options granted under this Article 6 shall be exercised by the delivery of a notice of exercise to the Company or an agent designated by the Company in a form and using a means specified or accepted by the Committee, or by complying with any alternative procedures which may be authorized by the Committee, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. A condition of the issuance of the Shares as to which an Option shall be exercised shall be the payment of the Option Price, as specified in the Award Agreement. The Option Price of any exercised Option shall be payable to the Company in accordance with one of the following methods:

(a)    in cash or its equivalent;

(b)    by tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the Option Price;

(c)    by a cashless (broker-assisted) exercise;

(d)    by any combination of (a), (b) and (c); or

(e)    any other method approved or accepted by the Committee in its sole discretion.

        Subject to any governing rules or regulations, as soon as practicable after receipt of written notification of exercise and full payment (including satisfaction of any applicable tax withholding), the Company shall deliver to the Participant evidence of book entry Shares, or upon the Participant’s request, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). Unless otherwise determined by the Committee, all payments under all of the methods indicated above shall be paid in United States dollars or Shares, as applicable.

6.7    Special Rules Regarding ISOs. Notwithstanding any provision of the Plan to the contrary, an ISO granted to a Participant shall be subject to the following rules:

(a)    Special ISO Definitions:

(i)    “Parent Corporation” shall mean as of any applicable date a corporation in respect of the Company that is a parent corporation within the meaning of Code Section 424(e).

(ii)    “ISO Subsidiary” shall mean as of any applicable date any corporation in respect of the Company that is a subsidiary corporation within the meaning of Code Section 424(f).

(iii)    A “10% Owner” is an individual who owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent Corporation or any ISO Subsidiary.

(b)    Eligible employees. ISOs may be granted solely to eligible Employees of the Company, Parent Corporation, or ISO Subsidiary (as permitted under Code Sections 422 and 424).

(c)    Specified as an ISO. The Award Agreement evidencing the grant of an ISO shall specify that such grant is intended to be an ISO.

(d)    Option price. The Option Price of an ISO granted under the Plan shall be determined by the Committee in its sole discretion and shall be specified in the Award Agreement; provided, however, the Option Price must at least equal one hundred percent (100%) of the Fair Market Value of a Share as of the ISO’s Grant Date (in the case of a 10% owner, the Option Price may not be not less than 110% of such Fair Market Value).

(e)    Right to exercise. Any ISO granted to a Participant under the Plan shall be exercisable during his or her lifetime solely by such Participant or, in the event of the Participant’s death, by his estate or heirs (as permitted under Code Section 422(b)(5)).

(f)    Exercise period. The period during which a Participant may exercise an ISO shall not exceed ten (10) years (five (5) years in the case of a Participant who is a 10% Owner) from the date on which the ISO was granted.

(g)    Dollar limitation. To the extent that the aggregate Fair Market Value of (a) the Shares with respect to which Options designated as Incentive Stock Options plus (b) the shares of stock of the Company, Parent Corporation, and any ISO Subsidiary with respect to which other Incentive Stock Options are exercisable for the first time by a holder of an ISO during any calendar year under all plans of the Company and any Affiliate and Subsidiary exceeds $100,000, such Options shall be treated as Nonqualified Stock Options. For purposes of the preceding sentence, (a) Options shall be taken into account in the order in which they were granted, and (b) the Fair Market Value of the Shares shall be determined as of the time the Incentive Stock Options were granted.

(h)    Notification of disqualifying disposition. If any Participant shall make any disposition of Shares issued pursuant to the exercise of an ISO, such Participant shall notify the Company of such disposition within thirty (30) days thereof. The Company shall use such information to determine whether a disqualifying disposition as described in Code Section 421(b) has occurred.

(i)    Transferability. No ISO granted under this Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution (as permitted under Code Section 422(b) (5)); provided, however, at the discretion of the Committee, an ISO may be transferred to a grantor trust under which the Participant making the transfer is the sole beneficiary.

Article 7. Stock Appreciation Rights

7.1    Grant of SARs. Subject to the terms and conditions of this Plan, SARs may be awarded to Participants at any time and from time to time as shall be determined by the Committee. Subject to the terms and conditions of this Plan, the Committee shall have complete discretion in determining the number of SARs granted to each Participant and, consistent with the provisions of this Plan, in determining the terms and conditions pertaining to such SARs.

7.2    Grant Price. The Grant Price for each grant of an SAR shall be determined by the Committee and shall be specified in the Award Agreement; provided, however, the Grant Price must be at least equal to one hundred percent (100%) of the FMV of a Share as of the Grant Date.

7.3    SAR Agreement. Each SAR Award shall be evidenced by an Award Agreement that shall specify the Grant Price, the term of the SAR, and such other provisions as the Committee shall determine.

7.4    Term of SAR. The term of an SAR granted under this Plan shall be determined by the Committee, in its sole discretion, and except as determined otherwise by the Committee and specified in the SAR Award Agreement, no SAR shall be exercisable later than the tenth (10^th) anniversary date of its grant.

7.5    Exercise of SARs. SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes.

7.6    Settlement of SARs. Upon the exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a)    the excess of the Fair Market Value of a Share on the date of exercise over the Grant Price; by

(b)    the number of Shares with respect to which the SAR is exercised.

7.7    Form of Payment. Payment, if any, with respect to an SAR settled in accordance with Section 7.6 of the Plan shall be made in accordance with the terms of the applicable Award Agreement, in cash, Shares, or a combination thereof, as the Committee determines.

7.8    Other Restrictions. The Committee shall impose such other conditions or restrictions on any Shares received upon exercise of an SAR granted pursuant to this Plan as it may deem advisable or desirable. These restrictions may include, but shall not be limited to, a requirement that the Participant hold the Shares received upon exercise of an SAR for a specified period of time.

Article 8. Restricted Stock, Restricted Stock Units and Deferred Stock Units

8.1    Grant of Restricted Stock, Restricted Stock Unitsor Deferred Stock Units. Subject to the terms and provisions of this Plan, the Committee, at any time and from time to time, may award Shares of Restricted Stock, Restricted Stock Units and/or Deferred Stock Units to Participants in such amounts as the Committee shall determine. Restricted Stock Units shall be similar to Restricted Stock except that no Shares are actually issued to the Participant until the Period of Restriction has expired and any other performance-based or other vesting conditions have been satisfied. Deferred Stock Units shall be similar to Restricted Stock Units except that the issuance of Shares shall be further delayed after vesting as specified under the terms of the Award.

8.2    Restricted Stock, Restricted Stock Unit or Deferred Stock Unit Agreement. Each Restricted Stock, Restricted Stock Unit and/or Deferred Stock Unit award shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units or Deferred Stock Units granted, and such other provisions as the Committee shall determine.

8.3    Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock, Restricted Stock Units or Deferred Stock Units awarded pursuant to this Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit or Deferred Stock Unit, restrictions based upon the achievement of specific performance goals, as provided for in Article 12, time-based restrictions on vesting following the attainment of the performance goals, time-based restrictions, and/or restrictions under applicable laws or under the requirements of any stock exchange or market upon which such Shares are listed or traded, or holding requirements or sale restrictions placed on the Shares by the Company upon vesting of such Restricted Stock, Restricted Stock Units or Deferred Stock Units. To the extent deemed appropriate by the Committee, the Company may retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied or lapse. Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock Award shall become freely transferable by the Participant after all conditions and restrictions applicable to such Shares have been satisfied or lapse (including satisfaction of any applicable tax withholding obligations), and Restricted Stock Units and Deferred Stock Units shall be paid in cash, Shares, or a combination of cash and Shares as the Committee, in its sole discretion, shall determine.

8.4    Certificate Legend. In addition to any legends placed on certificates pursuant to Section 8.3, each certificate representing Shares of Restricted Stock granted pursuant to this Plan may bear a legend such as the following or as otherwise determined by the Committee in its sole discretion:

The sale or transfer of Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Mentor Graphics Corporation 2010 Omnibus Incentive Plan, and in the associated Award Agreement. A copy of the Plan and such Award Agreement may be obtained from Mentor Graphics Corporation.

8.5    Voting Rights. Unless otherwise determined by the Committee and set forth in a Participant’s Award Agreement, to the extent permitted or required by law, as determined by the Committee, Participants holding Shares of Restricted Stock awarded hereunder shall have the right to exercise full voting rights with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units or Deferred Stock Units awarded hereunder until Shares are issued.

Article 9. Performance Units/Performance Shares

9.1    Award of Performance Units/Performance Shares. Subject to the terms and provisions of this Plan, the Committee, at any time and from time to time, may award Performance Units and/or Performance Shares to Participants in such amounts and upon such terms as the Committee shall determine.

9.2    Value of Performance Units/Performance Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the Grant Date. The Committee shall, in its sole discretion, set performance goals, as provided for in Article 12. The extent to which the performance goals are met will determine the value and/or number of Performance Units/Performance Shares that will be paid out to the Participant.

9.3    Earning of Performance Units/Performance Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Performance Shares shall be entitled to receive payout on the value and number of Performance Units/Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.

9.4    Form and Timing of Payment of Performance Units/Performance Shares. Payment of earned Performance Units/Performance Shares shall be as determined by the Committee and as evidenced in the Award Agreement. Subject to the terms of this Plan, the Committee, in its sole discretion, may pay earned Performance Units/Performance Shares in the form of cash or in Shares (or in a combination thereof) equal to the value of the earned Performance Units/Performance Shares at the close of the applicable Performance Period, or as soon as practicable after the end of the Performance Period. Any Shares may be granted subject to any restrictions deemed appropriate by the Committee. The determination of the Committee with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.

Article 10. Cash-Based Awards and Other Stock-Based Awards

10.1    Grant of Cash-Based Awards. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms as the Committee may determine.

10.2    Other Stock-Based Awards. The Committee may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted Shares) in such amounts and subject to such terms and conditions, as the Committee shall determine. Such Awards may involve the transfer of actual Shares to Participants, or payment in cash of amounts based on the value of Shares and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.

10.3    Value of Cash-Based Awards or Other Stock-Based Awards. Each Cash-Based Award shall specify a payment amount or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as determined by the Committee. The Committee may, in its sole discretion, establish performance goals, as provided for in Article 12. If the Committee exercises its discretion to establish performance goals, the number and/or value of Other Stock-Based Awards and/or the amount of the Cash-Based Awards that will be paid out to the Participant will depend on the extent to which the performance goals are met.

10.4    Payment of Cash-Based Awards or Other Stock-Based Awards. Payment, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash or Shares as the Committee determines.

Article 11. Transferability of Awards and Shares

11.1    Transferability of Awards. Except as provided in Section 11.2, during a Participant’s lifetime, his or her Awards shall be exercisable only by the Participant. Awards shall not be transferable other than by will or the laws of descent and distribution or, subject to the consent of the Committee, pursuant to a domestic relation order entered into by a court of competent jurisdiction. No Awards shall be subject, in whole or in part, to attachment, execution or levy of any kind. Any purported transfer in violation of this Section 11.1 shall be null and void. The Committee may establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable or Shares deliverable in the event of, or following, the Participant’s death may be provided.

11.2    Committee Action. Except as provided in Section 6.7(i), the Committee may, in its discretion, determine that notwithstanding Section 11.1, any or all Awards shall be transferable to and exercisable by such transferees, and subject to such terms and conditions, as the Committee may deem appropriate; provided, however, no Award may be transferred for value without stockholder approval.

11.3    Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired by a Participant under the Plan as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed or traded, or under any blue sky or state securities laws applicable to such Shares.

Article 12. Performance Measures

12.1    Performance Measures. The performance goals upon which the payment or vesting of an Award to a Covered Employee that is intended to qualify as Performance-Based Compensation shall be limited to the following Performance Measures:

(a)    revenue;

(b)    bookings;

(c)    gross profit or margin;

(d)    operating income or margin;

(e)    exit rate operating income margin (derived by annualizing the cost of sales and operating expense structure

in place at fiscal year-end compared to the actual revenues generated in that fiscal year);

(f)    earnings before or after taxes, interest, depreciation, and/or amortization;

(g)    net earnings or net income (before or after taxes);

(h)    earnings per share;

(i)    share price (including, but not limited to, growth measures and total stockholder return);

(j)    operating expenses (including cost reductions);

(k)    return measures (including return on assets, capital, invested capital, equity, sales, or revenue);

(l)    cash flow (including operating cash flow, free cash flow, cash flow return on equity, and cash flow return

on investment);

(m)    asset turnover (including days sales outstanding);

(n)    reduction in leverage;

(o)    market share;

(p)    working capital; and

(q)    economic value added or EVA^® (net operating profit after tax minus the sum of capital multiplied by the

cost of capital).

        Any of the above Performance Measure(s), or any combination thereof, may be used to measure the performance of the Company, Subsidiary, and/or Affiliate as a whole or any business unit of the Company, Subsidiary, and/or Affiliate, as the Committee may deem appropriate. Performance Measures may be compared to (i) the performance of a group of comparator companies, (ii) a published or special index that the Committee, in its sole discretion, deems appropriate, and/or (iii) other benchmarks approved by the Committee. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals.

12.2    Evaluation of Performance. The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events or income or expense items that occur during a Performance Period: (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, executive termination costs or other special charges, (e) extraordinary items as defined by generally accepted accounting principles or any successor there to, (f) acquisitions or divestitures, including asset sales, (g) the positive or negative impact of foreign exchange movements, (h) stock-based compensation expense, (i) in-process research and development expenses, (j) intangible asset amortization, (k) integration and other one-time expenditures or other adjustments related to acquisitions, (l) acquisition costs, (m) merger costs, including severance, lease and other facility costs of the acquired company, (n) gains or losses associated with either the repurchase or potential settlement of any or all of the Company’s outstanding debt or convertible debt instruments issued by the Company from time to time, and (o) the positive or negative impacts associated with the implementation of International Financial Reporting Standards (“IFRS”). To the extent such inclusions or exclusions affect Awards to Covered Employees that are intended to qualify as Performance-Based Compensation, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.

12.3    Adjustment of Performance-Based Compensation. Subject to Section 12.4, Awards that are intended to qualify as Performance-Based Compensation may not be adjusted upward. The Committee shall retain the discretion to adjust such Awards downward, either on a formula or discretionary basis or any combination, as the Committee determines.

12.4    Committee Discretion. In the event that applicable tax or securities laws or regulations or court or regulatory decisions change to permit Committee discretion to alter the governing Performance Measures without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and base vesting on Performance Measures other than those set forth in Section 12.1.

Article 13. Dividend Equivalents

Any Participant selected by the Committee may be granted dividend equivalents based on the dividends declared on Shares that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is exercised, vests, or expires, as determined by the Committee. Such dividend equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee. Notwithstanding the foregoing, the Committee may not grant dividend equivalents based on the dividends declared on Shares that are subject to a NQSO, ISO, or SAR Award, and if any Award for which dividend equivalents have been granted has its vesting dependent upon the achievement of one or more Performance Measures, then the dividend equivalents shall accrue and only be paid to the extent the Award becomes vested.

Article 14. Beneficiary Designation

Each Participant under this Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under this Plan is to be paid in case of his death before he receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such beneficiary designation, benefits remaining unpaid or rights remaining unexercised at the Participant’s death shall be paid to or exercised by the Participant’s executor, administrator, or legal representative.

Article 15. Rights of Participants

15.1    Employment. Nothing in this Plan or an Award Agreement shall (a) interfere with or limit in any way the right of the Company, its Affiliates, and/or its Subsidiaries, to terminate any Participant’s employment or service on the Board or to the Company, its Affiliates, and/or its Subsidiaries at any time or for any reason not prohibited by law, or (b) confer upon any Participant any right to continue his employment or service as a Non-employee Director for any specified period of time. Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company or any Affiliate or Subsidiary and, accordingly, subject to Articles 3 and 17, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Committee without giving rise to any liability on the part of the Company, its Affiliates, and/or its Subsidiaries.

15.2    Participation. No individual shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.

15.3    Rights as a Stockholder. Except as otherwise provided herein, a Participant shall have none of the rights of a stockholder with respect to Shares covered by any Award until the Participant becomes the record holder of such Shares.

Article 16. Change of Control

16.1    Change of Control of the Company. Notwithstanding any other provision of this Plan to the contrary, the provisions of this Article 16 shall apply in the event of a Change of Control, unless otherwise determined by the Committee in connection with the grant of an Award as reflected in the applicable Award Agreement.

(a)    Outstanding Options and SARs exchanged for Replacement Awards. Upon a Change of Control, if an award meeting the requirements of Section 16.2 (a “Replacement Award”) is provided to a Participant to replace the Participant’s then outstanding Options or Stock Appreciation Rights (the “Replaced Award”), then the Replaced Award shall be deemed cancelled and shall have no further force or effect and the Company shall have no further obligation with respect to the Replaced Award.

(b)    Outstanding Options and SARs not exchanged for Replacement Awards. Upon a Change of Control, to the extent a Participant’s then-outstanding Options and Stock Appreciation Rights are not exchanged for Replacement Awards as provided for in paragraph (a) above, then such Options and Stock Appreciation Rights may become fully vested and exercisable if approved by the Committee or provided for in the Award Agreement.

(c)    Service-Based Outstanding Awards other than Options and SARs. Upon a Change of Control, all then-outstanding Awards, other than Options and SARs, that are not vested and as to which vesting depends solely on the satisfaction of a service obligation by a Participant to the Company, Subsidiary, or Affiliate may vest in full and be free of restrictions related to the vesting or transferability of such Awards if approved by the Committee or provided for in the Award Agreement.

(d)    Other Awards. Upon a Change of Control, the treatment of then-outstanding Awards not subject to subparagraphs (a), (b) or (c) above shall be determined by the terms and conditions set forth in the applicable Award Agreement.

(e)    Committee discretion regarding treatment of Awards not exchanged for Replacement Awards. Except to the extent that a Replacement Award is provided to the Participant, the Committee may, in its sole discretion, (i) determine that any or all outstanding Awards granted under the Plan, whether or not exercisable, will be canceled and terminated and that in connection with such cancellation and termination the holder of such Award may receive for each Share subject to such Awards a cash payment (or the delivery of shares of stock, other securities or a combination of cash, stock and securities equivalent to such cash payment) equal to the difference, if any, between the consideration received by stockholders of the Company in respect of a Share in connection with such transaction and the purchase price per Share, if any, under the Award multiplied by the number of Shares subject to such Award; provided that if such product is zero or less or to the extent that the Award is not then exercisable, the Awards will be canceled and terminated without payment therefore or (ii) provide that the period to exercise Options or Stock Appreciation Rights granted under the Plan shall be extended (but not beyond the expiration date of such Option or Stock Appreciation Right).

16.2    Replacement Awards. An award shall qualify as a Replacement Award if: (i) it has a value in the aggregate at least equal to the value of the Replaced Award as determined by the Committee in its sole discretion; (ii) it relates to publicly traded equity securities of the Company or its successor in the Change of Control or of another entity that is affiliated with the Company or of its successor following the Change of Control; and (iii) its other terms and conditions are in the aggregate not less favorable to the Participant than the terms and conditions of the Replaced Award (including the provisions that would apply in the event of a subsequent Change of Control). Without limiting the generality of the foregoing, the Replacement Award may take the form of a continuation of the Replaced Award if the requirements of the preceding sentence are satisfied. The determination of whether the conditions of this Section 16.2 are satisfied shall be made by the Committee, as constituted immediately before the Change of Control, in its sole discretion.

Article 17. Amendment and Termination

17.1    Amendment and Termination of the Plan and Award Agreements.

(a)    Subject to subparagraphs (b) and (c) of this Section 17.1 and Section 17.3 of the Plan, the Board may at any time terminate the Plan or an outstanding Award Agreement and the Committee may, at any time and from time to time, amend the Plan or an outstanding Award Agreement.

(b)    Except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), the terms of an outstanding Award may not be amended to reduce the Option Price of outstanding Options or to reduce the Grant Price of outstanding SARs or cancel outstanding Options or SARs in exchange for cash, other awards or options or SARs with an Option Price or Grant Price, as applicable, that is less than the Option Price of the cancelled Options or the Grant Price of the cancelled SARs without stockholder approval.

(c)    Notwithstanding the foregoing, no amendment of this Plan shall be made without stockholder approval if stockholder approval is required pursuant to rules promulgated by any stock exchange or quotation system on which Shares are listed or quoted or by applicable U.S. state corporate laws or regulations, applicable U.S. federal laws or regulations or the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

17.2    Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. Subject to Section 12.3, the Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.4 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under this Plan. By accepting an Award under this Plan, a Participant agrees to any adjustment to the Award made pursuant to this Section 17.2 without further consideration or action.

17.3    Awards Previously Granted. Notwithstanding any other provision of this Plan to the contrary, other than Sections 17.2, 17.4, or 20.14, no termination or amendment of this Plan or an Award Agreement shall adversely affect in any material way any Award previously granted under this Plan, without the written consent of the Participant holding such Award.

17.4    Amendment to Conform to Law. Notwithstanding any other provision of this Plan to the contrary, the Committee may amend the Plan or an Award Agreement, to take effect retroactively or otherwise, as deemed necessary or advisable for the purpose of conforming the Plan or an Award Agreement to any present or future law relating to plans of this or similar nature, and to the administrative regulations and rulings. By accepting an Award under this Plan, a Participant agrees to any amendment made pursuant to this Section 17.4 to any Award granted under the Plan without further consideration or action.

Article 18. Withholding

18.1    Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, the minimum statutory amount to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.

18.2    Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock and Restricted Stock Units, or upon the achievement of performance goals related to Performance Shares, or any other taxable event arising as a result of an Award (collectively and individually referred to as a “Share Payment”), Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold from a Share Payment the number of Shares having a Fair Market Value on the date the withholding is to be determined equal to the minimum statutory withholding requirement but in no event shall such withholding exceed the minimum statutory withholding

requirement. All such elections shall be irrevocable, made in writing, and signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

Article 19. Successors

All obligations of the Company under this Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

Article 20. General Provisions

20.1    Forfeiture Events.

(a)    The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of employment for cause, termination of the Participant’s provision of services to the Company, Affiliate, or Subsidiary, violation of material Company, Affiliate, or Subsidiary policies, breach of non-competition, confidentiality, or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company, any Affiliate, or Subsidiary.

(b)    The Committee may specify in an Award Agreement that, if any of the Company’s financial statements are required to be restated resulting from errors, omissions, or fraud, the Company may recover all or a portion of any Award granted or paid to a Participant with respect to any fiscal year of the Company the financial results of which are negatively affected by such restatement. Unless otherwise specified in the Award Agreement, the amount to be recovered from the Participant shall be the amount by which the Award exceeded the amount that would have been payable to the Participant had the financial statements been initially filed as restated, or any greater or lesser amount (including, but not limited to, the entire Award) that the Committee shall determine. In no event shall the amount to be recovered by the Company be less than the amount required to be repaid or recovered as a matter of law (including but not limited to amounts that are required to be recovered or forfeited under Section 304 of the Sarbanes-Oxley Act of 2002). The Committee shall determine whether the Company shall effect any such recovery: (i) by seeking repayment from the Participant, (ii) by reducing (subject to applicable law and the terms and conditions of the applicable plan, program or arrangement) the amount that would otherwise be payable to the Participant under any compensatory plan, program, or arrangement maintained by the Company, an Affiliate, or any Subsidiary, (iii) by withholding payment of future increases in compensation (including the payment of any discretionary bonus amount) or grants of compensatory awards that would otherwise have been made in accordance with the company’s otherwise applicable compensation practices, or (iv) by any combination of the foregoing.

20.2    Legend. The certificates for Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer of such Shares.

20.3    Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural.

20.4    Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

20.5    Requirements of Law. The granting of Awards and the issuance of Shares under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. The Company, in its discretion, may postpone the granting and exercising of Awards, the issuance or delivery of Shares under any Award or any other action permitted under the Plan to permit the Company, with reasonable diligence, to complete such national securities exchange listing or registration or qualification of such Shares or other required action under any federal or state law, rule, or regulation and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules, and regulations. The Company shall not be obligated by virtue of any provision of the Plan to recognize the exercise of any Award or to otherwise sell or issue Shares in violation of any such laws, rules, or regulations, and any postponement of the exercise or settlement of any Award under this provision shall not extend the term of such Awards. Neither the Company nor its directors or officers shall have any obligation or liability to a Participant with respect to any Award (or Shares issuable thereunder) that shall lapse because of such postponement.

20.6    Delivery of Title. The Company shall have no obligation to issue or deliver evidence of title for Shares issued under this Plan prior to:

(a)    obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and

(b)    completion of any registration or other qualification of the Shares under any applicable national or foreign law or ruling of any governmental body that the Company determines to be necessary or advisable.

20.7    Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

20.8    Investment Representations. The Committee may require any individual receiving Shares pursuant to an Award under this Plan to represent and warrant in writing that the individual is acquiring the Shares for investment and without any present intention to sell or distribute such Shares.

20.9    Participants Based Outside of the United States. Notwithstanding any provision of this Plan to the contrary, in order to comply with the laws in other countries in which the Company, its Affiliates, and/or its Subsidiaries operate or have Employees, Non-employee Directors or Third Party Service Providers, the Committee, in its sole discretion, shall have the power and authority to:

(a)    determine which Affiliates and Subsidiaries shall be covered by this Plan;

(b)    determine which Employees, Non-employee Directors or Third Party Service Providers outside the United States are eligible to participate in this Plan;

(c)    modify the terms and conditions of any Award granted to Employees, Non-employee Directors or Third Party Service Providers outside the United States to comply with applicable foreign laws;

(d)    establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable, and any such subplans and modifications to Plan terms and procedures established under this Section 20.9 by the Committee shall be attached to this Plan document as appendices; and

(e)    take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with any necessary local government regulatory exemptions or approvals.

        Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate applicable law.

20.10     Uncertificated Shares. To the extent that this Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.

20.11     Unfunded Plan. Participants shall have no right, title, or interest whatsoever in or to any investments that the Company, its Subsidiaries, or its Affiliates may make to aid them in meeting their obligations under this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative, or any other individual. To the extent that any individual acquires a right to receive payments from the Company or any Affiliate or Subsidiary under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company or the Subsidiary or Affiliate, as the case may be. All payments to be made hereunder shall be paid from the general funds of the Company, or the Subsidiary or Affiliate, as the case may be and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in this Plan.

20.12     No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to this Plan or any Award. The Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.

20.13     Retirement and Welfare Plans. Neither Awards made under this Plan nor Shares or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits payable to any Participant under the Company’s or any Subsidiary’s or Affiliate’s retirement plans (both qualified and nonqualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a Participant’s benefit.

20.14     Deferred Compensation.

(a)    The Committee may grant Awards under the Plan that provide for the deferral of compensation within the meaning of Code Section 409A. It is intended that such Awards comply with the requirements of Code Section 409A so that amounts deferred thereunder are not includible in income and are not subject to an additional tax of twenty percent (20%) at the time the deferred amounts are no longer subject to a substantial risk of forfeiture.

(b)    Notwithstanding any provision of the Plan or Award Agreement to the contrary, if one or more of the payments or benefits to be received by a Participant pursuant to an Award would constitute deferred compensation subject to Code Section 409A and would cause the Participant to incur any penalty tax or interest under Code Section 409A or any regulations or Treasury guidance promulgated thereunder, the Committee may reform the Plan and Award Agreement to comply with the requirements of Code Section 409A and to the extent practicable maintain the original intent of the Plan and Award Agreement. By accepting an Award under this Plan, a Participant agrees to any amendments to the Award made pursuant to this Section 20.14(b) without further consideration or action.

20.15    Nonexclusivity of this Plan. The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee to adopt such other compensation arrangements as it may deem desirable for any Participant.

20.16     No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (i) limit, impair, or otherwise affect the Company’s or a Subsidiary’s or an Affiliate’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or (ii) limit the right or power of the Company or a Subsidiary or an Affiliate to take any action which such entity deems to be necessary or appropriate.

20.17     Governing Law. The Plan and each Award Agreement shall be governed by the laws of the State of Oregon, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an Award under this Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Oregon to resolve any and all issues that may arise out of or relate to this Plan or any related Award Agreement.

20.18     Delivery and Execution of Electronic Documents. To the extent permitted by applicable law, the Company may (i) deliver by email or other electronic means (including posting on a web site maintained by the Company or by a third party under contract with the Company) all documents relating to the Plan or any Award thereunder (including without limitation, prospectuses) and all other documents that the Company is required to deliver to its security holders (including without limitation, annual reports and proxy statements) and (ii) permit Participants to electronically execute applicable Plan documents (including, but not limited to, Award Agreements) in a manner prescribed by the Committee.

20.19     No Representations or Warranties Regarding Tax Effect. Notwithstanding any provision of the Plan to the contrary, the Company, its Affiliates and Subsidiaries, the Board and the Committee neither represent nor warrant the tax treatment under any federal, state, local or foreign laws and regulations thereunder (individually and collectively referred to as the “Tax Laws”) of any Award granted or any amounts paid to any Participant under the Plan including, but not limited to, when and to what extent such Awards or amounts may be subject to tax, penalties and interest under the Tax Laws.

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Walden C. Rhines, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mentor Graphics Corporation, the registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 30, 2016

/S/ WALDEN C. RHINES

Walden C. Rhines

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Gregory K. Hinckley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mentor Graphics Corporation, the registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 30, 2016

/S/ GREGORY K. HINCKLEY

Gregory K. Hinckley

President, Chief Financial Officer

EX-32

Exhibit 32

Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mentor Graphics Corporation (the “Company”) hereby certifies to such officer’s knowledge that:

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended July 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 30, 2016

/S/ WALDEN C. RHINES

Walden C. Rhines

Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to Mentor Graphics Corporation and will be retained by Mentor Graphics Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mentor Graphics Corporation (the “Company”) hereby certifies to such officer’s knowledge that:

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended July 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 30, 2016

/S/ GREGORY K. HINCKLEY

Gregory K. Hinckley

President, Chief Financial Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to Mentor Graphics Corporation and will be retained by Mentor Graphics Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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Document and Entity Information - shares	6 Months Ended
	Jul. 31, 2016	Aug. 26, 2016
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jul. 31, 2016
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Trading Symbol	MENT
Entity Registrant Name	MENTOR GRAPHICS CORP
Entity Central Index Key	0000701811
Current Fiscal Year End Date	--01-31
Entity Filer Category	Large Accelerated Filer
Common Stock, Shares, Outstanding		108,155,975

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Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Revenues:
System and software	$ 133,755	$ 162,201	$ 240,459	$ 318,132
Service and support	120,589	118,861	241,524	235,073
Total revenues	254,344	281,062	481,983	553,205
Cost of revenues:
System and software	15,330	13,049	23,662	26,673
Service and support	32,513	31,420	65,261	64,989
Amortization of purchased technology	1,787	1,794	3,572	3,652
Total cost of revenues	49,630	46,263	92,495	95,314
Gross profit	204,714	234,799	389,488	457,891
Operating expenses:
Research and development	93,402	89,053	184,538	178,568
Marketing and selling	83,911	84,741	168,170	169,692
General and administration	19,227	18,670	36,762	36,633
Equity in earnings of Frontline	(1,041)	(1,351)	(1,677)	(2,221)
Amortization of intangible assets	1,520	2,234	3,074	4,453
Special charges	1,445	2,186	4,436	39,163
Total operating expenses	198,464	195,533	395,303	426,288
Operating income (loss):	6,250	39,266	(5,815)	31,603
Other income	638	187	1,527	529
Interest expense	(5,690)	(4,772)	(9,828)	(9,466)
Income (loss) before income tax	1,198	34,681	(14,116)	22,666
Income tax expense (benefit)	(2,239)	4,071	(4,117)	2,559
Net income (loss)	3,437	30,610	(9,999)	20,107
Less: Loss attributable to noncontrolling interest	0	(602)	0	(1,220)
Net income (loss) attributable to Mentor Graphics shareholders	$ 3,437	$ 31,212	$ (9,999)	$ 21,327
Net income (loss) per share:
Basic	$ 0.03	$ 0.27	$ (0.09)	$ 0.18
Diluted	$ 0.03	$ 0.26	$ (0.09)	$ 0.18
Weighted average number of shares outstanding:
Basic	107,374	116,584	108,215	116,296
Diluted	109,874	119,368	108,215	118,986
Cash dividends declared per common share	$ 0.055	$ 0.055	$ 0.110	$ 0.110

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Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Net income (loss)	$ 3,437	$ 30,610	$ (9,999)	$ 20,107
Other comprehensive income (loss), net of tax:
Change in accumulated translation adjustment	(4,165)	(4,777)	4,321	(4,160)
Change in unrealized gain (loss) on derivative instruments	(7)	420	23	359
Change in pension liability	(28)	(2)	(25)	(4)
Other comprehensive income (loss)	(4,200)	(4,359)	4,319	(3,805)
Comprehensive income (loss)	(763)	26,251	(5,680)	16,302
Net loss attributable to noncontrolling interest	0	(602)	0	(1,220)
Change in accumulated translation adjustment attributable to the noncontrolling interest	0	(8)	0	42
Comprehensive loss attributable to the noncontrolling interest	0	(610)	0	(1,178)
Comprehensive income (loss) attributable to Mentor Graphics shareholders	$ (763)	$ 26,861	$ (5,680)	$ 17,480

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Current assets:
Cash and cash equivalents	$ 265,796	$ 334,826
Trade accounts receivable, net of allowance for doubtful accounts of $3,207 as of July 31, 2016 and $3,826 as of January 31, 2016	384,392	493,209
Other receivables	18,115	23,120
Inventory	17,853	24,762
Prepaid expenses and other	39,591	22,550
Total current assets	725,747	898,467
Property, plant, and equipment, net of accumulated depreciation of $365,398 as of July 31, 2016 and $348,597 as of January 31, 2016	191,543	182,092
Term receivables	226,268	268,657
Goodwill	608,536	606,842
Intangible assets, net of accumulated amortization of $232,518 as of July 31, 2016 and $225,818 as of January 31, 2016	30,880	37,446
Other assets	76,443	70,860
Total assets	1,859,417	2,064,364
Current liabilities:
Short-term borrowings	4,752	33,449
Accounts payable	9,623	16,740
Income taxes payable	5,430	3,966
Accrued payroll and related liabilities	44,916	73,371
Accrued and other liabilities	34,461	37,059
Deferred revenue	232,440	258,725
Total current liabilities	331,622	423,310
Notes payable (Note 6)	244,029	240,076
Deferred revenue	31,509	18,303
Income tax liability	18,721	25,116
Other long-term liabilities	26,689	37,130
Total liabilities	652,570	743,935
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value, 300,000 shares authorized as of July 31, 2016 and January 31, 2016; 108,141 shares issued and outstanding as of July 31, 2016 and 114,934 shares issued and outstanding as of January 31, 2016	712,367	818,683
Retained earnings	511,261	522,846
Accumulated other comprehensive loss	(16,781)	(21,100)
Total stockholders’ equity	1,206,847	1,320,429
Total liabilities and stockholders' equity	$ 1,859,417	$ 2,064,364

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Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Allowance for doubtful accounts receivable, current	$ 3,207	$ 3,826
Property, plant, and equipment, accumulated depreciation	365,398	348,597
Intangible assets, accumulated amortization	$ 232,518	$ 225,818
Common stock, no par value	$ 0	$ 0
Common stock, shares authorized	300,000	300,000
Common stock, shares issued	108,141	114,934
Common stock, shares outstanding	108,141	114,934

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015
Operating Cash Flows:
Net income (loss)	$ (9,999)	$ 20,107
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property, plant, and equipment	18,936	17,721
Amortization of intangible assets, debt costs and other	10,898	12,439
Stock-based compensation	22,427	20,864
Deferred income taxes	1,838	2,350
Changes in other long-term liabilities	(982)	(1,874)
Equity in income of unconsolidated entities, net of dividends received	868	740
Other	40	(713)
Changes in operating assets and liabilities, net of effect of acquired businesses:
Trade accounts receivable, net	109,747	101,651
Prepaid expenses and other	(9,094)	(6,302)
Term receivables, long-term	42,781	35,138
Accounts payable and accrued liabilities	(39,529)	(66,818)
Income taxes receivable and payable	(4,418)	(5,082)
Deferred revenue	(14,007)	(35,409)
Net cash provided by operating activities	129,506	94,812
Investing Cash Flows:
Proceeds from sale of buildings	0	2,068
Purchases of property, plant, and equipment	(25,617)	(17,036)
Acquisitions of businesses and equity interests, net	(4,959)	(7,200)
Net cash used in investing activities	(30,576)	(22,168)
Financing Cash Flows:
Proceeds from issuance of common stock	17,312	19,347
Repurchase of common stock	(146,050)	0
Payments Related to Tax Withholding for Share-based Compensation	(5)	(5)
Dividends paid	(11,766)	(12,772)
Net decrease in short-term borrowing	(3,810)	(6,232)
Repayments of revolving credit facility	(25,000)	0
Repayments of other borrowings	(1,489)	(6,925)
Net cash used in financing activities	(170,808)	(6,587)
Effect of exchange rate changes on cash and cash equivalents	2,848	(891)
Net change in cash and cash equivalents	(69,030)	65,166
Cash and cash equivalents at the beginning of the period	334,826	230,281
Cash and cash equivalents at the end of the period	$ 265,796	$ 295,447

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General

6 Months Ended

Jul. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

General

General

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP) and reflect all material normal recurring adjustments. However, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the condensed consolidated financial statements include adjustments necessary for a fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Any changes in estimates will be reflected in the financial statements in future periods.

The condensed consolidated financial statements include our financial statements and those of our wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

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Recent accounting pronouncements (Notes)

6 Months Ended

Jul. 31, 2016

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent accounting pronouncements

Recent Accounting Pronouncements

Recently Adopted Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, as part of their simplification initiative to improve the accounting for share-based payments to employees. The new standard affects several aspects of the accounting for share-based payments. It requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement when awards vest or are exercised. Cash flows associated with excess tax benefits are no longer classified as cash flows from financing activities but will be classified as operating activities, consistent with other income tax cash flows. The standard also allows for additional employee tax withholding on the exercise or release of awards, without triggering liability classification of the award. Additionally, when we withhold shares for tax-withholding purposes and in-turn pay cash for taxes on behalf of an employee, the cash payment is classified as a financing activity in our statement of cash flows. Finally, the standard allows an accounting policy election for the treatment of forfeitures of stock based awards. Companies can elect to continue to estimate forfeitures expected to occur, or account for forfeitures as they occur. This standard is effective for us in the first quarter of fiscal year 2018, with early adoption permitted.

We early adopted the new standard effective February 1, 2016. The primary impact to our financial statements was the recognition of $48,605 in deferred tax assets associated with excess tax benefits offset by a valuation allowance of $38,425 and a cumulative-effect adjustment of $10,180 to retained earnings as of January 31, 2016. We have elected to continue to estimate forfeitures that are expected to occur when estimating the amount of compensation expense to record in each accounting period.

We have retrospectively applied to all periods presented in our statements of cash flows, the presentation of excess tax benefits and cash paid for employee taxes where shares were withheld. As a result of this election excess tax benefits will be reclassified from financing activities to operating activities and cash paid for shares withheld will be reclassified from operating activities to financing activities. The net impact on previously reported results is as follows:

Six months ended July 31, 2015	As originally reported			As Adjusted
Net cash provided by operations	$	94,807		$	94,812
Net cash used in financing activities	$	(6,582	)	$	(6,587	)

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. This standard eliminates the requirement for an acquirer to retrospectively account for adjustments made to provisional amounts recognized in a business combination. The standard requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are identified. Changes in depreciation, amortization, and any other income effects resulting from the adjustments to provisional amounts, should be computed as of the acquisition date. The standard requires that an entity present separately, by line item, the amounts included in current-period earnings that would have been recorded in previous reporting periods, if the adjustments to provisional amounts had been recognized on the acquisition date. We adopted this standard beginning February 1, 2016. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40),Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer accounts for fees related to the software license element consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer accounts for the arrangement as a service contract. An arrangement would contain a software license element if both: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. We adopted this standard beginning February 1, 2016 on a prospective basis. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Issued Pronouncements not yet Adopted

Revenue Recognition

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients. This ASU amends narrow aspects of Topic 606 in ASU 2014-09, Revenue from Contracts with Customers, related to the assessment of collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. Practical expedients are provided in the ASU to simplify the transition to the new standard.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. This ASU clarifies guidance in ASU 2014-09, Revenue from Contracts with Customers related to identifying performance obligations and licensing implementation. This ASU is expected to: (i) reduce the cost and complexity of applying the guidance on identifying promised goods or services; (ii) improve guidance on criteria in assessing whether promises to transfer goods and services are separately identifiable; and (iii) improve the operability and understandability of the licensing implementation guidance.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers(Topic 606), Principal versus Agent Considerations. This ASU amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies that the analysis must determine whether the entity controls the specified goods or services before they are transferred to the customer.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to be entitled to in exchange for the transfer of goods and services to customers. This ASU requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU also requires qualitative and quantitative disclosure about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard permits one of two methods for adoption: (i) retrospectively to each prior reporting period presented, with the ability to utilize certain practical expedients; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, including additional disclosures. We have not yet selected a transition method.

We are evaluating the effect that each of these ASUs will have on our consolidated financial statements and related disclosures. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted beginning in the first quarter of fiscal year 2018.

Other

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU changes how companies measure and recognize credit losses for various financial assets. This ASU will require companies to use an expected credit loss model to recognize estimated credit losses expected to occur over the remaining life of the financial assets rather than the current incurred credit loss model methodology. This revised guidance is applicable to our trade and term receivables. We will be required to implement this guidance in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases(Topic 842). This ASU requires a lessee to recognize in the statement of financial position a liability to make lease payments, and a right-of-use asset representing its right to use the underlying asset for the lease term. We will be required to implement this guidance in the first quarter of fiscal year 2020. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In September 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU provides guidance on management's responsibility in evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide related disclosures if required. Evaluation is required every reporting period, including interim periods. We will be required to implement this guidance in thefourth quarter of fiscal year 2017. Early adoption is permitted. This update is not expected to have a material impact on our consolidated financial statements.

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Fair Value Measurement

6 Months Ended

Jul. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurement

Fair Value Measurement

The following table presents information about financial liabilities measured at fair value on a recurring basis:

	Fair Value		Level 1		Level 2		Level 3
Contingent consideration at July 31, 2016	$	2,366	$	—	$	—	$	2,366
Contingent consideration at January 31, 2016	$	3,749	$	—	$	—	$	3,749

The FASB's authoritative guidance for the hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. The fair value hierarchy consists of the following three levels:

• Level 1—Quoted prices for identical instruments in active markets;

• Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and

• Level 3—One or more significant inputs to the valuation model are unobservable.

In connection with certain acquisitions, payment of a portion of the purchase price is contingent typically upon the acquired business’ achievement of certain revenue goals. The short-term portion of the total recorded contingent consideration is included in accrued and other liabilities and the long-term portion of the total recorded contingent consideration is included in other long-term liabilities on our condensed consolidated balance sheet. The following table summarizes the total recorded contingent consideration:

As of	July 31, 2016		January 31, 2016
Contingent consideration, short-term	$	1,043	$	1,460
Contingent consideration, long-term	1,323		2,289
Total contingent consideration	$	2,366	$	3,749

We have estimated the fair value of our contingent consideration as the present value of the expected payments over the term of the arrangements. The fair value measurement of our contingent consideration as of July 31, 2016 encompasses the following significant unobservable inputs (Level 3):

Unobservable Inputs	Range
Total estimated contingent consideration	$84	-	$2,935
Discount rate	9.5%	-	15.0%
Timing of cash flows (in years)	0	-	2

Changes in the fair value of our contingent consideration are primarily driven by changes in the estimated amount and timing of payments, resulting from changes in the forecasted revenues of the acquired businesses. Significant changes in any of the inputs in isolation could result in a fluctuation in the fair value measurement of contingent consideration. Changes in fair value are recognized in special charges in our condensed consolidated statement of operations in the period in which the change is identified.

The following table summarizes contingent consideration activity:

Balance as of January 31, 2016	$	3,749
Payments	(1,475		)
Changes in fair value	34
Interest accretion	58
Balance as of July 31, 2016	$	2,366

The following table summarizes the fair value and carrying value of our 4.00% Convertible Subordinated Debentures (4.00% Debentures):

As of	July 31, 2016		January 31, 2016
Fair value of notes payable	$	276,978	$	255,487
Carrying value of notes payable	$	238,841	$	234,888

We based the fair value of our 4.00% Debentures on the quoted market price at the balance sheet date. Our notes are not actively traded and the quoted market price is derived from observable inputs including our stock price, stock volatility, and interest rate (Level 2). We believe the carrying value of other notes payable of $5,188 at July 31, 2016 and January 31, 2016 approximated fair value. Of the total carrying value of notes payable, none was classified as current on our condensed consolidated balance sheet as of July 31, 2016 and January 31, 2016. See additional discussion of notes payable in Note 6. “Notes Payable.”

The carrying amounts of cash equivalents, trade accounts receivable, net, term receivables, short-term borrowings, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments or because amounts have been appropriately discounted.

During the quarter ended July 31, 2016, we acquired a non-marketable equity security which was accounted for using the cost method of accounting. Our cost method investments are reported at cost net of impairment losses. The carrying amount of the non-marketable equity security was $3,000 at July 31, 2016. Investments accounted for under the cost method of accounting are measured and recorded at fair value when identified events or changes in circumstances have a significant adverse effect on the fair value of the investments. When these events or changes in circumstances occur, these investments are classified as Level 3 because they are valued using significant unobservable inputs. We periodically review our cost method investments for these types of events or changes in circumstances.

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Term Receivables and Trade Accounts Receivable

6 Months Ended

Jul. 31, 2016

Term Receivables and Trade Accounts Receivable [Abstract]

Term Receivables and Trade Accounts Receivable

Term Receivables and Trade Accounts Receivable

We have long-term installment receivables that are attributable to multi-year, multi-element term license sales agreements. Balances for term agreements that are due within one year of the balance sheet date are included in trade accounts receivable, net and balances that are due more than one year from the balance sheet date are included in term receivables, long-term. We discount the total product portion of the agreements to reflect the interest component of the transaction. We amortize the interest component of the transaction, to system and software revenues over the period in which payments are made and balances are outstanding, using the effective interest method. We determine the discount rate at the outset of the arrangement based upon the current credit rating of the customer. We reset the discount rate periodically considering changes in prevailing interest rates but do not adjust previously discounted balances.

Term receivable and trade accounts receivable balances were as follows:

As of	July 31, 2016		January 31, 2016
Trade accounts receivable	$	88,094	$	176,021
Term receivables, short-term	$	296,298	$	317,188
Term receivables, long-term	$	226,268	$	268,657

Trade accounts receivable include billed amounts whereas term receivables, short-term are comprised of unbilled amounts. Term receivables, short-term represent the portion of long-term installment agreements that are due within one year of the balance sheet date. Billings for term agreements typically occur thirty days prior to the contractual due date, in accordance with individual contract installment terms. Term receivables, long-term represent unbilled amounts which are scheduled to be billed beyond one year from the balance sheet date.

We perform a credit risk assessment of all customers using the Standard & Poor’s (S&P) credit rating as our primary credit-quality indicator. The S&P credit ratings are based on the most recent S&P score available at the time of assessment. For customers that do not have an S&P credit rating, we base our credit risk assessment on results provided in the customers’ most recent financial statements at the time of assessment. We determine whether or not to extend credit to these customers based on the results of our internal credit assessment, thus mitigating our risk of loss.

The credit risk assessment for our long-term receivables was as follows:

As of	July 31, 2016		January 31, 2016
S&P credit rating:
AAA+ through BBB-	$	164,331	$	195,764
BB+ and lower	32,900		22,520
	197,231		218,284
Internal credit assessment	29,037		50,373
Total long-term term receivables	$	226,268	$	268,657

We maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectibility of our trade accounts receivable based on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer’s operating results, financial position, or credit rating, we record a specific reserve for bad debt to reduce the related receivable to the amount believed to be collectible. We also record unspecified reserves for bad debt for all other customers based on a variety of factors including length of time the receivables are past due, the financial health of customers, the current business environment, and historical experience. If these factors change or circumstances related to specific customers change, we adjust the estimates of the recoverability of receivables resulting in either additional selling expense or a reduction in selling expense in the period the determination is made.

The following shows the change in allowance for doubtful accounts:

Allowance for doubtful accounts	Beginning balance		Expense adjustment			Other deductions(1)			Ending  balance
Six months ended July 31, 2016	$	3,826	$	(875	)	$	256		$	3,207
Six months ended July 31, 2015	$	4,217	$	(597	)	$	(9	)	$	3,611

(1)Specific account write-offs and foreign exchange.

We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $29,543 for the six months ended July 31, 2016 compared to $27,562 for the six months ended July 31, 2015. Amounts collected from customers on accounts receivable previously sold on a non-recourse basis to financial institutions are included in short-term borrowings on the balance sheet. These amounts are remitted to the financial institutions in the month following quarter-end.

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Short-Term Borrowings

6 Months Ended

Jul. 31, 2016

Short-term Debt [Abstract]

Short-Term Borrowings

Short-Term Borrowings

Short-term borrowings consisted of the following:

As of	July 31, 2016		January 31, 2016
Senior revolving credit facility	$	—	$	25,000
Collections of previously sold accounts receivable	3,761		7,568
Other borrowings	991		881
Short-term borrowings	$	4,752	$	33,449

We have a syndicated, senior, unsecured, revolving credit facility which expires on January 9, 2020.

The revolving credit facility has a maximum borrowing capacity of $125,000. As stated in the revolving credit facility, we have the option to pay interest based on:

(i) London Interbank Offered Rate (LIBOR) with varying maturities commensurate with the borrowing period we select, plus a spread of between 2.00% and 2.50% based on a pricing grid tied to a financial covenant, or

(ii) A base rate plus a spread of between 1.00% and 1.50%, based on a pricing grid tied to a financial covenant.

As a result of these interest rate options, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates.

Commitment fees are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40% based on a pricing grid tied to a financial covenant.

This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our common stock over the term of the facility to $200,000 plus 70% of our cumulative consolidated net income (loss) for periods ending after February 1, 2016.

We were in compliance with all financial covenants as of July 31, 2016. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.

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Notes Payable

6 Months Ended

Jul. 31, 2016

Notes Payable [Abstract]

Notes Payable

Notes Payable

Notes payable consist of the following:

As of	July 31, 2016		January 31, 2016
4.00% Debentures	$	238,841	$	234,888
Other	5,188		5,188
Notes payable	$	244,029	$	240,076

Our 4.00% Debentures are due in 2031, but we may be required to repay them earlier under the conversion and redemption provisions described below.

4.00% Debentures

In April 2011, we issued $253,000 of 4.00% Debentures in a private placement pursuant to the SEC Rule 144A under the Securities Act of 1933. Interest on the 4.00% Debentures is payable semi-annually in April and October. The 4.00% Debentures are unsecured obligations.

Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 50.3389 shares of our common stock (equivalent to a conversion price of $19.87 per share). The initial conversion rate for the 4.00% Debentures was 48.6902 shares of our common stock for each one thousand dollars in principal amount (equivalent to a conversion price of $20.54 per share). The conversion rate is adjusted because we declare and pay quarterly cash dividends, beginning in the first quarter of fiscal year 2014.

The 4.00% Debentures are convertible, under certain circumstances, into shares of our common stock at the conversion rate noted above. The circumstances for conversion include:

• The market price of our common stock exceeding 120% of the conversion price, or $23.84 per share as of July 31, 2016, for at least 20 of the last 30 trading days in the previous fiscal quarter;

• A call for redemption of the 4.00% Debentures;

• Specified distributions to holders of our common stock;

• If a fundamental change, such as a change of control, occurs;

• During the two months prior to, but not on, the maturity date; or

• The market price of the 4.00% Debentures declining to less than 98% of the value of the common stock into which the 4.00% Debentures are convertible.

Upon conversion of any 4.00% Debentures, a holder will receive:

(i) Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and

(ii) Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.

As of July 31, 2016, the if-converted value of the 4.00% Debentures to the note holders exceeded the principal amount by $19,032.

As of July 31, 2016, none of the conditions allowing the holders of the 4.00% Debentures to convert the 4.00% Debentures into shares of our common stock were met. The determination of whether or not the 4.00% Debentures are convertible is performed at each balance sheet date and may change from quarter to quarter.

Effective April 5, 2016, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices, expressed as a percentage of principal plus any accrued and unpaid interest:

Period	Redemption Price
Beginning on April 5, 2016 and ending on March 31, 2017	101.143	%
Beginning on April 1, 2017 and ending on March 31, 2018	100.571	%
On April 1, 2018 and thereafter	100.000	%

The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, our repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.

The 4.00% Debentures contain a conversion feature allowing for settlement of the debt in cash upon conversion, therefore we separately account for the implied liability and equity components of the 4.00% Debentures. The principal amount, unamortized debt discount, unamortized debt issuance costs, net carrying amount of the liability component, and carrying amount of the equity component of the 4.00% Debentures are as follows:

As of	July 31, 2016			January 31, 2016
Principal amount	$	252,957		$	252,957
Unamortized debt discount	(12,530		)	(16,007		)
Unamortized debt issuance costs	(1,586		)	(2,062		)
Net carrying amount of the liability component	$	238,841		$	234,888
Equity component, net of debt issuance costs	$	42,518		$	42,518

The unamortized debt discount and debt issuance costs amortize to interest expense using the effective interest method through March 2018.

We recognized the following amounts in interest expense in the condensed consolidated statement of income related to the 4.00% Debentures:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Interest expense at the contractual interest rate	$	2,530	$	2,530	$	5,059	$	5,060
Amortization of debt discount	$	1,754	$	1,633	$	3,477	$	3,237
Amortization of debt issuance costs	$	238	$	238	$	476	$	476

The effective interest rate on the 4.00% Debentures was 7.25% for the six months ended July 31, 2016 and 2015.

Other Notes Payable

In February 2015, we issued a subordinated note payable as part of a business combination. The principal amount of $3,188 was outstanding as of July 31, 2016. The note bears interest at a rate of 4.0% and is due in full on February 25, 2019.

In September 2015, we issued a subordinated note payable as part of a business combination. The principal amount of $2,000 was outstanding as of July 31, 2016. The note bears interest at a rate of 4.0% and is due in full on September 8, 2018.

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Commitments and Contingencies

6 Months Ended

Jul. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Indemnifications

Our license and services agreements generally include a limited indemnification provision for claims from third parties relating to our intellectual property (IP). The indemnification is generally limited to the amount paid by the customer, a multiple of the amount paid by the customer, or a set cap. As of July 31, 2016, we were not aware of any material liabilities arising from these indemnification obligations.

Legal Proceedings

From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to IP rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.

In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.

In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in the U.S. District Court for the Northern District of California, alleging that our Veloce^® family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent and Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys has appealed the decisions by both the district court and the U.S. Patent and Trademark Office.

In June 2013, Synopsys also filed a claim against us in the U.S District Court for the District of Oregon, similarly alleging that our Veloce family of products infringed on two additional Synopsys U.S. patents. These claims have been dismissed, and have been appealed.

We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.

On October 10, 2014, the jury in our patent lawsuit filed in the U.S. District Court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36,000 as well as certain royalties. As of July 31, 2016, nothing has been included in our financial results for this award. Synopsys has filed an appeal.

On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.

In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which sought compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. A Japanese appeals court has ratified that verdict.

We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus no liability has been established nor has a range of loss been disclosed.

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Stockholders Equity (Notes)

6 Months Ended

Jul. 31, 2016

Stockholders' Equity Attributable to Parent [Abstract]

Stockholders' Equity Note Disclosure

Stockholders' Equity

Dividends

The following table summarizes dividends declared since the beginning of fiscal year 2016:

Declaration Date	Record Date	Payment Date	Per Share Amount		Total Amount
Fiscal Year 2017
8/18/2016	9/19/2016	9/30/2016		$0.055
5/19/2016	6/10/2016	6/30/2016		$0.055		$5,886
3/3/2016	3/10/2016	3/31/2016		$0.055		$5,880
Fiscal Year 2016
11/19/2015	12/15/2015	1/4/2016		$0.055		$6,326
8/20/2015	9/10/2015	9/30/2015		$0.055		$6,491
5/22/2015	6/10/2015	6/30/2015		$0.055		$6,389
2/26/2015	3/10/2015	3/31/2015		$0.055		$6,383

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.

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Employee Stock and Savings Plans

6 Months Ended

Jul. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Employee Stock and Savings Plans

Stock-Based Compensation

Stock Option and Stock Plans

Our 2010 Omnibus Incentive Plan (Incentive Plan) is administered by the Compensation Committee of our Board of Directors and permits accelerated vesting of outstanding options, restricted stock units, restricted stock awards, and other equity incentives upon the occurrence of certain changes in control of our company. Stock options and time-based restricted stock units under the Incentive Plan are generally expected to vest over four years. Stock options have an expiration date of ten years from the date of grant and an exercise price no less than the fair market value of the shares on the date of grant. Performance-based restricted stock units vest after three years and include goals for operating income margin. We estimate forfeitures based on our historical forfeiture rates. The source of shares issued under the Incentive Plan is new shares. We have not issued any options since fiscal year 2013. Our current equity strategy is to grant restricted stock units rather than options to ensure that we deliver value to our employees when there is volatility in the market.

Employee Stock Purchase Plans

We have an employee stock purchase plan (ESPP) for U.S. employees and an ESPP for certain foreign subsidiary employees. The ESPPs provide for six-month offerings commencing on January 1 and July 1 of each year with purchases on June 30 and December 31 of each year. Each eligible employee may purchase up to six thousand shares of stock on each purchase date (subject to a plan limit on the total fair market value) at prices no less than 85% of the lesser of the fair market value of the shares on the offering date or on the purchase date.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense recognized:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Cost of revenues	$	781	$	608	$	1,492	$	1,316
Operating expenses:
Research and development	4,567		3,800		8,890		8,118
Marketing and selling	2,846		2,366		5,701		4,846
General and administration	3,732		3,812		6,344		6,584
Equity plan-related compensation expense	$	11,926	$	10,586	$	22,427	$	20,864

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Net Income (Loss) Per Share

6 Months Ended

Jul. 31, 2016

Earnings Per Share [Abstract]

Net Income (Loss) Per Share

Net Income (Loss) Per Share

We compute basic net income (loss) per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of common shares issuable upon vesting of restricted stock units, exercise of stock options and ESPP purchase rights, and conversion of the 4.00% Debentures using the treasury stock method.

The following provides the computation of basic and diluted net income (loss) per share:

	Three months ended July 31,					Six months ended July 31,
	2016		2015			2016			2015
Net income (loss) attributable to Mentor Graphics shareholders	$	3,437	$	31,212		$	(9,999	)	$	21,327
Adjustment to redemption value of noncontrolling interest with redemption feature	—		(144		)	—			125
Adjusted net income (loss) attributable to Mentor Graphics shareholders	$	3,437	$	31,068		$	(9,999	)	$	21,452
Weighted average common shares used to calculate basic net income (loss) per share	107,374		116,584			108,215			116,296
Potentially dilutive common shares	2,500		2,784			—			2,690
Weighted average common and potentially dilutive common shares used to calculate diluted net income (loss) per share	109,874		119,368			108,215			118,986
Net income (loss) per share attributable to Mentor Graphics shareholders:
Basic net income (loss) per share	$	0.03	$	0.27		$	(0.09	)	$	0.18
Diluted net income (loss) per share	$	0.03	$	0.26		$	(0.09	)	$	0.18

We have adjusted the numerator of our basic and diluted net income per share calculation for the three and six months ended July 31, 2015 for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings.

The effect of the conversion of the 4.00% Debentures was anti-dilutive for the three and six months ended July 31, 2016 and 2015 and therefore excluded from the computation of diluted net income (loss) per share. The conversion feature of the 4.00% Debentures, which allows for settlement in cash or a combination of cash and common stock, is further described in Note 6. “Notes Payable.”

The following details the adjustments to net income (loss) excluded from the computation of diluted net income (loss) per share:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures	$	2,074	$	2,075	$	2,074	$	2,075

The following details shares excluded from the computation of diluted net income (loss) per share:

	Three months ended July 31,		Six months ended July 31,
	2016	2015	2016	2015
Shares of common stock for restricted stock units	28	—	2,265	11
Shares of common stock for stock options	—	—	1,249	—
Shares of common stock for ESPP purchase rights	742	—	776	572
Shares of common stock for convertible debt	756	2,825	205	2,489
Total anti-dilutive shares excluded	1,526	2,825	4,495	3,072

The restricted stock units, stock options, ESPP purchase rights, and the 4.00% Debentures were determined to be anti-dilutive either because we incurred a net loss for the period or as a result of applying the treasury stock method.

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Accumulated Other Comprehensive Loss

6 Months Ended

Jul. 31, 2016

Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]

Accumulated Other Comprehensive Loss, net of tax

Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss, net of tax effects:

As of	July 31, 2016			January 31, 2016
Foreign currency translation adjustment	$	(16,692	)	$	(21,013	)
Unrealized loss on derivatives	(13		)	(36		)
Pension liability	(76		)	(51		)
Total accumulated other comprehensive loss	$	(16,781	)	$	(21,100	)

During the first six months of fiscal years 2017 and 2016, there were no significant amounts reclassified to net income from accumulated other comprehensive loss related to foreign currency translation adjustment, cash flow hedges or pension plans.

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Special Charges (Notes)

6 Months Ended

Jul. 31, 2016

Restructuring and Related Activities [Abstract]

Special Charges

Special Charges

The following is a summary of the components of special charges:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Employee severance and related costs	$	442	$	840	$	2,530	$	10,703
Litigation costs	556		944		1,363		2,519
Voluntary early retirement program	—		—		—		25,435
Other costs, net	447		402		543		506
Total special charges	$	1,445	$	2,186	$	4,436	$	39,163

Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.

We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 and 110 employees elected to participate. The costs presented here are for severance benefits.

Employee severance and related costs include severance benefits and notice pay. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.

Approximately 79% of the employee severance and related costs for the six months ended July 31, 2016 were paid during the period. We expect to pay the remainder during the fiscal year ending January 31, 2017. Substantially all of the employee severance and related costs for the six months ended July 31, 2015 were paid during the fiscal year ending January 31, 2016. There were no significant modifications to the amount of those charges.

Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, EVE, and Synopsys regarding emulation technology.

Accrued special charges are included in accrued and other liabilities in the condensed consolidated balance sheets. The following table shows changes in accrued special charges during the six months ended July 31, 2016:

	Accrued special charges as of		Charges during the six months ended		Payments during the six months ended			Accrued special charges as of
	January 31, 2016		July 31, 2016		July 31, 2016			July 31, 2016
Employee severance and related costs	$	1,935	$	2,530	$	(3,550	)	$	915
Litigation costs	311		1,363		(626		)	1,048
Other costs, net	760		543		(763		)	540
Total accrued special charges	$	3,006	$	4,436	$	(4,939	)	$	2,503

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Income Taxes

6 Months Ended

Jul. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The provision for income taxes was as follows:

	Three months ended July 31,						Six months ended July 31,
	2016			2015			2016			2015
Income tax expense (benefit)	$	(2,239	)	$	4,071		$	(4,117	)	$	2,559
Effective tax rate	(186.9		)%	11.7		%	29.2		%	11.3		%

Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full fiscal year and record adjustments in each quarter. Such adjustments consider period specific items and, when applicable, a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.

Our effective tax rate is 29.2% for the six months ended July 31, 2016, after the inclusion of $(1,576) in net favorable period specific items. For our full fiscal year forecast, we project an 18.0% effective tax rate. This rate is inclusive of period specific items recognized through July 31,2016. Our projected rate for the full fiscal year differs from tax computed at the U.S. federal statutory rate of 35.0% primarily due to:

• The benefit of lower tax rates on earnings of foreign subsidiaries;

• Net reduction in liabilities for uncertain tax positions; and

• Forecasted utilization of net operating loss carryforwards, foreign tax credit carryforwards, and research and experimentation credit carryforwards for which no tax benefit has been recognized.

These differences are partially offset by:

• Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to account for the impact of future repatriations; and

• Withholding taxes.

Actual results may differ significantly from our current projections. Further, our effective tax rate could fluctuate considerably on a quarterly basis and could be significantly affected to the extent our actual mix of earnings among individual jurisdictions is different than our expectations.

We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. In addition, we record deferred tax assets for net operating loss carryforwards and tax credit carryforwards. We calculate the deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized. We have determined that it is uncertain whether our U.S. entity will generate sufficient taxable income to fully utilize tax credit carryforwards. Accordingly, we recorded a valuation allowance against those deferred tax assets for which realization does not meet the more likely than not standard. We have established valuation allowances related to certain foreign deferred tax assets based on historical losses as well as future expectations in certain jurisdictions. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

As of July 31,2016, we had a liability of $24,151 for income taxes associated with uncertain income tax positions. Of this liability, $5,430 was classified as short-term liabilities in income taxes payable in our condensed consolidated balance sheet as we generally anticipate the settlement of such liabilities will require payment of cash within the next twelve months. The remaining $18,721 of income tax associated with uncertain tax positions was classified as long-term liabilities. Certain liabilities may result in the reduction of deferred tax assets rather than settlement in cash. We are not able to reasonably estimate the timing of any cash payments required to settle the long-term liabilities and do not believe that the ultimate settlement of these liabilities will materially affect our liquidity.

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Supplemental Cash Flow Information

6 Months Ended

Jul. 31, 2016

Supplemental Cash Flow Information [Abstract]

Supplemental Cash Flow Information

Supplemental Cash Flow Information

The following provides information concerning supplemental disclosures of cash flow activities:

	Six months ended July 31,
	2016		2015
Cash paid, net for:
Interest	$	6,892	$	5,966
Income taxes	$	5,900	$	5,693

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Segment Reporting

6 Months Ended

Jul. 31, 2016

Segment Reporting [Abstract]

Segment Reporting

Segment Reporting

Our Chief Operating Decision Makers (CODMs), which consist of the Chief Executive Officer and the President, review our consolidated results within one operating segment. In making operating decisions, our CODMs primarily consider consolidated financial information accompanied by disaggregated revenue information by geographic region.

We eliminate all intercompany revenues in computing revenues by geographic regions. Revenues related to operations in the geographic regions were as follows:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Revenues:
United States	$	106,460	$	115,598	$	189,680	$	244,789
Europe	47,590		69,520		102,464		115,839
Japan	23,580		15,524		61,512		36,941
Pacific Rim	74,142		77,458		123,109		147,587
Other	2,572		2,962		5,218		8,049
Total revenues	$	254,344	$	281,062	$	481,983	$	553,205

For the three months ended July 31, 2016, one customer accounted for approximately 11.0% of our total revenues. For the three months ended July 31, 2015, one customer accounted for approximately 24.0% of our total revenues. For the six months ended July 31, 2016, no customer accounted for 10.0% or more of our total revenues. For the six months ended July 31, 2015, one customer accounted for approximately 14.0% of our total revenues.

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Recent accounting pronouncements (Policies)

6 Months Ended

Jul. 31, 2016

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent accounting pronouncements, Policy

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, as part of their simplification initiative to improve the accounting for share-based payments to employees. The new standard affects several aspects of the accounting for share-based payments. It requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement when awards vest or are exercised. Cash flows associated with excess tax benefits are no longer classified as cash flows from financing activities but will be classified as operating activities, consistent with other income tax cash flows. The standard also allows for additional employee tax withholding on the exercise or release of awards, without triggering liability classification of the award. Additionally, when we withhold shares for tax-withholding purposes and in-turn pay cash for taxes on behalf of an employee, the cash payment is classified as a financing activity in our statement of cash flows. Finally, the standard allows an accounting policy election for the treatment of forfeitures of stock based awards. Companies can elect to continue to estimate forfeitures expected to occur, or account for forfeitures as they occur. This standard is effective for us in the first quarter of fiscal year 2018, with early adoption permitted.

We early adopted the new standard effective February 1, 2016. The primary impact to our financial statements was the recognition of $48,605 in deferred tax assets associated with excess tax benefits offset by a valuation allowance of $38,425 and a cumulative-effect adjustment of $10,180 to retained earnings as of January 31, 2016. We have elected to continue to estimate forfeitures that are expected to occur when estimating the amount of compensation expense to record in each accounting period.

We have retrospectively applied to all periods presented in our statements of cash flows, the presentation of excess tax benefits and cash paid for employee taxes where shares were withheld. As a result of this election excess tax benefits will be reclassified from financing activities to operating activities and cash paid for shares withheld will be reclassified from operating activities to financing activities. The net impact on previously reported results is as follows:

Six months ended July 31, 2015	As originally reported			As Adjusted
Net cash provided by operations	$	94,807		$	94,812
Net cash used in financing activities	$	(6,582	)	$	(6,587	)

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. This standard eliminates the requirement for an acquirer to retrospectively account for adjustments made to provisional amounts recognized in a business combination. The standard requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are identified. Changes in depreciation, amortization, and any other income effects resulting from the adjustments to provisional amounts, should be computed as of the acquisition date. The standard requires that an entity present separately, by line item, the amounts included in current-period earnings that would have been recorded in previous reporting periods, if the adjustments to provisional amounts had been recognized on the acquisition date. We adopted this standard beginning February 1, 2016. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40),Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer accounts for fees related to the software license element consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer accounts for the arrangement as a service contract. An arrangement would contain a software license element if both: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. We adopted this standard beginning February 1, 2016 on a prospective basis. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Issued Pronouncements not yet Adopted

Revenue Recognition

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients. This ASU amends narrow aspects of Topic 606 in ASU 2014-09, Revenue from Contracts with Customers, related to the assessment of collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. Practical expedients are provided in the ASU to simplify the transition to the new standard.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. This ASU clarifies guidance in ASU 2014-09, Revenue from Contracts with Customers related to identifying performance obligations and licensing implementation. This ASU is expected to: (i) reduce the cost and complexity of applying the guidance on identifying promised goods or services; (ii) improve guidance on criteria in assessing whether promises to transfer goods and services are separately identifiable; and (iii) improve the operability and understandability of the licensing implementation guidance.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers(Topic 606), Principal versus Agent Considerations. This ASU amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies that the analysis must determine whether the entity controls the specified goods or services before they are transferred to the customer.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to be entitled to in exchange for the transfer of goods and services to customers. This ASU requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU also requires qualitative and quantitative disclosure about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard permits one of two methods for adoption: (i) retrospectively to each prior reporting period presented, with the ability to utilize certain practical expedients; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, including additional disclosures. We have not yet selected a transition method.

We are evaluating the effect that each of these ASUs will have on our consolidated financial statements and related disclosures. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted beginning in the first quarter of fiscal year 2018.

Other

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU changes how companies measure and recognize credit losses for various financial assets. This ASU will require companies to use an expected credit loss model to recognize estimated credit losses expected to occur over the remaining life of the financial assets rather than the current incurred credit loss model methodology. This revised guidance is applicable to our trade and term receivables. We will be required to implement this guidance in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases(Topic 842). This ASU requires a lessee to recognize in the statement of financial position a liability to make lease payments, and a right-of-use asset representing its right to use the underlying asset for the lease term. We will be required to implement this guidance in the first quarter of fiscal year 2020. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In September 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU provides guidance on management's responsibility in evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide related disclosures if required. Evaluation is required every reporting period, including interim periods. We will be required to implement this guidance in thefourth quarter of fiscal year 2017. Early adoption is permitted. This update is not expected to have a material impact on our consolidated financial statements.

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Fair Value Measurement (Policies)

6 Months Ended

Jul. 31, 2016

Fair Value Disclosures [Abstract]

Fair value of financial instruments

The FASB's authoritative guidance for the hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. The fair value hierarchy consists of the following three levels:

• Level 1—Quoted prices for identical instruments in active markets;

• Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and

• Level 3—One or more significant inputs to the valuation model are unobservable.

Contingent consideration

We have estimated the fair value of our contingent consideration as the present value of the expected payments over the term of the arrangements.

Notes payable fair value determination

We based the fair value of our 4.00% Debentures on the quoted market price at the balance sheet date. Our notes are not actively traded and the quoted market price is derived from observable inputs including our stock price, stock volatility, and interest rate (Level 2).

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Term Receivables and Trade Accounts Receivable (Policies)

6 Months Ended

Jul. 31, 2016

Term Receivables and Trade Accounts Receivable [Abstract]

Receivables policy

Balances for term agreements that are due within one year of the balance sheet date are included in trade accounts receivable, net and balances that are due more than one year from the balance sheet date are included in term receivables, long-term. We discount the total product portion of the agreements to reflect the interest component of the transaction. We amortize the interest component of the transaction, to system and software revenues over the period in which payments are made and balances are outstanding, using the effective interest method. We determine the discount rate at the outset of the arrangement based upon the current credit rating of the customer. We reset the discount rate periodically considering changes in prevailing interest rates but do not adjust previously discounted balances.

Trade and unbilled receivables

Trade accounts receivable include billed amounts whereas term receivables, short-term are comprised of unbilled amounts. Term receivables, short-term represent the portion of long-term installment agreements that are due within one year of the balance sheet date. Billings for term agreements typically occur thirty days prior to the contractual due date, in accordance with individual contract installment terms. Term receivables, long-term represent unbilled amounts which are scheduled to be billed beyond one year from the balance sheet date.

Financing receivable credit quality determination

We perform a credit risk assessment of all customers using the Standard & Poor’s (S&P) credit rating as our primary credit-quality indicator. The S&P credit ratings are based on the most recent S&P score available at the time of assessment. For customers that do not have an S&P credit rating, we base our credit risk assessment on results provided in the customers’ most recent financial statements at the time of assessment. We determine whether or not to extend credit to these customers based on the results of our internal credit assessment, thus mitigating our risk of loss.

Allowance for doubtful accounts

We maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectibility of our trade accounts receivable based on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer’s operating results, financial position, or credit rating, we record a specific reserve for bad debt to reduce the related receivable to the amount believed to be collectible. We also record unspecified reserves for bad debt for all other customers based on a variety of factors including length of time the receivables are past due, the financial health of customers, the current business environment, and historical experience. If these factors change or circumstances related to specific customers change, we adjust the estimates of the recoverability of receivables resulting in either additional selling expense or a reduction in selling expense in the period the determination is made.

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Commitments and Contingencies (Policies)

6 Months Ended

Jul. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and contingencies policy

When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates.

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Special Charges Costs Associated with Exit or Disposal Activities or Restructuring (Policies)

6 Months Ended

Jul. 31, 2016

Restructuring and Related Activities [Abstract]

Costs associated with employee severance and related costs

Employee severance and related costs include severance benefits and notice pay. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.

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Recent accounting pronouncements (Tables)

6 Months Ended

Jul. 31, 2016

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

New accounting pronouncement, early adoption

The net impact on previously reported results is as follows:

Six months ended July 31, 2015	As originally reported			As Adjusted
Net cash provided by operations	$	94,807		$	94,812
Net cash used in financing activities	$	(6,582	)	$	(6,587	)

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Fair Value Measurement (Tables)

6 Months Ended

Jul. 31, 2016

Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis

Financial liabilities measured at fair value on a recurring basis

The following table presents information about financial liabilities measured at fair value on a recurring basis:

	Fair Value		Level 1		Level 2		Level 3
Contingent consideration at July 31, 2016	$	2,366	$	—	$	—	$	2,366
Contingent consideration at January 31, 2016	$	3,749	$	—	$	—	$	3,749

Schedule of contingent consideration

The following table summarizes the total recorded contingent consideration:

As of	July 31, 2016		January 31, 2016
Contingent consideration, short-term	$	1,043	$	1,460
Contingent consideration, long-term	1,323		2,289
Total contingent consideration	$	2,366	$	3,749

Significant unobservable inputs

The fair value measurement of our contingent consideration as of July 31, 2016 encompasses the following significant unobservable inputs (Level 3):

Unobservable Inputs	Range
Total estimated contingent consideration	$84	-	$2,935
Discount rate	9.5%	-	15.0%
Timing of cash flows (in years)	0	-	2

Summary of level 3 activity

The following table summarizes contingent consideration activity:

Balance as of January 31, 2016	$	3,749
Payments	(1,475		)
Changes in fair value	34
Interest accretion	58
Balance as of July 31, 2016	$	2,366

Schedule of notes payable

The following table summarizes the fair value and carrying value of our 4.00% Convertible Subordinated Debentures (4.00% Debentures):

As of	July 31, 2016		January 31, 2016
Fair value of notes payable	$	276,978	$	255,487
Carrying value of notes payable	$	238,841	$	234,888

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Term Receivables and Trade Accounts Receivable (Tables)

6 Months Ended

Jul. 31, 2016

Term Receivables and Trade Accounts Receivable [Abstract]

Term receivable and trade accounts receivable balances

Term receivable and trade accounts receivable balances were as follows:

As of	July 31, 2016		January 31, 2016
Trade accounts receivable	$	88,094	$	176,021
Term receivables, short-term	$	296,298	$	317,188
Term receivables, long-term	$	226,268	$	268,657

Credit risk assessment for long-term receivables

The credit risk assessment for our long-term receivables was as follows:

As of	July 31, 2016		January 31, 2016
S&P credit rating:
AAA+ through BBB-	$	164,331	$	195,764
BB+ and lower	32,900		22,520
	197,231		218,284
Internal credit assessment	29,037		50,373
Total long-term term receivables	$	226,268	$	268,657

Change in allowance for doubtful accounts

The following shows the change in allowance for doubtful accounts:

Allowance for doubtful accounts	Beginning balance		Expense adjustment			Other deductions(1)			Ending  balance
Six months ended July 31, 2016	$	3,826	$	(875	)	$	256		$	3,207
Six months ended July 31, 2015	$	4,217	$	(597	)	$	(9	)	$	3,611

(1)Specific account write-offs and foreign exchange.

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Short-Term Borrowings Short-term Borrowings (Tables)

6 Months Ended

Jul. 31, 2016

Short-term Debt [Abstract]

Schedule of Short-term Borrowings

Short-term borrowings consisted of the following:

As of	July 31, 2016		January 31, 2016
Senior revolving credit facility	$	—	$	25,000
Collections of previously sold accounts receivable	3,761		7,568
Other borrowings	991		881
Short-term borrowings	$	4,752	$	33,449

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Notes Payable (Tables)

6 Months Ended

Jul. 31, 2016

Debt Instrument

Schedule of Long-term Debt Instruments

Notes payable consist of the following:

As of	July 31, 2016		January 31, 2016
4.00% Debentures	$	238,841	$	234,888
Other	5,188		5,188
Notes payable	$	244,029	$	240,076

4.00% Debentures due 2031

Debt Instrument

Redemption prices

we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices, expressed as a percentage of principal plus any accrued and unpaid interest:

Period	Redemption Price
Beginning on April 5, 2016 and ending on March 31, 2017	101.143	%
Beginning on April 1, 2017 and ending on March 31, 2018	100.571	%
On April 1, 2018 and thereafter	100.000	%

Principal amount, unamortized debt premium (discount), unamortized debt issuance costs, net carrying amount of the liability component, and carrying amount of the equity component

The principal amount, unamortized debt discount, unamortized debt issuance costs, net carrying amount of the liability component, and carrying amount of the equity component of the 4.00% Debentures are as follows:

As of	July 31, 2016			January 31, 2016
Principal amount	$	252,957		$	252,957
Unamortized debt discount	(12,530		)	(16,007		)
Unamortized debt issuance costs	(1,586		)	(2,062		)
Net carrying amount of the liability component	$	238,841		$	234,888
Equity component, net of debt issuance costs	$	42,518		$	42,518

Recognized amounts in interest expense in the condensed consolidated statement of income related to debentures

We recognized the following amounts in interest expense in the condensed consolidated statement of income related to the 4.00% Debentures:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Interest expense at the contractual interest rate	$	2,530	$	2,530	$	5,059	$	5,060
Amortization of debt discount	$	1,754	$	1,633	$	3,477	$	3,237
Amortization of debt issuance costs	$	238	$	238	$	476	$	476

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Stockholders Equity Dividends Declared (Tables)

6 Months Ended

Jul. 31, 2016

Stockholders' Equity Attributable to Parent [Abstract]

Dividends declared

The following table summarizes dividends declared since the beginning of fiscal year 2016:

Declaration Date	Record Date	Payment Date	Per Share Amount		Total Amount
Fiscal Year 2017
8/18/2016	9/19/2016	9/30/2016		$0.055
5/19/2016	6/10/2016	6/30/2016		$0.055		$5,886
3/3/2016	3/10/2016	3/31/2016		$0.055		$5,880
Fiscal Year 2016
11/19/2015	12/15/2015	1/4/2016		$0.055		$6,326
8/20/2015	9/10/2015	9/30/2015		$0.055		$6,491
5/22/2015	6/10/2015	6/30/2015		$0.055		$6,389
2/26/2015	3/10/2015	3/31/2015		$0.055		$6,383

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Employee Stock and Savings Plans (Tables)

6 Months Ended

Jul. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock compensation expense recognized

The following table summarizes stock-based compensation expense recognized:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Cost of revenues	$	781	$	608	$	1,492	$	1,316
Operating expenses:
Research and development	4,567		3,800		8,890		8,118
Marketing and selling	2,846		2,366		5,701		4,846
General and administration	3,732		3,812		6,344		6,584
Equity plan-related compensation expense	$	11,926	$	10,586	$	22,427	$	20,864

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Net Income (Loss) Per Share (Tables)

6 Months Ended

Jul. 31, 2016

Earnings Per Share [Abstract]

Computation of basic and diluted net income (loss) per share

The following provides the computation of basic and diluted net income (loss) per share:

	Three months ended July 31,					Six months ended July 31,
	2016		2015			2016			2015
Net income (loss) attributable to Mentor Graphics shareholders	$	3,437	$	31,212		$	(9,999	)	$	21,327
Adjustment to redemption value of noncontrolling interest with redemption feature	—		(144		)	—			125
Adjusted net income (loss) attributable to Mentor Graphics shareholders	$	3,437	$	31,068		$	(9,999	)	$	21,452
Weighted average common shares used to calculate basic net income (loss) per share	107,374		116,584			108,215			116,296
Potentially dilutive common shares	2,500		2,784			—			2,690
Weighted average common and potentially dilutive common shares used to calculate diluted net income (loss) per share	109,874		119,368			108,215			118,986
Net income (loss) per share attributable to Mentor Graphics shareholders:
Basic net income (loss) per share	$	0.03	$	0.27		$	(0.09	)	$	0.18
Diluted net income (loss) per share	$	0.03	$	0.26		$	(0.09	)	$	0.18

We have adjusted the numerator of our basic and diluted net income per share calculation for the three and six months ended July 31, 2015 for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings.

Adjustments to Net Income excluded from the computation of diluted EPS

The following details the adjustments to net income (loss) excluded from the computation of diluted net income (loss) per share:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures	$	2,074	$	2,075	$	2,074	$	2,075

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

The following details shares excluded from the computation of diluted net income (loss) per share:

	Three months ended July 31,		Six months ended July 31,
	2016	2015	2016	2015
Shares of common stock for restricted stock units	28	—	2,265	11
Shares of common stock for stock options	—	—	1,249	—
Shares of common stock for ESPP purchase rights	742	—	776	572
Shares of common stock for convertible debt	756	2,825	205	2,489
Total anti-dilutive shares excluded	1,526	2,825	4,495	3,072

The restricted stock units, stock options, ESPP purchase rights, and the 4.00% Debentures were determined to be anti-dilutive either because we incurred a net loss for the period or as a result of applying the treasury stock method.

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Accumulated Other Comprehensive Loss (Tables)

6 Months Ended

Jul. 31, 2016

Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]

Schedule of components of accumulated other comprehensive loss, net of tax

The following table summarizes the components of accumulated other comprehensive loss, net of tax effects:

As of	July 31, 2016			January 31, 2016
Foreign currency translation adjustment	$	(16,692	)	$	(21,013	)
Unrealized loss on derivatives	(13		)	(36		)
Pension liability	(76		)	(51		)
Total accumulated other comprehensive loss	$	(16,781	)	$	(21,100	)

During the first six months of fiscal years 2017 and 2016, there were no significant amounts reclassified to net income from accumulated other comprehensive loss related to foreign currency translation adjustment, cash flow hedges or pension plans.

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Special Charges Special Charges (Tables)

6 Months Ended

Jul. 31, 2016

Restructuring and Related Activities [Abstract]

Components of special charges

The following is a summary of the components of special charges:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Employee severance and related costs	$	442	$	840	$	2,530	$	10,703
Litigation costs	556		944		1,363		2,519
Voluntary early retirement program	—		—		—		25,435
Other costs, net	447		402		543		506
Total special charges	$	1,445	$	2,186	$	4,436	$	39,163

Schedule of accrued special charges

The following table shows changes in accrued special charges during the six months ended July 31, 2016:

	Accrued special charges as of		Charges during the six months ended		Payments during the six months ended			Accrued special charges as of
	January 31, 2016		July 31, 2016		July 31, 2016			July 31, 2016
Employee severance and related costs	$	1,935	$	2,530	$	(3,550	)	$	915
Litigation costs	311		1,363		(626		)	1,048
Other costs, net	760		543		(763		)	540
Total accrued special charges	$	3,006	$	4,436	$	(4,939	)	$	2,503

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Income Taxes (Tables)

6 Months Ended

Jul. 31, 2016

Income Tax Disclosure [Abstract]

Provision for Income Taxes

The provision for income taxes was as follows:

	Three months ended July 31,						Six months ended July 31,
	2016			2015			2016			2015
Income tax expense (benefit)	$	(2,239	)	$	4,071		$	(4,117	)	$	2,559
Effective tax rate	(186.9		)%	11.7		%	29.2		%	11.3		%

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Supplemental Cash Flow Information (Tables)

6 Months Ended

Jul. 31, 2016

Supplemental Cash Flow Information [Abstract]

Information concerning supplemental disclosures of cash flow activities

The following provides information concerning supplemental disclosures of cash flow activities:

	Six months ended July 31,
	2016		2015
Cash paid, net for:
Interest	$	6,892	$	5,966
Income taxes	$	5,900	$	5,693

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Segment Reporting (Tables)

6 Months Ended

Jul. 31, 2016

Segment Reporting [Abstract]

Revenues related to operations in geographic regions

Revenues related to operations in the geographic regions were as follows:

	Three months ended July 31,				Six months ended July 31,
	2016		2015		2016		2015
Revenues:
United States	$	106,460	$	115,598	$	189,680	$	244,789
Europe	47,590		69,520		102,464		115,839
Japan	23,580		15,524		61,512		36,941
Pacific Rim	74,142		77,458		123,109		147,587
Other	2,572		2,962		5,218		8,049
Total revenues	$	254,344	$	281,062	$	481,983	$	553,205

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Recent accounting pronouncements (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jan. 31, 2016
New Accounting Pronouncement, Early Adoption [Line Items]
Net Cash Provided by (Used in) Operating Activities	$ 129,506	$ 94,812
Net Cash Provided by (Used in) Financing Activities	$ (170,808)	(6,587)
Adjustments for New Accounting Pronouncement [Member]
New Accounting Pronouncement, Early Adoption [Line Items]
Deferred Tax Assets, Gross			$ 48,605
Deferred tax assets valuation allowance			38,425
Cumulative Effect of New Accounting Principle in Period of Adoption			$ 10,180
Scenario, Previously Reported [Member]
New Accounting Pronouncement, Early Adoption [Line Items]
Net Cash Provided by (Used in) Operating Activities		94,807
Net Cash Provided by (Used in) Financing Activities		$ (6,582)

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Financial Liabilities Measured at Fair Value on a Recurring Basis (Detail) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Contingent consideration	$ 2,366	$ 3,749
Level 1 | Fair Value, Measurements, Recurring
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Contingent consideration	0	0
Level 2 | Fair Value, Measurements, Recurring
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Contingent consideration	0	0
Level 3 | Fair Value, Measurements, Recurring
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Contingent consideration	$ 2,366	$ 3,749

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Fair Value Measurement Level 3 Unobservable Inputs (Details) $ in Thousands	6 Months Ended
	Jul. 31, 2016 USD ($) year
Unobservable Inputs [Abstract]
Total estimated contingent consideration, low | $	$ 84
Total estimated contingent consideration, high | $	$ 2,935
Discount rate, low	9.50%
Discount rate, high	15.00%
Timing of cash flows (in years), low | year	0
Timing of cash flows (in years), high | year	2

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Summary of Level 3 Activity (Detail) $ in Thousands	6 Months Ended
	Jul. 31, 2016 USD ($)
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Balance at beginning of period	$ 3,749
Payments	(1,475)
Adjustment	34
Interest accretion	58
Balance at ending of period	$ 2,366

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Fair Value Measurement - Additional Information (Detail) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Notes payable (Note 6)	$ 244,029	$ 240,076
Business Combination, Contingent Consideration, Liability, Current	1,043	1,460
Business Combination, Contingent Consideration, Liability, Noncurrent	1,323	2,289
Current portion of notes payable	0	0
Non-marketable equity securities	3,000
4.00% Debentures due 2031
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of notes payable	276,978	255,487
Notes payable (Note 6)	238,841	234,888
Notes Payable, Other Payables
Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis
Notes payable (Note 6)	$ 5,188	$ 5,188

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Term Receivable and Trade Accounts Receivable Balances (Detail) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Accounts and Financing Receivable [Line Items]
Trade accounts receivable, net	$ 384,392	$ 493,209
Term receivables, long-term	226,268	268,657
Trade accounts receivable
Accounts and Financing Receivable [Line Items]
Trade accounts receivable, net	88,094	176,021
Term receivables, short-term
Accounts and Financing Receivable [Line Items]
Trade accounts receivable, net	$ 296,298	$ 317,188

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Credit Risk Assessment for Long-term Receivables (Detail) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Accounts and Financing Receivable [Line Items]
Term receivables, long-term	$ 226,268	$ 268,657
S&P credit rating, AAA+ through BBB-
Accounts and Financing Receivable [Line Items]
Term receivables, long-term	164,331	195,764
S&P credit rating, BB+ and lower
Accounts and Financing Receivable [Line Items]
Term receivables, long-term	32,900	22,520
S&P credit rating
Accounts and Financing Receivable [Line Items]
Term receivables, long-term	197,231	218,284
Internal Credit Rating
Accounts and Financing Receivable [Line Items]
Term receivables, long-term	$ 29,037	$ 50,373

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Change in Allowance for Doubtful Accounts (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015
Disclosure Change In Allowance For Doubtful Accounts [Abstract]
Allowance for doubtful accounts receivable, beginning balance	$ 3,826	$ 4,217
Valuation Allowances and Reserves, Period Increase (Decrease)	(875)	(597)
Valuation Allowances and Reserves, Adjustments	256	(9)
Allowance for doubtful accounts receivable, ending balance	$ 3,207	$ 3,611

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Term Receivables and Trade Accounts Receivable - Additional Information (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015
Disclosure Term Receivables And Trade Accounts Receivable Additional Information [Abstract]
Billing period	30 days
Net proceeds from sale of receivables	$ 29,543	$ 27,562

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Short-Term Borrowings Short-Term Borrowings (Details) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Short-term Debt [Line Items]
Senior revolving credit facility	$ 0	$ 25,000
Collections Of Previously Sold Accounts Receivable	3,761	7,568
Other Short-term Borrowings	991	881
Short-term borrowings	$ 4,752	$ 33,449

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Short-Term Borrowings - Additional Information (Detail) - Revolving credit facility $ in Thousands	6 Months Ended
	Jul. 31, 2016 USD ($)
Line of Credit Facility [Line Items]
Termination date for senior, unsecured revolving credit facility	Jan. 09, 2020
Revolving credit facility, maximum borrowing capacity	$ 125,000
Credit facility limits, aggregate amount available for dividend and repurchase of stock	$ 200,000
Credit facility limits, aggregate amount available for dividend and repurchase of stock, percentage of cumulative consolidated net income (loss)	70.00%
Minimum
Line of Credit Facility [Line Items]
Commitment fee percentage on unused line of credit	0.30%
Minimum | LIBOR
Line of Credit Facility [Line Items]
Basis spread	2.00%
Minimum | Base rate
Line of Credit Facility [Line Items]
Basis spread	1.00%
Maximum
Line of Credit Facility [Line Items]
Commitment fee percentage on unused line of credit	0.40%
Maximum | LIBOR
Line of Credit Facility [Line Items]
Basis spread	2.50%
Maximum | Base rate
Line of Credit Facility [Line Items]
Basis spread	1.50%

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Notes Payable (Details) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Debt Instrument
Notes payable (Note 6)	$ 244,029	$ 240,076
4.00% Debentures due 2031
Debt Instrument
Notes payable (Note 6)	238,841	234,888
Notes Payable, Other Payables
Debt Instrument
Notes payable (Note 6)	$ 5,188	$ 5,188

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Notes Payable - Redemption Prices Expressed as a Percentage of Principal, Plus any Accrued and Unpaid Interest (Detail) - 4.00% Debentures due 2031 - Convertible Subordinated Debt	6 Months Ended
	Jul. 31, 2016
Redemption period beginning on April 5, 2016 and ending on March 31, 2017
Debt Instrument
Debentures redemption price	101.143%
Redemption period beginning on April 1, 2017 and ending on March 31, 2018
Debt Instrument
Debentures redemption price	100.571%
Redemption period beginning on April 1, 2018 and thereafter
Debt Instrument
Debentures redemption price	100.00%

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Notes Payable - Principal Amount, Unamortized Debt Discount, Unamortized Debt Issuance Costs, Net Carrying Amount of the Liability Component, and Carrying Amount of the Equity Component of the 4.00% Debentures (Detail) - USD ($) $ in Thousands	Jul. 31, 2016	Jan. 31, 2016
Debt Instrument
Net carrying amount of liability component	$ 244,029	$ 240,076
4.00% Debentures due 2031
Debt Instrument
Principal amount	252,957	252,957
Unamortized debt discount	(12,530)	(16,007)
Unamortized debt issuance costs	(1,586)	(2,062)
Net carrying amount of liability component	238,841	234,888
Equity component, net of debt issuance costs	$ 42,518	$ 42,518

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Notes Payable - Recognized Amounts in Interest Expense in the Condensed Consolidated Statements of Income Related to the 4.00% Debentures (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Debt Instrument
Interest expense at the contractual interest rate	$ 5,690	$ 4,772	$ 9,828	$ 9,466
4.00% Debentures due 2031
Debt Instrument
Interest expense at the contractual interest rate	2,530	2,530	5,059	5,060
Amortization of debt discount	1,754	1,633	3,477	3,237
Amortization of debt issuance costs	$ 238	$ 238	$ 476	$ 476

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Notes Payable - Additional Information (Detail) $ / shares in Units, $ in Thousands				6 Months Ended
	Sep. 09, 2015	Feb. 25, 2015	Apr. 30, 2011 USD ($) $ / shares shares	Jul. 31, 2016 USD ($) day $ / shares shares	Jul. 31, 2015	Jan. 31, 2016 USD ($)
Debt Instrument
Notes payable (Note 6)				$ 244,029		$ 240,076
4.00% Debentures due 2031
Debt Instrument
Notes payable (Note 6)				238,841		$ 234,888
4.00% Debentures due 2031 | Convertible Subordinated Debt
Debt Instrument
Debt Instrument, Maturity Date, Description			2031
Issued debt			$ 253,000
Interest rate			4.00%
Principal amount multiple			$ 1	$ 1
Conversion rate | shares			48.6902	50.3389
Conversion price | $ / shares			$ 20.54	$ 19.87
Market price of common stock exceeding percent of the conversion price				120.00%
Debt instrument conversion circumstance stock price | $ / shares				$ 23.84
Debt instrument threshold trading days | day				20
Debt instrument threshold consecutive trading days				30 days
Market price of debentures declining to maximum percent of the value of the common stock				98.00%
If-converted Value in Excess of Principal				$ 19,032
Amortization end date				2018-03
Debt Instrument, Interest Rate During Period				7.25%	7.25%
February 2015, Other Notes Payable [Member]
Debt Instrument
Notes payable (Note 6)				$ 3,188
Interest rate		4.00%
Debt Instrument, Maturity Date		Feb. 25, 2019
September 2015, Other Notes Payable [Member]
Debt Instrument
Notes payable (Note 6)				$ 2,000
Interest rate	4.00%
Debt Instrument, Maturity Date	Sep. 08, 2018
Holder optional redemption on April 1, 2018 | 4.00% Debentures due 2031 | Convertible Subordinated Debt
Debt Instrument
Debentures redemption price				100.00%
Holder optional redemption on April 1, 2021 | 4.00% Debentures due 2031 | Convertible Subordinated Debt
Debt Instrument
Debentures redemption price				100.00%
Holder optional redemption on April 1, 2026 | 4.00% Debentures due 2031 | Convertible Subordinated Debt
Debt Instrument
Debentures redemption price				100.00%

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Commitments and Contingencies Gain Contingency, Unrecorded Amount (Details) $ in Thousands	Jul. 31, 2016 USD ($)
Commitments and Contingencies Disclosure [Abstract]
Gain Contingency, Unrecorded Amount	$ 36,000

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Commitments and Contingencies Loss Contingency, Inestimable Loss (Details)	6 Months Ended
	Jul. 31, 2016
Commitments and Contingencies Disclosure [Abstract]
Loss Contingency, Inestimable Loss	We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus no liability has been established nor has a range of loss been disclosed.

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Stockholders Equity Dividend (Details) - USD ($) $ / shares in Units, $ in Thousands				3 Months Ended						6 Months Ended
	Sep. 30, 2016	Sep. 19, 2016	Aug. 18, 2016	Jul. 31, 2016	Apr. 30, 2016	Jan. 31, 2016	Oct. 31, 2015	Jul. 31, 2015	Apr. 30, 2015	Jul. 31, 2016	Jul. 31, 2015
Dividends Payable [Line Items]
Dividends payable, date declared				May 19, 2016	Mar. 03, 2016	Nov. 19, 2015	Aug. 20, 2015	May 22, 2015	Feb. 26, 2015
Dividends payable, date of record				Jun. 10, 2016	Mar. 10, 2016	Dec. 15, 2015	Sep. 10, 2015	Jun. 10, 2015	Mar. 10, 2015
Dividends payable, date to be paid				Jun. 30, 2016	Mar. 31, 2016	Jan. 04, 2016	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015
Cash dividends declared per common share				$ 0.055	$ 0.055	$ 0.055	$ 0.055	$ 0.055	$ 0.055	$ 0.110	$ 0.110
Payments of dividends				$ 5,886	$ 5,880	$ 6,326	$ 6,491	$ 6,389	$ 6,383	$ 11,766	$ 12,772
Subsequent Event [Member]
Dividends Payable [Line Items]
Dividends payable, date declared			Aug. 18, 2016
Dividends payable, date of record		Sep. 19, 2016
Dividends payable, date to be paid	Sep. 30, 2016
Cash dividends declared per common share			$ 0.055

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Stock-Based Compensation Stock Based Compensation Details Textual (Details) shares in Thousands	6 Months Ended
	Jul. 31, 2016 shares
Omnibus Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Requisite Service Period	4 years
Share Based Compensation Arrangement By Share Based Payment Award Expiry Period From Date Of Grant	10 years
Employee Stock Purchase Plans [Member]
Employee Stock Purchase Plan Maximum Number Of Shares Per Buy Date That May Be Purchased By Eligible Participants	6
Share Based Compensation Arrangement By Share Based Payment Award Discounted Price From Market Price Offering	85.00%

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Stock-Based Compensation Stock Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based Compensation	$ 11,926	$ 10,586	$ 22,427	$ 20,864
Cost of Sales [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based Compensation	781	608	1,492	1,316
Research and Development Expense [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based Compensation	4,567	3,800	8,890	8,118
Selling and Marketing Expense [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based Compensation	2,846	2,366	5,701	4,846
General and Administrative Expense [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based Compensation	$ 3,732	$ 3,812	$ 6,344	$ 6,584

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Net Income (Loss) Per Share - Computation of Basic and Diluted Net Income Per Share (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Disclosure Computation Of Basic And Diluted Net Income Per Share [Abstract]
Net income (loss) attributable to Mentor Graphics shareholders	$ 3,437	$ 31,212	$ (9,999)	$ 21,327
Adjustment to redemption value of noncontrolling interest with redemption feature	0	(144)	0	125
Adjusted net income (loss) attributable to Mentor Graphics shareholders	$ 3,437	$ 31,068	$ (9,999)	$ 21,452
Weighted average common shares used to calculate basic net income (loss) per share	107,374	116,584	108,215	116,296
Potentially dilutive common shares	2,500	2,784	0	2,690
Weighted average common and potentially dilutive common shares used to calculate diluted net income (loss) per share	109,874	119,368	108,215	118,986
Basic net income (loss) per share	$ 0.03	$ 0.27	$ (0.09)	$ 0.18
Diluted net income (loss) per share	$ 0.03	$ 0.26	$ (0.09)	$ 0.18
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Interest, net of tax, to be forfeited upon conversion	$ 2,074	$ 2,075	$ 2,074	$ 2,075
Antidilutive securities excluded from computation of earnings per share, amount	1,526	2,825	4,495	3,072
Restricted Stock Units (RSUs) [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share, amount	28	0	2,265	11
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share, amount	0	0	1,249	0
ESPP Purchase Right [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share, amount	742	0	776	572
Convertible Debt [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share, amount	756	2,825	205	2,489

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Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jan. 31, 2016
Accumulated Other Comprehensive Loss [Line Items]
Reclassification from Accumulated Other Comprehensive Loss, Current Period, Net of Tax	$ 0	$ 0
Foreign currency translation adjustment	(16,692)		$ (21,013)
Unrealized loss on derivatives	(13)		(36)
Pension liability, net of tax	(76)		(51)
Total accumulated other comprehensive loss	$ (16,781)		$ (21,100)

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Special Charges - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Accrued special charges, period start			$ 3,006
Special charges	$ 1,445	$ 2,186	4,436	$ 39,163
Special charges, payments			(4,939)
Accrued special charges, period end	2,503		2,503
Employee severance and related costs
Accrued special charges, period start			1,935
Special charges	442	840	2,530	10,703
Special charges, payments			(3,550)
Accrued special charges, period end	915		$ 915
Percentage of termination benefit paid during the period			79.00%
Litigation costs
Accrued special charges, period start			$ 311
Special charges	556	944	1,363	2,519
Special charges, payments			(626)
Accrued special charges, period end	1,048		1,048
Early retirement benefits
Special charges	0	0	0	25,435
Other costs
Accrued special charges, period start			760
Special charges	447	$ 402	543	$ 506
Special charges, payments			(763)
Accrued special charges, period end	$ 540		$ 540

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Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015	Jan. 31, 2017	Jan. 31, 2016
Income Taxes [Line Items]
Income tax expense (benefit)	$ (2,239)	$ 4,071	$ (4,117)	$ 2,559
Effective tax rate	(186.90%)	11.70%	29.20%	11.30%
Period specific items expense			$ (1,576)
U.S. federal statutory rate			35.00%
Income taxes associated with uncertain income tax positions	$ 24,151		$ 24,151
Liability for uncertain tax positions, current	5,430		5,430
Liability for uncertain tax positions, non current	$ 18,721		$ 18,721			$ 25,116
Scenario, Forecast [Member]
Income Taxes [Line Items]
Effective income tax rate forecast					18.00%

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Supplemental Cash Flow Information - Additional Information (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015
Supplemental Cash Flow Information [Abstract]
Interest	$ 6,892	$ 5,966
Income taxes	$ 5,900	$ 5,693

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Segment Reporting Operating Segment (Details)	6 Months Ended
	Jul. 31, 2016 segment
Segment Reporting [Abstract]
Number of operating segments	1

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Segment Reporting - Additional Information (Detail) - customer	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Concentration Risk [Line Items]
Customers accounting for ten percent or more of net revenue	1	1	0	1
Customer concentration risk | Sales Revenue, Net [Member]
Concentration Risk [Line Items]
Customer percent of total revenues	11.00%	24.00%	10.00%	14.00%

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Segment Reporting Revenues Related to Operations in Geographic Regions (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2016	Jul. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Revenues:
Total revenues	$ 254,344	$ 281,062	$ 481,983	$ 553,205
UNITED STATES
Revenues:
Total revenues	106,460	115,598	189,680	244,789
Europe
Revenues:
Total revenues	47,590	69,520	102,464	115,839
Japan
Revenues:
Total revenues	23,580	15,524	61,512	36,941
Asia
Revenues:
Total revenues	74,142	77,458	123,109	147,587
Americas
Revenues:
Total revenues	$ 2,572	$ 2,962	$ 5,218	$ 8,049