EX-99.1 2 a4809608ex991.txt FINANCIAL RESULTS FOR 4TH Q OF '04 Exhibit 99.1 Mentor Graphics Announces Fourth Quarter Results WILSONVILLE, Ore.--(BUSINESS WIRE)--Jan. 27, 2005--Mentor Graphics Corporation (Nasdaq:MENT) today announced record revenues of $214.9 million for the fourth quarter of 2004 driven by record bookings for the quarter. Diluted earnings per share for the quarter on a pro forma basis were $.39, and on a GAAP basis were $.20. "Mentor's growth in a sluggish EDA environment is being driven by the successful proliferation of our younger product portfolio including the Calibre(R) and Scalable Verification(TM) tools, and newer printed circuit board design tools. Seven of the top ten deals in the quarter were renewals with an aggregate bookings increase of 40% over the prior deals, on comparable terms, including contract length. Customers need, and are willing to pay for, new products that solve their problems," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "Furthermore, we saw significant momentum from our newer, emerging products as we received significant orders in cabling, embedded software, high speed board design, and coverage-driven verification." Book-to-bill reached its highest level since 1996 and backlog reached a level not seen since year 2000. Bookings rose over 35% for the quarter, and 20% for the year. All regions performed well with Japan and Pacific Rim bookings up over 100%, Europe up 45%, and North America up 15% over the year ago quarter. All three product platforms grew during the quarter, with Scalable Verification almost doubling and Integrated System Design up 45%. Calibre Design to Silicon was up 5% over an extremely strong fourth quarter of 2003. Revenue by region for the quarter was 40% North America, 30% Europe, 15% Japan, and 15% Pacific Rim. By product platform, revenue was 35% Scalable Verification, 30% Calibre Design to Silicon, 20% Integrated System Design and 15% New and Emerging products. Special charges of $4.9 million were primarily acquisition and restructuring related. "While we see no sign of an upturn for the overall EDA industry, we note that Mentor and other companies like us with young product lines continue to perform well in this environment," said Gregory K. Hinckley, president of Mentor Graphics. "With proliferation of our young, but well-seeded products, combined with a strong product pipeline in earlier stages of adoption, we believe we are well positioned to perform regardless of overall EDA market conditions." Preliminary Results of Sarbanes-Oxley Section 404 Review During the course of the audit of Mentor Graphics' 2004 financial statements, KPMG identified a material weakness in internal controls over financial reporting related to the calculation of its income tax provision. PCAOB Audit Standard No. 2 defines a material weakness to be an instance when the design or operation of a control does not allow management to prevent or detect material misstatements on a timely basis. A benefit was recorded to equity for a stock option deduction that was not deemed to be realizable. Mentor Graphics then recorded a valuation reserve for the deferred tax asset that was created as a result of this benefit. The reserve was inappropriately established with a charge to earnings. Proper accounting was determined to be a direct charge to common stock instead of income tax expense. This error was identified during KPMG's annual audit of financial reporting specifically related to income tax calculations. The error overstated income tax expense and understated net income by $5.3 million but had no net effect on equity accounts. The material weakness was confined to a single erroneous accounting entry in the fourth quarter of 2004, was corrected prior to completion of the audit and as a result, did not have any effect on reported year-end or previously reported quarterly financial results. Mentor Graphics will finalize its evaluation of internal controls over financial reporting prior to issuance of its Form 10-K for the year ended December 31, 2004. The remaining steps in evaluating our internal controls over financial reporting primarily relate to preparation of financial reports to be filed with the SEC on Form 10-K. "Exclusive of this instance no other material weaknesses have been identified by management or our auditors," said Gregory K. Hinckley, president of Mentor Graphics. "Management takes its role in designing, maintaining and evaluating internal controls over financial reporting seriously and is considering several options to remediate this one material weakness." About Mentor Graphics Mentor Graphics Corporation (Nasdaq:MENT) is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world's most successful electronics and semiconductor companies. Established in 1981, the company reported revenues over the last 12 months of over $700 million and employs approximately 3,850 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777; Silicon Valley headquarters are located at 1001 Ridder Park Drive, San Jose, California 95131-2314. World Wide Web site: http://www.mentor.com/. Mentor Graphics and Calibre are registered trademarks and Scalable Verification is a trademark of Mentor Graphics Corporation. In the calculation of pro forma earnings, gross margin and operating expenses, Mentor Graphics excludes amortization of acquired intangibles and write-offs of in-process R&D from acquisitions. Also excluded are non-operating and non-recurring items classified as special charges such as restructure expenses and asset impairments, as well as income tax expense in excess of a normalized 17% effective tax rate. These excluded items are generally infrequent, less predictable and are often non-cash in nature. Mentor Graphics believes that excluding these items provides investors with a representation of its core performance, and a pro forma base line for assessing the future earnings potential of Mentor Graphics. These pro forma measures should be assessed in conjunction with GAAP earnings measures for a more complete understanding of the Company's results. Since pro forma measures exclude certain items, differences in earnings from GAAP can be significant; Mentor Graphics management evaluates its performance under both measures for a complete understanding of its results. Investors are encouraged to review both measures for their evaluations and consider the GAAP earnings measures as the most complete measure of Mentor Graphics' overall performance. Statements in this press release regarding the Company's outlook for future periods constitute "forward-looking" statements based on current expectations within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: (i) the Company's ability to successfully offer products and services that compete in the highly competitive EDA industry including the risk that the Company's technology, products or inventory become obsolete; (ii) the Company's ability to successfully integrate and manage its acquisitions, (iii) changes in accounting or reporting rules or interpretations, limitations on repatriation of earnings, licensing and intellectual property rights protection; (iv) changes in tax laws, regulations or enforcement practices where the Company does business; (v) effects of the increasing volatility of foreign currency fluctuations on the Company's business and operating results; (vi) effects of unanticipated shifts in product mix on gross margin and unanticipated shifts in geographic mix on the overall tax rate, all as may be discussed in more detail under the heading "Factors That May Affect Future Results and Financial Condition" in the Company's most recent Form 10-K or Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. In addition, statements regarding outlook do not reflect potential impacts of mergers or acquisitions that have not been announced or closed as of the time the statements are made. Mentor Graphics disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements to reflect future events or developments. MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, --------------------------------------- 2004 2003 2004 2003 -------------------------------------- Revenues: System and software $140,127 $128,680 $422,672 $ 394,449 Service and support 74,822 73,229 288,284 281,219 -------- -------- -------- --------- Total revenues 214,949 201,909 710,956 675,668 -------- -------- -------- --------- Cost of revenues: System and software 4,839 7,180 16,639 22,721 Service and support 20,800 22,749 80,294 84,554 Amortization of purchased technology 2,982 2,625 10,624 9,422 -------- -------- -------- --------- Total cost of revenues 28,621 32,554 107,557 116,697 -------- -------- -------- --------- Gross margin 186,328 169,355 603,399 558,971 -------- -------- -------- --------- Operating expenses: Research and development 54,594 51,434 202,289 184,797 Marketing and selling 76,126 69,492 267,181 245,170 General and administration 18,825 21,830 74,255 75,984 Amortization of intangible assets 1,098 908 3,586 3,883 Emulation litigation settlement - - - 20,264 Special charges 4,893 7,809 16,913 15,980 -------- -------- -------- --------- Total operating expenses 155,536 151,473 564,224 546,078 -------- -------- -------- --------- Operating income 30,792 17,882 39,175 12,893 Other income, net 2,689 952 8,388 5,460 Interest expense (4,838) (4,725) (18,619) (17,224) -------- -------- -------- --------- Income before income taxes 28,643 14,109 28,944 1,129 Income tax expense (benefit) 12,829 1,059 49,494 (6,804) -------- -------- -------- --------- Net income (loss) $ 15,814 $ 13,050 $(20,550)$ 7,933 ======== ======== ======== ========= Net income (loss) per share: Basic $ .21 $ .19 $ (.28)$ .12 ======== ======== ======== ========= Diluted $ .20 $ .18 $ (.28)$ .11 ======== ======== ======== ========= Weighted average number of shares outstanding: Basic 76,354 68,056 72,381 67,680 ======== ======== ======== ========= Diluted 78,426 71,066 72,381 70,464 ======== ======== ======== ========= MENTOR GRAPHICS CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Three Months Ended December 31, 2004 GAAP Adjustments Pro Forma ----------------------------------- Revenues: System and software $140,127 $ - $140,127 Service and support 74,822 - 74,822 -------------------- --------- Total revenues 214,949 - 214,949 -------------------- --------- Cost of revenues: System and software 4,839 - 4,839 Service and support 20,800 - 20,800 Amortization of purchased technology 2,982 (2,982) (1) - -------------------- --------- Total cost of revenues 28,621 (2,982) 25,639 -------------------- --------- Gross margin 186,328 2,982 189,310 -------------------- --------- Gross margin percentage 86.7% 88.1% --------- --------- Operating expenses: Research and development 54,594 - 54,594 Marketing and selling 76,126 - 76,126 General and administration 18,825 - 18,825 Amortization of intangible assets 1,098 (1,098) (1) - Special charges 4,893 (4,893) (2) - -------------------- --------- Total operating expenses 155,536 (5,991) 149,545 -------------------- --------- Operating income 30,792 8,973 39,765 Other income, net 2,689 - - 2,689 Interest expense (4,838) - (4,838) -------------------- --------- Income before income taxes 28,643 8,973 37,616 Income tax expense (benefit) 12,829 (6,434) (3) 6,395 -------------------- --------- Net income $15,814 $15,407 $31,221 ==================== ========= Net income per share: Basic $.21 $.41 ========= ========= Diluted $.20 $.39 ========= ========= Weighted average number of shares outstanding: Basic 76,354 76,354 ========= ========= Diluted 78,426 12,099 (4) 90,525 ==================== ========= (1) Non-cash amortization of intangible assets. (2) Merger, acquisition, restructuring and other charges. (3) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% for 2004. (4) Dilutive shares related to the company's convertible debt as required by EITF 04-8. In calculating pro forma diluted net income per share, $3,682, representing the after-tax interest and amortization on the company's convertible debt, is added back to pro forma net income. MENTOR GRAPHICS CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Three Months Ended December 31, 2003 GAAP Adjustments Pro Forma -------------------------------- Revenues: System and software $128,680 $ - $128,680 Service and support 73,229 - 73,229 -------- --------- -------- Total revenues 201,909 - 201,909 -------- --------- -------- Cost of revenues: System and software 7,180 - 7,180 Service and support 22,749 - 22,749 Amortization of purchased technology 2,625 (2,625)(1) - -------- --------- -------- Total cost of revenues 32,554 (2,625) 29,929 -------- --------- -------- Gross margin 169,355 2,625 171,980 -------- --------- -------- Gross margin percentage 83.9% 85.2% -------- -------- Operating expenses: Research and development 51,434 - 51,434 Marketing and selling 69,492 - 69,492 General and administration 21,830 - 21,830 Amortization of intangible assets 908 (908)(1) - Special charges 7,809 (7,809)(2) - -------- --------- -------- Total operating expenses 151,473 (8,717) 142,756 -------- --------- -------- Operating income 17,882 11,342 29,224 Other income, net 952 - 952 Interest expense (4,725) - (4,725) -------- --------- -------- Income before income taxes 14,109 11,342 25,451 Income tax expense 1,059 3,268 (3) 4,327 -------- --------- -------- Net income $ 13,050 $ 8,074 $ 21,124 ======== ========= ======== Net income per share: Basic $ .19 $ .31 ======== ======== Diluted $ .18 $ .29 ======== ======== Weighted average number of shares outstanding: Basic 68,056 68,056 ======== ======== Diluted 71,066 4,700 (4) 75,766 ======== ========= ======== (1) Non-cash amortization of intangible assets. (2) Merger, acquisition, restructuring and other charges. (3) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% for 2003. (4) Dilutive shares related to the company's convertible debt as required by EITF 04-8. In calculating pro forma diluted net income per share, $866, representing the after-tax interest and amortization on the company's convertible debt, is added back to pro forma net income. MENTOR GRAPHICS CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Twelve Months Ended December 31, 2004 GAAP Adjustments Pro Forma --------------------------------- Revenues: System and software $422,672 $ - $ 422,672 Service and support 288,284 - 288,284 -------- --------- --------- Total revenues 710,956 - 710,956 -------- --------- --------- Cost of revenues: System and software 16,639 - 16,639 Service and support 80,294 - 80,294 Amortization of purchased technology 10,624 (10,624)(1) - -------- --------- --------- Total cost of revenues 107,557 (10,624) 96,933 -------- --------- --------- Gross margin 603,399 10,624 614,023 -------- --------- --------- Gross margin percentage 84.9% 86.4% -------- --------- Operating expenses: Research and development 202,289 - 202,289 Marketing and selling 267,181 - 267,181 General and administration 74,255 - 74,255 Amortization of intangible assets 3,586 (3,586)(1) - Special charges 16,913 (16,913)(2) - -------- --------- --------- Total operating expenses 564,224 (20,499) 543,725 -------- --------- --------- Operating income 39,175 31,123 70,298 Other income, net 8,388 - 8,388 Interest expense (18,619) - (18,619) -------- --------- --------- Income before income taxes 28,944 31,123 60,067 Income tax expense (benefit) 49,494 (39,283)(3) 10,211 -------- --------- --------- Net income (loss) $(20,550) $ 70,406 $ 49,856 ======== ========= ========= Net income (loss) per share: Basic $ (.28) $ .69 ======== ========= Diluted $ (.28) $ .66 ======== ========= Weighted average number of shares outstanding: Basic 72,381 72,381 ======== ========= Diluted 72,381 75,397 ======== ========= (1) Non-cash amortization of intangible assets. (2) Merger, acquisition, restructuring and other charges. (3) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% for 2004. MENTOR GRAPHICS CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Twelve Months Ended December 31, 2003 GAAP Adjustments Pro Forma ---------------------------------- Revenues: System and software $ 394,449 $ - $ 394,449 Service and support 281,219 - 281,219 --------- --------- --------- Total revenues 675,668 - 675,668 --------- --------- --------- Cost of revenues: System and software 22,721 - 22,721 Service and support 84,554 - 84,554 Amortization of purchased technology 9,422 (9,422)(1) - --------- --------- --------- Total cost of revenues 116,697 (9,422) 107,275 --------- --------- --------- Gross margin 558,971 9,422 568,393 --------- --------- --------- Gross margin percentage 82.7% 84.1% --------- --------- Operating expenses: Research and development 184,797 - 184,797 Marketing and selling 245,170 - 245,170 General and administration 75,984 - 75,984 Amortization of intangible assets 3,883 (3,883)(1) - Emulation litigation settlement 20,264 (20,264) - Special charges 15,980 (15,980)(2) - --------- --------- --------- Total operating expenses 546,078 (40,127) 505,951 --------- --------- --------- Operating income 12,893 49,549 62,442 Other income, net 5,460 - 5,460 Interest expense (17,224) - (17,224) --------- --------- --------- Income before income taxes 1,129 49,549 50,678 Income tax expense (benefit) (6,804) 15,419 (3) 8,615 --------- --------- --------- Net income $ 7,933 $ 34,130 $ 42,063 ========= ========= ========= Net income per share: Basic $ .12 $ .62 ========= ========= Diluted $ .11 $ .60 ========= ========= Weighted average number of shares outstanding: Basic 67,680 67,680 ========= ========= Diluted 70,464 70,464 ========= ========= (1) Non-cash amortization of intangible assets. (2) Merger, acquisition, restructuring and other charges. (3) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% for 2003. MENTOR GRAPHICS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands - Unaudited) As of As of December 31, 2004 December 31, 2003 ---------------------------------------------------------------------- Assets Current assets: Cash and short-term investments $ 94,287 $ 71,324 Trade accounts receivable, net 116,858 104,043 Term receivables, short-term 125,832 119,627 Prepaid expenses and other 28,457 27,164 Deferred income taxes 12,319 18,787 ---------- ---------- Total current assets 377,753 340,945 Property, plant and equipment, net 91,224 91,350 Term receivables, long-term 139,146 98,207 Goodwill and intangibles, net 374,144 326,281 Other assets 39,640 83,905 ---------- ---------- Total assets $1,021,907 $ 940,688 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 9,632 $ 6,910 Accounts payable 18,037 18,105 Income taxes payable 35,299 35,122 Accrued payroll and related liabilities 81,709 80,484 Accrued liabilities 37,098 37,719 Deferred revenue 103,336 74,662 ---------- ---------- Total current liabilities 285,111 253,002 Long-term notes payable 283,983 286,768 Other long-term liabilities 19,098 23,161 ---------- ---------- Total liabilities 588,192 562,931 ---------- ---------- Minority Interest - 3,391 Stockholders' equity: Common stock 363,455 294,180 Deferred compensation (508) (2,601) Retained earnings 39,717 57,800 Accumulated other comprehensive income 31,051 24,987 ---------- ---------- Total stockholders' equity 433,715 374,366 ---------- ---------- Total liabilities and stockholders' equity $1,021,907 $ 940,688 ========== ========== MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands - Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, ------------------------------------------ 2004 2003 2004 2003 ------------------------------------------ Operating Cash Flows: Net income (loss) $ 15,814 $ 13,050 $ (20,550)$ 7,933 Depreciation and amortization 11,442 5,752 43,720 41,850 Other adjustments to reconcile operating cash 13,147 (4,008) 48,002 (6,591) Changes in working capital (37,790) (23,031) (30,653) (57,823) --------- ---------- -------- ---------- Net cash provided (used) by operating activities 2,613 (8,237) 40,519 (14,631) Net cash used in investing activities (9,801) (12,386) (60,835) (37,575) Net cash provided (used) by financing activities (668) 2,643 19,347 84,641 Effect of exchange rate changes on cash and cash equivalents 601 202 552 929 --------- ---------- -------- ---------- Net change in cash and cash equivalents (7,255) (17,778) (417) 33,364 Cash and cash equivalents at beginning of period 75,171 86,111 68,333 34,969 --------- ---------- -------- ---------- Cash and cash equivalents at end of period $ 67,916 $ 68,333 $ 67,916 $ 68,333 ========= ========== ======== ========== Supplemental disclosure of cash flow information: Common stock issued in connection with an acquisition - - $ 49,576 - ======== MENTOR GRAPHICS CORPORATION SUPPLEMENTAL FINANCIAL AND OTHER INFORMATION (In thousands, except for days sales outstanding -Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, --------------------------------------- 2004 2003 2004 2003 --------------------------------------- Geographic Revenue: Americas $ 90,336 $104,280 $306,911 $331,307 42.0% 51.7% 43.2% 49.0% Europe $ 64,660 $ 55,277 $199,417 $188,657 30.1% 27.4% 28.1% 27.9% Japan $ 32,617 $ 26,146 $131,107 $100,737 15.2% 12.9% 18.4% 14.9% Pac Rim $ 27,336 $ 16,206 $ 73,521 $ 54,967 Other Data: 12.7% 8.0% 10.3% 8.2% Capital expenditures $ 7,590 $ 9,189 $ 24,423 $ 23,532 Days sales outstanding 102 100 - - CONTACT: Mentor Graphics Corporation Ryerson Schwark, 503-685-1462 ry_schwark@mentor.com or Dennis Weldon, 503-685-1462 dennis_weldon@mentor.com