-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nfx8llOy2+sqiIwCnkT++k60nSOjZ+g2orEdwbp1ZM586fGO7cn2sqVODPNmvu64 m1H+j1YmWcJFF17hoaIBoA== 0001157523-05-009025.txt : 20051020 0001157523-05-009025.hdr.sgml : 20051020 20051020164936 ACCESSION NUMBER: 0001157523-05-009025 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20051020 ITEM INFORMATION: Results of Operations and Financial Condition FILED AS OF DATE: 20051020 DATE AS OF CHANGE: 20051020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13442 FILM NUMBER: 051147803 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070-7777 BUSINESS PHONE: 5036857000 8-K 1 a5000388.txt MENTOR GRAPHICS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): October 20, 2005 ---------------- MENTOR GRAPHICS CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) OREGON 0-13442 93-0786033 - ------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 8005 S.W. BOECKMAN ROAD WILSONVILLE, OR 97070-7777 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 685-7000 ---------------------------- NO CHANGE (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [_] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [_] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [_] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 2.02 Results of Operations and Financial Condition. - -------------------------------------------------------- Attached as Exhibit 99.1 is a copy of a press release of Mentor Graphics Corporation dated October 20, 2005, announcing the Company's financial results for the third quarter of 2005, which is being furnished to the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MENTOR GRAPHICS CORPORATION (Registrant) Date: October 20, 2005 By: /s/ Dean M. Freed ---------------------------------- Dean M. Freed Vice President and General Counsel EX-99.1 2 a5000388ex991.txt EXHIBIT 99.1 Exhibit 99.1 Mentor Graphics Announces Third Quarter Results; Reaffirms 2005 and 2006 Guidance WILSONVILLE, Ore.--(BUSINESS WIRE)--Oct. 20, 2005--Mentor Graphics Corporation (Nasdaq:MENT) today announced record revenue for a third quarter of $164.8 million. Earnings were break-even on a GAAP basis, and $0.04 on a non-GAAP basis. Bookings increased to the highest level ever for a third quarter, and were up about 15% on both a year-on-year and a sequential basis. "The expected Calibre rebound resulted in a strong booking quarter for Mentor. Bookings for our Design-to-Silicon family of tools were up about 50% sequentially and nearly double the third quarter of 2004," said Walden C. Rhines, CEO and chairman of Mentor Graphics. "Calibre usage continues to expand. For the third quarter, average dollar value of Calibre family bookings was up 60% versus the third quarter of 2004." During the quarter, the company introduced enhancements to its wire harness product line, as well as launching its new full automotive design flow. The automotive products, including the Volcano product line, acquired in the second quarter of 2005, performed well in the quarter. Volcano won its first order from a major Chinese auto manufacturer. In addition, more than 40 customers purchased Mentor's advanced verification solution, Questa, which was launched in the second quarter of 2005. "We saw positive signs of growth in demand from customers in the quarter. Four of our top ten transactions were renewals, and these deals grew in both absolute dollars and units," said Gregory K. Hinckley, president of Mentor Graphics. "Three years ago when these deals were signed, the market looked bleak and customer demand was down. As these deals are coming up for renewal, we believe our customers' businesses are in much better shape and demand is up. However, while the third quarter booking trend is positive compared to the prior year, total year-to-date bookings still lag the first nine months of 2004 due to first half weakness." Revenue by region was 35% Americas, 35% Europe, 15% Japan and 15% Pacific Rim. By product line, revenue was 30% Design-to-Silicon, 30% scalable verification, 25% integrated system design and 15% new and emerging products. Term bookings were 55% of total, perpetual was 35%, and subscription was 10%. Top ten accounts were 45% of total bookings, unchanged from the third quarter of 2004. GAAP Results On a GAAP basis, net income was $0.2 million for the third quarter of 2005, or $0.00 per share, compared to a net loss of $5.7 million, or ($0.08) per share for the same period in 2004. Net loss on a GAAP basis for the nine months ended September 30, 2005 was $11.1 million, or ($0.14) per share, compared to a net loss of $36.4 million, or ($0.51) per share for the same period in 2004. Non-GAAP Results On a non-GAAP basis, net income was $3.4 million for the third quarter of 2005, or $0.04 per share, compared to net income of $3.0 million, or $0.04 per share for the same period in 2004. Non-GAAP net loss for the nine months ended September 30, 2005 was $4.0 million, or ($0.05) per share as compared to net income of $18.0 million, or $0.24 per share for the same period in 2004. 2005 and 2006 Guidance Mentor reaffirms its previous full year 2005 and 2006 guidance. For 2005, Mentor expects revenue of approximately $700 million, GAAP earnings per share of $0.08 and non-GAAP earnings per share of approximately $0.40, all within previously guided ranges. For the fourth quarter, Mentor expects revenue of approximately $216 million, GAAP earnings per share of $0.22 and non-GAAP earnings per share of $0.42. For 2006, Mentor continues to expect revenue of approximately $755 million, GAAP earnings per share of $0.30 and non-GAAP earnings per share of approximately $0.50, representing, respectively, 8%, 275% and 25% growth from 2005. Mentor is not providing guidance per quarter for 2006 at this time. For the fourth quarter non-GAAP earnings per share estimate, the dilutive impact from Mentor's convertible debt of approximately ($0.02) has been included. For all other earnings per share guidance, the convertible debt is anti-dilutive, and therefore was excluded from the calculations. Discussion of Non-GAAP Financial Measures Mentor Graphics management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted net income (loss), which we refer to as non-GAAP net income (loss). This measure is generally based on the revenues of our product, maintenance and services business operations and the costs of those operations, such as cost of revenue, research and development, sales and marketing and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. Non-GAAP net income (loss) consists of net income (loss) excluding amortization of intangible assets, merger and acquisition charges, special charges and charges and gains which management does not consider reflective of our core operating business. Intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships, employment agreements and stock options issued in connection with acquisitions. Merger and acquisition charges represent in-process research and development charges related to products in development that had not reached technological feasibility at the time of acquisition. Special charges consist of post-acquisition restructuring costs including severance and benefits, excess facilities and asset-related charges, and also include strategic reallocations or reductions of personnel resources. In addition, for purposes of comparability across other periods and against other companies in our industry, non-GAAP net income (loss) is adjusted by the amount of additional taxes or tax benefit that the company would accrue using a normalized effective tax rate applied to the non-GAAP results. In addition, during the nine months ended September 30, 2005, a $4.75 million purchase of technology that had not yet reached technological feasibility, a $957 thousand gain on the sale of a building and a $469 thousand gain on investment earnout income were excluded as management does not consider these transactions a part of its core operating performance. During the nine months ended September 30, 2004, investment earnout and holdback income of $745 thousand were also excluded. Non-GAAP net income (loss) is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Moreover, it should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We present non-GAAP net income (loss) because we consider it an important supplemental measure of our performance. Management excludes from its non-GAAP net income (loss) certain recurring items to facilitate its review of the comparability of the company's core operating performance on a period to period basis because such items are not related to the company's ongoing core operating performance as viewed by management. Management uses this view of its operating performance for purposes of comparison with its business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. More specifically management adjusts for the excluded items for the following reasons: -- Amortization charges for our intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of the company's acquisition transactions. We therefore consider our operating results without these charges when evaluating our core performance. Generally, the most significant impact to the company's net income (loss) is in the first twelve months following the acquisition. -- Special charges are primarily severance related and are due to the company's reallocation or reduction of personnel resources driven by modifications of business strategy or business emphasis and by assimilation of acquired businesses. These costs are originated based on the particular facts and circumstances of business decisions and can vary in size. Special charges also include excess facility and asset-related restructuring charges. These charges are not specifically included in the company's annual operating plan and related budget due to the rapidly changing technology and competitive environment in our industry. We therefore exclude them when evaluating our managers' performance internally. -- Merger and acquisition charges are in-process R&D charges, which are largely disregarded as acquisition decisions are made and which often result in charges that vary significantly in size and amount. Management excludes these charges when evaluating the impact of an acquisition transaction and our ongoing performance. -- Income tax expense (benefit) is adjusted by the amount of additional tax expense or benefit that we would accrue if we used non-GAAP results instead of GAAP results in the calculation of our tax liability, taking into consideration the company's long-term tax structure. We use a normalized effective tax rate of 17%, which reflects the weighted average tax rate applicable under the various tax jurisdictions in which the company operates assuming current year forecasted geographic business mix. This rate is subject to change as the geographic business mix and statutory tax rates and their effect on the weighted average tax rate differ over time. Our GAAP tax rate for the nine months ended September 30, 2005 is 52% and assumes a pre-tax profit for the year overall resulting in a tax benefit in our 2005 nine month GAAP results. This tax rate is substantially impacted by minor changes in forecasted earnings as pre-tax income for the year is currently projected to be near break-even, which exacerbates the effect of certain mandatory payments in some jurisdictions on our overall expected tax rate. Our adjustment for tax related items in 2005 applies this normalized rate to our non-GAAP pre-tax loss, and thereby reduces the unusually large benefit for taxes reflected in our GAAP results. Our adjustment for tax-related items in 2004 primarily reflects the elimination of the additional tax charge associated with a one-time intercompany tax dividend of $120 million, in addition to the tax impact of other previously described non-GAAP adjustments. Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. However, non-GAAP net income (loss) has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. In the future the company expects to continue to incur expenses similar to the non-GAAP adjustments described above and exclusion of these items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Some of the limitations in relying on non-GAAP net income (loss) are: -- Amortization of intangibles, though not directly affecting our current cash position, represent the loss in value as the technology in our industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry, which is addressed through our research and development program. -- The company regularly engages in acquisition and assimilation activities as part of its ongoing business and therefore we will continue to experience special charges and merger and acquisition charges on a regular basis. These costs also directly impact available funds of the company. -- The company's income tax expense (benefit) will be ultimately based on its GAAP taxable income and actual tax rates in effect, which may differ significantly from the 17% rate assumed in our non-GAAP presentation. -- Other companies, including other companies in our industry, may calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with our net income (loss), which is our most directly comparable GAAP financial results. We compensate for the limitations of our use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only supplementally. For more information, see the consolidated statements of operations contained in this press release. About Mentor Graphics Mentor Graphics Corporation (Nasdaq:MENT) is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world's most successful electronics and semiconductor companies. Established in 1981, the company reported revenues over the last 12 months of about $700 million and employs approximately 3,950 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/. Mentor Graphics, Calibre and Catapult C are registered trademarks and Questa and Scalable Verification are trademarks of Mentor Graphics Corporation. Statements in this press release regarding the Company's guidance for future periods constitute "forward-looking" statements based on current expectations within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: (i) the Company's ability to successfully offer products and services that compete in the highly competitive EDA industry including the risk that the Company's technology, products or inventory become obsolete; (ii) reductions in spending on EDA tools by the Company's customers due to cyclical downturns or initiatives to increase profitability, (iii) discounting of products and services by competitors, which could force the company to lower its prices or offer other more favorable terms to customers (iv) changes in accounting or reporting rules or interpretations, limitations on repatriation of earnings, licensing and intellectual property rights protection; (v) changes in tax laws, regulations or enforcement practices where the Company does business; (vi) effects of the increasing volatility of foreign currency fluctuations on the Company's business and operating results; (vii) effects of unanticipated shifts in product mix on gross margin and unanticipated shifts in geographic mix on the overall tax rate, (viii) effects of customer seasonal purchasing patterns and the timing of significant orders may negatively or positively impact the Company's quarterly results of operations, (ix) the Company's ability to successfully integrate and manage its acquisitions, all as may be discussed in more detail under the heading "Factors That May Affect Future Results and Financial Condition" in the Company's most recent Form 10-K or Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. In addition, statements regarding guidance do not reflect potential impacts of mergers or acquisitions that have not been announced or closed as of the time the statements are made. Mentor Graphics disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements to reflect future events or developments. MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data - Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------- 2005 2004 2005 2004 ------------ -------- -------- -------- Revenues: System and software $ 91,492 $ 89,933 $264,427 $282,545 Service and support 73,317 72,027 219,552 213,462 --------- -------- -------- -------- Total revenues 164,809 161,960 483,979 496,007 --------- -------- -------- -------- Cost of revenues: System and software 3,166 2,615 12,729 11,800 Service and support 19,596 20,320 59,843 59,494 Amortization of purchased technology 3,076 2,672 8,489 7,642 --------- -------- -------- -------- Total cost of revenues 25,838 25,607 81,061 78,936 --------- -------- -------- -------- Gross margin 138,971 136,353 402,918 417,071 --------- -------- -------- -------- Operating expenses: Research and development 51,563 50,990 159,066 147,695 Marketing and selling 64,728 63,304 197,627 191,055 General and administration 19,883 18,120 57,343 55,430 Amortization of intangible assets 1,059 916 3,153 2,488 Special charges (48) 507 2,529 4,370 Merger and acquisition related charges - 7,290 750 7,650 --------- -------- -------- -------- Total operating expenses 137,185 141,127 420,468 408,688 --------- -------- -------- -------- Operating income (loss) 1,786 (4,774) (17,550) 8,383 Other income, net 4,144 2,479 10,601 5,699 Interest expense (5,461) (4,755) (16,130) (13,781) --------- -------- -------- -------- Income (loss) before income taxes 469 (7,050) (23,079) 301 Income tax expense (benefit) 310 (1,304) (12,009) 36,665 --------- -------- -------- -------- Net income (loss) $ 159 $ (5,746) $(11,070)$(36,364) ========= ======== ======== ======== Net income (loss) per share: Basic $ - $ (0.08) $ (0.14)$ (0.51) ========= ======== ======== ======== Diluted $ - $ (0.08) $ (0.14)$ (0.51) ========= ======== ======== ======== Weighted average number of shares outstanding: Basic 79,135 73,213 78,440 71,045 ========= ======== ======== ======== Diluted 80,077 73,213 78,440 71,045 ========= ======== ======== ======== MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Three Months Ended September 30, 2005 GAAP Adjustments Non-GAAP ----------------------------------- Revenues: System and software $ 91,492 $ - $ 91,492 Service and support 73,317 - 73,317 -------- -------- -------- Total revenues 164,809 - 164,809 -------- -------- -------- Cost of revenues: System and software 3,166 - 3,166 Service and support 19,596 - 19,596 Amortization of purchased technology 3,076 (3,076) (1) - -------- -------- -------- Total cost of revenues 25,838 (3,076) 22,762 -------- -------- -------- Gross margin 138,971 3,076 142,047 -------- -------- -------- Gross margin percentage 84.3% 86.2% -------- -------- Operating expenses: Research and development 51,563 - 51,563 Marketing and selling 64,728 - 64,728 General and administration 19,883 - 19,883 Amortization of intangible assets 1,059 (1,059) (2) - Special charges (48) 48 (3) - -------- -------- -------- Total operating expenses 137,185 (1,011) 136,174 -------- -------- -------- Operating income 1,786 4,087 5,873 Other income, net 4,144 (469) (4) 3,675 Interest expense (5,461) - (5,461) -------- -------- -------- Income before income taxes 469 3,618 9,591 4,087 Income tax expense 310 385 (5) 695 -------- -------- -------- Net income $ 159 $ 3,233 $ 3,392 ======== ======== ======== Net income per share: Basic $ - $ 0.04 ======== ======== Diluted $ - $ 0.04 ======== ======== Weighted average number of shares outstanding: Basic 79,135 79,135 ======== ======== Diluted 80,077 80,077 ======== ======== (1) Amortization of purchased technology acquired in 16 separate acquisition transactions, three of which were completed in the last twelve months. Purchased technology is amortized over two to five years. (2) Amortization of other identified intangible assets including tradenames, employment agreements, customer relationships and deferred compensation acquired in eight separate acquisition transactions, three of which were completed in the last twelve months. Other identified intangible assets are amortized over two to five years. (3) Special charges consist of a $550 reversal of previously recorded non-cancellable lease payments related to a facility in North America due to an increase in the expected sublease income substantially offset by costs of $415 incurred for employee rebalances. These rebalance costs included severance benefits, notice pay and outplacement services. In addition, $87 represents other costs incurred to restructure the organization other than employee rebalances and excess leased facility costs. (4) Investment earnout payment received related to a sale of stock in 2003. (5) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income (loss) before income taxes. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Three Months Ended September 30, 2004 GAAP Adjustments Non-GAAP ----------------------------------- Revenues: System and software $ 89,933 $ - $ 89,933 Service and support 72,027 - 72,027 -------- --------- -------- Total revenues 161,960 - 161,960 -------- --------- -------- Cost of revenues: System and software 2,615 - 2,615 Service and support 20,320 - 20,320 Amortization of purchased technology 2,672 (2,672) (1) - -------- --------- -------- Total cost of revenues 25,607 (2,672) 22,935 -------- --------- -------- Gross margin 136,353 2,672 139,025 -------- --------- -------- Gross margin percentage 84.2% 85.8% -------- -------- Operating expenses: Research and development 50,990 - 50,990 Marketing and selling 63,304 - 63,304 General and administration 18,120 - 18,120 Amortization of intangible assets 916 (916) (2) - Special charges 507 (507) (3) - Merger and acquisition related charges 7,290 (7,290) (4) - -------- --------- -------- Total operating expenses 141,127 (8,713) 132,414 -------- --------- -------- Operating income (loss) (4,774) 11,385 6,611 Other income, net 2,479 (745) (5) 1,734 Interest expense (4,755) - (4,755) -------- --------- -------- Income (loss) before income taxes (7,050) 10,640 3,590 Income tax expense (benefit) (1,304) 1,914 (6) 610 -------- --------- -------- Net income (loss) $ (5,746) $ 8,726 $ 2,980 ======== ========= ======== Net income (loss) per share: Basic $ (0.08) $ 0.04 ======== ======== Diluted $ (0.08) $ 0.04 ======== ======== Weighted average number of shares outstanding: Basic 73,213 73,213 ======== ======== Diluted 73,213 75,048 ======== ======== (1) Amortization of purchased technology acquired in twelve separate acquisition transactions, five of which were completed in the last twelve months. Purchased technology is amortized over two to five years. (2) Amortization of other identified intangible assets including tradenames, employment agreements, customer relationships and deferred compensation acquired in seven separate acquisition transactions, three of which were completed in the last twelve months. Other identified intangible assets are amortized over two to five years. (3) Special charges primarily consist of $534 in costs incurred for employee rebalances, which included severance benefits, notice pay and outplacement services, partially offset by a $27 reversal of previously recorded non-cancellable lease payments related to a facility due to an increase in the estimated expected sublease income. (4) Merger and acquisition related charges consist of an in-process R&D charge related to the acquisitions of 0-In and Palmchip. (5) Investment earnout and holdback payments received related to a sale of stock in 2003. (6) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income (loss) before income taxes. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Nine Months Ended September 30, 2005 GAAP Adjustments Non-GAAP -------------------------------- Revenues: System and software $264,427 $ - $264,427 Service and support 219,552 - 219,552 -------- --------- -------- Total revenues 483,979 - 483,979 -------- --------- -------- Cost of revenues: System and software 12,729 - 12,729 Service and support 59,843 - 59,843 Amortization of purchased technology 8,489 (8,489)(1) - -------- --------- -------- Total cost of revenues 81,061 (8,489) 72,572 -------- --------- -------- Gross margin 402,918 8,489 411,407 -------- --------- -------- Gross margin percentage 83.3% 85.0% -------- -------- Operating expenses: Research and development 159,066 (4,750)(2) 154,316 Marketing and selling 197,627 - 197,627 General and administration 57,343 - 57,343 Amortization of intangible assets 3,153 (3,153)(3) - Special charges 2,529 (2,529)(4) - Merger and acquisition related charges 750 (750)(5) - -------- --------- -------- Total operating expenses 420,468 (11,182) 409,286 -------- --------- -------- Operating income (loss) (17,550) 19,671 2,121 Other income, net 10,601 (1,426)(6) 9,175 Interest expense (16,130) - (16,130) -------- --------- -------- Loss before income taxes (23,079) 18,245 (4,834) Income tax expense (benefit) (12,009) 11,187 (7) (822) -------- --------- -------- Net loss $(11,070) $ 7,058 $ (4,012) ======== ========= ======== Net loss per share: Basic $ (0.14) $ (0.05) ======== ======== Diluted $ (0.14) $ (0.05) ======== ======== Weighted average number of shares outstanding: Basic 78,440 78,440 ======== ======== Diluted 78,440 78,440 ======== ======== (1) Amortization of purchased technology acquired in 16 separate acquisition transactions, three of which were completed in the last twelve months. Purchased technology is amortized over two to five years. (2) A charge of $4,750 for a purchase of technology that had not reached technological feasibility. This technology will be the basis for a new offering in the Calibre product family which is expected to be introduced in 2006. (3) Amortization of other identified intangible assets including tradenames, employment agreements, customer relationships and deferred compensation acquired in eight separate acquisition transactions, three of which were completed in the last twelve months. Other identified intangible assets are amortized over two to five years. (4) Special charges consist of (i) $2,763 of costs incurred for employee rebalances, which included severance benefits, notice pay and outplacement services, (ii) a $550 reversal of previously recorded non-cancellable lease payments related to a facility in North America due to an increase in the expected sublease income, (iii) a $91 charge for the abandonment of excess leased facility space, and (iv) $225 in other costs incurred to restructure the organization other than employee rebalances and excess leased facility costs. (5) Merger and acquisition related charges consist of in-process R&D charges related to the acquisitions of Volcano Communications Technologies AB and Aptix Corporation. (6) Investment earnout payment received related to a sale of stock in 2003 and the gain on sale of a building in the first quarter of 2005. (7) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income (loss) before income taxes. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data-Unaudited) Nine Months Ended September 30, 2004 GAAP Adjustments Non-GAAP --------- ----------- ---------- Revenues: System and software $282,545 $ - $ 282,545 Service and support 213,462 - 213,462 -------- --------- --------- Total revenues 496,007 - 496,007 -------- --------- --------- Cost of revenues: System and software 11,800 - 11,800 Service and support 59,494 - 59,494 Amortization of purchased technology 7,642 (7,642) (1) - -------- --------- --------- Total cost of revenues 78,936 (7,642) 71,294 -------- --------- --------- Gross margin 417,071 7,642 424,713 -------- --------- --------- Gross margin percentage 84.1% 85.6% -------- --------- Operating expenses: Research and development 147,695 - 147,695 Marketing and selling 191,055 - 191,055 General and administration 55,430 - 55,430 Amortization of intangible assets 2,488 (2,488) (2) - Special charges 4,370 (4,370) (3) - Merger and acquisition related charges 7,650 (7,650) (4) - -------- --------- --------- Total operating expenses 408,688 (14,508) 394,180 -------- --------- --------- Operating income 8,383 22,150 30,533 Other income, net 5,699 (745) (5) 4,954 Interest expense (13,781) - (13,781) -------- --------- --------- Income before income taxes 301 21,405 21,706 Income tax expense (benefit) 36,665 (32,975) (6) 3,690 -------- --------- --------- Net income (loss) $(36,364) $ 54,380 $ 18,016 ======== ========= ========= Net income (loss) per share: Basic $ (0.51) $ 0.24 ======== ========= Diluted $ (0.51) $ 0.24 ======== ========= Weighted average number of shares outstanding: Basic 71,045 71,045 ======== ========= Diluted 71,045 74,181 ======== ========= (1) Amortization of purchased technology acquired in 12 separate acquisition transactions, five of which were completed in the last twelve months. Purchased technology is amortized over two to five years. (2) Amortization of other identified intangible assets including tradenames, employment agreements, customer relationships and deferred compensation acquired in seven separate acquisition transactions, three of which were completed in the last twelve months. Other identified intangible assets are amortized over two to five years. (3) Special charges consist of (i) $1,998 in adjustments primarily related to previously recorded non-cancellable lease payments related to facilities in North America and Europe as a result of a reduction in the estimated expected sublease income, (ii) $1,997 in costs incurred for employee rebalances, which included severance benefits, notice pay and outplacement services, and (iii) $375 which represent other costs incurred to restructure the organization other than employee rebalances and excess leased facility costs. (4) Merger and acquisition related charges consist of an in-process R&D charge related to the acquisitions of 0-In and Palmchip and Project Technology Inc. (5) Investment earnout and holdback payments received related to a sale of stock in 2003. (6) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income (loss) before income taxes. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE DILUTED NET EARNINGS PER SHARE (In thousands, except earnings per share data-Unaudited) The following table reconciles the specific items excluded from GAAP in the calculation of non-GAAP earnings per share for the periods shown below: Q4 2005 2005 2006 -------- ------- ------- Diluted GAAP net earnings per share $ 0.22 $ 0.08 $ 0.30 Amortization of purchased technology (1) 0.05 0.15 0.15 Amortization of intangible assets (2) 0.01 0.05 0.05 Special charges (3) - 0.04 - Merger and acquisition related charges (4) - 0.01 - Purchased technology (5) - 0.06 - Other income and expense (6) - (0.01) - Income tax adjustment (7) 0.16 0.02 - Dilutive effect of convertible debt (8) (0.02) - - ------- ------- ------- Diluted non-GAAP net earnings per share $ 0.42 $ 0.40 $ 0.50 ======= ======= ======= (1) Excludes amortization of purchased technology acquired in 16 separate acquisition transactions. Purchased technology is amortized over two to five years. The guidance for Q4 2005 and 2006 do not assume any new acquisition transactions. (2) Excludes amortization of other identified intangible assets including tradenames, employment agreements, customer relationships and deferred compensation acquired in ten separate acquisition transactions. Other identified intangible assets are amortized over two to five years. The guidance for Q4 2005 and 2006 do not assume any new acquisition transactions. (3) Excludes special charges consisting primarily of costs incurred for employee rebalances, which included severance benefits, notice pay and outplacement services, partially offset by a reversal of previously recorded non-cancelable lease payments related to a facility in North America due to an increase in the estimated expected sublease income. The guidance for Q4 2005 and 2006 do not assume any new special charges. (4) Excludes merger and acquisition related charges consisting of in- process R&D charges related to the acquisitions of Volcano Communications Technologies AB and Aptix Corporation. The guidance for Q4 2005 and 2006 do not assume any new merger and acquisition related charges. (5) Excludes a charge for the purchase of technology that had not reached technological feasibility. This technology will be the basis for a new offering in the Calibre product family which is expected to be introduced in 2006. GAAP and non-GAAP results for 2006 will not include these costs. The guidance for Q4 2005 and 2006 do not assume any new purchases of technology. (6) Excludes investment earnout income related to a sale of stock in 2003. In addition, the 2005 guidance includes the gain on the sale of a building which occurred in Q1 2005. The guidance for Q4 2005 and 2006 assumes no additional investment earnout income or gain or losses outside the normal course of business. (7) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income (loss) before income taxes. (8) For purposes of calculating earnings per share, fourth quarter non-GAAP earnings are expected to reach a level which would require the inclusion of the dilutive effect of shares attributable to convertible debt in shares assumed outstanding, partly offset by an add back to income for interest expense and other debt related costs. MENTOR GRAPHICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands - Unaudited) As of As of September 30, December 31, 2005 2004 - ------------------------------------------ ------------- ------------ Assets Current assets: Cash, cash equivalents and short-term investments $ 102,098 $ 94,287 Trade accounts receivable, net 79,145 116,858 Term receivables, short-term 129,367 125,832 Prepaid expenses and other 28,842 28,457 Deferred income taxes 9,424 10,298 ---------- ---------- Total current assets 348,876 375,732 Property, plant and equipment, net 79,567 91,224 Term receivables, long-term 117,408 139,146 Intangibles, net 383,169 374,144 Other assets 37,141 41,661 ---------- ---------- Total assets $ 966,161 $ 1,021,907 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 7,210 $ 9,632 Accounts payable 13,312 18,037 Income taxes payable 18,845 35,299 Accrued payroll and related liabilities 54,442 81,709 Accrued liabilities 34,484 37,098 Deferred revenue 106,599 103,336 ---------- ---------- Total current liabilities 234,892 285,111 Long-term notes payable 282,577 283,983 Other long-term liabilities 16,705 19,098 ---------- ---------- Total liabilities 534,174 588,192 ---------- ---------- Stockholders' equity: Common stock 381,359 363,455 Deferred compensation - (508) Retained earnings 28,647 39,717 Accumulated other comprehensive income 21,981 31,051 ---------- ---------- Total stockholders' equity 431,987 433,715 ---------- ---------- Total liabilities and stockholders' equity $ 966,161 $ 1,021,907 ========== ========== MENTOR GRAPHICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands - Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------- --------------------- 2005 2004 2005 2004 ---------- ---------- -------- -------- Operating Cash Flows: Net income (loss) $ 159 $ (5,746) $ (11,070) $ (36,364) Depreciation and amortization 11,043 11,465 33,128 32,278 Other adjustments to reconcile operating cash (967) 1,185 (2,434) 34,110 Changes in working capital 681 14,463 5,712 7,137 ---------- ---------- -------- -------- Net cash provided by operating activities 10,916 21,367 25,336 37,161 Net cash used in investing activities (26,116) (27,060) (46,131) (50,289) Net cash provided by financing activities 7,662 5,931 13,836 20,015 Effect of exchange rate changes on cash and cash equivalents 755 4 (1,936) (49) ---------- ---------- -------- -------- Net change in cash and cash equivalents (6,783) 242 (8,895) 6,838 Cash and cash equivalents at beginning of period 65,804 74,929 67,916 68,333 ---------- ---------- -------- -------- Cash and cash equivalents at end of period, excluding short-term investments $ 59,021 $ 75,171 $ 59,021 $ 75,171 ========== ========== ======== ======== MENTOR GRAPHICS CORPORATION SUPPLEMENTAL FINANCIAL AND OTHER INFORMATION (In thousands, except for days sales outstanding -Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2005 2004 2005 2004 ------- ------- -------- -------- Geographic Revenue: Americas $61,702 $68,653 $203,901 $216,575 37.4% 42.4% 42.1% 43.7% Europe $54,583 $47,637 $140,616 $134,757 33.1% 29.4% 29.1% 27.2% Japan $22,989 $31,337 $ 79,074 $ 98,490 14.0% 19.4% 16.3% 19.8% Pac Rim $25,535 $14,333 $ 60,388 $ 46,185 15.5% 8.8% 12.5% 9.3% Other Data: Capital expenditures $ 4,682 $ 7,887 $ 17,259 $ 16,833 Days sales outstanding 114 117 - - CONTACT: Mentor Graphics Corporation Dennis Weldon, 503-685-1462 dennis_weldon@mentor.com or Ryerson Schwark, 503-685-1462 ry_schwark@mentor.com -----END PRIVACY-ENHANCED MESSAGE-----