UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
| ¨ | Preliminary Proxy Statement |
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| ¨ | Definitive Proxy Statement |
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| ¨ | Soliciting Material Pursuant to § 240.14a-12 |
MENTOR GRAPHICS CORPORATION
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| x | No fee required. |
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 Investor
Presentation April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Forward-Looking Statements
This
presentation
may
contain
“forward-looking”
statements
based
on
current
expectations
within
the
meaning of the Securities Exchange Act of 1934. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements
of
the
Company
or
industry
results
to
be
materially
different
from
any
results,
performance or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: (i) weakness or recession in the US, EU,
Japan or other economies; (ii) the Company’s ability to successfully offer products
and services that compete in the highly competitive EDA industry; (iii) product bundling
or discounting of products and services by competitors, which could force the Company to
lower its prices or offer other more favorable terms to customers; (iv) possible delayed
or canceled customer orders, a loss of key personnel or other consequences resulting
from the business disruption and uncertainty of prolonged proxy fights, offers to
purchase the Company’s securities or other actions of activist shareholders; (v) effects
of the increasing volatility of foreign currency fluctuations on the Company’s
business and operating results; (vi) changes in accounting or reporting rules or
interpretations; (vii) the impact of tax audits by the IRS or other taxing authorities,
or changes in the tax laws, regulations or enforcement practices where the Company
does
business;
(viii)
effects
of
unanticipated
shifts
in
product
mix
on
gross
margin;
and
(ix)
effects
of
customer seasonal purchasing patterns and the timing of significant orders, which may
negatively or positively impact the Company’s quarterly results of operations, all
as may be discussed in more detail under
the
heading
“Risk
Factors”
in
the
Company’s
most
recent
Form
10-K
or
Form
10-Q.
Given
these
uncertainties, prospective investors are cautioned not to place undue reliance on such
forward-looking statements. In addition, statements regarding guidance do not
reflect potential impacts of mergers or acquisitions that have not been announced or
closed as of the time the statements are made. The Company 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. 2
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Important Information
On March 31, 2011, the Company filed a definitive proxy statement
with the Securities and Exchange Commission (the “SEC”) in
connection with the Company’s upcoming 2011 annual meeting of
shareholders. Shareholders are advised to read the Company’s
definitive proxy statement, and any other relevant documents filed by
the Company with the SEC, before making any voting or investment
decision because they contain important information. The definitive
proxy statement is, and any other relevant documents and other
material filed with the SEC concerning the Company will be, when
filed,
available
free
of
charge
at
http://www.sec.gov
and
http://www.mentor.com/company/investor_relations. In
addition,
copies of the proxy materials may be requested from the company’s
proxy solicitor, MacKenzie Partners, Inc., by telephone at 1-800-322-
2885 or by email at
proxy@mackenziepartners.com.
3
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Agenda
Mentor Graphics Investor Presentation, April 2011
Business Strategy Overview
Financial Highlights & Outlook
2011 Annual Meeting
Appendix
4
Part 1
Part 2
Part 3
Part 4 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Summary
Mentor achieved record results in fiscal 2011 driven by strong overall
bookings growth of approximately 30%
—
All-time record revenues of $915 million
—
Non-GAAP
earnings
per
share
of
$0.70
(49%
increase
from
fiscal
2010)
*
For full-year fiscal 2012, company expects:
—
Revenue to be approximately $1 billion (up 9%)
—
Non-GAAP
earnings
per
share
of
~$1.00
(up
43%)
*
Mentor focuses on building #1 product positions —
segment leader gains
share while others may lose ground
Expect Mentor’s growth to continue to exceed underlying growth of traditional
EDA
New applications including automotive and aerospace design are expected to
continue to grow rapidly with minimal competition from EDA companies
Growth anticipated to be between 8 and 10%, non-GAAP operating margin
trending towards 20%+, generating significant cash flow*. Mentor presently
anticipates using its strong cash flow to return approximately $150 million of
capital to shareholders through stock repurchases or dividends
Mentor Graphics Investor Presentation, April 2011
5
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Summary (continued)
The Mentor Board unanimously believes that continued execution of
our strategic plan offers the greatest value to all Mentor shareholders
Board remains open to any opportunity to enhance shareholder value,
just as it was in 2008 when it evaluated the offer from Cadence
$17 per share “stalking horse”
proposal made by Icahn undervalues
the company and its future prospects
Analysis shows Icahn’s platform of a public sale is risky and
potentially destructive
—
Substantial regulatory and commercial risk to in-market combination
The Mentor Board urges shareholders to reject Icahn’s nominees, as
the Board believes they:
—
Run on a singular risky platform of selling Mentor without any other
stated vision or specific strategy
—
Do not have the collective knowledge, skill and experience of Mentor’s
current Board
6
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
What Is Electronic Design Automation?
Critical design software used to create the world’s
electronic systems
Comprehensive EDA product portfolios address all levels –
from component to systems
Integrated
Circuit (IC)
Printed Circuit
Board (PCB)
Systems
7
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
EDA Product Segments
Mentor Graphics Investor Presentation, April 2011
8
EDA Product Segments >$1M of Sales
Source: Gary Smith EDA Market Trends 2010 and Mentor analysis
|
 ©
2011 Mentor Graphics Corp.
www.mentor.com
#1 Supplier in Each EDA Product Segment
Averages 66% Revenue Share
Mentor Graphics Investor Presentation, April 2011
SNPS
CDNS
MENT
SNPS
Other
SNPS
MENT
CDNS
MENT
Other
MENT
9
Source: Gary Smith EDA Market Trends, 2010 and Mentor analysis
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EDA
Average
ASIC
Layout
RTL
Simulation
RTL
Synthesis
PCB Layout
DRC
RET
RF Design
& Verif.
Custom
Layout
Emulation
RTL Design
DFT
Largest EDA Product Segments |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
The EDA Industry and Mentor’s Strategy
Mentor’s view of the EDA industry:
Segment leader gains share while others may lose ground
Profitability within product segment driven by category size (linear) and
share (exponentially)
Traditional EDA growth modest, new challenges drive new spend by
customers
Mentor’s strategy focuses on:
Building #1 product positions
—
Mentor’s investments in recent years have yielded #1 product positions that
Mentor expects to maintain for years
Strengthening focus on internal development
Making bolt-on acquisitions to build on #1 positions
Actively seeking TAM-expanding green field opportunities
Mentor Graphics Investor Presentation, April 2011
10 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor Graphics Investor Presentation, April 2011
11
Mentor Focuses on Product Categories
Where Mentor Can Be #1
($ millions)
(% Revenue)
$136
$360
$480
$570
$635
$753
$674
$700
Full market share data by company for EDA product segments is only
available from the market analyst firm Gary Smith EDA.
The most recently
available data is from 2009.
2010
Product
segment
size
(revenue)
is
available
from
the
market
statistics
survey
of
the
electronic
design
automation
consortium,
but
companies
can
only compute their own market share using their own known revenue
numbers;
they
cannot
compute
other
companies’
market
share.
30%
70%
80%
80%
80%
85%
85%
87%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
100
200
300
400
500
600
700
800
CY1996
CY1999
CY2002
CY2005
CY2006
FY2008
FY2009
FY2010
Product Revenue from Leadership Positions |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor –
Reporting Categories
Mentor Graphics Investor Presentation, April 2011
12
Integrated
System Design
PCB
Scalable
Verification
New & Emerging
Markets
IC Design-
to-Silicon
Tools for printed
circuit board (PCB)
and design and field
programmable gate
array (FPGA) design
Used to examine
and verify
functionality before
committing to silicon
Tools to create
integrated circuits
(ICs) for 90nm and
smaller
Products targeting
new and emerging
markets
Description
Expedition
Mechanical Analysis
PADS
Valor
Precision Synthesis
ModelSim
Questa
Veloce (Emulation)
ADVance MS
Calibre Platform
IC Custom Design
Olympus-SoC
Place & Route
Transportation
Embedded
Software
Design-for-Test
Key Product Areas
25%
25%
30%
15%
*Percent of FY11
Revenue
*
Services & Other account for 5% of FY 11 revenue of $915 million.
|
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Graphical Schematic
and Layout
Mentor
Graphics
1
product:
Board Station
1980s
Multi-Disciplined,
Concurrent Design and
Virtual Prototyping
Mentor Graphics delivers
paradigm shift in
PCB systems design
2008-2010
The Evolution of Mentor’s Leadership in PCB
13
Mentor Graphics Investor Presentation, April 2011
st |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor Worldwide PCB Revenue Share
Mentor Graphics Investor Presentation, April 2011
Source: Gary Smith EDA
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2000
2002
2004
2006
2008
2009 |
   ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor Graphics Investor Presentation, April 2011
15
Moore’s Law: IC Complexity Steadily Rises,
Creating Opportunities for EDA
Each new design generation
creates demand for EDA tools
More licenses of existing tools
New tools and methodologies to
address design problems that
didn’t exist previously
Replacement of older tools that
break (discontinuity)
1979
29,000
Transistors
8088
1982
134,000
Transistors
286
1985
275,000
Transistors
386
1989
1,290,000
Transistors
486
1993
3.1M+
Transistors
Pentium
1995
5.5M+
Transistors
Pentium Pro
1997
7.5M+
Transistors
Pentium II
2000
42M
Transistors
Pentium 4
2004
592M
Transistors
Itanium 2
(9MB cache)
2002
220M
Transistors
Itanium 2
2008
2.0B
Transistors
Tukwila
2010
3B
Transistors |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Discontinuity Leads to Success
Mentor Graphics Investor Presentation, April 2011
16
Calibre nmDRC
Calibre Pattern Matching
Calibre Automatic Waivers
Calibre nmLVS
Calibre InRoute
Calibre xRC
Calibre xACT-3D
Calibre xL
Calibre PERC
Calibre DESIGNrev
Calibre Interactive
Calibre RVE
Calibre LFD
Calibre CMP Analyzer
Calibre YieldAnalyzer
Calibre YieldEnhancer
Calibre nmOPC (RET)
Calibre OPCverify
Calibre nmMPC
Calibre MDP
1996
Calibre Point Tool
~ $1.1M Revenue
2011
Calibre nm Platform
Approaching $300M
Revenue
2011 Calibre Platform
Building upon a #1 Position |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Transportation, an Exciting Opportunity
Mentor Graphics Investor Presentation, April 2011
17
Collision Avoidance
Automated Highway
Navigation &
Trip Computer
Entertainment
Electrochromic
Glass
Active Noise Cancellation
Communication
Lighting
Engine & Emissions
Management
Traction Control
Vehicle Stability
Low Tire
Pressure
Monitors
Airbag
Deployment
System
Security Systems
Multi-Zone Automatic
Climate Control
Lane Departure
Warning
Continuously Variable
Transmission
Engine Management
Antilock Braking
Active Suspension |
 Mentor’s
Transportation Solutions
Transportation has accounted for approximately 15%
of product bookings in recent quarters
Mentor Graphics Investor Presentation, April 2011
18
CHS
Electrical
System Design
and
Wire Harness
Engineering
System Vision
and
Mechatronics
Analysis
Volcano
Network Design
and Analysis
©
2011 Mentor Graphics Corp.
www.mentor.com |
 Transportation
– A Growing Opportunity for Mentor
Mentor Graphics Investor Presentation, April 2011
19
Customers include …
©
2011 Mentor Graphics Corp.
www.mentor.com |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Agenda
Mentor Graphics Investor Presentation, April 2011
Business Strategy Overview
Financial Highlights & Outlook
2011 Annual Meeting
Appendix
20
Part 1
Part 2
Part 3
Part 4 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Q4 FY 2011 Results
Q4 FY 2011 –
marked the seventh out of the last eight quarters of
exceeding non-GAAP EPS guidance
Book-to-bill solidly above 1 with backlog at record levels
Q4 FY 2011 cash from operations of $75 million
21
21
Mentor Graphics Investor Presentation, April 2011
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation $237
$293
$307
Actual
Q4 FY'10
Guidance
Q4 FY'11
Actual
Q4 FY'11
$0.30
$0.46
$0.48
Actual
Q4 FY'10
Guidance
Q4 FY'11
Actual
Q4 FY'11
Revenue ($mm) +30% year-on-year
Non-GAAP EPS
*
+60%
year-on-year |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
FY 2011 Results
Mentor Graphics Investor Presentation, April 2011
22
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation Mentor
has
demonstrated
strong
top-line
and
earnings
growth
over
the
past
two
years,
and
anticipates
continued
strength
$1,000
$789
$803
$915
Actual
FY 2009
Actual
FY 2010
Actual
FY 2011
Guidance
FY 2012
Revenue ($mm)
Non-GAAP EPS
*
$1.00
$0.20
$0.47
$0.70
Actual
FY 2009
Actual
FY 2010
Actual
FY 2011
Guidance
FY 2012 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
FY 2011 Results
Revenue of $915 million, up 14% from FY 2010
Non-GAAP EPS of $0.70, an increase of 49%
*
—
GAAP EPS of $0.26 compared to a GAAP loss per share
of $0.23 in FY 2010
Bookings up 30% for the year
All regions showed bookings growth for the year
Second largest provider of EDA software and support
23
Mentor Graphics Investor Presentation, April 2011
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Successful FY 2011 Operating Expense
Programs
Aggressive program to reduce internal expenses
—
Implemented structural changes to commission and incentive plans
—
Reduced stock compensation expense
—
Modified ESPP plan provisions
—
Froze senior executive wages since 2007
Reduced outside expenditures
—
Lowered expenditures on outside services in FY11 by over 10% year-
over-year
—
Decreased FY11 travel expenses by 20% from FY09 level
Extracted facilities savings in excess of $4 million worldwide in FY11
24
Reduced non-GAAP SG&A expense by over 500 bps as % of revenue in last 2 years*
On track to reduce non-GAAP SG&A expense by approximately 200 bps as % of revenue in
FY12** Goal to achieve long-term operating model of 20% operating profit over next 2
years 24
Mentor Graphics Investor Presentation, April 2011
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation **For a reconciliation of non-GAAP to GAAP financial measures, see the
appendix to this presentation; estimate does
not
account
for
increased
costs
incurred
in
connection
with
Icahn’s
proxy
contest |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Strengthened Balance Sheet and Disciplined
Use of Leverage
No near-term debt obligations
Renewing $100 million bank facility and replaced convertible debt
Overview of recent convertible offering
$253 million Convertible Offering and concurrent $25 million share repurchase
provide the following benefits relative to Mentor’s former 6.25% Convertible
Subordinated Debentures:
Lower interest rate of 4.00% vs. 6.25%
Increases conversion price to $20.54 from $17.97
Increases flexibility by pushing out initial put date from 2013 to 2018 and maturity
from 2026 to 2031
Reduces dilution by using $25 million of proceeds to repurchase approx. 1.7 million
shares (net decrease of approximately 300,000 shares on a fully diluted basis)
Enables Mentor to refinance revolving credit facility
Proceeds used in part to repay the outstanding amounts owing under Mentor’s $18.5
million aggregate principal amount term loan due 2013
Make whole provision in-line with prior convertible debt and precedent transactions
—
will not have a material impact on the ability of a potential acquiror to
consummate a transaction
Mentor Graphics Investor Presentation, April 2011
25 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Fiscal 2012 Business Outlook
Strong end-of-year momentum –
bookings, revenue, new customers, consulting,
training, support reinstatements and software and hardware benchmark activity
Q1 FY 2012 expected revenue of approximately $225 million, up 25% year-over-
year, and non-GAAP EPS of approximately $0.15, up from a loss of $0.02*
—
GAAP EPS of approximately $0.06, up from a loss of $0.22 in the prior year
Fiscal 2012 revenue guidance of approximately $1 billion, up 9% year-over-year,
and non-GAAP EPS of approximately $1.00, up 43% from the prior year*
—
GAAP EPS of approximately $0.77, up approximately 200% from $0.26 in the
prior year
Forecasting fiscal 2012 non-GAAP operating income margin of approximately
15%, a gain of another 200 bps, and 50% earnings leverage on incremental
revenues*
Revenue growth outlook, at 9%, is consistent with that of our two principal
competitors
26
Mentor Graphics Investor Presentation, April 2011
26
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Long-Term Outlook and Capital Policy
Mentor’s leading industry products, presence in emerging markets and
leverageable operating model, create a platform anticipated to generate
significant returns for shareholders
EPS growth driven by top line momentum and operating margin expansion;
should be further enhanced by the use of our strong free cash flow to
repurchase shares
—
Mentor has historically operated on a leveraged net debt basis to reduce our
overall cost of capital and we presently anticipate using our strong cash flow to
return approximately $150 million of capital to shareholders through stock
repurchases or dividends
27
Mentor Graphics Investor Presentation, April 2011
27
Long-Term
FY12
Model
Revenue Growth
9% Y-o-Y
8-10% CAGR
Growth in-line with industry analyst expectations
15%
20%+
Mild gross margin expansion due to both scale efficiencies and
structural operating changes
R&D constant at ~30% of revenues
SG&A declining as % of revenue due to scale efficiencies
Assumptions
Operating Margin
(non-GAAP)*
* For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor Delivers Shareholder Value
Mentor Graphics Investor Presentation, April 2011
28
Source:
Institutional
Brokers’
Estimate
System,
Capital
IQ
* For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation 09-Mar-09: NASDAQ
recent low
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
Mar-2009
Jul
-2009
Oct-2009
Feb-2010
Jun-2010
Oct-2010
Feb-2011
Daily from 09-Mar-2009 to 15-Apr-2011
History of Outperforming Analyst Estimates
Actual
IBES Median (1-Month Prior)
Quarter
Date
Revenue
Non-GAAP
EPS*
Revenue
Non-GAAP
EPS
Q4'FY11
Feb-2011
$
307
$
0.48
$
293
$
0.46
Q3'FY11
Nov-2010
239
0.22
220
0.16
Q2'FY11
Aug-2010
188
0.01
180
(0.04)
Q1'FY11
May-2010
181
(0.02)
183
(0.02)
Q4'FY10
Feb-2010
237
0.30
230
0.28
Q3'FY10
Nov-2009
189
0.05
183
0.01
Q2'FY10
Aug-2009
183
0.02
165
(0.10)
Q1'FY10
May-2009
194
0.09
202
0.08 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Agenda
Mentor Graphics Investor Presentation, April 2011
Business Strategy Overview
Financial Highlights & Outlook
2011 Annual Meeting
Appendix
29
Part 1
Part 2
Part 3
Part 4 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Key Dates Relating to the Proxy Contest
27-May-2010 –
Icahn filed an initial 13D disclosing 6.86% ownership in Mentor
June-2010
–
Icahn filed 13D amendments disclosing up to 10.8% ownership in Mentor; filing on June 30, 2010
indicated that Icahn met with representatives of Mentor and looked forward to further
conversations and working constructively together
24-June-2010
–
Mentor adopted a limited duration shareholder rights plan with a 15% trigger, set to expire
December 31, 2011
July-2010
–
Icahn filed 13D amendments disclosing up to 14.1% ownership in Mentor
24-Aug-2010
–
Icahn filed a 13D amendment disclosing 14.98% ownership in Mentor
May-2010 to Jan-2011
–
Mentor and Icahn’s associates had periodic business discussions; Icahn did not indicate
any interest in nominating a slate of directors, engaging in a proxy solicitation or
making a conditional proposal to purchase the Company
4-Feb-2011
–
Mentor announced that its Annual Meeting would be held on May 12, 2011
8-Feb-2011
–
Icahn announces the intent to nominate three directors for election and belief that Mentor
should be put up for sale
11-Feb-2011
–
Icahn announced its three nominees for election as director and
its intent to make certain
proposals with respect to the Company’s bylaws
22-Feb-2011
–
Icahn announced a conditional proposal to acquire Mentor for $17/share, which Icahn
subsequently characterized as a “stalking horse”
offer
15-Mar-2011 –
Mentor announced that its Board adopted certain amendments to the Company’s bylaws;
Mentor filed a preliminary proxy statement that recommended a proposal for another
amendment to the bylaws, identical to one of Icahn’s proposals
18-Mar-2011 –
Icahn withdrew its proposals regarding amendments to the Company’s bylaws
28-Mar-2011
–
Mentor announced that its Board rejected Icahn’s “stalking horse”
proposal
29-Mar-2011
–
Mentor announced the commencement of its convertible debt financing and
concurrent share
repurchase; Icahn offered to provide non-convertible, limited duration “stalking
horse” financing in lieu of Mentor
proceeding with the convertible financing
31-Mar-2011
–
Mentor announced that its Board rejected Icahn’s “stalking horse”
financing proposal and affirmed
its decision to proceed with the convertible debt financing; Mentor filed its definitive proxy
statement 12-May-2011
–
Annual Meeting date
30
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Icahn Has One Goal –
A Risky Exit Strategy
Icahn platform has one plank –
that Mentor “should be put up for sale”
In furtherance of his goal, Icahn seeks to replace three experienced, independent and
highly-qualified directors with:
—
David Schechter –
an employee of Icahn’s, who has no prior industry experience,
and
whose
director
history
includes
positions
at
WCI
Communities
and
BKF
Capital
(companies that lost substantial shareholder value)
—
José
Maria Alapont –
the President and CEO of Federal Mogul, a company 76%
owned by Icahn
—
Gary Meyers –
the former President and CEO of Synplicity, a small EDA company
that
averaged
SG&A
expense
as
a
percentage
of
revenue
well
above
Mentor’s
and
generated a negative return for shareholders prior to its sale to Synopsys for
approximately $220 million in 2008
Mentor’s Board is open to any opportunity to enhance shareholder value and
periodically
reviews
its
strategy
and
alternatives
–
however,
it
has
determined
that
Icahn’s proposed course of action entails significant commercial and regulatory risk
31
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Icahn’s Platform Carries Multiple Risks
Icahn’s platform of simply putting the company up for sale demonstrates a fundamental lack
of knowledge about the EDA industry
Mentor
undertook
an
analysis
of
the
regulatory
risks
inherent
to
any combination with Cadence or
Synopsys (the two companies that could be logical strategic buyers) following Cadence’s
proposal in 2008. The FTC issued a Second Request; Cadence withdrew its proposal shortly
thereafter Mentor updated its analysis in connection with the Icahn proposal. The
analysis showed that serious regulatory risks persist
If combined with Cadence, ~75% of Mentor’s total revenues would be derived from product
areas in which Mentor and Cadence have a combined 50% to nearly 100% share of the
product area overlapping
If combined with Synopsys, ~65% of Mentor’s total revenues would be derived from product
areas in which Mentor and Synopsys have a combined 50% to nearly 100% share of the
product area overlapping
For these reasons, Mentor believes a transaction between Mentor and either Cadence or Synopsys
would face serious regulatory risks and a substantial risk that the deal would fail to
close Any discussions concerning a combination with Cadence or Synopsys entail
significant commercial risk including disruption to:
—
The growth and stability of the company’s customer base
—
The company’s relationship with its employees
This disruption could result in serious adverse effects should discussions commence but not
result in a completed transaction because of regulatory risks
32
We believe electing nominees committed to a sale process that is
risky and unwise does not make sense
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
33
Icahn’s $17 per Share “Stalking Horse”
Proposal
Icahn proposed, as a part of his platform to put the company up for sale, a
$17 per share “stalking horse”
bid
After carefully reviewing the proposal, together with its financial advisors,
the Board unanimously determined that continued execution of Mentor’s
strategic plan offers greatest long-term value to all Mentor shareholders
Proposal undervalues the company and its future prospects
—
Excellent prospects for continued growth and shareholder value creation
—
Portfolio of highly profitable #1 product positions
—
Focused on building #1 product positions
—
Strength in PCB, design for physical verification, emulation and
transportation
We believe Icahn wants to catalyze a liquidity event for the significant
stake he has taken in Mentor’s stock
Icahn’s platform would create a significant conflict for his nominees if they
were elected to Mentor’s Board
Mentor’s Board remains open to any opportunity to enhance
shareholder value, but Icahn’s proposal undervalues Mentor and
represents a conflict of interest for Icahn’s nominees
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor’s Strong Corporate Governance
Profile
Strong, experienced, independent Board
—
Wholly independent Nominating & Corporate Governance and Audit &
Compensation committees
—
All independent directors have a deep understanding of Mentor’s
business, significant technology sector knowledge and experience
in
serving as public company directors
Structural profile ensures accountability
—
Annually elected board
—
Special meetings may be called by shareholders
Responsive to Icahn’s governance proposals
—
Amended bylaws to permit shareholders to call special meetings
—
Amended bylaws to limit the directors’
ability to increase the size of the
Board and to change the frequency of elections
—
Amended bylaws to opt out of Oregon Control Share Act
Proposal to shareholders to opt out of the Oregon Business
Combination Statute
34
Mentor’s Board is Experienced, Independent,
Accountable and Responsive
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Summary
Mentor achieved record results in fiscal 2011 driven by strong overall
bookings growth of approximately 30%
—
All-time record revenues of $915 million
—
Non-GAAP
earnings
per
share
of
$0.70
(49%
increase
from
fiscal
2010)
*
For full-year fiscal 2012, company expects:
—
Revenue to be approximately $1 billion (up 9%)
—
Non-GAAP
earnings
per
share
of
~$1.00
(up
43%)
*
Mentor focuses on building #1 product positions —
segment leader gains
share while others may lose ground
Expect Mentor’s growth to continue to exceed underlying growth of traditional
EDA
New applications including automotive and aerospace design are expected to
continue to grow rapidly with minimal competition from EDA companies
Growth anticipated to be between 8 and 10%, non-GAAP operating margin
trending towards 20%+, generating significant cash flow*. Mentor presently
anticipates using its strong cash flow to return approximately $150 million of
capital to shareholders through stock repurchases or dividends
Mentor Graphics Investor Presentation, April 2011
35
*For a reconciliation of non-GAAP to GAAP financial measures, see the appendix to this
presentation |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Summary (continued)
The Mentor Board unanimously believes that continued execution of
our strategic plan offers the greatest value to all Mentor shareholders
Board remains open to any opportunity to enhance shareholder value,
just as it was in 2008 when it evaluated the offer from Cadence
$17 per share “stalking horse”
proposal made by Icahn undervalues
the company and its future prospects
Analysis shows Icahn’s platform of a public sale is risky and
potentially destructive
—
Substantial regulatory and commercial risk to in-market combination
The Mentor Board urges shareholders to reject Icahn’s
nominees, as the Board believes they:
—
Run on a singular risky platform of selling Mentor without any
other stated vision or specific strategy
—
Do not have the collective knowledge, skill and experience of
Mentor’s current Board
36
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Agenda
Mentor Graphics Investor Presentation, April 2011
Business Strategy Overview
Financial Highlights & Outlook
2011 Annual Meeting
Appendix
37
Part 1
Part 2
Part 3
Part 4 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
38
Mentor Directors
Dr. Walden C. Rhines
Dr. Rhines has been Chairman of the Board and Chief Executive Officer of the Company since 2000,
and was President and Chief
Executive
Officer
of
the
Company
from
1993
to
2000.
He
is
currently
a
director
of
TriQuint
Semiconductor,
Inc.
(manufacturer of semiconductors), and served as a director of Cirrus Logic, Inc. (manufacturer
of semiconductors) from 1995 to 2009. Dr. Rhines is currently in his fifth term as chair
of the Electronic Design Automation Consortium. He is also a board member of the
Semiconductor Research Corporation. He has previously served as chair of the Semiconductor Technical Advisory
Committee of the Department of Commerce, and as a member of the boards of directors of the
Computer and Business Equipment Manufacturers’
Association
(CBEMA),
SEMI–Sematech/SISA
(a
semiconductor
equipment
suppliers
board),
University
of
Michigan
National
Advisory
Council,
Lewis
and
Clark
College
and
SEMATECH.
Prior
to
joining
Mentor,
Dr.
Rhines
was
Executive
Vice
President,
Semiconductor
Group
of
Texas
Instruments
Incorporated
from
1987
to
1993.
During
a
21–year
career
at
Texas
Instruments,
he
held
numerous
executive
and
management
positions.
He
was
co–inventor
of
a
patented
invention
that
is
fundamental to solid state lighting and DVDs.
Dr.
Rhines
is
nominated
for
election
because
he
has
been
our
CEO
for
the
past
18
years,
has
extensive
executive
management
experience,
and has deep and broad knowledge of the semiconductor and electronics design industries.
Gregory K. Hinckley
Mr. Hinckley has been President of the Company since 2000, and was Executive Vice President,
Chief Operating Officer and Chief Financial Officer of the Company from 1997 to 2000. He
continued to function as the Company’s Chief Financial Officer from 2000 to July
2007, and again became the Chief Financial Officer in December 2008. He is a director of Intermec, Inc. (a
provider of integrated system solutions), Super Micro Computer, Inc. (a server board, chassis
and server systems supplier), and SI Bone, Inc. (a privately held medical device
company). Until 2007, Mr. Hinckley was also a director of Amkor Technology, Inc. (a
provider
of
semiconductor
packaging
and
test
services).
Prior
to
joining
Mentor,
Mr.
Hinckley
was
Vice
President,
and
then
Senior
Vice
President,
of
VLSI
Technology,
Inc.
(a
semiconductor
company)
from
1992
to
1997.
Mr. Hinckley is nominated for election because he has been our Chief Operating Officer for the
past 14 years and has broad business management experience with technology
companies. Mentor Graphics Investor Presentation, April 2011
|
 ©
2011 Mentor Graphics Corp.
www.mentor.com
39
Mentor Directors
Sir Peter Bonfield
Sir
Peter
Bonfield
has
been
a
self–employed
international
business
advisor
since
2002
and
has
been
Chairman
of
NXP
Semiconductor
N.V.
(a
semiconductor
company)
since
2006.
He
served
as
Chairman
of
the
Executive
Committee
and
Chief
Executive
Officer
of
British Telecommunications PLC (a provider of telecom services) from 1996 to 2002 and before
that served as Chairman and Chief Executive
Officer
of
ICL
plc
(a
UK–based
information
technology
company).
Sir
Peter
is
a
director
of
Sony
Corporation
(a
worldwide
provider of electronics, games, music, movies and financial services), Taiwan Semiconductor
Manufacturing Company Ltd. (a manufacturer
of
semiconductors),
Telefonaktiebolaget
LM
Ericsson
(a
telecommunications
equipment
manufacturer),
and
Actis
LLP
(a private equity investor in emerging markets). He previously served as a director of
AstraZeneca PLC (a pharmaceuticals company) from
1995
to
2007.
He
is
a
senior
advisor
to
N.M.
Rothschild
London
and
a
member
of
the
advisory
boards
of
the
Longreach
Group
and
New
Venture
Partners.
He
also
serves
as
an
advisor
to
Apax
Partners
LLP
and
a
board
mentor
to
CMi.
He
has
received
numerous honors for his contributions to business, including a knighthood, and is a fellow of
the Royal Academy of Engineering. Sir Peter is nominated for election because he has
extensive international business and CEO experience. Marsha B. Congdon
Ms.
Congdon
has
been
self–employed
as
a
private
investor
since
1997.
She
served
as
Vice
President,
Policy
and
Strategy,
of
US
West Inc. (a provider of communications services) from 1995 to 1997; Chief Executive Officer
Oregon and regional Vice President
for
US
West
Inc.
from
1992
to
1994;
and
Vice
President
and
Chief
Executive
Officer
for
US
West
Inc.
Oregon
from
1987 to 1992. Ms. Congdon also held executive positions with Directory Publishing Corp., DEX
Publishing, AT&T, Northwestern Bell and Pacific Northwestern Bell. She previously
served as a director of two publicly traded companies, Bohemia Corp. from 1989 until its
merger with Weyerhaeuser Co. in 1991, and US Bank Corporation from 1988 until its merger with First
Bank
System,
Inc.
in
1997.
She
currently
serves
on
the
board
of
the
not–for–profit
entity,
Jackson
Hospital
Injury
Institute
in
Miami,
Florida.
She
has
served
on
the
boards
of
the
National
Multiple
Sclerosis
Foundation,
Marylhurst
University,
the
Oregon
Symphony, Reed College and the Oregon Investment Council. She was a founding director of the
Oregon Children’s Foundation. She
is
a
past
chair
of
the
Economic
Development
Commissions
for
each
of
Oregon
and
South
Dakota.
Ms.
Congdon
has
been
a
guest lecturer at the Kennedy School, Harvard and served as a McKenzie Judge for the Harvard
Business Review. In 2009, she was asked by the State Department to chair a strategic
planning training session for the Royal University of Phnom Pehn. Ms. Congdon is
nominated for election because she has extensive executive leadership and board experience with a wide range
of
profit
and
not–for–profit
companies.
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
40
Mentor Directors
Mentor Graphics Investor Presentation, April 2011
Dr. James R. Fiebiger
Dr. Fiebiger has been a self–employed semiconductor industry consultant since 2005. He
served as Chairman of the Board and Chief Executive Officer of Lovoltech Inc. (a
semiconductor company) from 1999 to 2004; Vice Chairman and Managing Director of
Technology Licensing of Gatefield Corporation (a semiconductor company) from 1998 to 2000; and President and Chief
Executive Officer of Gatefield Corporation from 1996 to 1998. From 1987 to 1993, Dr. Fiebiger
was President and Chief Operating Officer of VLSI Technology, Inc., an
application–specific integrated circuit (“ASIC”) semiconductor company which
developed electronic design automation (“EDA”) tools for ASIC design and manufactured
the ASICs designed using their EDA tools. Dr. Fiebiger has also held executive positions
such as Chief Executive Officer, Senior Corporate Vice President and Vice President with
leading semiconductor manufacturers, including Thomson–Mostek, Motorola and Texas Instruments. Dr. Fiebiger
is a director of Power Integrations, Inc. (a supplier of high–voltage integrated
circuits), Pixelworks, Inc. (a fabless semiconductor company) and QLogic Corporation (a
developer of semiconductor and board and box–level products), and served as a director of
Actel Corporation (a developer of field programmable gate arrays) until it was acquired in
November 2010. Dr. Fiebiger is nominated for election because he has extensive management experience in the
semiconductor industry, and considerable experience as a board member of both hardware
and software solutions providers.
Kevin C. McDonough
Mr. McDonough has been President of Kammstone LLC (a consulting firm providing services to the
electronics industry) since 2002. He previously served as President and Chief Executive
Officer of ChipData, Inc. (an internet service company) from 1999 to 2002; Vice
President and General Manager of National Semiconductor Corporation (a manufacturer of electronic components)
from 1997 to 1999; and Senior Vice President of Engineering of Cyrix Corporation (a
manufacturer of microprocessors) from 1989 to 1997. Mr. McDonough spent 15 years in
various semiconductor design and product development roles at Texas Instruments, where
he was listed as inventor on 23 patents. Mr. McDonough is nominated for election because he has CEO experience running a software
company serving the electronics design market. He has extensive engineering experience
in semiconductor design. |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
41
Mentor Directors
Patrick B. McManus
Mr. McManus has been self-employed as a private
investor since 1987. He was Chief Financial Officer of Charles Schwab Corporation from
1984 to 1987, and Chief Financial Officer of various companies prior to 1984 including Univest, Pacific
Express Airlines, Acurex Solar Corporation and Itel Corporation.
Earlier in his career, he was controller of the African and
Middle East division of Singer Corporation.
Mr. McManus is nominated for election because he has strong financial credentials that he
brings to his role as Chair of our Audit Committee, and broad business experience,
including international experience. Dr. Fontaine K. Richardson
Dr. Richardson has been self-employed as a private
investor since 2000. He was General Partner of Eastech III and Vice President of Eastech
Management Company (affiliated private venture capital firms) from 1983 to 2000. From 1984 to 2003, Dr.
Richardson served as a director for the public company, Banyan Systems/ePresence (a computer
software company that created and distributed a network operating system). In addition,
he has been a director of Network Engines, Inc. (a provider of computer
hardware and integration services) since 2002, including four years of service as lead
director. Dr. Richardson was a director and
co-founder of Applicon Incorporated (an early
provider of CAD/CAM hardware and software products). He has been a director of numerous
private hardware/software product companies, including Advanced Color Technology, Raster Technologies,
Autographix, Meta Graphics, Aries Technology, and Channel Computing.
Dr. Richardson is nominated for election because, as a private venture capitalist and longtime
director of numerous technology companies, he has broad industry and business
experience. Mentor Graphics Investor Presentation, April 2011
|
 ©
2011 Mentor Graphics Corp.
www.mentor.com
GAAP vs Non-GAAP
*
The Non-GAAP Metric:
Adopted by all public companies in the EDA industry
Used by all equity analysts that track the EDA industry
GAAP items excluded from non-GAAP results
—
Equity plan-related compensation
—
Special charges
—
Amortization of purchased technology
—
Amortization of other identified intangible assets
—
Amortization of debt discount and retirement costs
—
Other extraordinary items
42
Mentor Graphics Investor Presentation, April 2011
*For a reconciliation of non-GAAP to GAAP financial measures, see the slides immediately
following this slide |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures
The Company’s management evaluates and makes operating decisions using various
performance measures. In addition to our GAAP results, we also consider adjusted gross
margin, operating margin, net income (loss), and earnings (loss) per share which we
refer to as non-GAAP gross margin, operating margin, net income (loss), and earnings (loss)
per share, respectively. These non-GAAP measures are derived from the revenues of our
product, maintenance, and services business operations and the costs directly related to
the generation of those revenues, such as cost of revenue, research and development,
sales and marketing, and general and administrative expenses, that management considers in
evaluating our ongoing core operating performance. These non-GAAP measures exclude
amortization of intangible assets, special charges, equity plan-related compensation
expenses and charges, interest expense attributable to net retirement premiums or
discounts on the early retirement of debt and associated debt issuance costs, interest expense associated
with the amortization of debt discount and premium on convertible debt, impairment of
long-lived assets, impairment of cost method investments, and the equity in income
or losses of unconsolidated entities (except Frontline P.C.B Solutions Limited
Partnership (Frontline)), which management does not consider reflective of our core operating business.
Identified intangible assets consist primarily of purchased technology, backlog, trade names,
customer relationships, and employment agreements. Special charges primarily consist of
costs incurred for employee terminations due to a reduction of personnel resources
driven by modifications of business strategy or business emphasis. Special charges may
also include expenses incurred related to potential acquisitions, abandonment of in-process
research and development, excess facility costs, asset-related charges,
post-acquisition rebalance costs and restructuring costs, including severance and
benefits. Equity plan-related compensation expenses represent the fair value of all share-based payments to
employees, including grants of employee stock options. 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 tax expense or benefit that we would
accrue using the normalized effective tax rate described below applied to the non-GAAP results.
43
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
44
Management excludes from our non-GAAP measures certain recurring items to facilitate its
review of the comparability of our core operating performance on a
period-to-period basis because such items are not related to our ongoing core
operating performance as viewed by management. Management considers our core operating performance
to be that which can be affected by our managers in any particular period through their
management of the resources that affect our underlying revenue and profit generating
operations during that period. Management uses this view of our operating performance
for purposes of comparison with our business plan and individual operating budgets and allocation
of resources. Additionally, when evaluating potential acquisitions, management excludes the
items described above from its consideration of target performance and valuation. More
specifically, management adjusts for the excluded items for the following reasons:
Amortization charges for our intangible assets are excluded as they are inconsistent in amount
and frequency and are significantly impacted by the timing and magnitude of our
acquisition transactions. We therefore consider our operating results without these
charges when evaluating our core performance. Generally, the most significant impact to
inter-period comparability of our net income (loss) is in the first twelve months
following an acquisition.
Special charges are incurred based on the particular facts and circumstances of acquisition
and restructuring decisions and can vary in size and frequency. These charges are
excluded as they are not ordinarily included in our annual operating plan and related
budget due to the unpredictability of economic trends and the rapidly changing
technology and competitive environment in our industry. We therefore exclude them when
evaluating our managers’
performance internally.
We view equity plan-related compensation as a key element of our employee retention and
long-term incentives, not as an expense that we use in evaluating core operations
in any given period. Interest expense attributable to net retirement premiums or
discounts on the early retirement of debt, the write-off of associated debt
issuance costs and the amortization of the debt discount and premium on convertible
debt are excluded. Management does not consider these charges as a part of our core operating
performance. The early retirement of debt and the associated debt issuance costs are not
included in our annual operating plan and related budget due to unpredictability
of market conditions which could facilitate
an early retirement of debt. We do not consider the amortization
of the debt discount and premium on
convertible debt to be a direct cost of operations.
44
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
45
Impairment of cost method investments can occur when the fair value of the investment is less
than its cost. This can occur when there is a significant deterioration in the
investee’s earnings performance, significant adverse changes in the general market
conditions of the industry in which the investee operates, or indications that the
investee may no longer be able to conduct business. These charges are inconsistent in amount
and frequency. We therefore consider our operating results without these charges when
evaluating our core performance. Equity in earnings or losses of unconsolidated
subsidiaries, with the exception of our investment in Frontline, represents the net
income (losses) in an investment accounted for under the equity method. The amounts
represent our equity in the net income (losses) of a common stock investment. The carrying
amount of our investment is adjusted for our share of earnings or losses of the
investee. The amounts are excluded as we do not control the results of operations for
these investments, we do not participate in regular and periodic operating activities
and management does not consider these businesses a part of our core operating performance.
In connection with the Company’s acquisition of Valor on March 18, 2010, we also acquired
Valor’s 50% interest in Frontline, a joint venture. We report our equity in the
earnings or losses of Frontline within operating income. We
actively participate in regular and periodic activities such as budgeting, business planning,
marketing and direction of research and development projects. Accordingly, we do not
exclude our share of Frontline’s earnings or losses from our non-GAAP results
as management considers the joint venture to be core to our operating performance.
Income tax expense (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 our long-term tax
structure. We use a normalized effective tax rate of 17%, which reflects the weighted average
tax rate applicable under the various jurisdictions in which we operate. This non-GAAP tax
rate eliminates the effects of non-recurring and period specific items which are
often attributable to acquisition decisions and can vary
in size and frequency and considers our US loss carryforwards that have not been previously
benefited. This rate is subject to change over time for various reasons, including
changes in the geographic business mix and changes in statutory tax rates. Our GAAP tax
rate for the fiscal year ended January 31, 2011 was 11%. The GAAP tax rate
considers certain mandatory and other non-scalable tax costs which may adversely or
beneficially affect our tax rate depending upon our level of profitability in various
jurisdictions. 45
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
In certain instances our GAAP results of operations may not be profitable when our corresponding
non-GAAP results are profitable or vice versa. The number of shares on which our
non-GAAP earnings per share is calculated may therefore differ from the GAAP
presentation due to the anti-dilutive effect of stock options in a loss situation.
Non-GAAP gross margin, operating margin, and net income (loss) are supplemental measures of
our performance that are not required by, or presented in accordance with, GAAP.
Moreover, they should not be considered as an
alternative to any performance measure derived in accordance with GAAP, or as an alternative to
cash flow from operating activities as a measure of our liquidity. We present
non-GAAP gross margin, operating margin, and net income (loss) because we consider
them to be important supplemental measures of our operating performance and profitability
trends, and because we believe they give investors useful information on
period-to-period performance as evaluated by management. Non-GAAP net income
(loss) also facilitates comparison with other companies in our industry, which use
similar financial measures to supplement their GAAP results. Non-GAAP net income (loss) has
limitations as an analytical tool, and therefore should not be considered in isolation
or as a substitute for analysis of our results as reported under GAAP. In the future we
expect to continue to incur expenses similar to the non-GAAP adjustments described above and
exclusion of these items in our non-GAAP presentation should not be construed as an
inference that these costs are unusual, infrequent or non-recurring. Some of the
limitations in relying on non-GAAP net income (loss) are: Amortization of
intangibles represents the loss in value as the technology in our industry evolves, is
advanced, or is replaced over time. The expense associated with this loss in value is not
included in the non- GAAP net income (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. We regularly engage in acquisition and assimilation
activities as part of our ongoing business and regularly evaluate our businesses to
determine whether any operations should be eliminated or curtailed. We therefore will
continue to experience special charges on a regular basis. These costs also directly impact our available
funds.
We perform impairment analyses on cost method investments when triggering events occur and
adjust the carrying value of assets when we determine it to be necessary. Impairment
charges could therefore be incurred in any period.
46
46
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
Our stock option and stock purchase plans are important components of our incentive
compensation arrangements and will be reflected as expenses in our GAAP results.
Our income tax expense (benefit) will be ultimately based on our
GAAP taxable income and actual tax rates in
effect, which often differ significantly from the 17% rate assumed in our non-GAAP
presentation. In addition, if we have a GAAP loss and non-GAAP net income, our
non-GAAP results will not reflect any projected GAAP tax benefits. Similarly, in
the event we were to have GAAP net income and a non-GAAP loss, our GAAP tax expense
would be replaced by a credit in our non-GAAP presentation. Other companies,
including other companies in our industry, calculate non-GAAP net income (loss) differently
than we do, limiting its usefulness as a comparative measure.
47
47
Mentor Graphics Investor Presentation, April 2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
Mentor Graphics Investor Presentation, April 2011
48
2011
2010
2009
GAAP net income (loss)
28,584
$
(21,889)
$
(91,252)
$
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues
888
1,618
1,544
Research and development
7,785
10,931
12,005
Marketing and selling
6,112
8,406
8,627
General and administration
5,726
5,204
6,047
System and software cost of revenues (2)
-
-
103
Acquisition -
related items:
Amortization of purchased assets
Cost of revenues (3)
13,771
12,012
12,403
Amortization of intangible assets (4)
7,347
11,184
11,113
Frontline purchased technology and intangible assets (5)
4,347
-
-
Impairment of long-lived assets (6)
-
-
4,553
In-process research and development (7)
-
-
22,075
Special charges (8)
10,257
21,334
16,888
Other income (expense), net (9)
938
1,108
4,920
Interest expense (10)
3,326
2,410
2,540
Non-GAAP income tax effects (11)
(12,298)
(7,028)
7,039
Total of non-GAAP adjustments
48,199
67,179
109,857
Non-GAAP net income
76,783
$
45,290
$
18,605
$
GAAP weighted average shares (diluted)
109,861
96,474
91,829
Non-GAAP adjustment
-
1,901
714
Non-GAAP weighted average shares (diluted)
a
109,861
98,375
92,543
GAAP net income (loss) per share (diluted)
0.26
$
(0.23)
$
(0.99)
$
Non-GAAP adjustments detailed above
0.44
0.70
1.19
Non-GAAP net income per share (diluted)
a
0.70
$
0.47
$
0.20
$
Year Ended January 31,
RECONCILIATION
OF
NON-GAAP
ADJUSTMENTS
(In thousands, except earnings per share data)
MENTOR
GRAPHICS
CORPORATION |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor Graphics Investor Presentation, April 2011
49
Non-GAAP Financial Measures (cont.)
(1)
Equity plan-related compensation expense.
(2)
Amount represents the write-off of prepaid royalty amounts
associated with the closure of our Intellectual Property division.
(3)
Amount represents amortization of purchased technology resulting
from acquisitions. Purchased intangible assets are amortized over two
to five years. (4)
Other identified intangible assets are amortized to other operating
expense over two to five years. Other identified intangible assets include trade names,
employment agreements, customer relationships, and deferred
compensation which are the result of acquisition transactions.
(5)
Amount represents amortization of purchased technology and other
identified intangible assets identified as part of the fair value of
the Frontline P.C.B. Solutions Limited Partnership (Frontline)
investment. Mentor Graphics acquired a 50% joint venture in Frontline as a result of the Valor Computerized Systems, Ltd. acquisition in the first
quarter of fiscal 2011. The purchased technology will be amortized over
three years, other identified intangible assets will be amortized over three to four years, and are
reflected in the income statement in the equity in earnings of
Frontline results. This expense is the same type as being adjusted for in notes (3) and (4) above.
(6)
Amount represents write-off of fixed assets and purchased
technology associated with our Emulation division.
(7)
Twelve months ended January 31, 2009 :
Write-off of $8,090 for in-process research and development
related to the Ponte and Flomerics acquisitions and $13,985
related to the acquisition of technology which has not yet reached technological feasibility and provided no alternative
future uses.
(8)
Twelve months ended January 31, 2011:
Special charges consist of (i) $6,114 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $2,083 in advisory fees, (iii) $1,432 in lease restoration costs, (iv) $900 related to the abandonment of excess leased facility space,
(v) $(566) related to a casualty loss, (vi) $360 related to an asset
abandonment, (vii) $(231) in acquisition costs, and (viii) $165 in other costs.
Twelve months ended January 31, 2010:
Special charges consist of (i) $10,713 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $4,700 in advisory fees, (iii) $2,530 related to the abandonment of excess leased facility space, (iv) $2,067 in acquisition costs, (v)
$566 related to a casualty loss, (vi) $405 related to an asset
abandonment, (vii) $302 in lease restoration costs, and (viii) $51 in other costs.
Twelve months ended January 31, 2009:
Special charges consist of (i) $9,793 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $4,535 in advisory fees, (iii) $2,547 related to the abandonment of excess leased facility space, and (iv) $13 in fixed asset write-offs
related to the closure of our Intellectual Property Division.
(9)
Twelve months ended January 31, 2011:
Loss of $938 on investment accounted for under the equity method
of accounting.
Twelve months ended January 31, 2010:
Other income (expense), net consists of: (i) loss of $995 on
investment accounted for under the equity method of accounting
and (ii) an impairment of $113 for an investment accounted for under the cost method.
Twelve months ended January 31, 2009:
Other income (expense), net consists of: (i) loss of $1,432 on
investment accounted for under the equity method of accounting
and (ii) an impairment of $3,488 for investments accounted for under the cost method.
(10)
Twelve months ended January 31, 2011:
$2,981 in amortization of original issuance debt discount and premiums
and $345 in premium on partial redemption of the $110.0M
convertible debt. Twelve months ended January 31, 2010:
$2,764 in amortization of original issuance debt discount and $(354)
in discounts and unamortized debt costs relate to a
partial redemption of the $110.0M convertible debt. Twelve months
ended January 31, 2009:
$2,540 in amortization of original issuance debt discount.
(11)
Non-GAAP income tax expense adjustment reflects the application of
our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-GAAP pre-tax
income.
a Diluted non-GAAP net income per share for the
twelve months ended January 31, 2010 includes $633 of convertible debt interest, net of tax, added back to non-GAAP net income and
1,415 of corresponding dilutive shares added to the diluted weighted
average number of shares outstanding. |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
50
50
Mentor Graphics Investor Presentation, April 2011
2011
2010
2009
GAAP Selling, General, and Administrative (SG&A) expenses
421,205
$
395,969
$
412,487
$
Reconciling items to non-GAAP SG&A expenses
Equity plan-related compensation
(11,838)
(13,610)
(14,674)
Non-GAAP SG&A expenses
409,367
$
382,359
$
397,813
$
2011
2010
2009
GAAP SG&A expenses as a percent of total revenues
46%
49%
52%
Non-GAAP adjustments detailed above
-1%
-1%
-2%
Non-GAAP SG&A expenses as a percent of total revenues
45%
48%
50%
Twelve Months Ended January 31,
MENTOR GRAPHICS CORPORATION
UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP
FINANCIAL MEASURES (In thousands, except percentages)
Twelve Months Ended January 31, |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Q1
Q2
Q3
Q4
GAAP net income (loss)
(23,025)
$
(14,247)
$
15,257
$
50,599
$
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues
212
238
221
217
Research and development
2,438
1,771
1,798
1,778
Marketing and selling
2,190
1,313
1,299
1,310
General and administration
1,741
1,781
1,589
615
Acquisition-related items:
Amortization of purchased assets
Cost of revenues (2)
3,569
3,560
3,299
3,343
Amortization of intangible assets (3)
2,361
1,936
1,445
1,605
Frontline purchased technology and intangible assets (4)
621
1,242
1,242
1,242
Special charges (5)
3,268
3,206
1,578
2,205
Other income (expense), net (6)
270
1
-
667
Interest expense (7)
729
1,089
753
755
Non-GAAP income tax effects (8)
3,084
(1,139)
(4,133)
(10,110)
Total of non-GAAP adjustments
20,483
14,998
9,091
3,627
Non-GAAP net income (loss)
(2,542)
$
751
$
24,348
$
54,226
$
GAAP weighted average shares (diluted)
103,763
107,629
112,139
113,082
Non-GAAP adjustment
-
2,040
-
-
Non-GAAP weighted average shares (diluted)
103,763
109,669
112,139
113,082
GAAP net income (loss) per share (diluted)
(0.22)
$
(0.13)
$
0.14
$
0.45
$
Non-GAAP adjustments detailed above
0.20
0.14
0.08
0.03
Non-GAAP net income (loss) per share (diluted)
(0.02)
$
0.01
$
0.22
$
0.48
$
MENTOR
GRAPHICS
CORPORATION
RECONCILIATION
OF
NON-GAAP
ADJUSTMENTS
(In thousands, except earnings per share data)
Fiscal Year Ended January 31, 2011
Non-GAAP Financial Measures (cont.)
51
51
Mentor
Graphics
Investor
Presentation,
April
2011 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
52
52
Mentor Graphics Investor Presentation, April 2011
(1)
Equity plan-related compensation expense.
(2)
Amount represents amortization of purchased technology resulting
from acquisitions. Purchased intangible assets are amortized over two
to five years. (3)
Other identified intangible assets are amortized to other operating
expense over two to five years. Other identified intangible assets include trade names,
employment agreements, customer relationships, and deferred
compensation which are the result of acquisition transactions.
Amount represents amortization of purchased technology and other
identified
intangible assets identified as part of the fair value of the
Frontline P.C.B. Solutions Limited Partnership (Frontline)
investment. Mentor Graphics acquired a 50% joint venture in Frontline as a result of the Valor Computerized Systems, Ltd. acquisition in the first
quarter of fiscal 2011. The purchased technology will be amortized over
three years, other identified intangible assets will be amortized over three to four years, and are
reflected in the income statement in the equity in earnings of
Frontline results. This expense is the same type as being adjusted for in notes (2) and (3) above.
(5)
Q1 Fiscal 2011:
Special charges consist of (i) $1,589 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $1,175 in advisory fees, (iii) $843 related
to the abandonment of excess leased facility space, (iv) $200 in
acquisition costs, (v) $(566) related to a casualty loss, and
(vi) $27 in other adjustments. Q2 Fiscal 2011:
Special charges consist of (i) $1,860 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $825 in advisory fees, (iii) $247 related
to the abandonment of excess leased facility space, (iv) $220 in acquisition costs, and (v) $54 in other
adjustments.
Q3 Fiscal 2011:
Special charges consist of (i) $1,191 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and
outplacement services, (ii) $734 related to the abandonment of excess
leased facility space, (iii) $(513) in acquisition costs, (iv) $83 in advisory fees, and (v) $83 in other
adjustments.
Q4 Fiscal 2011
: Special charges consist of (i) $1,474 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and outplacement services, (ii)
$412 in lease restoration costs, (iii) $360 related to an asset
abandonment, (iv) $96 related to the abandonment of excess lease
space, (v) $(138) in acquisition costs, and (vi)
$1 in other adjustments.
(6)
Q1 Fiscal 2011:
Loss of $270 on investment accounted for under the equity method
of accounting.
Q2 Fiscal 2011:
Loss of $1 on investment accounted for under the equity method of
accounting. Q4 Fiscal 2011:
Loss of $667 on investment accounted for under the equity method
of accounting.
(7)
Q1 Fiscal 2011:
$729 in amortization of original issuance debt discount.
Q2 Fiscal 2011:
$744 in amortization of original issuance debt discount and $345
in premium on partial redemption of the $110.0M convertible debt
Q3 Fiscal 2011:
$753 in amortization of original issuance debt discount and bond
premiums, net.
Q4 Fiscal 2011:
$755 in amortization of original issuance debt discount and bond
premiums, net.
Non-GAAP income tax expense adjustment reflects the application of
our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-GAAP pre-
tax income.
(4)
(8) |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
53
53
Mentor Graphics Investor Presentation, April 2011
Q1
Q2
Q3
Q4
GAAP net income (loss)
(12,956)
$
(21,266)
$
(27,034)
$
39,367
$
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues
499
470
349
300
Research and development
3,447
3,058
2,374
2,052
Marketing and selling
2,537
2,391
1,856
1,622
General and administration
1,287
1,578
1,130
1,209
Acquisition -
related items:
Amortization of purchased assets
Cost of revenues (2)
2,948
2,928
3,089
3,047
Amortization of intangible assets (3)
2,870
2,888
2,796
2,630
Special charges (4)
5,695
4,202
5,993
5,444
Other income (expense), net (5)
437
244
170
257
Interest expense (6)
421
578
698
713
Non-GAAP income tax effects (7)
1,067
4,391
13,391
(25,877)
Total of non-GAAP adjustments
21,208
22,728
31,846
(8,603)
Non-GAAP net income
8,252
$
1,462
$
4,812
$
30,764
$
GAAP weighted average shares (diluted)
a
94,168
94,853
97,854
101,750
Non-GAAP adjustment
3
387
2,042
-
Non-GAAP weighted average shares (diluted)
94,171
95,240
99,896
101,750
GAAP net income (loss) per share (diluted)
a
(0.14)
$
(0.22)
$
(0.28)
$
0.39
$
Non-GAAP adjustments detailed above
0.23
0.24
0.33
(0.09)
Non-GAAP net income per share (diluted)
0.09
$
0.02
$
0.05
$
0.30
$
MENTOR GRAPHICS CORPORATION
RECONCILIATION OF NON-GAAP ADJUSTMENTS
(In thousands, except earnings per share data)
Fiscal Year Ended January 31, 2010 |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
54
54
Mentor Graphics Investor Presentation, April 2011
a
Diluted GAAP and non-GAAP net income per share for Q4 Fiscal 2010
includes $125 of convertible debt interest, net of tax, added back to GAAP and non-GAAP
net income and 1,379 of corresponding dilutive shares added to the
diluted weighted average number of shares outstanding. (1) Equity plan-related compensation
expense. (2)
Amount represents amortization of purchased technology resulting from
acquisitions. Purchased intangible assets are amortized over two to five years.
(3)
Other identified intangible assets are amortized to other operating
expense over two to five years. Other identified intangible assets include trade names,
employment agreements, customer relationships, and deferred
compensation which are the result of acquisition transactions. (4)
Q1 Fiscal 2010: Special charges consist of (i) $4,028 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement
services, (ii) $1,175 in advisory fees, (iii) $268 in acquisition
costs, (iv) $265 related to a casualty loss, and (v) $(41) in other adjustments.
Q2 Fiscal 2010:
Special charges consist of (i) $1,599 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and outplacement
services, (ii) $1,175 in advisory fees, (iii) $865 related to the
abandonment of excess leased facility space, (iv) $270 in acquisition costs, (v) $242 related to a
casualty loss, and (vi) $51 in other adjustments.
Q3 Fiscal 2010:
Special charges consist of (i) $3,369 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and outplacement
services, (ii) $1,231 in acquisition costs, (iii) $1,175 in advisory
fees, (iv) $159 related to the abandonment of excess leased facility space, and (v) $59 related to a
casualty loss.
Q4 Fiscal 2010:
Special charges consist of (i) $1,717 of costs incurred for employee
rebalances which includes severance benefits, notice pay, and outplacement
services, (ii) $1,547 related to the abandonment of excess leased
facility space, (iii) $1,175 in advisory fees, (iv) $405 related to an asset abandonment, (v) $302 in
lease restoration costs, and (vi) $298 in acquisition costs. (5)
Q1 Fiscal 2010:
Other income, net consists of (i) loss of $324 on investment accounted
for under the equity method of accounting and (ii) an impairment of $113
for an investment accounted for under the cost method. Q2 Fiscal 2010:
Loss of $244 on investment accounted for under the equity method of
accounting. Q3 Fiscal 2010:
Loss of $170 on investment accounted for under the equity method of
accounting. Q4 Fiscal 2010:
Loss of $257 on investment accounted for under the equity method of
accounting. (6) Q1 Fiscal 2010:
$669 in amortization of original issuance debt discount and $(248) in
discounts and unamortized debt costs related to a partial redemption of the
$110.0M convertible debt.
Q2 Fiscal 2010:
$684 in amortization of original issuance debt discount and $(106) in
discounts and unamortized debt costs related to a partial redemption of the
$110.0M convertible debt.
Q3 Fiscal 2010:
$698 in amortization of original issuance debt discount. Q4 Fiscal 2010:
$713 in amortization of original issuance debt discount. (7)
Non-GAAP income tax expense adjustment reflects the application of
our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to our non-
GAAP pre-tax income.
|
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Non-GAAP Financial Measures (cont.)
55
55
Mentor Graphics Investor Presentation, April 2011
Q1 FY12
FY12
Diluted GAAP net income per share
$0.06
$0.77
Non-GAAP Adjustments:
Amortization of purchased intangible assets (1)
0.03
0.08
Amortization of other identified intangible assets (2)
0.02
0.09
Equity plan-related compensation (3)
0.05
0.17
Special charges (4)
-
-
Other expense, net and interest expense (5)
0.01
0.03
Non-GAAP income tax effects (6)
(0.02)
(0.14)
Non-GAAP net income per share
$0.15
$1.00
(1)
(2)
(3)
(4)
(5)
(6)
Excludes amortization of purchased intangible assets resulting from
acquisition transactions. Purchased intangible assets are amortized over two to five
years. The guidance for Q1 FY12 and Full Year FY12 assumes no
additional acquisitions. Excludes amortization of other
identified intangible assets including trade names, employment agreements, customer relationships, and deferred
compensation resulting from acquisition transactions. Other
identified intangible assets are amortized over two to five years. The guidance for Q1 FY12
and Full Year FY12 assumes no additional acquisitions.
Excludes equity plan-related compensation expense.
Excludes special charges consisting primarily of costs incurred for
facility closures, employee rebalances (which includes severance benefits, notice pay
and outplacement services), and acquisition costs. The guidance for Q1
FY12 and Full Year FY12 assumes no additional special charges.
Reflects amortization of original issuance debt discount and premium,
net. Non-GAAP income tax expense adjustment reflects the
application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to
our non-GAAP pre-tax income.
MENTOR
GRAPHICS
CORPORATION
UNAUDITED
RECONCILIATION
OF
GAAP
TO
NON-GAAP
EARNINGS
PER
SHARE
GUIDANCE
The following table reconciles management's estimates of the specific
items excluded from GAAP in the calculation of expected
non-GAAP loss per share for the periods shown below: |
 ©
2011 Mentor Graphics Corp.
www.mentor.com
Mentor Graphics Investor Presentation, April 2011
56
Non-GAAP Financial Measures (cont.)
AS
OF
NOVEMBER
19,
2010
Q4 FY11
FY11
Diluted GAAP net income per share
$0.40
$0.19
Non-GAAP Adjustments:
Amortization of purchased intangible assets (1)
$0.03
0.17
Amortization of other identified intangible assets (2)
$0.01
0.07
Equity plan-related compensation (3)
$0.05
0.20
Special charges (4)
$0.00
0.07
Other income and interest expense (5)
$0.01
0.03
Non-GAAP income tax effects (6)
($0.04)
(0.06)
Non-GAAP net income per share
$0.46
$0.67
(1)
(2)
(3)
(4)
(5)
(6)
Reflects amortization of original issuance debt discount and equity in
losses on equity method investment. Non-GAAP income tax
expense adjustment reflects the application of our assumed normalized effective 17% tax rate, instead of our GAAP tax rate, to
our non-GAAP pre-tax income.
Excludes amortization of purchased intangible assets resulting from
acquisition transactions. Purchased intangible assets are amortized over two to five
years. The guidance for Q4 FY11 and Full Year FY11 assumes no
additional acquisitions. MENTOR
GRAPHICS
CORPORATION
UNAUDITED
RECONCILIATION
OF
GAAP
TO
NON-GAAP
EARNINGS
PER
SHARE
GUIDANCE
The following table reconciles management's estimates of the specific
items excluded from GAAP in the calculation of expected
non-GAAP loss per share for the periods shown below:
Excludes amortization of other identified intangible assets including
trade names, employment agreements, customer relationships, and deferred
compensation resulting from acquisition transactions. Other
identified intangible assets are amortized over two to five years. The guidance for Q4
FY11 and Full Year FY11 assumes no additional acquisitions.
Excludes equity plan-related compensation expense.
Excludes special charges consisting primarily of costs incurred for
facility closures, employee rebalances (which includes severance benefits, notice
pay and outplacement services), advisory legal fees, and acquisition
costs. The guidance for Q4 FY11 and Full Year FY11 assumes no additional special
charges. |