Mentor Graphics Reports Fiscal Second Quarter Results

WILSONVILLE, Ore. — (BUSINESS WIRE) — August 18, 2011 — Mentor Graphics Corporation (NASDAQ: MENT) today announced financial results for the company’s fiscal second quarter ended July 31, 2011. The company reported revenues of $213.7 million, non-GAAP earnings per share of $.11, and GAAP earnings per share of $.04.

“Second quarter bookings were a record by a significant margin, up 25% from the previous record for a second quarter. Earnings per share were well ahead of guidance, further increasing our confidence in our outlook for the year,” said Walden C. Rhines, chairman and CEO of Mentor Graphics® Corporation. “Systems business was a key driver of strength in the quarter. Traditional PCB design software bookings were up nearly a third and bookings in new and emerging products, led by the Capital electrical systems design software, nearly tripled. Scalable verification, which is used by both systems and IC customers, had bookings growth of 60%.”

During the quarter, the company expanded the Capital® electrical systems design product suite with three new products, addressing configuration complexity, harness manufacturing and vehicle documentation and maintenance. In the multi-physics simulation space, the company announced the new FloEFD™ for Siemens NX product for computational fluid dynamics simulation. In embedded software, Mentor introduced a unified embedded software debugging platform from pre-silicon to final product, and the Mentor® Embedded Sourcery™ CodeBench product, a next-generation, integrated development environment based on the open-source GNU toolchain.

“Record bookings for a second quarter and continued strong cost controls led to another excellent quarter for the company,” said Gregory K. Hinckley, president of Mentor Graphics. “Leading indicators of the business remain very strong, with new customers up 15% in number and 35% in value over the previous second quarter. We see no slowdown in EDA spending.”

Outlook

For the third quarter, the company expects revenues of about $245 million, non-GAAP earnings per share of about $0.21, and GAAP earnings per share of approximately $0.18. For the full year, the company now expects revenues of approximately $1.004 billion, non-GAAP earnings per share of about $1.03 and GAAP earnings per share of approximately $0.68.

Fiscal Year Definition

Mentor Graphics’ fiscal year runs from February 1 to January 31. The fiscal year is dated by the calendar year in which the fiscal year ends. As a result, the first three fiscal quarters of any fiscal year will be dated with the next calendar year, rather than the current calendar year.

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 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, 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, and the equity in income (loss) of unconsolidated entities (except Frontline PCB Solutions Limited Partnership (Frontline)), which management does not consider reflective of our core operating business.

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:

  • Identified intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships, and employment agreements. Amortization charges for our intangible assets can vary in frequency and amount due to the timing and magnitude of acquisition transactions. We consider our operating results without these charges when evaluating our core performance due to the variability. 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 primarily consist of restructuring costs incurred for employee terminations, including severance and benefits, driven by modifications of business strategy or business emphasis. Special charges may also include expenses incurred related to potential acquisitions, excess facility costs, and asset-related charges. 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.
  • Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options and restricted stock units. We do not consider equity plan-related compensation expense in evaluating our manager’s performance internally or our 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.
  • 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.
  • Equity in earnings or losses of unconsolidated subsidiaries, with the exception of our investment in Frontline, represents our equity in the net income (loss) of a common stock investment accounted for under the equity method. The carrying amount of our investment is adjusted for our share of earnings or losses of the investee. The amounts are excluded from our non-GAAP results as we do not control the results of operations for this investment and we do not participate in regular and periodic operating activities; therefore, management does not consider these businesses a part of our core 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 U.S. 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 six months ended July 31, 2011 is 297%, after the consideration of period specific items. Without period specific items of ($5.1) million, our GAAP tax rate is (206%). Our full fiscal year 2012 GAAP tax rate, inclusive of period specific items, is projected to be 8%. 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.

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