Mentor Graphics Reports Fiscal Second Quarter Results

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS

(In thousands, except earnings per share data)
       
 
Three Months Ended July 31, Six Months Ended July 31,
2011 2010 2011 2010
GAAP net income (loss) $ 4,334 $ (14,247 ) $ 1,981 $ (37,272 )
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues 237 238 504 450
Research and development 1,975 1,771 4,114 4,209
Marketing and selling 1,413 1,313 3,028 3,503
General and administration 2,204 1,781 3,863 3,522
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2) 2,754 3,560 6,111 7,129
Frontline purchased technology and intangible assets (3) 1,242 1,242 2,484 1,863
Amortization of intangible assets (4) 1,455 1,936 3,065 4,297
Special charges (5) 1,677 3,206 6,224 6,474
Other income (expense), net (6) 52 1 52 271
Interest expense (7) 1,228 1,089 13,907 1,818
Non-GAAP income tax effects (8)   (6,141 )   (1,139 )   (10,183 )   1,945  
Total of non-GAAP adjustments   8,096     14,998     33,169     35,481  
Non-GAAP net income (loss) $ 12,430   $ 751   $ 35,150   $ (1,791 )
 
GAAP weighted average shares (diluted) 112,844 107,629 113,892 105,717
Non-GAAP adjustment   -     2,040     -     -  
Non-GAAP weighted average shares (diluted)   112,844     109,669     113,892     105,717  
 
GAAP net income (loss) per share (diluted) $ 0.04 $ (0.13 ) $ 0.02 $ (0.35 )
Non-GAAP adjustments detailed above   0.07     0.14     0.29     0.33  
Non-GAAP net income (loss) per share (diluted) $ 0.11   $ 0.01   $ 0.31   $ (0.02 )
 
(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 )

Amount represents amortization of purchased technology and other identified intangible assets identified as part of the fair value of the Frontline PCB 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) above and (4) below.

(4 ) Other identified intangible assets are amortized to other operating expense over two to five years. Other identified intangible assets include trade names, customer relationships, and backlog which are the result of acquisition transactions.
(5 )

Three months ended July 31, 2011: Special charges consist of (i) $1,207 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $736 in consulting fees associated with our proxy contest, (iii) $202 related to the abandonment of excess lease space, (iv) $(572) in acquisition costs, and (v) $104 in other adjustments.

Three months ended July 31, 2010: 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) $220 in acquisition costs, (iv) $219 in lease restoration costs, (v) $28 related to the abandonment of excess leased facility space, and (vi) $54 in other adjustments.
Six months ended July 31, 2011: Special charges consist of (i) $3,838 in consulting fees associated with our proxy contest, (ii) $2,354 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (iii) $454 related to the abandonment of excess lease space, (iv) $(526) in acquisition costs, and (v) $104 in other adjustments.
Six months ended July 31, 2010: Special charges consist of (i) $3,449 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $2,000 in advisory fees, (iii) $502 related to the abandonment of excess leased facility space, (iv) $420 in acquisition costs, (v) $588 in lease restoration costs, (vi) $(566) related to a casualty loss, and (vii) $81 in other adjustments.
(6 ) Three months ended July 31, 2011 : Loss of $52 on investment accounted for under the equity method of accounting.
Three months ended July 31, 2010 : Loss of $1 on investment accounted for under the equity method of accounting.
Six months ended July 31, 2011 : Loss of $52 on investment accounted for under the equity method of accounting.
Six months ended July 31, 2010 : Loss of $271 on investment accounted for under the equity method of accounting.
(7 ) Three months ended July 31, 2011 : $1,228 in amortization of original issuance debt discount.
Three months ended July 31, 2010 : $744 in amortization of original issuance debt discount and $345 in premium on partial redemption of the $110.0M convertible debt.
Six months ended July 31, 2011 : $2,403 in amortization of original issuance debt discount and bond premium, and $11,504 for the premium and other costs related to the retirement of the 6.25% convertible debentures and the term loan.
Six months ended July 31, 2010 : $1,473 in amortization of original issuance debt discount and $345 in premium on partial redemption of the $110M convertible debt.
(8 ) 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.

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