Mentor Graphics Reports Fiscal First Quarter Results and Announces Dividend

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Mentor Graphics Reports Fiscal First Quarter Results and Announces Dividend

WILSONVILLE, Ore.--(BUSINESS WIRE)-- Mentor Graphics Corporation (NAS: MENT) today announced financial results for the company's fiscal first quarter ended April 30, 2013. The company reported revenues of $226.5 million, non-GAAP earnings per share of $0.10, and GAAP earnings per share of $0.01.

"Sales force execution and strong customer demand produced an all-time bookings record for a first quarter. Strength was evident in the IC Design to Silicon, Scalable Verification—driven by emulation demand—and New and Emerging product categories. The year is off to a great start and Q2 is already showing continued bookings strength," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "During the quarter we initiated a $0.045 quarterly dividend. This has been well received by our shareholders."

"Mentor's business was exceptional in the first quarter, with bookings more than doubling year over year," said Gregory K. Hinckley, president of Mentor Graphics. "First quarter non-GAAP earnings per share of $0.10 were double our guidance and represented the 17th consecutive quarter of exceeding non-GAAP guidance. Earnings benefited from continuous rigorous attention to operating expenses and a higher margin for our hardware business."

During the first quarter the company announced the purchase of automotive assets of MontaVista, LLC, which establishes Mentor Graphics as the number one commercial provider of Linux-based, automotive in-vehicle infotainment solutions. Mentor also announced the FloTHERM® XT product, the industry's first electronics cooling simulation solution that integrates both mechanical and electronic design automation from conceptual through detailed design.

The company introduced the Embedded Sourcery™ CodeBench Virtual Edition product. This allows software developers to remain in their native development environment while they optimize software on virtual prototypes and emulation platforms, before and after first silicon. Also in the quarter, Mentor Graphics and Mercedes-Benz Trucks announced that the Capital® electrical systems software suite was successfully deployed in the development of Daimler's flagship heavy truck.


For the second quarter of fiscal 2014, the company expects revenues of about $245 million, non-GAAP earnings per share of about $0.17, and GAAP earnings per share that are approximately $0.14. For the full fiscal year 2014, the company expects revenues of about $1.155 billion. The company is forecasting non-GAAP earnings per share of about $1.55, and GAAP earnings per share of approximately $1.33.

Share Repurchase

In the first quarter of fiscal year 2014, the company used $20 million to repurchase 1.2 million shares at an average price of $17.37 per share. The company has repurchased $144 million of Mentor Graphics stock since March 2011 and has $56 million available under the current Board authorized share repurchase program.


The company announces a second quarter dividend of $0.045 per share on outstanding common stock. The dividend is payable on July 1, 2013 to shareholders of record as of the close of business on June 10, 2013.

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 profit, operating income, net income, and earnings per share which we refer to as non-GAAP gross profit, operating income, net income, and earnings 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 associated with the amortization of original issuance debt discount on convertible debt, the equity in earnings or losses of unconsolidated entities (except Frontline PCB Solutions Limited Partnership (Frontline)), and the impact on basic and diluted earnings per share of changes in the calculated redemption value of noncontrolling interests, 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, and customer relationships. 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 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, and purchases made as a result of the employee stock purchase plan. We do not consider equity plan-related compensation expense in evaluating our managers' performance internally or our core operations in any given period.
  • Interest expense attributable to amortization of the original issuance debt discount on convertible debt is excluded. Management does not consider this charge as a part of our core operating performance. We do not consider the amortization of the original issuance debt discount on convertible debt to be a direct cost of operations.
  • Equity in earnings or losses of unconsolidated entities represents our equity in the net income (loss) of common stock investments accounted for under the equity method. The carrying amounts of our investments are adjusted for our share of earnings or losses of the investee. We report our equity in the earnings or losses of investments in other income (expense), net (with the exception of our investment in Frontline as discussed below). The amounts are excluded from our non-GAAP results as we do not control the results of operations for the investments and we do not participate in regular and periodic operating activities; therefore, management does not consider these investments as a part of our core operating performance.
  • The Company maintains a 50% interest in Frontline, a joint venture. We report our equity in the earnings or losses of Frontline within operating income. Although we do not exert control, 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 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 three months ended April 30, 2013 is 381% after consideration of period specific items. Without period specific items of $0.4 million, our GAAP tax rate is 140%. Our full fiscal year 2014 GAAP tax rate, inclusive of period specific items, is projected to be 13%. 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.
  • Our agreement with the owners of noncontrolling interests in one of our subsidiaries gives them a right to require us to purchase their interests at a future date for a price based on a formula defined in the agreement. Under GAAP, increases (or decreases to the extent they offset previous increases) in the calculated redemption value of the noncontrolling interests are recorded directly to retained earnings and therefore do not affect net income. However, as required by GAAP, these amounts are applied to increase or decrease the numerator in the calculation of basic and diluted earnings per share. Management does not consider fluctuations in the calculated redemption value of noncontrolling interests to be relevant to our core operating performance.

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, restricted stock units, and employee stock purchase plan shares in a loss situation.

Non-GAAP gross profit, operating income, net income, and earnings per share are supplemental measures of our performance that are not 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 profit, operating income, net income, and earnings per share 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 also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. Non-GAAP net income 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 are:

  • Amortization of intangible assets 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 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 evaluate our business to determine whether any operations should be eliminated or curtailed and engage in acquisition and assimilation activities as part of our ongoing business. We therefore will continue to experience special charges on a regular basis. These costs also directly impact our available funds.
  • Our stock incentive 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 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 differently than we do, limiting its usefulness as a comparative measure.

About Mentor Graphics

Mentor Graphics Corporation 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 electronic, semiconductor and systems companies. Established in 1981, the company reported revenues in the last fiscal year of about $1,090 million. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site:

(Mentor Graphics, FloTHERM and Capital are registered trademarks and Sourcery is a trademark of Mentor Graphics Corporation. All other company and/or product names are the trademarks and/or registered trademarks of their respective owners.)

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 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 in the United States or international economies; (ii) the company's ability to successfully offer products and services that compete in the highly competitive EDA industry, including the risk of obsolescence for our hardware products; (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) effects of the volatility of foreign currency fluctuations on the company's business and operating results; (v) changes in accounting or reporting rules or interpretations; (vi) 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; (vii) effects of unanticipated shifts in product mix on gross margin; and (viii) 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. 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.




(In thousands, except earnings per share data)
Three Months Ended April 30,
2013 2012
System and software $ 123,284 $ 149,356
Service and support   103,231     98,562  
Total revenues   226,515     247,918  
Cost of revenues: (1)
System and software 8,899 14,790
Service and support 30,075 28,414
Amortization of purchased technology   1,207     2,179  
Total cost of revenues   40,181     45,383  
Gross profit   186,334     202,535  
Operating expenses:
Research and development (2) 79,717 71,046
Marketing and selling (3) 79,107 79,752
General and administration (4) 18,277 16,649
Equity in earnings of Frontline (5) (397 ) (587 )
Amortization of intangible assets (6) 1,654 1,706
Special charges (7)   2,083     1,147  
Total operating expenses   180,441     169,713  
Operating income 5,893 32,822
Other income (expense), net (8) (959 ) 83
Interest expense (9)   (4,785 )   (4,594 )
Income before income tax 149 28,311
Income tax expense (10)   568     781  
Net income (loss) (419 ) 27,530
Less: Loss attributable to noncontrolling interest (11)   (624 )   (652 )

Net income attributable to Mentor Graphics shareholders

$ 205 $ 28,182

Net income per share attributable to Mentor Graphics shareholders:

Basic (a) $ 0.01   $ 0.26  
Diluted (a) $ 0.01   $ 0.25  
Weighted average number of shares outstanding:
Basic   112,711     109,907  
Diluted   115,751     113,243  
(a) We have increased the numerator of our basic and diluted earnings per share calculation by $468 for the three months ended April 30, 2013 for the adjustment to decrease the noncontrolling interest with redemption feature to its calculated redemption value at April 30, 2013, recorded directly to retained earnings.
Refer to following page for a description of footnotes.




(In thousands)

Listed below are the items included in net income that management excludes in computing the non-GAAP financial measures referred to in the text of this press release. Items are further described under "Discussion of Non-GAAP Financial Measures."

  Three Months Ended April 30,
2013   2012
(1) Cost of revenues:
Equity plan-related compensation $ 460 $ 319
Amortization of purchased technology   1,207     2,179  
$ 1,667   $ 2,498  
(2) Research and development:
Equity plan-related compensation $ 2,610   $ 2,117  
(3) Marketing and selling:
Equity plan-related compensation $ 1,882   $ 1,549  
(4) General and administration:
Equity plan-related compensation $ 1,614   $ 1,162  
(5) Equity in earnings of Frontline:

Amortization of purchased technology and other identified intangible assets

$ 737   $ 1,242  
(6) Amortization of intangible assets:
Amortization of other identified intangible assets $ 1,654   $ 1,706  
(7) Special charges:
Rebalance, restructuring, and other costs $ 2,083   $ 1,147  
(8) Other income (expense), net:
Net income of unconsolidated entities $ (51 ) $ (13 )
(9) Interest expense:
Amortization of original issuance debt discount $ 1,391   $ 1,295  
(10) Income tax expense:
Non-GAAP income tax effects $ (1,767 ) $ (6,191 )
(11) Loss attributable to noncontrolling interest:
Amortization of intangible assets, equity-plan related compensation, and income tax effects $ (393 ) $ (269 )




(In thousands, except earnings per share data)
Three Months Ended April 30,
2013 2012
GAAP net income attributable to Mentor Graphics shareholders $ 205 $ 28,182
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues 460 319
Research and development 2,610 2,117
Marketing and selling 1,882 1,549
General and administration 1,614 1,162
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2) 1,207 2,179
Frontline purchased technology and intangible assets (3) 737 1,242
Amortization of intangible assets (4) 1,654 1,706
Special charges (5) 2,083 1,147
Other income (expense), net (6) (51 ) (13 )
Interest expense (7) 1,391 1,295
Non-GAAP income tax effects (8) (1,767 ) (6,191 )
Noncontrolling interest (9)   (393 )   (269 )
Total of non-GAAP adjustments   11,427     6,243  
Non-GAAP net income attributable to Mentor Graphics shareholders $ 11,632   $ 34,425  
GAAP and Non-GAAP weighted average shares (diluted)   115,751     113,243  
Net income per share attributable to Mentor Graphics shareholders:
GAAP (diluted) $ 0.01 $
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