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Mentor Graphics Announces First Quarter Results

WILSONVILLE, Ore. April 27, 2005 - Mentor Graphics Corporation (Nasdaq: MENT) today announced first quarter revenues of $164.3 million, approximately flat with the year ago quarter. GAAP earnings per share were a loss of $.06, while pro forma earnings per share were $.01, consistent with the company's pre-announcement of April 4, 2005.

"Weakness in the business was driven primarily by softness in demand from semiconductor companies, while demand from system businesses was better. As a result, Mentor systems products like FPGA synthesis, embedded software and selected PCB products performed well," said Walden C. Rhines, CEO and chairman of Mentor Graphics. "On the other hand, Calibre product line bookings were particularly weak in the quarter. We expect strength in this product line in the second half of the year based upon the number of current customer engagements."

The Scalable Verification product line was also down, driven largely by a tough compare with the year ago quarter when the company's largest ever ModelSim order occurred.

"As the drive to time-based licensing continues, our business is increasingly driven into the fourth quarter," said Gregory K. Hinckley, president of Mentor Graphics. "While we are not satisfied with our first quarter performance, our second half continues to look solid."

Revenue by region was 45% North America, 25% Europe, 20% Japan and 10% Pacific Rim. By product line, revenue was 30% scalable verification, 25% integrated system design, 25% design to silicon, and 20% new and emerging products.

About Mentor Graphics

Mentor Graphics Corporation (Nasdaq: MENT) is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world's most successful electronics and semiconductor companies. Established in 1981, the company reported revenues over the last 12 months of over $700 million and employs approximately 3,850 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777; Silicon Valley headquarters are located at 1001 Ridder Park Drive, San Jose, California 95131-2314. World Wide Web site: http://www.mentor.com/.

Mentor Graphics and Calibre are registered trademarks and Scalable Verification is a trademark of Mentor Graphics Corporation.

In the calculation of pro forma earnings, gross margin and operating expenses, Mentor Graphics excludes amortization of acquired intangibles and write-offs of in-process R&D from acquisitions. Included in pro forma earnings was a $1million gain related to the sale of a building classified in other income, net. Also, excluded are non-operating and non-recurring items classified as special charges such as restructure expenses and asset impairments, as well as income tax expense in excess of a normalized 17% effective tax rate. These excluded items are generally infrequent, less predictable and are often non-cash in nature. Mentor Graphics believes that excluding these items provides investors with a representation of its core performance, and a pro forma base line for assessing the future earnings potential of Mentor Graphics.

These pro forma measures should be assessed in conjunction with GAAP earnings measures for a more complete understanding of the Company's results. Since pro forma measures exclude certain items, differences in earnings from GAAP can be significant; Mentor Graphics management evaluates its performance under both measures for a complete understanding of its results. Investors are encouraged to review both measures for their evaluations and consider the GAAP earnings measures as the most complete measure of Mentor Graphics' overall performance.

Statements in this press release regarding the Company's outlook for future periods constitute "forward-looking" statements based on current expectations within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: (i) the Company's ability to successfully offer products and services that compete in the highly competitive EDA industry including the risk that the Company's technology, products or inventory become obsolete; (ii) reductions in spending on EDA tools by the Company's customers due to cyclical downturns or initiatives to increase profitability, (iii) changes in accounting or reporting rules or interpretations, limitations on repatriation of earnings, licensing and intellectual property rights protection; (iv) changes in tax laws, regulations or enforcement practices where the Company does business; (v) effects of the increasing volatility of foreign currency fluctuations on the Company's business and operating results; (vi) effects of unanticipated shifts in product mix on gross margin and unanticipated shifts in geographic mix on the overall tax rate, (vii) the Company's ability to successfully integrate and manage its acquisitions, all as may be discussed in more detail under the heading "Factors That May Affect Future Results and Financial Condition" in the Company's most recent Form 10-K or Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. In addition, statements regarding outlook do not reflect potential impacts of mergers or acquisitions that have not been announced or closed as of the time the statements are made. Mentor Graphics disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements to reflect future events or developments.

MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data-Unaudited)

Three Months Ended March 31,

2005

2004

Revenues:

System and software

$ 91,560

$ 94,521

Service and support

72,774

69,884

Total revenues

164,334

164,405

Cost of revenues:

System and software

4,735

4,562

Service and support

19,908

20,095

Amortization of purchased technology

2,713

2,466

Total cost of revenues

27,356

27,123

Gross margin

136,978

137,282

Operating expenses:

Research and development

51,310

48,383

Marketing and selling

67,575

63,706

General and administration

18,708

18,562

Amortization of intangible assets

1,122

782

Special charges

1,313

-

Total operating expenses

140,028

131,433

Operating income (loss)

(3,050)

5,849

Other income, net

3,615

1,230

Interest expense

(5,031)

(4,455)

Income (loss) before income taxes

(4,466)

2,624

Income tax expense (benefit)

(80)

446

Net income (loss)

$ (4,386)

$ 2,178

Net income (loss) per share:

Basic

$ (0.06)

$ 0.03

Diluted

$ (0.06)

$ 0.03

Weighted average number of

shares outstanding:

Basic

78,007

69,803

Diluted

78,007

72,763

MENTOR GRAPHICS CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except percentages and earnings per share data-Unaudited)

Three Months Ended March 31, 2005

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$ 91,560

$ -

$ 91,560

Service and support

72,774

-

72,774

Total revenues

164,334

-

164,334

Cost of revenues:

System and software

4,735

-

4,735

Service and support

19,908

-

19,908

Amortization of purchased technology

2,713

(2,713)

(1)

-

Total cost of revenues

27,356

(2,713)

24,643

Gross margin

136,978

2,713

139,691

Gross margin percentage

83.4%

85.0%

Operating expenses:

Research and development

51,310

-

51,310

Marketing and selling

67,575

-

67,575

General and administration

18,708

-

18,708

Amortization of intangible assets

1,122

(1,122)

(1)

-

Special charges

1,313

(1,313)

-

Total operating expenses

140,028

(2,435)

137,593

Operating income (loss)

(3,050)

5,148

2,098

Other income, net

3,615

-

3,615

Interest expense

(5,031)

-

(5,031)

Income (loss) before income taxes

(4,466)

5,148

682

Income tax expense (benefit)

(80)

196

(2)

116

Net income (loss)

$ (4,386)

$ 4,952

$ 566

Net income (loss) per share:

Basic

$ (0.06)

$ .01

Diluted

$ (0.06)

$ .01

Weighted average number of

shares outstanding:

Basic

78,007

78,007

Diluted

78,007

80,340



(1) Non-cash amortization of intangible assets.
(2) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% for 2005.

MENTOR GRAPHICS CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except percentages and earnings per share data-Unaudited)

Three Months Ended March 31, 2004

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$ 94,521

$ -

$ 94,521

Service and support

69,884

-

69,884

Total revenues

164,405

-

164,405

Cost of revenues:

System and software

4,562

-

4,562

Service and support

20,095

-

20,095

Amortization of purchased technology

2,466

(2,466)

(1)

-

Total cost of revenues

27,123

(2,466)

24,657

Gross margin

137,282

2,466

139,748

Gross margin percentage

83.5%

85.0%

Operating expenses:

 

Research and development

48,383

-

48,383

Marketing and selling

63,706

-

63,706

General and administration

18,562

-

18,562

Amortization of intangible assets

782

(782)

(1)

-

Total operating expenses

131,433

(782)

130,651

Operating income

5,849

3,248

9,097

Other income, net

1,230

-

1,230

Interest expense

(4,455)

-

(4,455)

Income before income taxes

2,624

3,248

5,872

Income tax expense

446

552

(2)

998

Net income

$ 2,178

$ 2,696

$ 4,874

Net income per share:

Basic

$ .03

$ .07

Diluted

$ .03

$ .07

Weighted average number of

shares outstanding:

Basic

69,803

69,803

Diluted

72,763

72,763


(1) Non-cash amortization of intangible assets.
(2) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% for 2004.

MENTOR GRAPHICS CORPORATION CONSOLIDATED BALANCE SHEETS
(In thousands - Unaudited)

As of
March 31, 2005

As of
December 31, 2004

Assets

Current assets:

Cash and short-term investments

$ 108,676

$ 94,287

Trade accounts receivable, net

94,983

116,858

Term receivables, short-term

133,828

125,832

Prepaid expenses and other

33,003

28,457

Deferred income taxes

10,125

10,298

Total current assets

380,615

375,732

Property, plant and equipment, net

82,723

91,224

Term receivables, long-term

126,393

139,146

Intangibles, net

370,208

374,144

Other assets

40,145

41,661

Total assets

$ 1,000,084

$ 1,021,907

Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings

$ 7,889

$ 9,632

Accounts payable

17,583

18,037

Income taxes payable

31,676

35,299

Accrued payroll and related liabilities

51,847

81,709

Accrued liabilities

36,863

37,098

Deferred revenue

118,482

103,336

Total current liabilities

264,340

285,111

Long-term notes payable

283,475

283,983

Other long-term liabilities

18,115

19,098

Total liabilities

565,930

588,192

Stockholders' equity:

Common stock

372,445

363,455

Deferred compensation

(203)

(508)

Retained earnings

35,331

39,717

Accumulated other comprehensive income

26,581

31,051

Total stockholders' equity

434,154

433,715

Total liabilities and stockholders' equity

$ 1,000,084

$ 1,021,907

MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)

Three Months Ended March 31,

2005

2004

Operating Cash Flows:

Net income (loss)

$ (4,386)

$ 2,178

Depreciation and amortization

11,320

10,327

Other adjustments to reconcile operating cash

(1,730)

(1,557)

Changes in working capital

2,397

(2,435)

Net cash provided by operating activities

7,601

8,513

Net cash used in investing activities

(8,362)

(13,902)

Net cash provided by financing activities

7,001

10,354

Effect of exchange rate changes on cash and cash equivalents

(793)

(79)

Net change in cash and cash equivalents

5,447

4,886

Cash and cash equivalents at beginning of period

67,916

68,333

Cash and cash equivalents at end of period

$ 73,363

$ 73,219

MENTOR GRAPHICS CORPORATION SUPPLEMENTAL FINANCIAL AND OTHER INFORMATION
(In thousands, except for percentages and days sales outstanding -Unaudited)

Three Months Ended
March 31,

2005

2004

Geographic Revenue:

Americas

$ 71,087

$ 65,030

43.3%

39.5%

Europe

$ 43,788

$ 43,821

26.6%

26.7%

Japan

$ 32,422

$ 38,795

19.7%

23.6%

Pac Rim

$ 17,037

$ 16,759

Other Data:

10.4%

10.2%

Capital expenditures

$7,264

$4,820

Days sales outstanding

125

115

For more information, please contact:

Ryerson Schwark
Public and Investor Relations
503.685.1462
ry_schwark@mentor.com

Dennis Weldon
Treasurer
503.685.1462
dennis_weldon@mentor.com