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Mentor Graphics Announces Second Quarter Results

WILSONVILLE, Ore. July 29, 2005 - Mentor Graphics Corporation (Nasdaq: MENT) today announced second quarter revenue of $154.8 million. Loss per share, on both a GAAP and pro forma basis, was $.09, on the lower end of the company's prior guidance, based on weaker bookings.

"Despite weaker bookings, there were many signs of an improved business climate in the quarter. New customer logo additions were up nearly 20% over the second quarter of 2004, up both worldwide, and in every region. Bookings from new customers doubled from the year ago quarter, as well," said Walden C. Rhines, CEO and chairman of Mentor Graphics. "During the quarter, we saw good bookings growth in most of our new and emerging products. Automotive electrical system design products more than doubled over the second quarter of 2004, and design data management, Catapult™ C Synthesis, embedded and FPGA tools all did well during the quarter."

During the quarter, the company launched the Questa™ verification platform. The Questa verification platform extends Mentor's functional verification leadership by offering a single product with built-in support for testbench automation, coverage-driven verification, assertion-based verification, and transaction-level modeling. These new methodologies enhance traditional simulation technology to achieve faster and more complete verification of systems. Additionally, the company released a new version of its Catapult C Synthesis product that improved its ability to use high-level, faster verification methods.

"During the quarter, currency moved in a positive direction for Mentor. A strengthening Yen and a weakening Euro are both helpful for Mentor," said Gregory K. Hinckley, president of Mentor Graphics. "While the first half was weak, we are still confident that key products like the Calibre® family will deliver in the second half."

Revenue by region was 45% Americas, 30% Europe, 15% 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 about $700 million and employs approximately 3,900 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/.

Mentor Graphics, Calibre and Catapult C are registered trademarks and Questa and Scalable Verification are trademarks 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. For the three and six months ended June 30, 2005, a $4.75 million charge to R&D related to the purchase of technology that had not reached technological feasibility was also excluded from pro forma earnings. Included in pro forma earnings for the six months ended June 30, 2005 was a $1 million gain related to the sale of a building in the first quarter 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) 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) changes in accounting or reporting rules or interpretations, limitations on repatriation of earnings, licensing and intellectual property rights protection; (v) changes in tax laws, regulations or enforcement practices where the Company does business; (vi) effects of the increasing volatility of foreign currency fluctuations on the Company's business and operating results; (vii) effects of unanticipated shifts in product mix on gross margin and unanticipated shifts in geographic mix on the overall tax rate, (viii) effects of customer seasonal purchasing patterns and the timing of significant orders may negatively impact the Company's quarterly results of operations, (ix) 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
June 30,
Six Months Ended
June 30,

2005

2004

2005

2004

Revenues:

System and software

$81,375

$98,091

$172,935

$192,612

Service and support

73,461

71,551

146,235

141,435

Total revenues

154,836

169,642

319,170

334,047

Cost of revenues:

System and software

4,828

4,623

9,563

9,185

Service and support

20,339

19,079

40,247

39,174

Amortization of purchased technology

2,700

2,504

5,413

4,970

Total cost of revenues

27,867

26,206

55,223

53,329

Gross margin

126,969

143,436

263,947

280,718

Operating expenses:

Research and development

56,193

48,322

107,503

96,705

Marketing and selling

65,324

64,045

132,899

127,751

General and administration

18,752

18,748

37,460

37,310

Amortization of intangible assets

972

790

2,094

1,572

Special charges

1,264

3,863

2,577

3,863

Merger and acquisition related charges

750

360

750

360

Total operating expenses

143,255

136,128

283,283

267,561

Operating income (loss)

(16,286)

7,308

(19,336)

13,157

Other income, net

2,842

1,990

6,457

3,220

Interest expense

(5,638)

(4,571)

(10,669)

(9,026)

Income (loss) before income taxes

(19,082)

4,727

(23,548)


7,351

Income tax expense (benefit)

(12,239)

37,523

(12,319)

37,969

Net loss

$(6,843)

$(32,796)

$(11,229)

$(30,618)

Net loss per share:

Basic




$(.09)




$(.47)




$(.14)




$(.44)

Diluted

$(.09)

$(.47)

$(.14)

$(.44)

Weighted average number of shares outstanding:

Basic





78,165





70,090





78,086





69,946

Diluted

78,165

70,090

78,086

69,946



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

Three Months Ended June 30, 2005

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$81,375

$-

$ 81,375

Service and support

73,461

-

73,461

Total revenues

154,836

-

154,836

Cost of revenues:

System and software

4,828

-

4,828

Service and support

20,339

-

20,339

Amortization of purchased technology

2,700

(2,700)

(1)

-

Total cost of revenues

27,867

(2,700)

25,167

Gross margin

126,969

2,700

129,669

Gross margin percentage

82.0%

83.7%

Operating expenses:

Research and development

56,193

(4,750)

(2)

51,443

Marketing and selling

65,324

-

65,324

General and administration

18,752

-

18,752

Amortization of intangible assets

972

(972)

(1)

-

Special charges

1,264

(1,264)

(3)

-

Merger and acquisition related charges

750

(750)

(3)

-

Total operating expenses

143,255

(7,736)

135,519

Operating income (loss)

(16,286)

10,436

(5,850)

Other income, net

2,842

-

2,842

Interest expense

(5,638)

-

(5,638)

Income (loss) before income taxes

(19,082)

10,436

(8,646)

Income tax expense (benefit)

(12,239)

10,769

(4)

(1,470)

Net loss

$(6,843)

$(333)

$(7,176)

Net loss per share:

Basic



$(.09)



$(.09)

Diluted

$(.09)

$(.09)

Weighted average number of shares outstanding:

Basic




78,165




78,165

Diluted

78,165

78,165

(1) Non-cash amortization of intangible assets.

(2) Unusual charge related to the purchase of technology that had not reached technological feasibility.

(3) Merger, acquisition, restructuring and other charges.

(4) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17% .

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

Three Months Ended June 30, 2004

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$98,091

$-

$98,091

Service and support

71,551

-

71,551

Total revenues

169,642

-

169,642

Cost of revenues:

System and software

4,623

-

4,623

Service and support

19,079

-

19,079

Amortization of purchased technology

2,504

(2,504)

(1)

-

Total cost of revenues

26,206

(2,504)

23,702

Gross margin

143,436

2,504

145,940

Gross margin percentage

84.6%

86.0%

Operating expenses:

Research and development

48,322

-

48,322

Marketing and selling

64,045

-

64,045

General and administration

18,748


-

18,748

Amortization of intangible assets

790

(790)

(1)

-

Special charges

3,863

(3,863)

(2)

-

Merger and acquisition related charges

360

(360)

(2)

-

Total operating expenses

136,128

(5,013)

131,115

Operating income

7,308

7,517

14,825

Other income, net

1,990

-

1,990

Interest expense

(4,571)

-

(4,571)

Income before income taxes

4,727

7,517

12,244

Income tax expense (benefit)

37,523

(35,442)

(3)

2,081

Net income (loss)

$(32,796)

$42,959

$10,163

Net income (loss) per share:

Basic




$(.47)




$.14

Diluted

$(.47)

$.14

Weighted average number of shares outstanding:

Basic




70,090




70,090

Diluted

70,090

73,236

(1) Non-cash amortization of intangible assets.

(2) Merger, acquisition, restructuring and other charges.

(3) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17%.

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

Six Months Ended June 30, 2005

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$172,935

$-

$172,935

Service and support

146,235

-

146,235

Total revenues

319,170

-

319,170

Cost of revenues:

System and software

9,563

-

9,563

Service and support

40,247

-

40,247

Amortization of purchased technology

5,413

(5,413)

(1)

-

Total cost of revenues

55,223

(5,413)

49,810

Gross margin

263,947

5,413

269,360

Gross margin percentage

82.7%

84.4%

Operating expenses:

Research and development

107,503

(4,750)

(2)

102,753

Marketing and selling

132,899

-

132,899

General and administration

37,460

-

37,460

Amortization of intangible assets

2,094

(2,094)

(1)

-

Special charges

2,577

(2,577)

(3)

-

Merger and acquisition related charges

750

(750)

(3)

-

Total operating expenses

283,283

(10,171)

273,112

Operating income (loss)

(19,336)

15,584

(3,752)

Other income, net

6,457

-

6,457

Interest expense

(10,669)

-

(10,669)

Income (loss) before income taxes

(23,548)

15,584

(7,964)

Income tax expense (benefit)

(12,319)

10,965

(4)

(1,354)

Net income (loss)

$(11,229)

$4,619

$(6,610)

Net income (loss) per share:


Basic




$(.14)




$(.08)

Diluted

$(.14)

$(.08)

Weighted average number of shares outstanding:

Basic




78,086




78,086

Diluted

78,086

78,086

(1) Non-cash amortization of intangible assets.

(2) Unusual charge related to the purchase of technology that had not reached technological feasibility.

(3) Merger, acquisition, restructuring and other charges.

(4) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17%.

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

Six Months Ended June 30, 2004

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$192,612

$-

$192,612

Service and support

141,435

-

141,435

Total revenues

334,047

-

334,047

Cost of revenues:

System and software

9,185

-

9,185

Service and support

39,174

-

39,174

Amortization of purchased technology

4,970

(4,970)

(1)

-

Total cost of revenues

53,329

(4,970)

48,359

Gross margin

280,718

4,970

285,688

Gross margin percentage

84.0%

85.5%

Operating expenses:

Research and development

96,705

-

96,705

Marketing and selling

127,751

-

127,751

General and administration

37,310

-

37,310

Amortization of intangible assets

1,572

(1,572)

(1)

-

Special charges

3,863

(3,863)

(2)

-

Merger and acquisition related charges

360

(360)

(2)

-

Total operating expenses

267,561

(5,795)

261,766

Operating income

13,157

10,765

23,922

Other income, net

3,220

-

3,220

Interest expense

(9,026)

-

(9,026)

Income before income taxes

7,351

10,765

18,116

Income tax expense (benefit)

37,969

(34,889)

(3)

3,080

Net income (loss)

$(30,618)

$45,654

$15,036

Net income (loss) per share:

Basic




$(.44)




$.21

Diluted

$(.44)

$.21

Weighted average number of shares outstanding:

Basic





69,946





69,946

Diluted

69,946

73,297

(1) Non-cash amortization of intangible assets.

(2) Merger, acquisition, restructuring and other charges.

(3) Pro forma income tax expense calculation differs from the GAAP calculation as it assumed a normalized effective rate of 17%.

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

As of June 30, 2005 As of December 31, 2004

Assets

Current assets:

Cash, cash equivalents and short-term investments

$87,219

$94,287

Trade accounts receivable, net

98,308

116,858

Term receivables, short-term

126,501

125,832

Prepaid expenses and other

30,331

28,457

Deferred income taxes

9,480

10,298

Total current assets

351,839

375,732


Property, plant and equipment, net


81,262


91,224

Term receivables, long-term

117,429

139,146

Intangibles, net

386,645

374,144

Other assets

39,330

41,661

Total assets

$976,505

$1,021,907


Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings

$7,460

$9,632

Accounts payable

14,669

18,037

Income taxes payable

18,956

35,299

Accrued payroll and related liabilities

58,878

81,709

Accrued liabilities

33,052

37,098

Deferred revenue

119,667

103,336

Total current liabilities

252,682

285,111


Long-term notes payable


283,012


283,983

Other long-term liabilities

17,150

19,098

Total liabilities

552,844

588,192

Stockholders' equity:

Common stock

373,153

363,455

Deferred compensation

-

(508)

Retained earnings

28,488

39,717

Accumulated other comprehensive income

22,020

31,051

Total stockholders' equity

423,661

433,715

Total liabilities and stockholders' equity

$976,505

$1,021,907

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

Three Months Ended
June 30,
Six Months Ended
June 30,

2005

2004

2005

2004

Operating Cash Flows:

Net loss

$(6,843)

$(32,796)

$(11,229)

$(30,618)

Depreciation and amortization

10,765

10,486

22,085

20,813

Other adjustments to reconcile operating cash

263

34,482

(1,467)

32,925

Changes in working capital

2,634

(4,891)

5,031

(7,326)

Net cash provided by operating activities

6,819

7,281

14,420

15,794

Net cash used in investing activities

(11,653)

(9,327)

(20,015)

(23,229)

Net cash provided by (used in) financing activities

(827)

3,730

6,174

14,084

Effect of exchange rate changes on cash and cash equivalents

(1,898)

26

(2,691)

(53)

Net change in cash and cash equivalents

(7,559)

1,710

(2,112)

6,596

Cash and cash equivalents at beginning of period

73,363

73,219

67,916

68,333

Cash and cash equivalents at end of period, excluding short-term investments

$65,804

$74,929

$65,804

$74,929


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

Three Months Ended
June 30,
Six Months Ended
June 30,

2005

2004

2005

2004

Geographic Revenue:

Americas

$71,112

$82,892

$142,199

$147,922

45.9%

48.9%

44.6%

44.3%

Europe

$42,245

$ 43,299

$86,033

$87,120

27.3%

25.5%

26.9%

26.1%

Japan

$23,663

$28,358

$56,085

$67,153

15.3%

16.7%

17.6%

20.1%

Pac Rim

$17,816

$15,093

$34,853

$31,852


Other Data:

11.5%

8.9%

10.9%

9.5%

Capital expenditures

$5,313

$4,126

$12,577

$8,946

Days sales outstanding

131

119

-

-

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