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Mentor Graphics Announces Fourth Quarter Results

WILSONVILLE, Ore. Jan. 27, 2005 - Mentor Graphics Corporation (Nasdaq: MENT) today announced record revenues of $214.9 million for the fourth quarter of 2004 driven by record bookings for the quarter. Diluted earnings per share for the quarter on a pro forma basis were $.39, and on a GAAP basis were $.20.

"Mentor's growth in a sluggish EDA environment is being driven by the successful proliferation of our younger product portfolio including the Calibre{reg} and Scalable Verification™ tools, and newer printed circuit board design tools. Seven of the top ten deals in the quarter were renewals with an aggregate bookings increase of 40% over the prior deals, on comparable terms, including contract length. Customers need, and are willing to pay for, new products that solve their problems," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "Furthermore, we saw significant momentum from our newer, emerging products as we received significant orders in cabling, embedded software, high speed board design, and coverage-driven verification."

Book-to-bill reached its highest level since 1996 and backlog reached a level not seen since year 2000. Bookings rose over 35% for the quarter, and 20% for the year. All regions performed well with Japan and Pacific Rim bookings up over 100%, Europe up 45%, and North America up 15% over the year ago quarter. All three product platforms grew during the quarter, with Scalable Verification almost doubling and Integrated System Design up 45%. Calibre Design to Silicon was up 5% over an extremely strong fourth quarter of 2003.

Revenue by region for the quarter was 40% North America, 30% Europe, 15% Japan, and 15% Pacific Rim. By product platform, revenue was 35% Scalable Verification, 30% Calibre Design to Silicon, 20% Integrated System Design and 15% New and Emerging products.

Special charges of $4.9 million were primarily acquisition and restructuring related.

"While we see no sign of an upturn for the overall EDA industry, we note that Mentor and other companies like us with young product lines continue to perform well in this environment," said Gregory K. Hinckley, president of Mentor Graphics. "With proliferation of our young, but well-seeded products, combined with a strong product pipeline in earlier stages of adoption, we believe we are well positioned to perform regardless of overall EDA market conditions."

Preliminary Results of Sarbanes-Oxley Section 404 Review

During the course of the audit of Mentor Graphics' 2004 financial statements, KPMG identified a material weakness in internal controls over financial reporting related to the calculation of its income tax provision. PCAOB Audit Standard No. 2 defines a material weakness to be an instance when the design or operation of a control does not allow management to prevent or detect material misstatements on a timely basis.

A benefit was recorded to equity for a stock option deduction that was not deemed to be realizable. Mentor Graphics then recorded a valuation reserve for the deferred tax asset that was created as a result of this benefit. The reserve was inappropriately established with a charge to earnings. Proper accounting was determined to be a direct charge to common stock instead of income tax expense. This error was identified during KPMG's annual audit of financial reporting specifically related to income tax calculations. The error overstated income tax expense and understated net income by $5.3 million but had no net effect on equity accounts. The material weakness was confined to a single erroneous accounting entry in the fourth quarter of 2004, was corrected prior to completion of the audit and as a result, did not have any effect on reported year-end or previously reported quarterly financial results.

Mentor Graphics will finalize its evaluation of internal controls over financial reporting prior to issuance of its Form 10-K for the year ended December 31, 2004. The remaining steps in evaluating our internal controls over financial reporting primarily relate to preparation of financial reports to be filed with the SEC on Form 10-K.

"Exclusive of this instance no other material weaknesses have been identified by management or our auditors," said Gregory K. Hinckley, president of Mentor Graphics. "Management takes its role in designing, maintaining and evaluating internal controls over financial reporting seriously and is considering several options to remediate this one material weakness."

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. 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) the Company's ability to successfully integrate and manage its acquisitions, (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, 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 December 31 , Twelve Months Ended December 31,

2004

2003

2004

2003

Revenues:

System and software

$ 140,127

$ 128,680

$ 422,672

$ 394,449

Service and support

74,822

73,229

288,284

281,219

Total revenues

214,949

201,909

710,956

675,668

Cost of revenues:

System and software

4,839

7,180

16,639

22,721

Service and support

20,800

22,749

80,294

84,554

Amortization of purchased technology

2,982

2,625

10,624

9,422

Total cost of revenues

28,621

32,554

107,557

116,697

Gross margin

186,328

169,355

603,399

558,971

Operating expenses:

Research and development

54,594

51,434

202,289

184,797

Marketing and selling

76,126

69,492

267,181

245,170

General and administration

18,825

21,830

74,255

75,984

Amortization of intangible assets

1,098

908

3,586

3,883

Emulation litigation settlement

-

-

-

20,264

Special charges

4,893

7,809

16,913

15,980

Total operating expenses

155,536

151,473

564,224

546,078

Operating income

30,792

17,882

39,175

12,893

Other income, net

2,689

952

8,388

5,460

Interest expense

(4,838)

(4,725)

(18,619)

(17,224)

Income before income taxes

28,643

14,109

28,944

1,129

Income tax expense (benefit)

12,829

1,059

49,494

(6,804)

Net income (loss)

$ 15,814

$ 13,050

$ (20,550)

$ 7,933

Net income (loss) per share:

Basic

$ .21

$ .19

$ (.28)

$ .12

Diluted

$ .20

$ .18

$ (.28)

$ .11

Weighted average number of

shares outstanding:

Basic

76,354

68,056

72,381

67,680

Diluted

78,426

71,066

72,381

70,464

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

Three Months Ended December 31, 2004

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$ 140,127

$ -

$ 140,127

Service and support

74,822

-

74,822

Total revenues

214,949

-

214,949

Cost of revenues:

System and software

4,839

-

4,839

Service and support

20,800

-

20,800

Amortization of purchased technology

2,982

(2,982)

(1)

-

Total cost of revenues

28,621

(2,982)

25,639

Gross margin

186,328

2,982

189,310

Gross margin percentage

86.7%

88.1%

Operating expenses:

Research and development

54,594

-

54,594

Marketing and selling

76,126

-

76,126

General and administration

18,825

-

18,825

Amortization of intangible assets

1,098

(1,098)

(1)

-

Special charges

4,893

(4,893)

(2)

-

Total operating expenses

155,536

(5,991)

149,545

Operating income

30,792

8,973

39,765

Other income, net

2,689

- -

2,689

Interest expense

(4,838)

-

(4,838)

Income before income taxes

28,643

8,973

9,591

37,616

Income tax expense (benefit)

12,829

(6,434)

(3)

6,395

Net income

$ 15,814

$ 15,407

$ 31,221

Net income per share:

Basic

$ .21

$ .41

Diluted

$ .20

$ .39

Weighted average number of

shares outstanding:

Basic

76,354

76,354

Diluted

78,426

12,099

(4)

90,525

(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% for 2004.
(4) Dilutive shares related to the company's convertible debt as required by EITF 04-8. In calculating pro forma diluted net income per share, $3,682, representing the after-tax interest and amortization on the company's convertible debt, is added back to pro forma net income.

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

Three Months Ended December 31, 2003

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$ 128,680

$ -

$ 128,680

Service and support

73,229

-

73,229

Total revenues

201,909

-

201,909

Cost of revenues:

System and software

7,180

-

7,180

Service and support

22,749

-

22,749

Amortization of purchased technology

2,625

(2,625)

(1)

-

Total cost of revenues

32,554

(2,625)

29,929

Gross margin

169,355

2,625

171,980

Gross margin percentage

83.9%

85.2%

Operating expenses:

Research and development

51,434

-

51,434

Marketing and selling

69,492

-

69,492

General and administration

21,830

-

21,830

Amortization of intangible assets

908

(908)

(1)

-

Special charges

7,809

(7,809)

(2)

-

Total operating expenses

151,473

(8,717)

142,756

Operating income

17,882

11,342

29,224

Other income, net

952

-

952

Interest expense

(4,725)

-

(4,725)

Income before income taxes

14,109

11,342

25,451

Income tax expense

1,059

3,268

(3)

4,327

Net income

$ 13,050

$ 8,074

$ 21,124

Net income per share:

Basic

$ .19

$ .31

Diluted

$ .18

$ .29

Weighted average number of

shares outstanding:

Basic

68,056

68,056

Diluted

71,066

4,700

(4)

75,766

(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% for 2003.
(4) Dilutive shares related to the company's convertible debt as required by EITF 04-8. In calculating pro forma diluted net income per share, $866, representing the after-tax interest and amortization on the company's convertible debt, is added back to pro forma net income.

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

Twelve Months Ended December 31, 2004

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$ 422,672

$ -

$ 422,672

Service and support

288,284

-

288,284

Total revenues

710,956

-

710,956

Cost of revenues:

System and software

16,639

-

16,639

Service and support

80,294

-

80,294

Amortization of purchased technology

10,624

(10,624)

(1)

-

Total cost of revenues

107,557

(10,624)

96,933

Gross margin

603,399

10,624

614,023

Gross margin percentage

84.9%

86.4%

Operating expenses:

Research and development

202,289

-

202,289

Marketing and selling

267,181

-

267,181

General and administration

74,255

-

74,255

Amortization of intangible assets

3,586

(3,586)

(1)

-

Special charges

16,913

(16,913)

(2)

-

Total operating expenses

564,224

(20,499)

543,725

Operating income

39,175

31,123

70,298

Other income, net

8,388

-

8,388

Interest expense

(18,619)

-

(18,619)

Income before income taxes

28,944

31,123

60,067

Income tax expense (benefit)

49,494

(39,283)

(3)

10,211

Net income (loss)

$ (20,550)

$ 70,406

$ 49,856

Net income (loss) per share:

Basic

$ (.28)

$ .69

Diluted

$ (.28)

$ .66

Weighted average number of

shares outstanding:

Basic

72,381

72,381

Diluted

72,381

75,397

(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% for 2004.

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

Twelve Months Ended December 31, 2003

GAAP

Adjustments

Pro Forma

Revenues:

System and software

$ 394,449

$ -

$ 394,449

Service and support

281,219

-

281,219

Total revenues

675,668

-

675,668

Cost of revenues:

System and software

22,721

-

22,721

Service and support

84,554

-

84,554

Amortization of purchased technology

9,422

(9,422)

(1)

-

Total cost of revenues

116,697

(9,422)

107,275

Gross margin

558,971

9,422

568,393

Gross margin percentage

82.7%

84.1%

Operating expenses:

Research and development

184,797

-

184,797

Marketing and selling

245,170

-

245,170

General and administration

75,984

-

75,984

Amortization of intangible assets

3,883

(3,883)

(1)

-

Emulation litigation settlement

20,264

(20,264)

-

Special charges

15,980

(15,980)

(2)

-

Total operating expenses

546,078

(40,127)

505,951

Operating income

12,893

49,549

62,442

Other income, net

5,460

-

5,460

Interest expense

(17,224)

-

(17,224)

Income before income taxes

1,129

49,549

50,678

Income tax expense (benefit)

(6,804)

15,419

(3)

8,615

Net income

$ 7,933

$ 34,130

$ 42,063

Net income per share:

Basic

$ .12

$ .62

Diluted

$ .11

$ .60

Weighted average number of

shares outstanding:

Basic

67,680

67,680

Diluted

70,464

70,464

(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% for 2003.

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

As of December 31, 2004 As of December 31, 2003

Assets

Current assets:

Cash and short-term investments

$ 94,287

$ 71,324

Trade accounts receivable, net

116,858

104,043

Term receivables, short-term

125,832

119,627

Prepaid expenses and other

28,457

27,164

Deferred income taxes

12,319

18,787

Total current assets

377,753

340,945

Property, plant and equipment, net

91,224

91,350

Term receivables, long-term

139,146

98,207

Goodwill and intangibles, net

374,144

326,281

Other assets

39,640

83,905

Total assets

$ 1,021,907

$ 940,688

Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings

$ 9,632

$ 6,910

Accounts payable

18,037

18,105

Income taxes payable

35,299

35,122

Accrued payroll and related liabilities

81,709

80,484

Accrued liabilities

37,098

37,719

Deferred revenue

103,336

74,662

Total current liabilities

285,111

253,002

Long-term notes payable

283,983

286,768

Other long-term liabilities

19,098

23,161

Total liabilities

588,192

562,931

Minority Interest

-

3,391

Stockholders' equity:

Common stock

363,455

294,180

Deferred compensation

(508)

(2,601)

Retained earnings

39,717

57,800

Accumulated other comprehensive income

31,051

24,987

Total stockholders' equity

433,715

374,366

Total liabilities and stockholders' equity

$ 1,021,907

$ 940,688

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

Three Months Ended December 31, Twelve Months Ended December 31,

2004

2003

2004

2003

Operating Cash Flows:

Net income (loss)

$ 15,814

$ 13,050

$ (20,550)

$ 7,933

Depreciation and amortization

11,442

5,752

43,720

41,850

Other adjustments to reconcile operating

cash

13,147

(4,008)

48,002

(6,591)

Changes in working capital

(37,790)

(23,031)

(30,653)

(57,823)

Net cash provided (used) by operating

activities

2,613

(8,237)

40,519

(14,631)

Net cash used in investing

activities

(9,801)

(12,386)

(60,835)

(37,575)

Net cash provided (used) by financing activities

(668)

2,643

19,347

84,641

Effect of exchange rate changes on cash

and cash equivalents

601

202

552

929

Net change in cash and cash equivalents

(7,255)

(17,778)

(417)

33,364

Cash and cash equivalents at beginning of

period

75,171

86,111

68,333

34,969

Cash and cash equivalents at end of period

$ 67,916

$ 68,333

$ 67,916

$ 68,333

Supplemental disclosure of cash flow information:

Common stock issued in connection with an

acquisition

-

-

$ 49,576

-

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

Three Months Ended December 31, Twelve Months Ended December 31,

2004

2003

2004

2003

Geographic Revenue:

Americas

$ 90,336

$ 104,280

$ 306,911

$ 331,307

42.0%

51.7%

43.2%

49.0%

Europe

$ 64,660

$ 55,277

$ 199,417

$ 188,657

30.1%

27.4%

28.1%

27.9%

Japan

$ 32,617

$ 26,146

$ 131,107

$ 100,737

15.2%

12.9%

18.4%

14.9%

Pac Rim

$ 27,336

$ 16,206

$ 73,521

$ 54,967

Other Data:

12.7%

8.0%

10.3%

8.2%

Capital expenditures

$7,590

$9,189

$24,423

$23,532

Days sales outstanding

102

100

-

-

###

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