Mentor Graphics Reports Fiscal Third Quarter Results

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS

(In thousands, except earnings per share data)
                           
 
Three Months Ended October 31, Nine Months Ended October 31,
  2010     2009     2010     2009  
GAAP net income (loss) $ 15,257 $ (27,034 ) $ (22,015 ) $ (61,256 )
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues 221 349 671 1,318
Research and development 1,798 2,374 6,007 8,879
Marketing and selling 1,299 1,856 4,802 6,784
General and administration 1,589 1,130 5,111 3,995
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2) 3,299 3,089 10,428 8,965
Amortization of intangible assets (3) 1,445 2,796 5,742 8,554

Frontline purchased technology and intangible assets (4)

1,242 - 3,105 -
Special charges (5) 1,578 5,993 8,052 15,890
Other expense, net (6) - 170 271 851
Interest expense (7) 753 698 2,571 1,697
Non-GAAP income tax effects (8)   (4,133 )   13,391     (2,188 )   18,849  
Total of non-GAAP adjustments   9,091     31,846     44,572     75,782  
Non-GAAP net income $ 24,348   $ 4,812   $ 22,557   $ 14,526  
 
GAAP weighted average shares (diluted) 112,139 97,854 106,942 95,636
Non-GAAP adjustment   -     2,042     2,239     656  
Non-GAAP weighted average shares (diluted)   112,139     99,896     109,181     96,292  
 
GAAP net income (loss) per share (diluted) $ 0.14 $ (0.28 ) $ (0.21 ) $ (0.64 )
Non-GAAP adjustments detailed above   0.08     0.33     0.42     0.79  
Non-GAAP net income per share (diluted) $ 0.22   $ 0.05   $ 0.21   $ 0.15  
                                     
(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) Other identified intangible assets are amortized to other operating expense over two to five years. Other identified intangible assets include trade names, employment agreements, customer relationships, and deferred compensation which are the result of acquisition transactions.
(4) Amount represents amortization of purchased technology and other identified intangible assets identified as part of the fair value of the Frontline P.C.B. 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) and (3) above.
(5) Three months ended October 31, 2010: Special charges consist of (i) $1,191 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $734 related to the abandonment of excess leased facility space, (iii) $(513) in acquisition costs, (iv) $83 in advisory fees, and (v) $83 in other adjustments.
Three months ended October 31, 2009: Special charges consist of (i) $3,369 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $1,231 in acquisition costs, (iii) $1,175 in advisory fees, (iv) $159 related to the abandonment of excess leased facility space, and (v) $59 related to a casualty loss.
Nine months ended October 31, 2010: Special charges consist of (i) $4,640 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $2,083 in advisory fees, (iii) $1,824 related to the abandonment of excess leased facility space, (iv) $(566) related to a casualty loss, (v) $(93) in acquisition costs , and (vi) $164 in other costs.
Nine months ended October 31, 2009: Special charges consist of (i) $8,996 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, (ii) $3,525 in advisory fees, (iii) $1,769 in acquisition costs, (iv) $983 related to the abandonment of excess leased facility space, (v) $566 related to a casualty loss, and (vi) $51 in other costs.
(6) Three months ended October 31, 2009 : Loss of $170 on investment accounted for under the equity method of accounting.
Nine months ended October 31, 2010 : Loss of $271 on investment accounted for under the equity method of accounting.
Nine months ended October 31, 2009 : Other income (expense), net consists of: (i) equity losses of $738 on investment accounted for under the equity method of accounting and (ii) an impairment of $113 for an investment accounted for under the cost method of accounting.
(7) Three months ended October 31, 2010 : $753 in amortization of original issuance debt discount and bond premiums, net.
Three months ended October 31, 2009 : $698 in amortization of original issuance debt discount.
Nine months ended October 31, 2010 : $2,226 in amortization of original issuance debt discount and bond premiums, net and $345 in premium on partial redemption of the $110.0M convertible debt.
Nine months ended October 31, 2009 : $2,051 in amortization of original issuance debt discount and $(354) in discounts and unamortized debt costs related to a partial redemption of the $110.0M 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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