Mentor Graphics Reports Fiscal Second Quarter Results

 

MENTOR GRAPHICS CORPORATION

UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS

(In thousands, except earnings per share data)
         
 
Three Months Ended July 31, Six Months Ended July 31,
  2014     2013     2014     2013  
GAAP net income attributable to Mentor Graphics shareholders $ 14,172 $ 23,982 $ 11,621 $ 24,187
Non-GAAP adjustments:
Equity plan-related compensation: (1)
Cost of revenues 544 458 1,079 918
Research and development 3,311 2,543 6,552 5,153
Marketing and selling 2,143 1,771 4,321 3,653
General and administration 3,162 2,505 5,337 4,119
Acquisition - related items:
Amortization of purchased assets
Cost of revenues (2) 1,841 712 3,202 1,919
Frontline purchased technology and intangible assets (3) - 231 116 968
Amortization of intangible assets (4) 2,026 1,556 3,776 3,210
Special charges (5) 5,108 3,859 11,034 7,882
Other income (expense), net (6) 55 (42 ) 68 (93 )
Interest expense (7) 1,521 1,416 3,015 2,807
Non-GAAP income tax effects (8) (7,158 ) (8,529 ) (9,983 ) (10,626 )
Noncontrolling interest (9)   (204 )   (169 )   (404 )   (562 )
Total of non-GAAP adjustments   12,349     6,311     28,113     19,348  
Non-GAAP net income attributable to Mentor Graphics shareholders $ 26,521   $ 30,293   $ 39,734   $ 43,535  
 
GAAP and non-GAAP weighted average shares (diluted)   116,551     116,295     116,960     116,014  
 
Net income per share attributable to Mentor Graphics shareholders:
GAAP (diluted) $ 0.13 $ 0.19 $ 0.11 $ 0.19
Noncontrolling interest adjustment (10) (0.01 ) 0.02 (0.01 ) 0.02
Non-GAAP adjustments detailed above   0.11     0.05     0.24     0.17  
Non-GAAP (diluted) $ 0.23   $ 0.26   $ 0.34   $ 0.38  
 
                       
(1) Equity plan-related compensation expense is the fair value of all share-based payments to employees for stock options and restricted stock units, and purchases made as a result of the employee stock purchase plans.
(2) Amount represents amortization of purchased technology resulting from acquisitions. Purchased technology is amortized over two to five years.
(3) 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) joint venture investment. Mentor Graphics has a 50% interest in Frontline. The purchased technology was amortized over three years from the March 2010 acquisition date, other identified intangible assets were amortized over three to four years, and are reflected in the income statement in the equity in earnings of Frontline. This expense is the same type as being adjusted for in note (2) above and (4) below.
(4) Other identified intangible assets are amortized to operating expense over two to five years. Other identified intangible assets include trade names, customer relationships, and backlog which are the result of acquisition transactions.
(5) Three months ended July 31, 2014: Special charges consist of (i) $4,231 for EVE litigation costs, (ii) $575 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, and (iii) $302 in other adjustments.
Three months ended July 31, 2013: Special charges consist of (i) $3,231 of EVE litigation costs, (ii) $631 of costs incurred for employee rebalances which

severance benefits, notice pay, and outplacement services, and (iii) $(3) in other adjustments.

Six months ended July 31, 2014: Special charges consist of (i) $8,189 for EVE litigation costs, (ii) $1,700 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, and (iii) $1,145 in other adjustments.
Six months ended July 31, 2013: Special charges consist of (i) $5,171 for EVE litigation costs, (ii) $2,710 of costs incurred for employee rebalances which includes severance benefits, notice pay, and outplacement services, and (iii) $1 in other adjustments.
(6) Amount represents income (loss) on investment accounted for under the equity method of accounting.
(7) Amount represents the amortization of original issuance debt discount.
(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.
(9) Adjustment for the impact of amortization of intangible assets, equity plan-related compensation, and income tax expense on noncontrolling interest.
(10) Non-GAAP EPS excludes from the numerator of our earnings per share calculation the adjustment of the noncontrolling interest to the calculated redemption value, recorded directly to retained earnings.
 

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