CIMdata PLM Industry Summary Online Archive
27 January 2005
Financial News
Mentor Graphics Announces Fourth Quarter Results
Mentor Graphics Corporation 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® and Scalable VerificationT 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."
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.
Full financials are available at http://www.mentor.com/company/investor_relations/news/q4_2004_earnings.cfm .
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