Non-GAAP gross margin, operating margin, and net income (loss) are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We present non-GAAP gross margin, operating margin, and net income (loss) because we consider them to be important supplemental measures of our operating performance and profitability trends, and because we believe they give investors useful information on period-to-period performance as evaluated by management. Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. Non-GAAP net income (loss) has limitations as an analytical tool, and therefore should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we expect to continue to incur expenses similar to the non-GAAP adjustments described above and exclusion of these items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Some of the limitations in relying on non-GAAP net income (loss) are:
- Amortization of intangibles represents the loss in value as the technology in our industry evolves, is advanced, or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry, which is addressed through our research and development program.
- We regularly engage in acquisition and assimilation activities as part of our ongoing business and regularly evaluate our businesses to determine whether any operations should be eliminated or curtailed. We therefore will continue to experience special charges on a regular basis. These costs also directly impact our available funds.
- We perform impairment analyses on cost method investments when triggering events occur and adjust the carrying value of assets when we determine it to be necessary. Impairment charges could therefore be incurred in any period.
- Our stock option and stock purchase plans are important components of our incentive compensation arrangements and will be reflected as expenses in our GAAP results.
- Our income tax expense (benefit) will be ultimately based on our GAAP taxable income and actual tax rates in effect, which often differ significantly from the 17% rate assumed in our non-GAAP presentation. In addition, if we have a GAAP loss and non-GAAP net income, our non-GAAP results will not reflect any projected GAAP tax benefits. Similarly, in the event we were to have GAAP net income and a non-GAAP loss, our GAAP tax expense would be replaced by a credit in our non-GAAP presentation.
- Other companies, including other companies in our industry, calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure.
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MENTOR GRAPHICS CORPORATION |
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UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP |
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EARNINGS PER SHARE |
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| The following table reconciles management's estimates of the specific items excluded from GAAP in the calculation of estimated non-GAAP net income (loss) per share for the first quarter of fiscal 2012 and the specific items excluded from GAAP in the calculation of non-GAAP net loss per share for the first quarter of fiscal 2011. | ||||||||
| Estimated | ||||||||
| Q1 FY12 | Q1 FY11 | |||||||
| Diluted GAAP net income (loss) per share | $(0.06) - $(0.02) | $ (0.22) | ||||||
| Non-GAAP Adjustments: | ||||||||
| Amortization of purchased intangible assets (1) | 0.03 | 0.04 | ||||||
| Amortization of other identified intangible assets (2) | 0.02 | 0.03 | ||||||
| Equity plan-related compensation (3) | 0.05 | 0.06 | ||||||
| Special charges (4) | 0.03 | 0.03 | ||||||
| Other expense, net and interest expense (5) | 0.11 | 0.01 | ||||||
| Non-GAAP income tax effects (6) | (0.00) - (0.02) | 0.03 | ||||||
| Non-GAAP net income (loss) per share | $0.18 - $0.20 | $ (0.02) | ||||||
| (1) | Excludes amortization of purchased intangible assets resulting from acquisition transactions. Purchased intangible assets are amortized over two to five years. | |
| (2) | Excludes amortization of other identified intangible assets including trade names, employment agreements, customer relationships, and deferred compensation resulting from acquisition transactions. Other identified intangible assets are amortized over two to five years. This line item also excludes amortization of purchased intangible assets identified as part of the fair value of the Frontline P.C.B. Solutions Limited Partnership investment. The purchased technology will be amortized over three years and other identified intangible assets will be amortized over three to four years. | |
| (3) | Excludes equity plan-related compensation expense. | |
| (4) | Excludes special charges consisting primarily of consulting fees associated with our proxy contest, costs incurred for employee rebalances (which includes severance benefits, notice pay and outplacement services), facility closures, and acquisition costs. | |
| (5) |
Adjustment for the first quarter of fiscal 2012, reflects the amortization of original issuance debt discount and premium for our 6.25% Convertible Subordinated Debentures due 2026, the amortization of original issuance debt discount for our 4.00% Convertible Subordinated Debentures due 2031 and charges associated with the retirement of our 6.25% Convertible Subordinated Debentures and Term Loan. Adjustments for the first quarter of fiscal 2011, reflect the amortization of original issuance debt discount and the loss on an investment accounted for under the equity method of accounting. |
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| (6) | 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. The preliminary GAAP income tax provision embedded in these results includes a number of assumptions subject to change in the normal course of the close process. |
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MENTOR GRAPHICS CORPORATION |
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UNAUDITED RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES |
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| (In thousands, except percentages) | |||||||||
| Estimated | |||||||||
| Three Months Ended April 30, 2011 | Q1 FY12 | ||||||||
| GAAP operating income | $ | 17,394 | |||||||
| Reconciling items to non-GAAP operating income: | |||||||||
| Amortization of Frontline purchased technology and other | 1,242 | ||||||||
| identified intangible assets | |||||||||
| Equity plan-related compensation | 5,097 | ||||||||
| Amortization of purchased intangible assets: | |||||||||
| Cost of revenues | 3,357 | ||||||||
| Amortization of intangible assets | 1,611 | ||||||||
| Special Charges | 3,759 | ||||||||
| Non-GAAP operating income | $ | 32,460 | |||||||
| Three Months Ended April 30, 2011 | Q1 FY12 | ||||||||
| GAAP operating income as a percent of total revenues | 8 | % | |||||||
| Non-GAAP adjustments detailed above | 6 | % | |||||||
| Non-GAAP operating income as a percent of total revenues | 14 | % | |||||||
