UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1995. Commission File No. 0-13442
MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0786033
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8005 S.W. Boeckman Road, Wilsonville, Oregon
97070-7777
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(503) 685-7000
NO CHANGE
Former name, and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period
that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock, no par value,
outstanding as of April 30, 1995: 52,163,574
MENTOR GRAPHICS CORPORATION
Index to Form 10Q
PART I FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Statements of Operations for the three 3
months ended March 31, 1995 and 1994
Consolidated Balance Sheets as of March 31, 1995 4
and December 31, 1994
Consolidated Statements of Cash Flows for the 5
three months ended March 31, 1995 and 1994
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income per share)
(Unaudited)
Three Months Ended
March 31,
1995 1994
Revenues:
System and software $ 42,054 $ 49,663
Service and support 42,657 35,636
Total revenues 84,711 85,299
Cost of revenues:
System and software 8,124 9,782
Service and support 18,295 16,283
Total cost of revenues 26,419 26,065
Gross margin 58,292 59,234
Expenses:
Research and development 16,890 18,791
Marketing, general and
administration 34,173 35,454
Total expenses 51,063 54,245
Operating income 7,229 4,989
Other income, net 1,160 563
Income before income taxes 8,389 5,552
Provision for income taxes 1,700 940
Net income $ 6,689 $ 4,612
Net income per common and
common equivalent share $ .13 $ .09
Weighted average number of common
and common equivalent shares
outstanding 52,944 51,984
See accompanying notes to unaudited consolidated
financial statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
(Unaudited)
As of As of
March 31, 1995 December 31, 1994
ASSETS
Current assets:
Cash and cash equivalents $ 136,626 $ 130,676
Short-term investments 22,554 7,180
Trade accounts receivable, net 73,473 82,285
Other receivables 4,688 4,853
Prepaid expenses and other 11,722 13,012
Total current assets 249,063 238,006
Property, plant and equipment, net 96,616 97,701
Cash and investments, long-term 30,000 30,000
Other assets 28,479 28,090
Total $ 404,158 $ 393,797
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 7,096 $ 8,450
Accounts payable 9,419 11,570
Income taxes payable 10,499 12,793
Accrued and other liabilities 44,779 48,765
Deferred revenue 23,066 17,649
Total current liabilities 94,859 99,227
Long-term debt 53,448 53,625
Other long-term deferrals 1,288 1,877
Total liabilities 149,595 154,729
Stockholders' equity:
Common stock 258,051 254,271
Accumulated deficit (22,250) (27,877)
Foreign currency translation
adjustment 18,762 12,674
Total stockholders' equity 254,563 239,068
Total $ 404,158 $ 393,797
See accompanying notes to unaudited consolidated
financial statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1995 1994
Operating Cash Flows:
Net income $ 6,689 $ 4,612
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization of
property, plant & equipment 5,798 6,380
Deferred taxes (25) (40)
Amortization of other assets 1,996 2,170
Changes in operating assets and
liabilities:
Trade accounts receivable 10,940 (3,614)
Prepaid expenses and other assets 1,268 (5,760)
Accounts payable (2,387) (3,101)
Accrued liabilities (5,039) (2,649)
Other liabilities and deferrals 1,745 140
Net cash provided (used) by operating
activities 20,985 (1,862)
Investing Cash Flows:
Purchases of short-term investments (14,968) (1,935)
Purchases of property and equipment (3,830) (3,125)
Capitalization of software
development costs (1,964) (873)
Net cash used by investing activities (20,762) (5,933)
Financing Cash Flows:
Proceeds from issuance of common stock 3,780 4,452
Increase (decrease) in short-term
borrowings (1,529) 2,731
Repayment of long-term debt (177) (844)
Adjustment for pooling of interests 0 899
Net cash provided by financing activities 2,074 7,238
Effect of exchange rate changes on cash
and cash equivalents 3,653 1,511
Net change in cash and cash equivalents 5,950 954
Cash and cash equivalents at beginning
of period 130,676 95,958
Cash and cash equivalents at end of
period $ 136,626 $ 96,912
See accompanying notes to unaudited consolidated
financial statements.
MENTOR GRAPHICS CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) General - The accompanying financial statements
have been prepared in conformity with generally
accepted accounting principles. However, certain
information and footnote disclosures normally
included in financial statements prepared in
accordance with generally accepted accounting
principles have been condensed or omitted
pursuant to the rules and regulations of the
Securities and Exchange Commission. In the
opinion of management, the statements include all
adjustments necessary for a fair presentation of
the results of the interim periods presented.
Certain reclassifications have been made in the
accompanying financial statements for 1994 to
conform with the 1995 presentation.
(2) Capitalization of Software Development Costs -
During the first three months of 1995 and 1994,
$1,964 and $873 of new product development costs
were capitalized and included in other assets on
the consolidated balance sheets, respectively.
Amortization of previously capitalized software
development costs amounted to $1,136 and $2,010
for the three months ended March 31, 1995 and
1994, respectively, and is included in system and
software cost of revenues on the consolidated
statements of operations.
(3) Supplemental Disclosures of Cash Flow Information
- The following provides additional information
concerning cash flow activities:
Three Months Ended
March 31,
1995 1994
Interest paid $ 592 $ 582
Income taxes paid, net of refunds $ 3,423 $ 728
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
(All numerical references are in thousands, except for
percentages)
RESULTS OF OPERATIONS
REVENUES AND GROSS MARGINS
System and Software
System and software revenues for the quarter ended
March 31, 1995, totaled $42,054 compared to $49,663
for the same period of 1994. As a percentage of
system and software revenues, gross margins were 81%
for the quarter ended March 31, 1995, compared to 80%
for the first quarter of 1994.
Revenues during the first quarter of 1995 declined by
15% compared to the same period last year. Software
product revenue accounted for 75% of the decline while
hardware product revenue made up the balance of the
change. System and software revenues were lower in
the first quarter of 1995 due to a one-time contract
which yielded approximately $11,000 in the first
quarter of 1994. Historically the Company experiences
improved revenues in the second and fourth quarter
while the first and third quarters are slower. Japan
has usually posted stronger first and third quarter
revenues that has somewhat offset otherwise seasonally
slow quarters. Second quarter order and revenue
levels are expected to improve over seasonally slow
first quarter levels. System and software revenue
levels are dependent on order activity; as such
improved performance for the next quarter is not
guaranteed.
System and software gross margin levels are dependent
on such factors as third party software content for
which royalties are paid, lower margin hardware
revenue levels, and amortization of previously
capitalized software development costs and purchased
technology costs. Third party software royalty costs
have been increasing for the last several quarters.
This increase in cost of system and software revenues
was offset by lower hardware revenue and associated
cost of revenue and lower overall amortization levels
for the comparable periods. Third party royalty costs
are expected to be at or above current expense levels
for at least the next several quarters. Future trends
of third party revenue content are difficult to
predict since they are dependent on several variables
including new third party agreements, potential
acquisitions of third parties where existing
agreements are in place, and varying levels of
customer demand for third party product offerings.
The overall mix of hardware versus software continues
to move toward software. The Company experienced some
hardware sales to meet customer requests when gross
margins were above a minimum level. In the first
quarter of 1995, the hardware component of system and
software revenue declined to 7% from 10% for the same
quarter last year. The Company expects the decline of
hardware revenue to continue at a much slower rate as
the year progresses.
Amortization of previously capitalized software
development costs to system and software cost of
revenues was $1,136 and $2,010 for the first quarter
of 1995 and 1994, respectively. In 1994, amortization
reflected a higher level of capitalized costs
accumulated during development of Version 8 software
products. The amortization level declined in the
first quarter of 1995 as several capitalized projects
became fully amortized during the prior year.
Purchased technology amortization to system and
software cost of goods sold was $554 and $0 for the
quarters ended March 31, 1995 and 1994, respectively.
The increase in purchased technology amortization is
due to various technology acquisitions in 1994,
including the purchase of Anacad Electrical
Engineering Software GmbH (Anacad) on September 30,
1994. Exclusive of additional acquisitions,
amortization of capitalized software development and
purchased technology costs are expected to be
approximately flat for the next several quarters.
Service and Support
Service and support revenues for the first quarter of
1995 were $42,657, an increase of 20% from the
comparable quarter of 1994. Growth in software
support revenue is attributable to growth in the
Company's installed customer base, and continued
success of the Company's software support programs.
The Company continues to experience lower decline
rates for its software support program due partially
to the improved quality of the current software
product offerings. Also, in the first quarter of the
prior year, service and support revenue was impacted
by delayed annual software support contract renewals.
Approximately half of the Company's software support
contracts expire at the end of each calendar year. In
the first quarter of 1994, software support revenue
was negatively impacted by delayed software support
contract signings. In the first quarter of 1995, the
Company made a focused effort to minimize this trend
by allocating additional resources to software support
contract administration. This effort resulted in
fewer software support contract renewal delays,
allowing the Company to recognize additional revenue
for services rendered during the quarter.
Professional and other service revenues increased
approximately 18% the first quarter of 1995 compared
to the same period of 1994. A first quarter 1994
reorganization of the professional service team
worldwide negatively affected the growth in
professional service revenues. Other service revenues
were also reduced as a result of a change in
accounting policy under which non-recurring
engineering funding, which totaled approximately $900
in the first quarter of 1995, is now being applied as
an offset to R&D. In prior years this funding was
included as a component of service and support
revenue. Prior year's consolidated statements of
operations were not restated due to immateriality of
the change on total revenues and operating expenses.
Overall professional service revenues are expected to
continue to grow. In particular, integrated circuit
custom design services are experiencing increased
demand.
Service and support gross margins were 57% and 54% for
the quarters ended March 31, 1995 and 1994,
respectively. The increase in service and support
gross margins is attributable to the increased
software support revenue volume. Consistent with
consulting and training business models, gross margins
generated by the Company's professional service
activities have been and are expected to continue to
be lower than software support. Service and support
gross margins are expected to be lower as growth in
the professional service business is expected to be
higher than growth in software support.
OPERATING EXPENSES
Gross research and development (R&D) expenses were
$18,854 for the first quarter of 1995 compared to
$19,664 for the same period of 1994. Net R&D costs
were $16,890 for the quarter ended March 31, 1995,
compared to $18,791 for the same period of 1994. The
Company capitalized R&D costs of $1,964 and $873
during the first quarters of 1995 and 1994,
respectively. Capitalization levels during the second
quarter of 1995 are expected to decrease as
development of the Company's next update release is
not expected to reach technological feasibility until
later in the quarter.
Lower gross R&D expenses are attributable to lower
head count due to attrition and some planned
reductions in force. The Company closed an Integrated
Circuit Division R&D site during the first quarter of
1994, consolidating activities with other pre-existing
locations. Gross R&D costs were also reduced as a
result of a change in accounting policy under which
R&D costs associated with non-recurring engineering
contracts were offset by the contract funding in 1995
totaling approximately $900. Offsetting these expense
reductions was the acquisition of Anacad, resulting in
R&D expenses of $846 in the first quarter of 1995,
compared to $0 in the same period of 1994. R&D
expenses are expected to increase as new business
opportunities are funded as the year progresses.
Marketing, general and administration expenses (MG&A)
totaled $34,173 and $35,454 for the first quarters of
1995 and 1994, respectively. The reduction of MG&A
expenses is principally attributable to lower head
count. In 1994, North America, Europe and Japan
streamlined their organizations to improve the ratio
of selling and administrative expense compared to
regional revenue levels. This process was executed
throughout 1994 resulting in lower expense levels as
the year progressed. In addition, corporate
administrative costs have been reduced to better align
spending levels with industry business model
standards. Offsetting these expense reductions was
the acquisition of Anacad, resulting in MG&A expenses
of $1,297 in the first quarter of 1995, compared to $0
in the same period of 1994. Operating expenses should
increase in the second quarter of 1995 due to
weakening of the U.S. dollar against foreign
currencies. In addition, spending levels may also
increase due to annual salary increases in North
America at the beginning of the second quarter and
funding of some attrition replacement.
RESTRUCTURING COSTS
Implementation of the Company's restructuring plan
approved by management in December 1993, and modified
in 1994 proceeded as anticipated during the first
quarter of 1995. There have been no material changes
in the elements of the December 31, 1994 restructure
accrual of $11,897. Costs remaining to be incurred in
executing the restructuring plan consist primarily of
direct costs associated with severance and relocation
of employees, facilities closures and write-offs of
excess equipment and intangible software technology
assets related to discontinued product development
activities.
Approximately $11,000 of the restructuring accrual
should result in cash outflows during 1995. For the
first quarter, restructure-related cash outflows were
approximately $1,400. For the second quarter of 1995,
disbursements are anticipated to be near $1,200, with
the balance of $8,200 scheduled for the second half of
the year. Approximately $1,200, primarily related to
facilities closures, is expected to be disbursed
beyond 1995.
OTHER INCOME (EXPENSE)
Other income totaled $1,160 for the first quarter of
1995 compared to other income of $563 for the same
period of 1994. Interest income from investments was
$1,670 for the first quarter of 1995, compared to
$1,093 for the first quarter of 1994. The increase in
interest income is primarily attributable to higher
average cash, cash equivalent and short term
investments outstanding during the comparable
quarters. During the first quarter of 1995, interest
expense amounted to $640, up slightly from $635 for
the comparable period in 1994.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $1,700 for
the quarter ended March 31, 1995, as compared to $940
for the same period in 1994. The Company's income tax
position for each year combines the effects of
available tax benefits in certain countries where the
Company does business, benefits from available net
operating loss carry forwards, and tax expense for
subsidiaries with pre-tax income. As such, the
Company's income tax position and resultant effective
tax rate is uncertain for the remainder of 1995.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company experienced a net gain from foreign
currency transactions of $96 during the first quarter
of 1995 compared to a net loss of $91 during the first
quarter of 1994. These amounts are comprised of
realized gains and losses on cash transactions
involving various foreign currencies, and unrealized
gains and losses related to foreign currency
receivables and payables resulting from exchange rate
fluctuations between the various currencies in which
the Company operates. Foreign currency gains and
losses are included as a component of other income.
The "foreign currency translation adjustment", as
reported in the equity section of the consolidated
balance sheet at March 31, 1995, increased to $18,762
from $12,674 at the end of 1994. This reflects the
increase in the value of net assets denominated in
foreign currencies against the U.S. dollar since year-
end 1994.
During the period from December 31, 1994 to March 31,
1995, the U.S. dollar weakened approximately 13%
against the Japanese yen and 8% against the European
currencies. Generally, a weakening of the U.S. dollar
makes the Company's products less expensive in foreign
markets, which has a positive impact on the Company's
revenues over time. In addition, a weakening U.S.
dollar results in higher reported revenues and
operating expenses due to translation of local
currency activity to U.S. dollars for consolidated
financial reporting.
The Company generally realizes approximately half of
its revenue outside the United States and expects this
to continue in the future. As such, the Company's
business and operating results may be impacted by the
effects of future foreign currency fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND INVESTMENTS
Total cash and investments at March 31, 1995 were
$159,180 compared to $137,856 at the end of 1994.
Cash provided by operations was $20,985 for the first
three months of 1995 compared to cash used by
operations of $1,862 during the same period of 1994.
Cash provided by operations was positively impacted by
early quarter shipments which resulted in lowering trade
receivables by $8,812. Cash and short-term
investments at March 31, 1995 were positively impacted
by proceeds from the issuance of common stock of
$3,780, offset by decreased short-term borrowings of
$1,529 and investment in property, plant and equipment
of $3,830.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable decreased to $73,473 at
March 31, 1995 from $82,285 at year-end 1994. This
decrease is attributable to a more evenly distributed
shipment pattern during the first quarter of 1995
compared to the fourth quarter of 1994. As a result,
a higher percent of shipments made during the quarter
were converted into cash collections before the period
ended. Revenue levels also contributed to the decline
in trade accounts receivable as seasonally strong
fourth quarter revenues were $96,784 compared to
$84,711 in the first quarter of 1995.
OTHER ASSETS
Other assets increased to $28,479 at March 31, 1995
from $28,090 at year-end 1994. Net capitalized
software development costs increased by $828 as
capitalization and amortization were $1,964 and
$1,136, respectively, during the first quarter of
1995.
CAPITAL RESOURCES
Total capital expenditures increased to $3,830 through
March 31, 1995, compared to $3,125 for the same period
of 1994. The increase in capital expenditures is a
result of costs associated with a new global
information system. These expenditures will continue
as the year progresses. The Company anticipates that
current cash balances, anticipated cash flows from
operating activities, and existing credit facilities
will be sufficient to meet its working capital needs
for at least the next twelve months.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) No reports were filed on Form 8-K
during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized, on May 12,
1995.
MENTOR GRAPHICS
CORPORATION
(Registrant)
R. Douglas Norby
R. Douglas Norby
Senior Vice
President, and
Chief Financial
Officer
James J.Luttenbacher
James J.Luttenbacher
Corporate Controller, and
Chief Accounting Officer
VIA ELECTRONIC TRANSMISSION
May 12, 1995
Securities and Exchange Commission
450 Fifth Street NW
Judiciary Plaza
Washington, DC 20549
Attention: Division of Corporate Finance
Re: Mentor Graphics Corporation
File No. 0-13442
On behalf of Mentor Graphics Corporation (Company), I
enclose for filing the Company's Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-Q for the quarter
ended March 31, 1995.
Please inform me of receipt of the enclosed material
through the Company's MCI mail address, 313-4100.
Sincerely yours,
MENTOR GRAPHICS CORPORATION
Frank S. Delia
Frank S. Delia
Vice President and Chief Administrative Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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