Mentor Graphics Reports Fiscal Second Quarter Results
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Identified intangible assets consist primarily of purchased
technology, backlog, trade names, and customer relationships.
Amortization charges for our intangible assets can vary in frequency
and amount due to the timing and magnitude of acquisition
transactions. We consider our operating results without these charges
when evaluating our core performance due to the variability.
Generally, the most significant impact to inter-period comparability
of our net income is in the first twelve months following an
acquisition.
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Special charges may include expenses related to certain litigation
costs, employee severance, acquisitions, excess facility costs, and
other asset related charges. Special charges are incurred based on
particular facts and circumstances and can vary in size and frequency.
Litigation costs classified as special charges consist of professional
service fees related to patent litigation involving us, EVE S.A., and
Synopsys, Inc. These costs are included in special charges because of
their unusual nature due to the significance in variability of timing
and amount. Restructuring costs included in special charges include
costs incurred for employee terminations, including severance and
benefits, driven by modification of business strategy or business
emphasis. Special charges are not ordinarily included in our annual
operating plan and related budget due to unpredictability, driven in
part by rapidly changing technology and the competitive environment in
our industry. We therefore exclude them when evaluating our managers’
performance internally.
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Equity plan-related compensation expenses represent the fair value of
all share-based payments to employees, including grants of employee
stock options and restricted stock units, and purchases made as a
result of the employee stock purchase plan. We do not consider equity
plan-related compensation expense in evaluating our managers’
performance internally or our core operations in any given period.
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Interest expense attributable to amortization of the original issuance
debt discount on convertible debt is excluded. Management does not
consider this charge as a part of our core operating performance. We
do not consider the amortization of the original issuance debt
discount on convertible debt to be a direct cost of operations.
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Equity in earnings or losses of unconsolidated entities represents our
equity in the net income (loss) of common stock investments accounted
for under the equity method. The carrying amounts of our investments
are adjusted for our share of earnings or losses of the investee. We
report our equity in the earnings or losses of investments in other
income (expense), net (with the exception of our investment in
Frontline as discussed below). The amounts are excluded from our
non-GAAP results as we do not control the results of operations for
the investments and we do not participate in regular and periodic
operating activities; therefore, management does not consider these
investments as a part of our core operating performance.
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The Company maintains a 50% interest in Frontline, a joint venture. We
report our equity in the earnings or losses of Frontline within
operating income. Although we do not exert control, we actively
participate in regular and periodic activities such as budgeting,
business planning, marketing and direction of research and development
projects. Accordingly, we do not exclude our share of Frontline’s
earnings or losses from our non-GAAP results as management considers
the joint venture to be core to our operating performance.
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Income tax expense is adjusted by the amount of additional tax expense
or benefit that we would accrue if we used non-GAAP results instead of
GAAP results in the calculation of our tax liability, taking into
consideration our long-term tax structure. We use a normalized
effective tax rate of 17%, which reflects the weighted average tax
rate applicable under the various jurisdictions in which we operate.
This non-GAAP tax rate eliminates the effects of non-recurring and
period specific items which are often attributable to acquisition
decisions and can vary in size and frequency and considers our U.S.
loss carryforwards that have not been previously benefited. This rate
is subject to change over time for various reasons, including changes
in the geographic business mix and changes in statutory tax rates. Our
GAAP tax rate for the six months ended July 31, 2014 is (22%) after
consideration of period specific items. Without period specific items
of ($3.2 million), our GAAP tax rate is 14%. Our full fiscal year 2015
GAAP tax rate, inclusive of period specific items, is projected to be
10%. The GAAP tax rate considers certain mandatory and other
non-scalable tax costs which may adversely or beneficially affect our
tax rate depending upon our level of profitability in various
jurisdictions.
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Our agreement with the owners of noncontrolling interests in one of
our subsidiaries gives them a right to require us to purchase their
interests for a price based on a formula defined in the agreement.
Under GAAP, increases (or decreases to the extent they offset previous
increases) in the calculated redemption value of the noncontrolling
interests are recorded directly to retained earnings and therefore do
not affect net income. However, as required by GAAP, these amounts are
applied to increase or decrease the numerator in the calculation of
basic and diluted earnings per share. Management does not consider
fluctuations in the calculated redemption value of noncontrolling
interests to be relevant to our core operating performance.
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