Mentor Graphics Reports Fiscal Fourth 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 employee severance,
certain litigation costs, 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.
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. 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. 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 our employee stock purchase plans. 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, utilizing a
normalized effective tax rate. Our GAAP tax rate for the year ended
January 31, 2016 is 20.8%. Our normalized non-GAAP effective tax rate
for the year ended January 31, 2016 is 19%. The normalized non-GAAP
effective tax rate considers our global tax posture, including the
weighted average tax rates applicable in the various jurisdictions in
which we operate; 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. tax loss
carryforwards and tax credits that were not previously recorded as a
benefit in our financial statements. Our non-GAAP effective tax rate
is subject to change over time for various reasons, including changes
in geographic business mix, statutory tax rates, foreign re-investment
expectations, and availability of U.S. tax loss carryforwards and tax
credits that were not previously recorded as a benefit. Our normalized
effective non-GAAP tax rate for the year ended January 31, 2017 is
expected to be 19% which is consistent with the year ended January 31,
2016.
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Our agreement with the former owners of noncontrolling interests in
one of our subsidiaries gave 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. In September 2015
we acquired the remaining noncontrolling interest in the subsidiary.
The amount for the twelve months ended January 31, 2016 reflects the
final adjustment of redemption value to the actual price we paid.
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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