Mentor Graphics Acquires Sierra Design Automation; Answers Industry Need for Design-to-Fab Flow for 65 and 45 Nanometers

WILSONVILLE, Ore., June 11, 2007 - Mentor Graphics Corporation (Nasdaq: MENT) today announced it has acquired Sierra Design Automation (Santa Clara, Calif.), a leading provider of high-performance place and route solutions. The company was purchased for $90 million, payable 50 percent in cash and 50 percent in Mentor Graphics common stock.

“Combining Mentor’s market-leading design-for-manufacturing (DFM) capabilities with Sierra’s proven variability and lithography-driven place and route solution gives our customers the edge they need to achieve rapid design closure with high yield,” said Pravin Madhani, president and CEO, Sierra Design Automation. “At 65 and 45 nanometers (nm), discontinuities such as process variation, design size, low power and DFM are creating a major disruption in physical design.  The merger with Mentor enables us to deliver a powerful design-to-fab flow that addresses these discontinuities in a comprehensive fashion.”

“Mentor’s success with the Calibre product was built upon recognizing a market discontinuity and capitalizing on it.  We see the same type of discontinuity happening in this market,” said Walden C. Rhines, CEO and chairman, Mentor Graphics. “Our leading-edge customers are telling us that they need a design-to-fab flow capable of handling dozens of process corners and multiple modes, all while addressing manufacturability challenges to achieve manufacturing closure of their designs. Mentor’s and Sierra’s leadership in these areas make us a natural fit. The acquisition of Sierra expands Mentor’s leadership in DFM, and provides the integration that customers need between physical design, and back-end verification and yield-enhancement.”

"STMicroelectronics is designing some of the world's most complex chips and is aggressively pursuing advanced process geometries with 65 and 45 nm designs in production and in progress today," said Philippe Magarshack, Group Vice President, Central CAD General Manager, STMicroelectronics. "We decided to partner with Mentor and Sierra 18 months ago to address critical discontinuities that we identified in the design flow including low-power, design for variability and manufacturing. We are very impressed with the quality of the results of this partnership, which allows us to blend manufacturability know-how into the physical synthesis and routing phase."

Sierra’s flagship Olympus-SoC product delivers innovative technologies for 65 and 45 nm processes. It provides the next-generation place and route system that concurrently addresses variations in lithography, process corners and design modes. Integral to Olympus-SoC is Sierra’s detailed routing architecture which embeds variation-aware timing, optimization and litho-modeling to address optical proximity correction (OPC) and resolution enhancement technology (RET) effects early in the design cycle ensuring faster timing closure for complex process rules. It is capable of simultaneously solving for dozens of different process corners and design modes, ensuring an optimized chip without unnecessary guard banding.

Mentor Graphics will continue to sell and support Sierra’s products through its global sales and support organizations.
 
Because of this acquisition, the company now expects non-GAAP fiscal 2008 second quarter earnings to be in the range of $.06 to $.08, down $.02 from previous guidance.  For the full fiscal year ending January 31, 2008, the company expects the acquisition to be neutral to slightly accretive.  The company cannot yet assess GAAP earnings impact until the finalization of purchase accounting, but expects GAAP non-cash charges arising from the acquisition to cause larger decreases in GAAP earnings than in non-GAAP earnings.  The company will complete this assessment and report its revised GAAP outlook during its second quarter fiscal 2008 earnings call. Consistent with the company’s previous presentation of non-GAAP earnings, non-GAAP earnings exclude amortization of purchased intangible assets which include purchased technology, backlog, trade names, customer relationships and employment agreements. Non-GAAP earnings further exclude in-process research and development charges, special charges and stock-based compensation expenses.

Discussion of Non-GAAP Financial Measures  
Mentor Graphics management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted gross margin, operating margin and net income (loss), which we refer to as non-GAAP gross margin, operating margin and net income (loss), respectively. These non-GAAP measures are derived from the revenues of our product, maintenance and services business operations and the costs directly related to the generation of those revenues, such as cost of revenue, research and development, sales and marketing and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. These non-GAAP measures exclude amortization of purchased intangible assets, merger and acquisition charges, special charges, equity plan-related compensation expenses and charges and gains which management does not consider reflective of our core operating business.

Purchased intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships and employment agreements. Merger and acquisition charges represent in-process research and development charges related to products in development that had not reached technological feasibility at the time of acquisition. Special charges consist of post-acquisition rebalance costs including severance and benefits, excess facilities and asset-related charges, and also include strategic reallocations or reductions of personnel resources. Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options, as required under SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). For purposes of comparability across other periods and against other companies in our industry, non-GAAP net income (loss) is adjusted by the amount of additional taxes or tax benefit that the company would accrue using a normalized effective tax rate applied to the non-GAAP results.

In certain instances our GAAP results of operations may not be profitable when our corresponding non-
GAAP results are profitable or vice versa. The number of shares on which our non-GAAP EPS is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options in a loss situation.

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 or 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.

Management excludes from its non-GAAP measures certain recurring items to facilitate its review of the comparability of the company's core operating performance on a period-to-period basis because such items are not related to the company's ongoing core operating performance as viewed by management. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Management uses this view of its operating performance for purposes of comparison with its business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. More specifically management adjusts for the excluded items for the following reasons:

• Amortization charges for our purchased intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of the company's acquisition transactions. We therefore consider our operating results without these charges when evaluating our core performance. Generally, the most significant impact to inter-period comparability of the company's net income (loss) is in the first twelve months following the acquisition.
• Special charges are primarily severance related and are due to the company's reallocation or reduction of personnel resources driven by modifications of business strategy or business emphasis and by assimilation of acquired businesses. These costs are originated based on the particular facts and circumstances of business decisions and can vary in size. Special charges also include excess facility and asset-related restructuring charges. These charges are not specifically included in the company's annual operating plan and related budget due to the rapidly changing technology and competitive environment in our industry. We therefore exclude them when evaluating our managers' performance internally.
• Merger and acquisition charges are in-process R&D charges, which are largely disregarded as acquisition decisions are made and which often result in charges that vary significantly in size and amount. Management excludes these charges when evaluating the impact of an acquisition transaction and our ongoing performance.
• Management supplementally considers performance without the impact of stock-based compensation charges and believes this information is useful to investors to compare our performance to prior periods before SFAS 123R and to the performance of other companies in our industry who present non-GAAP results adjusted to exclude stock compensation expense. We view stock-based compensation as a key element of our employee retention and long-term incentives, not as an expense that should be an element of evaluating core operations in any given period. We therefore exclude these charges for purposes of evaluating our core performance.
• Income tax expense (benefit) 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 the company's long-term tax structure. We use a normalized effective tax rate of 17%, which reflects the weighted average tax rate applicable under the various tax jurisdictions in which the company operates. This non-GAAP weighted average tax rate is subject to change over time for various reasons, including changes in the geographic business mix and changes in statutory tax rates.

Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. However, non-GAAP net income (loss) has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. In the future the company expects 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 nonrecurring. Some of the limitations in relying on non-GAAP net income (loss) are:

• Amortization of purchased intangibles, though not directly affecting our current cash position, 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.
• The company regularly engages in acquisition and assimilation activities as part of its ongoing business and therefore we will continue to experience special charges and merger and acquisition charges on a regular basis. These costs also directly impact available funds of the company. 
• The company’s stock option and stock purchase plans are important components of our incentive compensation arrangements and will be reflected as expenses in our GAAP results for the foreseeable future under SFAS 123R.
• The company's income tax expense (benefit) will be ultimately based on its GAAP taxable income and actual tax rates in effect, which often differ significantly from the 17% rate assumed in our non-GAAP presentation.
• Other companies, including other companies in our industry, may calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure.

About Mentor Graphics
Mentor Graphics Corporation (Nasdaq: MENT) is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world’s most successful electronics and semiconductor companies.  Established in 1981, the company reported revenues over the last 12 months of about $800 million and employs approximately 4,200 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/.