Mentor Graphics and its non-GAAP earnings

Mentor Graphics and its non-GAAP earnings

Mentor Graphics Corporation, a supplier of electronic design automation systems, just announced its second quarter results. According to the earnings press release, the company reported revenues of $182.6 million, non-GAAP earnings per share of $0.02, and a GAAP loss per share of $0.22. Elsewhere in the press release the company says that non-GAAP earnings excludes the following items incurred during the quarter: equity-based (noncash) employee compensation; severance and related employee rebalancing costs; fees paid to consultants; losses related to the abandonment of excess facility space and a facility fire; interest expense; along with other assorted items.

There is no standard definition of non-GAAP earnings. Each firm is permitted to construct its own definition for press release purposes. As a result, the Securities and Exchange Commission requires firms such as Mentor Graphics to provide a reconciliation of GAAP and non-GAAP earnings any time a non-GAAP measure is presented.

Required:

1. Which of the excluded items represent ongoing costs of running the business and which are one-time special costs?

2. How might analysts and investors benefit when firms call attention to their non-GAAP earnings?

3. How might analysts and investors be harmed?”