Zarlink Releases Second Quarter Fiscal 2008 Results



    OTTAWA, Oct. 24 /CNW Telbec/ - Zarlink Semiconductor Inc. (NYSE/TSX:ZL)
today issued results for the Fiscal 2008 second quarter ended September 28,
2007, prepared in accordance with U.S. Generally Accepted Accounting
Principles (GAAP).
    In line with guidance, second quarter revenue was US$49.6 million. The
second quarter included eight weeks revenue of approximately US$18.6 million
from the acquisition of Legerity Holdings, Inc.
    "Second quarter revenue highlights Zarlink's broader market opportunity
and expanded customer base that results from the Legerity acquisition," said
Kirk K. Mandy, President and CEO, Zarlink Semiconductor. "The continuing
integration of Legerity's voice products and expertise, backed by a strong
opening backlog and improving revenue from new products, are all encouraging
signs for the coming quarters."

    During the second quarter Zarlink recorded a number of significant items
as a result of the Legerity acquisition:

    
    - A one-time, non-cash expense of US$20.3 million related to the value of
      In-Process Research and Development (IPR&D), in line with business
      combination accounting under GAAP;
    - A non-cash foreign exchange loss of US$3.5 million on the convertible
      debenture used to fund a portion of the acquisition;
    - Severance and other integration costs totaling US$2.9 million
      (US$0.8 million in R&D, US$1.4 million in S&A and US$0.7 million in
      contract impairment).

    Zarlink also recorded a charge of US$1.0 million for an insurance
deductible as a result of flooding of its Analog Foundry facility in Swindon,
UK.
    As previously announced, Zarlink recorded a gain in the quarter of US$12.9
million related to the sale of its investment in Mitel Networks Corporation.
    As a result, Zarlink recorded a second quarter Fiscal 2008 net loss of
US$15.9 million or US$0.13 per share in line with guidance. This compares with
a first quarter Fiscal 2008 net loss of US$5.0 million or US$0.05 per share.

    Review of Operations

    Gross margin in the second quarter was 46%, compared with 43% in the
previous quarter. Gross margin improved as a result of a more favorable
product mix. The US$1.0 million insurance deductible impacted gross margin in
the second quarter, while first quarter results were impacted by severance of
US$0.9 million at the Caldicot facility.
    R&D expenses in the second quarter were US$12.0 million or 24% of revenue,
compared with US$8.8 million or 29% of revenue in the previous quarter.
Severance and integration costs in R&D were US$0.8 million in the second
quarter. S&A expenses in the second quarter were US$13.6 million or 27% of
revenue, compared with US$9.9 million or 33% of revenue in the previous
quarter. Severance and integration costs in S&A were US$1.4 million in the
second quarter. R&D and S&A expenses were both higher in the quarter due to
the addition of eight weeks of operating expenses from Legerity and
integration-related severance and other costs.
    Amortization of intangible assets related to the acquisition was
US$1.2 million, up from US$0.2 million in the first quarter. A contract
impairment of US$0.7 million was recorded related to the write-off of design
tool contracts in conjunction with the Legerity integration. Zarlink recorded
a one-time, non-cash expense of US$20.3 million related to the value of
In-Process Research and Development (IPR&D). In accordance with GAAP for
combining businesses, Zarlink performed a valuation of the acquired business
and allocated the purchase price between the acquired assets. The value of the
IPR&D identified as part of the valuation had to be immediately expensed at
the time of the acquisition, since R&D expenses cannot be capitalized under
GAAP.
    While Zarlink's functional currency is the U.S. dollar, as a result of the
Company's new convertible debenture being denominated in the Canadian dollar,
Zarlink is required to revalue these debt instruments to the U.S. dollar at
the foreign exchange at the end of each fiscal period. As a result of this
quarterly revaluation, the Company will incur non-cash foreign exchange gains
or losses related to the holding of these debentures. Interest income and
expense fluctuated this quarter as a result of the acquisition. Zarlink has
completed a review of its operations and determined that it has no exposure to
asset-backed commercial paper.

    The Company made several important corporate and technology announcements
in the second quarter, including:

    - The closing of its acquisition of Legerity Holdings, Inc. Combining the
      products and expertise of the Company's Network Communications group
      and Legerity, Zarlink's Wired Communications group delivers a range of
      voice enhancement and timing and synchronization products for the
      access, residential and enterprise markets;
    - The sale of Zarlink's investment in Mitel Networks Corporation for
      US$12.9 million;
    - An application development kit that speeds design and evaluation of
      wireless medical telemetry systems that link implanted medical devices,
      including pacemakers, implantable cardioverter defibrillators (ICDs),
      drug pumps and physiological monitors, with monitoring and programming
      equipment.

    On October 24, 2007, Zarlink Semiconductor declared a quarterly dividend
of CDN$0.50 per share on its preferred shares (TSX: Zl.PR.A), payable on
December 28, 2007, to preferred shareholders of record as of December 7, 2007.

    Third quarter Fiscal 2008 guidance

    The opening order backlog at the start of the Fiscal 2008 third quarter
was US$37 million, an increase from the US$25 million opening backlog in the
second quarter of Fiscal 2008 due to the Legerity acquisition. Zarlink is
forecasting Fiscal 2008 third quarter revenue will be between US$55 million
and US$58 million. Severance and other integration costs are expected to be
US$4 million to US$5 million. Excluding these integration related costs, gross
margins are expected to be consistent with second quarter results and
operating expenses are expected to be approximately US$30 million excluding
amortization of intangibles. Excluding any potential impact of additional
foreign exchange gains/losses related to the Company's denominated debentures,
Zarlink expects a third quarter loss of US$0.08 to US$0.10 per share.

    About Zarlink Semiconductor

    For over 30 years, Zarlink Semiconductor has delivered semiconductor
solutions that drive the capabilities of voice, enterprise, broadband and
wireless communications. The Company's success is built on its technology
strengths including voice and data networks, optoelectronics and ultra
low-power communications. For more information, visit www.zarlink.com.

    Shareholders and other individuals wishing to receive, free of charge,
copies of the reports filed with the U.S. Securities and Exchange Commission
and Regulatory Authorities, should visit the Company's web site at
www.zarlink.com or contact Investor Relations.

    Certain statements in this press release constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and assumptions include,
among others, the following: our dependence on the successful development and
market introduction of new products; our ability to successfully integrate
Legerity and any businesses acquired in the future; our reliance on key
personnel; any potential undisclosed liabilities associated with the Legerity
acquisition; the potential adverse effect on critical reference design
partners who may object to the Legerity acquisition; our ability to continue
to operate profitably and generate positive cash flows in the future; our
dependence on our foundry suppliers and third-party subcontractors; order
cancellations and deferrals by our customers; and other factors referenced in
our Annual Report on Form 20-F. Investors are encouraged to consider the risks
detailed in this filing.

    Zarlink and the Zarlink Semiconductor logo are trademarks of Zarlink
    Semiconductor Inc.

    An open conference call for analysts will be held today beginning at
5:00 p.m. EDT. Investors, media and other parties are listen-only. Please dial
1-800-732-9307 or 416-644-3415. The replay number is 1-877-289-8525 (passcode
21249829#) or 416-640-1917 (passcode 21249829#). The replay is available until
midnight, November 7th, 2007. A live audio webcast will be available through
www.newswire.ca (Canada NewsWire) or from the Company's website at
www.zarlink.com.


                         Zarlink Semiconductor Inc.
                CONSOLIDATED STATEMENTS OF INCOME (LOSS) DATA
      (in millions of U.S dollars, except per share amounts, U.S. GAAP)
                                 (Unaudited)

                               Three months ended          Six months ended
                      --------------------------------- ---------------------
                        Sept. 28,   June 29,  Sept. 29,  Sept. 28,  Sept. 29,
                            2007       2007       2006       2007       2006
                      --------------------------------- ---------------------
    Revenue              $  49.6    $  30.6    $  38.1    $  80.2    $  76.5
    Cost of revenue         27.0       17.4       17.8       44.4       33.9
                      --------------------------------- ---------------------
    Gross margin            22.6       13.2       20.3       35.8       42.6
                      --------------------------------- ---------------------

    Expenses:
      Research and
       development (R&D)    12.0        8.8        7.5       20.8       17.0
      Selling and
       administrative       13.6        9.9        9.5       23.5       19.5
      Acquired in-process
       R&D                  20.3          -          -       20.3          -
      Amortization of
       intangible assets     1.2        0.2        0.1        1.4        0.1
      Contract impairment
       & other               0.7        0.5        0.5        1.2        0.5
                      --------------------------------- ---------------------
                            47.8       19.4       17.6       67.2       37.1
                      --------------------------------- ---------------------
    Operating income
     (loss)                (25.2)      (6.2)       2.7      (31.4)       5.5

    Gain on sale of Mitel
     investment             12.9          -          -       12.9          -
    Interest income          0.9        1.5        1.2        2.4        2.3
    Interest expense        (0.7)         -          -       (0.7)         -
    Amortization of debt
     issue costs            (0.1)         -          -       (0.1)         -
    Foreign exchange gain
     (loss)                 (3.5)      (0.3)       0.2       (3.8)       0.3
                      --------------------------------- ---------------------
    Income (loss) before
     income taxes          (15.7)      (5.0)       4.1      (20.7)       8.1
    Income tax (expense)
     recovery               (0.2)         -        2.8       (0.2)       3.0

                      -------------------------------------------------------
    Net income (loss)    $ (15.9)   $  (5.0)   $   6.9    $ (20.9)   $  11.1
                      -------------------------------------------------------

    Net income (loss)
     attributable to
     common shareholders
     after preferred
     share dividends
     and premiums on
     preferred shares    $ (16.7)   $  (6.1)   $   6.3    $ (22.8)   $   9.8
                      --------------------------------- ---------------------
                      --------------------------------- ---------------------

    Net income (loss)
     per common share:
      Basic and diluted  $ (0.13)   $ (0.05)   $  0.05    $ (0.18)   $  0.08
                      --------------------------------- ---------------------
                      --------------------------------- ---------------------

    Weighted average
     number of common
     shares outstanding
     (millions):
      Basic                127.3      127.3      127.3      127.3      127.3
                      --------------------------------- ---------------------
                      --------------------------------- ---------------------
      Diluted              127.3      127.3      127.4      127.3      127.4
                      --------------------------------- ---------------------
                      --------------------------------- ---------------------

    Percentage of revenue:
      Gross margin            46%        43%        53%        45%        56%
      Research and
       development            24%        29%        20%        26%        22%
      Selling and
       administrative         27%        33%        25%        29%        25%



                         Zarlink Semiconductor Inc.
                 CONSOLIDATED STATEMENTS OF CASH FLOWS DATA
                   (in millions of U.S. dollars, U.S. GAAP)
                                 (Unaudited)

                               Three months ended          Six months ended
                      --------------------------------- ---------------------
                        Sept. 28,   June 29,  Sept. 29,  Sept. 28,  Sept. 29,
                            2007       2007       2006       2007       2006
                      --------------------------------- ---------------------
    CASH PROVIDED BY (USED IN)
    --------------------------
    Operating activities:
      Net income (loss)  $ (15.9)   $  (5.0)   $   6.9    $ (20.9)   $  11.1
      Depreciation           1.5        1.2        1.3        2.7        2.7
      Amortization of
       intangible assets     1.2        0.2        0.1        1.4        0.1
      Stock compensation
       expense               0.5        0.5        0.3        1.0        0.6
      Other non-cash
       changes in
       operating
       activities           10.7          -          -       10.7       (0.3)
      Deferred income
       taxes                 1.8       (0.4)      (1.0)       1.4       (1.2)
      Decrease (increase)
       in working capital:
        Trade accounts
         and other
         receivables        (5.3)       1.7       (1.0)      (3.6)      (3.8)
        Inventories         (1.0)      (1.3)       1.9       (2.3)      (0.1)
        Prepaid expenses
         and other          (0.9)       0.3       (0.1)      (0.6)       0.4
        Payables and
         accrued
         liabilities         1.8       (3.9)      (0.9)      (2.1)      (8.9)
        Deferred credits     1.2       (0.1)         -        1.1          -
                      --------------------------------- ---------------------
    Total                   (4.4)      (6.8)       7.5      (11.2)       0.6
                      --------------------------------- ---------------------

    Investing activities:
      Acquisition of
       business           (135.9)         -          -     (135.9)      (7.1)
      Matured short-term
       investments           3.3          -          -        3.3       24.6
      Expenditures for
       fixed assets         (1.7)      (0.7)      (0.8)      (2.4)      (1.3)
      Proceeds from sale
       of investment        12.9          -          -       12.9          -
      Proceeds from
       disposal of
       fixed assets            -          -          -          -        0.1
                      --------------------------------- ---------------------
    Total                 (121.4)      (0.7)      (0.8)    (122.1)      16.3
                      --------------------------------- ---------------------

    Financing activities:
      Increase in
       (repayment of)
       long term debt       74.5          -          -       74.5       (0.1)
      Payment of
       dividends on
       preferred shares     (0.6)      (0.6)      (0.6)      (1.2)      (1.2)
      Repurchase of
       preferred shares     (1.1)      (0.5)         -       (1.6)      (0.1)
      Debt issue costs      (3.5)         -          -       (3.5)         -
      Decrease in
       restricted cash
       and cash
       equivalents           0.2          -          -        0.2        1.0
                      --------------------------------- ---------------------
    Total                   69.5       (1.1)      (0.6)      68.4       (0.4)
                      --------------------------------- ---------------------
    Effect of currency
     translation on cash     1.1        0.1        0.1        1.2        0.4

    Increase (decrease)
     in cash and cash
     equivalents           (55.2)      (8.5)       6.2      (63.7)      16.9

    Cash and cash
     equivalents,
     beginning of period   102.8      111.3      101.4      111.3       90.7
                      --------------------------------- ---------------------

    Cash and cash
     equivalents, end
     of period           $  47.6    $ 102.8    $ 107.6    $  47.6   $  107.6
                      --------------------------------- ---------------------
                      --------------------------------- ---------------------



                         Zarlink Semiconductor Inc.
                       CONSOLIDATED BALANCE SHEET DATA
                   (in millions of U.S. dollars, U.S. GAAP)
                                 (Unaudited)

                                              Sept. 28,   June 29,  March 30,
                                                  2007       2007       2007
                                             ---------- ---------- ----------
    ASSETS

    Current assets:
      Cash and cash equivalents                $  47.6    $ 102.8    $ 111.3
      Short-term investments                         -        3.3        3.3
      Restricted cash and cash equivalents        15.4       14.8       14.6
      Trade accounts receivable - net             27.3       15.6       16.3
      Other receivables                            9.3        5.9        6.6
      Inventories                                 30.3       20.5       19.1
      Prepaid expenses and other                   6.8        5.0        5.4
      Deferred income taxes - current portion      1.5          -          -
      Assets held for sale                         3.4        3.1        3.1
                                             ---------- ---------- ----------
                                                 141.6      171.0      179.7
    Fixed assets - net                            24.9       20.2       21.0
    Deferred income tax assets - net               9.4        8.9        4.9
    Goodwill                                      46.6        3.8        3.8
    Intangible assets                             60.2        1.4        1.6
    Other assets                                   4.4        1.1          -
                                             ---------- ---------- ----------
                                               $ 287.1    $ 206.4    $ 211.0
                                             ---------- ---------- ----------
                                             ---------- ---------- ----------

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:
      Trade accounts payable                   $  15.0     $  5.8     $  6.5
      Employee-related accruals                   11.0        8.7       11.5
      Income and other taxes payable               0.4        0.3        4.7
      Current portion of provisions for
       exit activities                             1.8        1.1        0.8
      Other accrued liabilities                    5.7        4.0        3.2
      Deferred credits                             1.7        0.5        0.6
      Deferred income tax liabilities
       - current portion                           0.1        0.1        0.1
                                             ---------- ---------- ----------
                                                  35.7       20.5       27.4

    Long-term debt                                79.1          -          -
    Long-term portion of provisions for exit
     activities                                    0.5        0.5        0.5
    Pension liabilities                           16.6       16.1       15.9
    Deferred income tax liabilities
     - long-term portion                           0.3        0.2        0.2
    Long-term accrued income taxes                 9.5        8.1          -
    Other long-term liabilities                    0.8          -          -
                                             ---------- ---------- ----------
                                                 142.5       45.4       44.0
                                             ---------- ---------- ----------

    Redeemable preferred shares, unlimited
     shares authorized; 1,193,600 shares
     issued and outstanding as at
     September 28, 2007                           15.3       15.6       16.1
                                             ---------- ---------- ----------

    Shareholders' equity:
    Common shares, unlimited shares authorized;
     no par value; 127,345,682 shares issued
     and outstanding as at September 28, 2007    768.5      768.5      768.5
    Additional paid-in capital                     4.6        4.3        4.3
    Deficit                                     (609.7)    (593.2)    (587.6)
    Accumulated other comprehensive loss         (34.1)     (34.2)     (34.3)
                                             ---------- ---------- ----------
                                                 129.3      145.4      150.9
                                             ---------- ---------- ----------
                                               $ 287.1    $ 206.4    $ 211.0
                                             ---------- ---------- ----------
                                             ---------- ---------- ----------



                         Zarlink Semiconductor Inc.
                           SUPPLEMENTARY SCHEDULES
                   (in millions of U.S. dollars, U.S. GAAP)
                                 (Unaudited)

    Geographic Information:
    -----------------------

    Revenue, based on the geographic location of Zarlink's customers, was
    distributed as follows:

                       Three               Three               Three
                      Months              Months              Months
                       Ended               Ended               Ended
                    Sept. 28,   % of     June 29,   % of    Sept. 29,   % of
                        2007   Total        2007   Total        2006   Total
                   ---------- -------- ---------- -------- ---------- -------

    Asia - Pacific   $  26.3      53%    $  10.6      35%    $  10.2     27%
    Europe              12.6      25        11.8      38        15.9     42
    Americas            10.7      22         8.2      27        12.0     31
                   ---------- -------- ---------- -------- ---------- -------
                     $  49.6     100%    $  30.6     100%    $  38.1    100%
                   ---------- -------- ---------- -------- ---------- -------
                   ---------- -------- ---------- -------- ---------- -------

                                             Six                 Six
                                          Months              Months
                                           Ended               Ended
                                        Sept. 28,   % of    Sept. 29,   % of
                                            2007   Total        2006   Total
                                       ---------- -------- ---------- -------

    Asia - Pacific                       $  36.9      46%    $  21.7      28%
    Europe                                  24.4      30        31.4      41
    Americas                                18.9      24        23.4      31
                                       ---------- -------- ---------- -------
                                         $  80.2     100%    $  76.5     100%
                                       ---------- -------- ---------- -------
                                       ---------- -------- ---------- -------
    






For further information:

For further information: Ed Goffin, Media Relations, (613) 270-7112,
edward.goffin@zarlink.com; Mike McGinn, Investor Relations, (613) 270-7210,
mike.mcginn@zarlink.com

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