Zarlink Releases Third Quarter Fiscal 2009 Results

OTTAWA, CANADA -- (MARKET WIRE) -- Jan 29, 2009 -- - Delivers basic earnings per share of US$0.09 or US$0.08 per diluted share, maintains strong cash position while investing in debt and share repurchase programs

- Plans restructuring actions in fourth quarter, with expected annualized savings of US$8-10 million

Zarlink Semiconductor Inc. (TSX: ZL) today issued results for the Fiscal 2009 third quarter ended December 26, 2008, prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

In line with guidance, third quarter revenue was US$53.8 million, compared with revenue of US$61.8 million in the Fiscal 2009 second quarter and US$48.6 million in the third quarter of Fiscal 2008. Zarlink recorded net income of US$12.1 million or US$0.09 basic earnings per share in the third quarter, compared with second quarter net income of US$7.2 million or US$0.05 per share, and a net loss of US$8.4 million or US$0.07 per share in Fiscal 2008 third quarter.

"We are aggressively managing through this slowdown to ensure we emerge as a stronger company," said Kirk Mandy, President and CEO, Zarlink Semiconductor. "While we anticipate challenges, we are still seeing opportunities where customers are continuing to invest in products relying on our communication, medical wireless and optical interconnect solutions. We have taken advantage of our cash holdings to strengthen our long-term financial position and enhance shareholder value, and will maintain firm cost control and are adjusting as necessary to guide Zarlink through this difficult market."

Third quarter results include:

- A non-cash foreign exchange gain of US$10.3 million related mainly to Zarlink's Canadian dollar denominated debenture, based on an exchange rate of CDN$1.00 to US$0.82 at December 26, 2008;

- A gain of US$3.6 million related to the repurchase of debt;

- An impairment of US$3.0 million in pre-paid expenses and receivables from MHS Electronics UK Ltd.;

- An impairment of US$1.2 million related to the fair value of assets held for sale in the United Kingdom, due to softening real estate markets;

- Integration and severance costs of approximately US$0.6 million (US$0.5 million in cost of goods sold and US$0.1 million in S&A).

At the end of the third quarter, cash and short-term investments totaled US$45.5 million compared with US$46.1 million at the end of the second quarter. During the quarter, the Company used US$2.6 million in cash to repurchase and cancel US$6.5 million principal amount of its convertible debentures and US$0.9 million to repurchase and cancel 3 million common shares.

Business review

Revenue from Zarlink's Communication Products group was US$33.7 million compared with revenue of US$39.7 million in the previous quarter. The acquisition of Legerity Holdings, Inc. accounted for US$17.3 million in revenue in the third quarter, compared to US$24.6 million in the Fiscal 2009 second quarter.

Medical Products revenue in the third quarter of Fiscal 2009 increased to US$8.2 million, compared with US$7.8 million in the previous quarter. Optical Products revenue in the third quarter was US$5.5 million, compared with US$6.8 million in the Fiscal 2009 second quarter. Custom and Other revenue in the third quarter of Fiscal 2009 was US$6.4 million, compared with Fiscal 2009 second quarter revenue of US$7.5 million.

The Company made several important technology announcements in the third quarter, including:

- A complete next-generation line card access solution that links Zarlink's VoiceEdge VE792 Next-Generation Carrier Chipset (NGCC) with Mindspeed's voice processing expertise to efficiently deliver voice service over packet networks;

- The successful design and testing of an in-body microgenerator that converts heartbeat energy into power for implanted medical devices;

- New ZLynx active optical cables with quad small form-factor (QSFP) and hybrid CX4-QSFP terminations for high-performance data center and computer cluster interconnect.

On January 29, 2009, Zarlink declared a quarterly dividend of CDN$0.50 per share on its preferred shares (TSX: ZL.PR.A) payable on March 27, 2009 to preferred shareholders of record as of March 6, 2009. This dividend is fully eligible for Canadian tax purposes.

Review of Operations

Gross margin in the third quarter was 49%, which included integration costs of US$0.5 million. This compares with gross margin of 50% in the previous quarter, which included integration costs of US$0.8 million.

R&D expenses in the third quarter were US$10.4 million or 19% of revenue. This compares with R&D expenses in the previous quarter of US$11.2 million or 18% of revenue, which included integration costs of US$0.1 million.

S&A expenses in the third quarter were US$11.0 million or 20% of revenue, which included integration costs of US$0.1 million. This compares with Fiscal 2009 second quarter S&A expenses of US$13.6 million or 22% of revenue, which included proxy contest costs of US$1.2 million and severance and integration costs of US$0.3 million.

Restructuring Plans

Zarlink also announced planned restructuring actions to help maintain profitability. The Company will be reducing its workforce by 6-8 percent. Zarlink's current workforce is approximately 630 employees. No current development projects will be impacted by these actions. Annualized savings of approximately US$8-10 million are expected as a result of this restructuring. Zarlink expects to record severance and other costs of US$5-7 million, or US$0.04 - US$0.06 per share, in the fourth quarter of Fiscal 2009.

Fourth Quarter Fiscal 2009 Guidance

The opening backlog at the start of the Fiscal 2009 fourth quarter was approximately US$54 million, compared with an opening backlog of US$53 million at the start of the third quarter. The opening backlog is based on customer requests for products to be delivered within a 90-day period. A portion of the current backlog includes customer product request dates in advance of posted delivery schedules, meaning the Company does not anticipate being able to ship all of these products in the current quarter.

As a result of this, and in combination with continuing economic uncertainties, Zarlink is forecasting Fiscal 2009 fourth quarter revenue will be between US$50 million and US$52 million. Gross margins are expected to be 49% to 51% and operating expenses are expected to be approximately US$22 million to US$23 million excluding amortization of intangibles. Excluding any potential impact of foreign exchange gains/losses related to the Company's Canadian dollar denominated debenture, Zarlink expects fourth quarter earnings of approximately break-even before restructuring costs.

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 integrate any business, technologies, product lines or services that we have or will acquire; our dependence on revenue generation from our legacy products in order to fund development of our new products; current market conditions, including the lack of liquidity in the markets and economic slowdown, may increase our operating costs or reduce our revenue, thereby negatively impacting our operating results; our ability to operate profitably and generate positive cash flows in the future; the impact of the current economic crisis on our suppliers and customers and our ability to transfer parts to other suppliers; our dependence on our foundry suppliers and third-party subcontractors; order cancellations and deferrals by our customers; our substantial indebtedness could adversely affect our financial position; the cost and accounting implications of compliance with new accounting standards; 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. Access the call by dialing 1-800-732-6179 or 416-644-3415. Investors, media and other parties are listen-only. For a replay, call 1-877-289-8525, passcode 21295025# or 416-640-1917, passcode 21295025#. The replay is available until midnight February 12th, 2009. A live audio webcast will be available through www.marketwire.com (Marketwire) 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            Nine  months  ended
--------------------------------------------------------------------------
                                          Dec.  26,      Sept.  26,      Dec.  28,      Dec.  26,        Dec.  28,
                                                2008                2008              2007              2008                2007
--------------------------------------------------------------------------
Revenue                                $53.8              $61.8            $48.6          $176.1            $128.8
Cost  of  revenue                  27.3                31.2              25.8              91.4                70.2
--------------------------------------------------------------------------
Gross  margin                        26.5                30.6              22.8              84.7                58.6
--------------------------------------------------------------------------

Expenses:
  Research  and
    development
    ("R&D")                              10.4                11.2              13.1              33.6                33.9
  Selling  and
    administrative                11.0                13.6              16.8              37.0                40.3
  Acquired
    in-process  R&D                      -                      -                    -                    -                20.3
  Amortization  of
    intangible  assets            1.8                  1.9                1.8                5.5                  3.2
  Contract
    impairment  and
    other                                    0.1                      -                1.4                0.1                  2.6
  Gain  on  sale  of
    business                                  -                      -              (0.7)                  -                (0.7)
  Impairment  of
    current  assets                  3.0                      -                    -                3.0                      -
--------------------------------------------------------------------------
                                                26.3                26.7              32.4              79.2                99.6
--------------------------------------------------------------------------

Operating
  income  (loss)                      0.2                  3.9              (9.6)              5.5              (41.0)

Gain  on  sale  of
  Mitel  investment                    -                      -                    -                    -                12.9
Gain  on  sale  of
  assets                                        -                      -                2.4                0.9                  2.4
Gain  on  repurchase
  of  long-term  debt              3.6                      -                    -                3.6                      -
Impairment  of
  asset  held  for
  sale                                      (1.2)                    -                    -              (1.2)                    -
Interest  income                    0.4                  0.3                0.6                1.1                  3.0
Interest  expense                (1.0)              (1.1)            (1.2)            (3.3)              (1.9)
Amortization  of
  debt  issue  costs              (0.1)              (0.2)            (0.2)            (0.5)              (0.3)
Foreign  exchange
  gain  (loss)                        10.3                  1.9              (0.6)            11.9                (4.4)
--------------------------------------------------------------------------
Income  (loss)
  before  income
  taxes                                    12.2                  4.8              (8.6)            18.0              (29.3)
Income  tax
  recovery  (expense)          (0.1)                2.4                0.2                2.4                      -

--------------------------------------------------------------------------
Net  income  (loss)            $12.1                $7.2            $(8.4)          $20.4            $(29.3)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Net  income  (loss)
  attributable  to
  common  shareholders
  after  preferred
  share  dividends
  and  premiums  on
  preferred  shares            $11.7                $6.5            $(9.2)          $18.6            $(32.0)

Net  income  (loss)
  per  common  share:
Basic                                    $0.09              $0.05          $(0.07)          $0.15            $(0.25)
Diluted                                $0.08              $0.05          $(0.07)          $0.13            $(0.25)

Weighted  average
  number  of  common
  shares  outstanding
  (millions):
    Basic                                123.9              125.6            127.3            125.6              127.3
    Diluted                            154.3              157.7            127.3            157.1              127.3

Percentage  of
  revenue:
Gross  margin                            49%                  50%                47%                48%                  45%
Research  and
  development                            19%                  18%                27%                19%                  26%
Selling  and
  administrative                      20%                  22%                35%                21%                  31%




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

                                                              Three  months  ended                Nine  months  ended
--------------------------------------------------------------------------
                                                          Dec.  26,  Sept.  26,  Dec.  28,  Dec.  26,    Dec.  28,
                                                                2008            2008          2007          2008            2007
--------------------------------------------------------------------------
CASH  PROVIDED  BY  (USED  IN)
--------------------------
Operating  activities:
Net  income  (loss)                            $12.1            $7.2        $(8.4)      $20.4        $(29.3)
    Depreciation  of  fixed
      assets                                                1.2              1.2            1.5            3.6              4.2
    Amortization  of  intangible
      assets                                                1.8              1.9            1.8            5.5              3.2
    Stock  compensation  expense          0.6              0.5            0.4            1.6              1.4
    Other  non-cash  changes  in
      operating  activities                  (9.0)          (0.9)        (1.0)      (10.2)            9.9
    Deferred  income  taxes                    1.3              1.0            1.9            2.2              3.3
    Decrease  (increase)  in
      working  capital:

        Trade  accounts  and
          other  receivables                      8.8            (2.9)        (1.3)          3.1            (4.9)
        Inventories                                  (0.3)            0.6                -            0.7            (2.3)
        Prepaid  expenses  and  other      2.2              0.2            1.8            3.7              1.2
        Payables  and  accrued
          liabilities                              (11.5)          (2.1)        (1.7)      (16.3)          (3.8)
        Deferred  credits                        (1.2)            2.3          (0.4)          0.8              0.7
--------------------------------------------------------------------------
Total                                                        6.0              9.0          (5.4)        15.1          (16.4)
--------------------------------------------------------------------------

Investing  activities:
    Acquisition  of  business                    -                  -          (0.1)              -        (136.0)
    Matured  short-term
      investments                                          -                  -                -                -              3.3
    Expenditures  for  fixed
      assets                                              (0.8)          (0.7)        (3.5)        (3.1)          (5.9)
    Proceeds  from  sale  of
      investment                                            -                  -                -                -            12.9
    Proceeds  from  insurance
      for  fixed  assets                                -                  -            3.4                -              3.4
    Proceeds  from  sale  of
      fixed  assets                                        -                  -            2.7            1.0              2.7
--------------------------------------------------------------------------
Total                                                      (0.8)          (0.7)          2.5          (2.1)      (119.6)
--------------------------------------------------------------------------

Financing  activities:
    Increase  in  long-term  debt              -                  -                -                -            74.5
    Repurchase  of  long-term
      debt                                                  (2.6)                -                -          (2.6)                -
    Payment  of  dividends  on
      preferred  shares                          (0.4)          (0.6)        (0.5)        (1.5)          (1.7)
    Repurchase  of  preferred
      shares                                              (0.3)          (0.4)        (0.5)        (1.2)          (2.1)
    Repurchase  of  common  shares      (0.9)          (1.0)              -          (2.7)                -
    Debt  issue  costs                                  -                  -          (0.2)              -            (3.7)
--------------------------------------------------------------------------
Total                                                      (4.2)          (2.0)        (1.2)        (8.0)          67.0
--------------------------------------------------------------------------

Effect  of  currency
  translation  on  cash                        (1.6)          (0.5)          0.2          (2.1)            1.4

Increase  (decrease)  in
  cash  and  cash  equivalents            (0.6)            5.8          (3.9)          2.9          (67.6)

Cash  and  cash  equivalents,
  beginning  of  period                        45.9            40.1          47.6          42.4          111.3
--------------------------------------------------------------------------
Cash  and  cash  equivalents,
  end  of  period                                  $45.3          $45.9        $43.7        $45.3          $43.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------




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

                                                                                  Dec.  26,        Sept.  26,        March  28,
                                                                                        2008                  2008                  2008
--------------------------------------------------------------------------
ASSETS
Current  assets:
  Cash  and  cash  equivalents                                  $45.3                $45.9                $42.4
  Short-term  investments                                            0.2                    0.2                    0.2
  Restricted  cash  and  cash  equivalents              12.8                  15.5                  17.3
  Trade  accounts  receivable  -  net                        24.9                  30.6                  23.4
  Other  receivables  -  net                                          4.6                    8.5                  10.0
  Inventories                                                                28.1                  27.8                  28.8
  Prepaid  expenses  and  other                                    2.3                    6.7                    8.2
  Deferred  tax  assets  -  current  portion              1.0                    1.1                    1.3
  Current  assets  held  for  sale                                1.9                    3.1                    3.1
--------------------------------------------------------------------------
                                                                                      121.1                139.4                134.7
Fixed  assets  -  net                                                    13.2                  13.4                  14.7
Deferred  income  tax  assets  -  net                          5.4                    6.6                    7.5
Goodwill                                                                        46.9                  46.9                  46.9
Intangible  assets  -  net                                          51.0                  52.8                  56.5
Other  assets                                                                  2.7                    3.2                    3.6
--------------------------------------------------------------------------
                                                                                    $240.3              $262.3              $263.9--------------------------------------------------------------------------
--------------------------------------------------------------------------

LIABILITIES  AND  SHAREHOLDERS'  EQUITY

Current  liabilities:
  Trade  accounts  payable                                        $13.5                $17.5                $13.3
  Employee-related  payables                                      8.8                  10.4                  12.7
  Income  and  other  taxes  payable                            0.2                    0.4                    0.4
  Current  portion  of  provisions  for
    exit  activities                                                        0.9                    1.1                    3.5
  Other  accrued  liabilities                                      7.6                    8.0                    9.6
  Deferred  credits                                                        1.4                    2.5                    0.6
  Deferred  income  tax  liabilities  -
    current  portion                                                            -                        -                    0.1
--------------------------------------------------------------------------
                                                                                        32.4                  39.9                  40.2

Long-term  debt  -  convertible  debentures          58.5                  76.2                  77.4
Long-term  portion  of  provisions  for
  exit  activities                                                          0.2                    0.3                    0.4
Pension  liabilities                                                  14.7                  17.8                  19.9
Deferred  income  tax  liabilities  -
  long-term  portion                                                          -                        -                    0.2
Long-term  accrued  income  taxes                              2.4                    7.2                  10.9
Other  long-term  liabilities                                    0.9                    0.9                    0.8
--------------------------------------------------------------------------
                                                                                      109.1                142.3                149.8
--------------------------------------------------------------------------

Redeemable  preferred  shares,
  unlimited  shares  authorized;
  1,081,600  shares  issued  and
  outstanding  as  at  December
  26,  2008                                                                      13.8                  14.1                  14.7
--------------------------------------------------------------------------

Shareholders'  equity:
Common  shares,  unlimited  shares
  authorized;  no  par  value;
  122,425,682  shares  issued  and
  outstanding  as  at
  December  26,  2008                                                  738.8                756.9                768.5
Additional  paid-in  capital                                    33.4                  15.6                    5.1
Deficit                                                                      (619.5)            (631.2)            (638.4)
Accumulated  other  comprehensive
  loss                                                                            (35.3)              (35.4)              (35.8)
--------------------------------------------------------------------------
                                                                                      117.4                105.9                  99.4
--------------------------------------------------------------------------
                                                                                    $240.3              $262.3              $263.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------




                                                    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  Months                      Three  Months                    Three  Months
                                  Ended      %  of                      Ended      %  of                    Ended      %  of
                  Dec.  26,  2008    Total    Sept.  26,  2008    Total    Dec.  28,  2007    Total
--------------------------------------------------------------------------


Asia  -
  Pacific                  $27.0          50%                    $32.8          53%                  $21.3          44%
Europe                        14.5          27                        15.1          25                      13.9          28
Americas                    12.3          23                        13.9          22                      13.4          28
--------------------------------------------------------------------------
                                  $53.8        100%                    $61.8        100%                  $48.6        100%
--------------------------------------------------------------------------
--------------------------------------------------------------------------

                                                                    Nine  Months                      Nine  Months
                                                                                Ended      %  of                    Ended      %  of
                                                                Dec.  26,  2008    Total    Dec.  28,  2007    Total
--------------------------------------------------------------------------
Asia  -
  Pacific                                                                $89.3          51%                  $58.2          45%
Europe                                                                      46.6          26                      38.3          30
Americas                                                                  40.2          23                      32.3          25
--------------------------------------------------------------------------
                                                                              $176.1        100%                $128.8        100%
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Product  Group  Information:
--------------------------

Revenue,  based  on  product  group,  was  distributed  as  follows:

                          Three  Months                  Three  Months                    Three  Months
                                        Ended    %  of                    Ended      %  of                    Ended    %  of
                        Dec.  26,  2008  Total  Sept.  26,  2008    Total    Dec.  28,  2007  Total
--------------------------------------------------------------------------
Communication              $33.7        63%                  $39.7          64%                $31.2          64%
Products
Medical
  Products                          8.2        15                        7.8          13                      7.6          16
Optical
  Products                          5.5        10                        6.8          11                      3.9            8
Custom  &
  Other                                6.4        12                        7.5          12                      5.9          12
--------------------------------------------------------------------------
                                        $53.8      100%                  $61.8        100%                $48.6        100%
--------------------------------------------------------------------------
--------------------------------------------------------------------------

                                                                    Nine  Months                    Nine  Months
                                                                                Ended      %  of                    Ended      %  of
                                                                Dec.  26,  2008    Total    Dec.  28,  2007    Total
--------------------------------------------------------------------------
Communication                                                    $112.5          64%                  $79.7          62%
Products
Medical
  Products                                                                25.2          14                      20.5          16
Optical
  Products                                                                18.5          11                      11.0            8
Custom  &
  Other                                                                      19.9          11                      17.6          14
--------------------------------------------------------------------------
                                                                              $176.1        100%                $128.8        100%
--------------------------------------------------------------------------
--------------------------------------------------------------------------

 

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