Zarlink Releases Fiscal 2009 Year End and Fourth Quarter Results

OTTAWA, CANADA -- (MARKET WIRE) -- May 26, 2009 -- Zarlink Semiconductor (TSX: ZL) -

- Year-over-year revenue increases by approximately 24% to US$227.2 million, with 15% organic sales growth

- Dr. Adam Chowaniec appointed Chairperson of the Board of Directors, replacing Dr. Henry Simon, who is retiring

Zarlink Semiconductor (TSX: ZL) today issued its fourth quarter and Fiscal 2009 results for the three- and 12-month periods ended March 27, 2009, prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

Fiscal 2009 Review

"In Fiscal 2009, we generated significant growth across all key product areas and strengthened our financial position, despite global economic challenges," said Kirk K. Mandy, President and CEO, Zarlink Semiconductor. "New products for the communications, optical interconnect and medical wireless markets have helped deepen relationships with existing customers and expand our sales opportunities. We have driven top line growth and generated positive cash from operations for the year, while significantly improving our cost structure and balance sheet. It is also important to note that, excluding a non-cash goodwill impairment charge, we returned to profitability."

Fiscal 2009 revenue increased by approximately 24% to US$227.2 million from revenue of US$183.6 million in Fiscal 2008:

- Communication Products group revenue increased by 21% to US$140.0 million in Fiscal 2009 from US$115.4 million in Fiscal 2008, due primarily to revenue gained through the acquisition of Legerity;

- Medical Products group revenue increased by 24% to US$34.7 million in Fiscal 2009 from US$28.0 million in Fiscal 2008;

- Optical Products group revenue increased by 42% to US$22.7 million in Fiscal 2009 from US$16.0 million in Fiscal 2008;

- Custom and Other products group revenue increased by 23% to US$29.8 million in Fiscal 2009 from US$24.2 million in Fiscal 2008.

Gross margin increased to 48% of revenue in Fiscal 2009, up from 45% of revenue in Fiscal 2008.

The Company successfully realized additional cost synergies related to the Legerity acquisition, and further reduced its cost base by restructuring activities to better align its workforce with ongoing market opportunities. The improvements include:

- A decrease in R&D expenses to US$46.0 million, or 20% of revenue, from US$47.7 million, or 26% of revenue, in Fiscal 2008;

- A reduction in S&A expenses to US$50.7 million, or 22% of revenue, from US$55.8 million, or 30% or revenue, in Fiscal 2008.

Zarlink generated positive cash from operations in all four quarters of Fiscal 2009. Total cash generated by operations for Fiscal 2009 was US$15.4 million, compared to US$12.1 million in cash used by operations in Fiscal 2008. As at March 27, 2009, Zarlink had cash and short-term investments totaling US$45.0 million, compared with US$45.5 million as at December 26, 2008, and US$42.6 million at the end of Fiscal 2008.

Fiscal 2009 results include:

- A non-cash impairment charge of US$46.9 million to write-off the book value of its goodwill. Goodwill was assigned to the Communication Products and Optical Products reporting units in relation to the Legerity and Primarion acquisitions. In accordance with company policy, goodwill was tested for impairment in Q4. Adverse global economic conditions, resulting in revenue declines in the communications and optical units in Q3 and Q4 and a decline in Zarlink common share price and market capitalization, have had a material impact on the impairment test for goodwill. While the impairment charge reduces reported results under GAAP, this charge is non-cash in nature and does not affect Zarlink's liquidity, cash flows, or current or future operations;

- A foreign exchange gain of US$14.0 million related mainly to Zarlink's Canadian dollar denominated debenture. As a result of the convertible debentures being denominated in Canadian dollars, while the Company's functional currency is the U.S. dollar, the Company is required to revalue these debentures into U.S. dollars at the month-end market rate;

- Severance and integration costs of US$8.8 million related to the integration of Legerity and Q4 Fiscal 2009 restructuring activities;

- A gain on the repurchase of long-term debt of US$3.6 million;

- An impairment of US$3.0 million related to current assets.

For Fiscal 2009, Zarlink recorded a net loss of US$29.6 million, or US$0.25 per share. In Fiscal 2008, the Company recorded a net loss of US$48.4 million, or US$0.41 per share.

Q4 Fiscal 2009 Review

In line with guidance, Q4 Fiscal 2009 revenue was US$51.1 million, compared with revenue of US$53.8 million in Q3 Fiscal 2009 and US$54.8 million in Q4 Fiscal 2008.

Q4 Fiscal 2009 results include:

- A non-cash impairment charge of US$46.9 million related to goodwill, as noted in Fiscal 2009 results;

- Severance and other costs of US$5.0 million, or US$0.04 per share, related to restructuring activities undertaken in the quarter;

- A non-cash foreign exchange gain of US$2.1 million primarily related to Zarlink's Canadian dollar denominated debenture, based on an exchange rate of CDN$1.00 to US$0.81 at March 27, 2009;

- A US$1.0 million gain related to the sale of Zarlink's packet switching product line to Conexant Systems, Inc.

Zarlink recorded a Q4 Fiscal 2009 net loss of US$50.0 million, or US$0.41 per share. In comparison, the Company recorded net income of US$12.1 million, or US$0.09 basic earnings per share, in Q3, and a net loss of US$19.1 million, or US$0.16 per share, in Q4 Fiscal 2008.

For Q4 Fiscal 2009, revenue from Zarlink's Communication Products group was US$27.5 million, compared with revenue of US$33.7 million in Q3 Fiscal 2009 and revenue of US$35.8 million in Q4 Fiscal 2008. Medical Products revenue for Q4 Fiscal 2009 increased to US$9.5 million, compared with Q3 Fiscal 2009 revenue of US$8.2 million and Q4 Fiscal 2008 revenue of US$7.5 million. Optical Products revenue in Q4 Fiscal 2009 was US$4.2 million, compared with revenue of US$5.5 million in Q3 Fiscal 2009 quarter and US$4.9 million in Q4 Fiscal 2008. Custom and Other revenue in Q4 Fiscal 2009 was US$9.9 million, compared with Q3 Fiscal 2009 revenue of US$6.4 million and Q4 Fiscal 2008 revenue of US$6.6 million.

Gross margin in Q4 Fiscal 2009 was 48% of revenue, which included severance costs of US$0.8 million. In comparison, gross margin in Q3 Fiscal 2009 was 49%, which included integration costs of $0.5 million. Gross margin in Q4 Fiscal 2008 was 45%, which included integration costs of US$1.4 million.

R&D expenses in Q4 Fiscal 2009 were US$12.4 million, or 24% of revenue, which included severance costs of US$1.6 million. This compares with Q3 Fiscal 2009 R&D expenses of US$10.4 million, or 19% of revenue. In Q4 Fiscal 2008, R&D expenses were US$13.8 million, or 25% of revenue.

S&A expenses in Q4 Fiscal 2009 were US$13.7 million, or 27% of revenue, which included severance costs of US$2.6 million. This compares with Q3 Fiscal 2009 S&A expenses of $11.0 million, or 20% of revenue, which included integration costs of US$0.1 million. In Q4 Fiscal 2008, S&A expenses were US$15.5 million, or 28% of revenue, which included integration and severance costs of US$1.1 million.

The Company made several important technology announcements in Q4 Fiscal 2009, including:

- An expanded portfolio of Synchronous Ethernet timing solutions that allow carriers to lower operating costs and increase revenue by ensuring accurate end-to-end transmission of voice, data, multimedia and mobile applications over wired and wireless networks;

- A new radio chip that consumes five times less power than competing devices to enable a new range of on-body medical devices, remote sensors, and sound and voice communication systems.

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

First Quarter Fiscal 2010 Guidance

Mr. Mandy added: "Although economic uncertainty persists, the long-term trends driving demand for our communications, medical wireless and optical interconnect products are strong, and our strategic plan to address these markets remains unchanged. We will work to continue to deliver high-value products to further improve our competitive position and gain additional market share, while diligently managing our costs. We believe we have the technology leadership, solid financial footing and the right team in place to demonstrate continued progress on these objectives in Fiscal 2010."

The opening backlog at the start of the Q1 Fiscal 2010 was approximately US$51 million, compared with an opening backlog of US$54 million at the start of Q4 Fiscal 2009. As stated in Q3 results, the Q4 opening backlog included orders that could not be shipped in the quarter due to product request dates in advance of posted delivery schedules.

Zarlink is forecasting for Q1 Fiscal 2010:

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