Zarlink Delivers Strong Fiscal 2011 and Fourth Quarter Results

OTTAWA, CANADA -- (MARKET WIRE) -- May 25, 2011 -- Zarlink Semiconductor (TSX: ZL) today issued Fiscal 2011 year-end and fourth quarter results for the 12- and three-month periods ended March 25, 2011. All figures are in U.S. dollars unless otherwise noted.

Fiscal 2011 Highlights


--  Revenue of $230.2 million, up 13% or $25.6 million year-on-year; 

--  Annual revenue for Communication Products grew by $39.1 million to reach
    $180.5 million, with revenue for timing products increasing by 39% and
    revenue for line circuit products increasing by 34% year-on-year; 

--  Cash increased by $53.8 million, driven by operations and the sale of
    the Optical Products Group and associated real estate in Sweden, to
    reach $128.2 million; 

--  Net income of $69.1 million, or $0.55 cents per basic share and $0.46
    cents per diluted share, which includes an income tax recovery of $30.2
    million, primarily related to a non-cash deferred tax asset, income of
    $5.9 million from discontinued operations following the sale of the
    Optical Products Group, and a $14.1 million gain related to sale of real
    estate in Sweden. 

Q4 Fiscal 2011 Highlights

--  Q4 revenue of $54.8 million, at the high end of $51.0 million and $55.0
    million guidance range; 

--  Medical products revenue of $7.9 million, up $2.6 million or 49% from
    the same period last year;  

--  Gross margins improved to 53%, up from 52% in the third quarter; 

--  Net income of $17.0 million, or $0.14 cents per basic share and $0.11
    cents per diluted share, which includes an income tax recovery of $13.7
    million primarily due to a reduction in valuation allowance related to
    deferred tax assets in the U.K. 

"In Fiscal 2011, we delivered the strongest top line results in the Company's history," said Gary Tanner, President and CEO, Zarlink Semiconductor. "During the year, we saw increasing customer demand for our network timing, line circuit and medical wireless products. Our timing business grew by nearly 40%, driven by strong customer demand for packet timing products required to support time-sensitive multimedia services over new wireless networks. We expect sales for this product line will continue to grow, as wireless network upgrades gain momentum and we expand our product portfolio to target timing requirements in optical transport networks. Our line circuit product line is large and profitable, and we see further potential to expand this business by targeting opportunities in growth economies where carriers are now deploying new broadband networks. In the medical market, equipment manufacturers are nearing completion of major projects integrating our wireless radio solution. We believe that this customer design momentum across our three growth platforms, coupled with our focus of cost management and cash generation, creates a strong, stable and profitable company with continued growth potential."

Fiscal 2011 Financial Results

Fiscal 2011 revenue was $230.2 million, an increase of $25.6 million or 13% compared with Fiscal 2010 revenue of $204.6 million. Revenue for Zarlink's Communication Products was $180.5 million, an increase of $39.1 million or 28% compared with Fiscal 2010 revenue of $141.4 million. The Company's timing and line circuit products contribute approximately 85% of revenue for the Communication Product Group. The remaining revenue is generated by telecom networking products, where the Company anticipates new design wins for voice processing products will offset declining sales for legacy switching technologies.

Medical Products revenue was $28.6 million, compared with $30.0 million in Fiscal 2010, as increasing sales for the Company's wireless radio solutions was offset by anticipated declining revenue for legacy hearing aid products.

Custom and Other revenue was $21.1 million, compared with $33.2 million in Fiscal 2010. This decline was anticipated, as the Company's managed last-time buys of customer specific legacy products as part of its strategy to increase its focus on Zarlink's growth platform of timing, line circuit and medical wireless portfolios. In Fiscal 2011, these growth platforms accounted for approximately 75% of revenue, with remaining sales generated by Custom and Other, telecom networking and legacy medical product lines.

Gross margin was 51% of revenue in Fiscal 2011, compared with 51% of revenue in Fiscal 2010.

R&D expenses were $42.1 million, or 18% of revenue, compared with $37.8 million or 18% of revenue in Fiscal 2010. The increase in R&D expenses is due to higher material costs and compensation costs related to additional engineering staff to support increasing design opportunities for the timing product line. S&A expenses were $42.9 million, or 19% of revenue, compared with $40.6 million or 20% of revenue in Fiscal 2010. The increase in S&A expenses is due to a one-time adjustment of $0.4 million related to a historical sales tax provision, higher compensation costs, and weakness of the U.S. dollar as many of the Company's S&A costs are incurred in currencies other than the U.S. dollar, in particular the Canadian dollar.

Fiscal 2011 operating income was $38.9 million, with net income of $69.1 million or $0.55 per basic share and $0.46 per diluted share. Fiscal 2011 net income includes:


--  A reduction in valuation allowance of $31.5 million related to deferred
    tax assets in both Canada and the U.K. These deferred tax assets
    represent the benefit of tax loss carry forwards and other tax credits,
    and results in a non-cash income tax recovery in the Consolidated
    Statement of Income (Loss) of $30.2 million for the 12 months ended
    March 25, 2011; 

--  A gain of $14.1 million related to the sale of real estate in Sweden; 

--  Income of $5.9 million, or $0.05 per basic share and $0.04 per diluted
    share, from discontinued operations following the sale of the Company's
    Optical Products group to Tyco Electronics in Q1 Fiscal 2011; 

--  Net interest expenses of $3.8 million, a non-cash foreign exchange loss
    of $1.5 million related primarily to Zarlink's Canadian dollar
    denominated debenture, and a $1.9 million loss related to the settlement
    of the Company's Swedish pension liability. 

For Fiscal 2010, Zarlink recorded operating income of $19.0 million, with net income of $7.7 million or $0.05 per basic share and $0.04 per diluted share.

As a supplement to Zarlink's consolidated financial statements presented in accordance with U.S. generally accepted accounting principles ("GAAP"), the Company provides non-GAAP measures for operating income, income from continuing operations, and basic and diluted income per share from continuing operations. For full reconciliation of GAAP to non-GAAP measures, refer to the schedule included with this press release.

Non-GAAP operating income for Fiscal 2011 was $36.0 million, compared with Fiscal 2010 non-GAAP operating income of $30.7 million. Non-GAAP net income in Fiscal 2011 was $30.9 million, or $0.24 per basic share and $0.21 per diluted share. For Fiscal 2010 non-GAAP net income was $26.4 million, or $0.20 per basic share and $0.17 per diluted share.

Cash and cash equivalents increased to $128.2 million as at March 25, 2011, up $53.8 million from $74.4 million at the end of Fiscal 2010. The cash increase was driven by cash provided by operations, proceeds of $13.5 million related to the sale the Optical Products Group, and proceeds of $14.2 million related to the sale of real estate in Sweden.

Fourth Quarter Fiscal 2011 Financial Results

Fourth quarter revenue was $54.8 million, which is at the high end of the Company's guidance range of $51.0 million to $55.0 million. As anticipated, the Company did see some slowdown in demand in the fourth quarter as customers managed excess inventory. In comparison, Q3 Fiscal 2011 revenue was $56.9 million and Q4 Fiscal 2010 revenue was $55.2 million.

Gross margin in Q4 Fiscal 2011 improved to 53% due to product mix, compared with Q3 Fiscal 2011 gross margin of 52% and Q4 Fiscal 2010 gross margin of 53%.

R&D expenses in Q4 Fiscal 2011 were $11.0 million, or 20% of revenue, compared with Q3 Fiscal 2011 R&D expenses of $9.9 million, or 17% of revenue. S&A expenses in Q4 Fiscal 2011 were $10.8 million, or 20% of revenue, compared with Q3 Fiscal 2011 S&A expenses of $12.4 million, or 22% of revenue, which included a one-time provision of $1.6 million related to a sales tax liability.

Operating income in Q4 Fiscal 2011 was $5.3 million, compared with operating income of $19.3 million in Q3 Fiscal 2011, which includes a gain of $14.1 million related to the sale of real estate in Sweden. In Q4 Fiscal 2010 operating income was $5.0 million.

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