Zarlink Releases Second Quarter Fiscal 2006 Results

OTTAWA, Canada, Oct. 20 /PRNewswire-FirstCall/ - Zarlink Semiconductor Inc. (NYSE: ZL) (TSX: ZL) today released results for the Fiscal 2006 second quarter ended September 23, 2005, prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

In line with the company's guidance, second quarter revenue was US$46.9 million, compared with US$45.5 million in the prior quarter, and US$58.8 million in the second quarter of Fiscal 2005. Revenues were higher in the Consumer Communications business unit and down marginally in both Network Communications and Ultra Low-Power Communications.

Zarlink recorded a second quarter net loss of US$2.3 million or US$0.02 per share. In the Fiscal 2005 second quarter, the Company reported a net profit of US$3.2 million, or US$0.02 per share, which included a US$2.9 million gain on a note receivable.

Gross margin in the second quarter was 43% of revenue, compared with 38% in the first quarter and 46% in the second quarter a year ago.

Subsequent to the end of the current quarter, on October 7, 2005, Zarlink signed an agreement to sell its RF Front-End Consumer Business to Intel Corporation and its UK subsidiary for approximately US$68 million in cash and US$2 million in other consideration. Subject to closing conditions, the transaction is expected to close by the end of November 2005.

"The agreement with Intel is an important part of our plan to reposition the company on higher-margin growth opportunities in communications markets," said Kirk K. Mandy, President and Chief Executive Officer, Zarlink Semiconductor. "We are satisfied that we met our second quarter revenue guidance and reported a lower net loss. We are making progress in our drive to further reduce our fixed costs, begin generating positive cash flow and return to profitability."

Review of Operations

Both Research and Development (R&D) and Selling and Administrative (S&A) expenses were lower sequentially in the Fiscal 2006 second quarter as a result of the restructuring implemented in the fourth quarter of Fiscal 2005.

R&D expenses in the second quarter were US$11.8 million or 25% of revenue, compared with US$13.6 million or 30% of revenue in the first quarter, and US$15.6 million or 27% of revenue in the Fiscal 2005 second quarter.

S&A expenses were US$10.3 million or 22% of revenue in the second quarter, compared with US$11.3 million or 25% of revenue in the first quarter, and US$11.0 million or 19% of revenue in the second quarter of Fiscal 2005.

During the second quarter, the Company launched six new products, including:

    - The industry's first devices for carrying timing and synchronization
      over packet-switched networks;
    - An acoustic echo canceller chip that delivers superior sound quality in
      hands-free communications products, including car kits, speakerphones,
      security and intercom systems;
    - The world's first single-chip tuner for free-to-air satellite DTV
      receivers;
    - A low-power tuner for digital satellite PayTV systems; and
    - Two terrestrial demodulators for PC-TV and portable DTV products.

    Third Quarter Fiscal 2006 Guidance

Excluding the RF Front-End Consumer business, the opening order backlog at the start of the third quarter of Fiscal 2006 was US$28 million, compared with US$26 million in the prior quarter. Zarlink is forecasting that third quarter revenues, excluding RF Front-End revenues, will be between US$34 million and US$36 million. This compares to second quarter revenue of US$34.2 million, excluding the RF Front-End business. As a result, Zarlink expects third quarter earnings of between breakeven and US$0.01 per share. In addition, the company anticipates a gain of US$41 million to US$45 million, or US$0.32 to US$0.35 per share, relating to the sale of the RF Front-End business. After related costs associated with the transaction, the Company expects that net cash proceeds will be approximately US$60 million.

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, consumer and ultra low-power communications, and high-performance analog. 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: rapid technological developments and changes; our ability to achieve profitability and generate positive cash flows in the future; our exposure to product warranty claims resulting from product defects or failures; our dependence on our foundry suppliers and third-party subcontractors; increasing price and product competition; our exposure to currency exchange rate fluctuations and other factors inherent in our international operations; and other factors referenced in our Annual Report on Form 20-F for the fiscal year ended March 25, 2005. 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 from 5:30-6:30 p.m. EDT. Investors, media and other parties are listen-only. Please dial 1-800-814-4859 or 613-287-8027. The replay number is 1-877-289-8525 (passcode 21157732 (pound key)) or 416-640-1917 (passcode 21157732 (pound key)). The replay is available until midnight, November 3, 2005. 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. 23,   June 24,  Sept. 24,  Sept. 23,  Sept. 24,
                           2005       2005       2004       2005       2004
                       -------------------------------- ---------------------
    Revenue            $   46.9   $   45.5   $   58.8   $   92.4   $  114.6
    Cost of revenue        26.8       28.0       32.0              54.8              62.6
                                              --------------------------------  ---------------------
        Gross  margin                      20.1              17.5              26.8              37.6              52.0
                                              --------------------------------  ---------------------

        Expenses:
            Research  and
              development                  11.8              13.6              15.6              25.4              30.5
            Selling  and
              administrative            10.3              11.3              11.0              21.6              21.7
            Gain  on  sale  of
              business                              -              (1.9)            (2.9)            (1.9)            (9.9)
                                              --------------------------------  ---------------------
                                                      22.1              23.0              23.7              45.1              42.3
                                              --------------------------------  ---------------------
        Income  (loss)  from
          operations                        (2.0)            (5.5)              3.1              (7.5)              9.7

        Interest  income                  0.4                0.4                0.2                0.8                0.4
        Foreign  exchange
          gain  (loss)                      (0.3)              1.5              (0.1)              1.2              (0.4)
                                              --------------------------------  ---------------------
        Income  (loss)  from
          operations  before
          income  taxes                    (1.9)            (3.6)              3.2              (5.5)              9.7
        Income  tax  (expense)
          recovery                            (0.4)                  -                    -              (0.4)              1.0
                                              --------------------------------  ---------------------

        Net  income  (loss)
          for  the  period        $      (2.3)    $      (3.6)    $        3.2      $      (5.9)    $      10.7
                                              --------------------------------  ---------------------
                                              --------------------------------  ---------------------

        Net  income  (loss)
          attributable  to
          common
          shareholders            $      (3.0)    $      (4.3)    $        2.7      $      (7.3)    $        9.7
                                              --------------------------------  ---------------------
                                              --------------------------------  ---------------------

        Net  income  (loss)
          per  common  share:
            Basic  and
              diluted                  $    (0.02)    $    (0.03)    $      0.02      $    (0.06)    $      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            127.3            127.3            127.4
                                              --------------------------------  ---------------------
                                              --------------------------------  ---------------------

        Percentage  of
          revenue:
            Gross  margin                      43%                38%                46%                41%                45%
            Research  and
              development                      25%                30%                27%                27%                27%
            Selling  and
              administrative                22%                25%                19%                23%                19%



                                                  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.  23,      June  24,    Sept.  24,    Sept.  23,    Sept.  24,
                                                      2005              2005              2004              2005              2004
                                              --------------------------------  ---------------------

        CASH  PROVIDED
        -------------
          BY  (USED  IN)
          ------------
        Operating  activities:
            Net  income  (loss)
              for  the  period    $      (2.3)    $      (3.6)    $        3.2      $      (5.9)    $      10.7
            Depreciation                    1.6                1.8                2.3                3.4                4.6
            Other  non-cash
              changes  in
              operating
              activities                      0.3              (3.2)            (2.7)            (2.9)            (9.6)
            Deferred  income
              taxes                              (0.3)              0.1              (0.4)            (0.2)            (0.2)
            Decrease  (increase)
              in  working  capital:
                Trade  accounts
                  and  other
                  receivables              (1.8)              2.6                1.6                0.8              (4.9)
                Inventories                  1.0                1.1                0.6                2.1              (3.7)
                Prepaid  expenses
                  and  other                  (3.2)            (1.8)              0.6              (5.0)            (2.2)
                Payables  and
                  accrued
                  liabilities                0.7              (9.6)            (3.8)            (8.9)            (3.2)
                Deferred  credits            -              (0.2)              0.7              (0.2)              0.6
                                              --------------------------------  ---------------------
        Total                                    (4.0)          (12.8)              2.1            (16.8)            (7.9)
                                              --------------------------------  ---------------------

        Investing  activities:
            Purchased
              short-term
              investments                        -            (28.1)                  -            (28.1)          (54.6)
            Matured
              short-term
              investments                  28.1              39.6                7.4              67.7              62.2
            Expenditures  for
              fixed  assets                (0.1)            (0.6)            (1.6)            (0.7)            (2.0)
            Proceeds  from
              disposal  of
              fixed  assets                  0.2                0.2                0.4                0.4                0.4
            Proceeds  from
              repayment  of
              note  receivable                -                2.0                2.9                2.0                9.9
                                              --------------------------------  ---------------------
        Total                                    28.2              13.1                9.1              41.3              15.9
                                              --------------------------------  ---------------------

        Financing  activities:
            Repayment  of
              capital  lease
              liabilities  and
              long  term  debt                  -                    -                    -                    -              (0.1)
            Payment  of
              dividends  on
              preferred  shares        (0.6)            (0.5)            (0.5)            (1.1)            (1.0)
            Repurchase  of
              preferred  shares        (0.4)            (0.4)                  -              (0.8)                  -
            Increase  in
              restricted  cash          (0.2)                  -                    -              (0.2)                  -
                                              --------------------------------  ---------------------
        Total                                    (1.2)            (0.9)            (0.5)            (2.1)            (1.1)
                                              --------------------------------  ---------------------

        Effect  of  currency
          translation  on
          cash                                          -              (0.3)                  -              (0.3)              0.1
                                              --------------------------------  ---------------------

        Increase  (decrease)
          in  cash  and  cash
          equivalents                      23.0              (0.9)            10.7              22.1                7.0

        Cash  and  cash
          equivalents,
          beginning  of
          period                                18.5              19.4              23.3              19.4              27.0
                                              --------------------------------  ---------------------

        Cash  and  cash
          equivalents,  end
          of  period                  $      41.5      $      18.5      $      34.0      $      41.5      $        34.0
                                              --------------------------------  ---------------------
                                              --------------------------------  ---------------------


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

                                                                                          Sept.  23,      June  24,    March  25,
                                                                                                  2005              2005              2005
                                                                                          ----------  ----------  ----------

        ASSETS

        Current  assets:
            Cash  and  cash  equivalents                            $      41.5      $      18.5      $      19.4
            Short-term  investments                                                -              28.1              39.6
            Restricted  cash                                                        14.1              13.9              13.9
            Trade  accounts  receivable  -  net                        23.3              20.9              23.2
            Other  receivables                                                      3.1                3.9                4.2
            Note  receivable                                                              -                    -                0.1
            Inventories                                                                21.1              22.1              23.2
            Prepaid  expenses  and  other                                    8.8                7.7                5.9
                                                                                          ----------  ----------  ----------
                                                                                                111.9            115.1            129.5
        Fixed  assets  -  net                                                      30.8              32.2              33.4
        Deferred  income  tax  assets  -  net                            3.7                3.4                3.5
        Other  assets                                                                    6.6                4.6                4.9
                                                                                          ----------  ----------  ----------
                                                                                          $    153.0      $    155.3      $    171.3
                                                                                          ----------  ----------  ----------
                                                                                          ----------  ----------  ----------


        LIABILITIES  AND  SHAREHOLDERS'  EQUITY

        Current  liabilities:
            Trade  accounts  payable                                  $      13.9      $      10.2      $      14.6
            Employee-related  accruals                                      9.0                9.0                9.6
            Income  and  other  taxes  payable                            3.7                3.3                3.5
            Current  portion  of  provisions
              for  exit  activities                                                1.0                3.1                7.9
            Other  accrued  liabilities                                      5.4                6.4                5.8
            Deferred  credits                                                        1.2                1.2                1.4
                                                                                          ----------  ----------  ----------
                                                                                                  34.2              33.2              42.8
        Long-term  debt                                                                0.1                0.1                0.1
        Long-term  portion  of  provision
          for  exit  activities                                                    0.6                0.8                0.9
        Pension  liabilities                                                    17.9              17.8              19.3
                                                                                          ----------  ----------  ----------
                                                                                                  52.8              51.9              63.1
                                                                                          ----------  ----------  ----------

        Redeemable  preferred  shares,
          unlimited  shares  authorized;
          1,305,900  shares  issued  and
          outstanding  as  at
          September  23,  2005                                                    16.7              17.0              17.2
                                                                                          ----------  ----------  ----------

        Shareholders'  equity:
        Common  shares,  unlimited  shares
          authorized;  no  par  value;
          127,308,973  shares  issued  and
          outstanding  as  at
          September  23,  2005                                                  768.4            768.4            768.4
        Additional  paid-in  capital                                        1.9                2.0                2.2
        Deficit                                                                        (653.5)        (650.6)        (646.5)
        Accumulated  other  comprehensive  loss                (33.3)          (33.4)          (33.1)
                                                                                          ----------  ----------  ----------
                                                                                                  83.5              86.4              91.0
                                                                                          ----------  ----------  ----------
                                                                                          $    153.0      $    155.3      $    171.3
                                                                                          ----------  ----------  ----------
                                                                                          ----------  ----------  ----------


                                                  Zarlink  Semiconductor  Inc.
                                                      SUPPLEMENTARY  SCHEDULES
                      (in  millions  of  U.S.  dollars,  except  per  share  amounts)
                                                                  (Unaudited)


        Cash,  Cash  Equivalents,  Short-Term  Investments  and  Restricted  Cash
        ------------------------------------------------------------------
 


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