We are aggressively managing through this slowdown to ensure we emerge as a stronger company, said Kirk Mandy, president and chief executive officer, Zarlink. 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 $10.3 million related mainly to Zarlink’s Canadian dollar denominated debenture, based on an exchange rate of CAD1.00 to $0.82 at December 26, 2008;
A gain of $3.6 million related to the repurchase of debt;
An impairment of $3.0 million in pre-paid expenses and receivables from MHS Electronics UK Ltd.;
An impairment of $1.2 million related to the fair value of assets held for sale in the UK, due to softening real estate markets;
Integration and severance costs of about $0.6 million ($0.5 million in cost of goods sold and $0.1 million in S&A).
At the end of the third quarter, cash and short-term investments totaled $45.5 million compared with $46.1 million at the end of the second quarter. During the quarter, the company used $2.6 million in cash to repurchase and cancel $6.5 million principal amount of its convertible debentures and $0.9 million to repurchase and cancel 3 million common shares.
Business review:
Revenue from Zarlink’s Communication Products group was $33.7 million compared with revenue of $39.7 million in the previous quarter. The acquisition of Legerity Holdings, Inc. accounted for $17.3 million in revenue in the third quarter, compared to $24.6 million in the Fiscal 2009 second quarter.
Medical Products revenue in the third quarter of Fiscal 2009 increased to $8.2 million, compared with $7.8 million in the previous quarter. Optical Products revenue in the third quarter was $5.5 million, compared with $6.8 million in the Fiscal 2009 second quarter. Custom and Other revenue in the third quarter of Fiscal 2009 was $6.4 million, compared with Fiscal 2009 second quarter revenue of $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.
Review of Operations:
Gross margin in the third quarter was 49%, which included integration costs of $0.5 million. This compares with gross margin of 50% in the previous quarter, which included integration costs of $0.8 million.
R&D expenses in the third quarter were $10.4 million or 19% of revenue. This compares with R&D expenses in the previous quarter of $11.2 million or 18% of revenue, which included integration costs of $0.1 million.
S&A expenses in the third quarter were $11.0 million or 20% of revenue, which included integration costs of $0.1 million. This compares with Fiscal 2009 second quarter S&A expenses of $13.6 million or 22% of revenue, which included proxy contest costs of $1.2 million and severance and integration costs of $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%. Zarlink’s current workforce is about 630 employees. No current development projects will be impacted by these actions. Annualized savings of about $8-10 million are expected as a result of this restructuring. Zarlink expects to record severance and other costs of $5-7 million, or $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 about $54 million, compared with an opening backlog of $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 $50 million and $52 million. Gross margins are expected to be 49% to 51% and operating expenses are expected to be about $22 million to $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 about break-even before restructuring costs.
