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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 2004
Commission File No. 1-8139
ZARLINK SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 March Road,
Ottawa, Ontario, Canada K2K 3H4
(Address of principal executive offices) (Postal Code)
(613)-592-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
As at July 16, 2004 there were 127,308,973 Common Shares of Zarlink
Semiconductor Inc., no par value, issued and outstanding.
ZARLINK SEMICONDUCTOR INC.
TABLE OF CONTENTS
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.....................................3
CONSOLIDATED BALANCE SHEETS......................................3
CONSOLIDATED STATEMENTS OF INCOME (LOSS).........................4
CONSOLIDATED STATEMENTS OF CASH FLOWS............................5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS...................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........20
ITEM 4. CONTROLS AND PROCEDURES..............................................21
PART II - OTHER INFORMATION...................................................22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................22
SIGNATURES....................................................................22
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Zarlink Semiconductor Inc.
CONSOLIDATED BALANCE SHEETS
(In millions of U.S. dollars, U.S. GAAP)
(Unaudited)
June 25, March 26,
2004 2004
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 23.3 $ 27.0
Short-term investments 54.6 54.8
Restricted cash 10.0 10.0
Trade accounts receivable, less allowance for
doubtful accounts of $0.3 (March 26, 2004 - $0.3) 29.2 24.1
Other receivables 3.3 2.3
Note receivable - net of deferred gain of $10.3
(March 26, 2004 - $17.1) 0.1 0.1
Inventories 25.1 20.8
Prepaid expenses and other 8.3 5.1
-------- --------
153.9 144.2
Fixed assets - net 40.0 41.1
Deferred income tax assets - net 7.3 7.5
Other assets 4.6 4.6
-------- --------
$ 205.8 $ 197.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 20.5 $ 15.0
Employee-related accruals 10.2 11.1
Income and other taxes payable 7.0 7.9
Provisions for exit activities 1.5 2.7
Other accrued liabilities 9.4 10.9
Deferred credits 0.6 0.7
Current portion of long-term debt 0.1 0.1
-------- --------
49.3 48.4
Long-term debt 0.1 0.1
Pension liabilities 16.9 16.7
-------- --------
66.3 65.2
-------- --------
Redeemable preferred shares, unlimited shares
authorized; 1,390,300 shares issued and
outstanding (March 26, 2004 - 1,390,300) 17.6 17.6
-------- --------
Commitments (Note 8)
Shareholders' equity:
Common shares, unlimited shares authorized;
no par value; 127,302,973 shares issued
and outstanding (March 26, 2004 - 127,301,411) 768.4 768.4
Additional paid-in capital 2.4 2.3
Deficit (616.5) (623.5)
Accumulated other comprehensive loss (32.4) (32.6)
-------- --------
121.9 114.6
-------- --------
$ 205.8 $ 197.4
======== ========
(See accompanying notes to the consolidated financial statements)
3
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In millions of U.S. dollars, except per share amounts, U.S. GAAP)
(Unaudited)
Three Months Ended
June 25, June 27,
2004 2003
--------- ---------
Revenue $ 55.8 $ 53.7
Cost of revenue 30.6 28.1
--------- ---------
Gross margin 25.2 25.6
--------- ---------
Expenses:
Research and development 14.9 19.2
Selling and administrative 10.6 11.6
Gain on sale of business (7.0) --
Stock compensation expense 0.1 --
--------- ---------
18.6 30.8
--------- ---------
Income (loss) from operations 6.6 (5.2)
Other expense - net (0.1) (0.7)
--------- ---------
Income (loss) before income taxes 6.5 (5.9)
Income tax (expense) recovery 1.0 (0.3)
--------- ---------
Net income (loss) for the period $ 7.5 $ (6.2)
========= =========
Net income (loss) attributable to common
shareholders after preferred share dividends $ 7.0 $ (6.7)
========= =========
Net income (loss) per common share:
Basic and diluted $ 0.05 $ (0.05)
========= =========
Weighted average number of common shares
outstanding (millions):
Basic 127.3 127.3
========= =========
Diluted 127.5 127.3
========= =========
(See accompanying notes to the consolidated financial statements)
4
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of U.S. dollars, U.S. GAAP)
(Unaudited)
Three Months Ended
June 25, June 27,
2004 2003
------- -------
CASH PROVIDED BY (USED IN)
Operating activities:
Net income (loss) for the period $ 7.5 $ (6.2)
Depreciation of fixed assets 2.3 3.6
Amortization of other assets -- 0.3
Other non cash changes in operating activities (7.0) 1.0
Stock compensation expense 0.1 --
Deferred income taxes 0.2 0.1
Decrease (increase) in working capital:
Trade accounts and other receivables (6.1) (7.4)
Inventories (4.3) 0.8
Prepaid expenses and other (3.2) (3.0)
Payables and accrued liabilities 0.6 1.3
Deferred credits (0.1) (0.2)
------- -------
Total (10.0) (9.7)
------- -------
Investing activities:
Purchased short-term investments (54.6) (62.3)
Matured short-term investments 54.8 89.5
Expenditures for fixed and other assets (0.4) (1.2)
Proceeds from disposal of fixed and other assets -- 0.4
Proceeds from repayment of note receivable 7.0 --
------- -------
Total 6.8 26.4
------- -------
Financing activities:
Repayment of capital lease liabilities
and long term debt (0.1) (0.2)
Payment of dividends on preferred shares (0.5) (0.5)
Repurchase of preferred shares -- (0.4)
------- -------
Total (0.6) (1.1)
------- -------
Effect of currency translation on cash 0.1 0.1
------- -------
Increase (decrease) in cash and cash equivalents (3.7) 15.7
Cash and cash equivalents, beginning of period 27.0 23.5
------- -------
Cash and cash equivalents, end of period $ 23.3 $ 39.2
======= =======
(See accompanying notes to the consolidated financial statements)
5
Zarlink Semiconductor Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In millions of U.S. dollars, except per share amounts, U.S. GAAP)
(Unaudited)
1. Basis of presentation
These unaudited interim consolidated financial statements have been
prepared by Zarlink Semiconductor Inc. (Zarlink or the Company) in United
States (U.S.) dollars, unless otherwise stated, and in accordance with
accounting principles generally accepted in the U.S. for interim financial
statements and with the instructions to Form 10-Q and Regulation S-X
pertaining to interim financial statements. Accordingly, these interim
consolidated financial statements do not include all information and
footnotes required by generally accepted accounting principles (GAAP) for
complete financial statements. In the opinion of management of the
Company, the unaudited interim consolidated financial statements reflect
all adjustments, which consist only of normal and recurring adjustments,
necessary to present fairly the financial position at June 25, 2004, and
the results of operations and cash flows of the Company for the three
month periods ended June 25, 2004 and June 27, 2003, respectively, in
accordance with U.S. GAAP, applied on a consistent basis. The consolidated
financial statements include the accounts of Zarlink and its wholly owned
subsidiaries. Intercompany transactions and balances have been eliminated.
Canadian GAAP financial statements for interim periods are also prepared
and presented to shareholders.
The balance sheet at March 26, 2004 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements
should be read in conjunction with the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year
ended March 26, 2004. The Company's fiscal year-end is the last Friday in
March.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year or future
periods.
2. Stock-based compensation
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS 123 for awards granted or modified after
April 1, 1995, as if the Company had accounted for its stock-based awards
to employees under the fair value method of SFAS 123. The fair value of
the Company's stock-based awards to employees was estimated using a
Black-Scholes option pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Three Months Ended
June 25, June 27,
2004 2003
------- -------
Net income (loss), as reported $ 7.5 $ (6.2)
Adjustments:
Stock compensation expense as reported 0.1 --
Pro forma stock compensation expense (2.9) (3.1)
------- -------
Pro forma net income (loss) $ 4.7 $ (9.3)
------- -------
Net income (loss) per common share, as reported
Basic and diluted $ 0.05 $ (0.05)
------- -------
Pro forma net income (loss) per common share:
Basic and diluted $ 0.03 $ (0.08)
------- -------
6
Based upon the fair value method of accounting for stock compensation
expense, the pro forma net income for the quarter ended June 25, 2004, was
decreased by $2.8 as compared to the net income, as reported. For the
quarter ended June 27, 2003, the pro forma net loss was increased by $3.1.
Pro forma financial information required by SFAS 123 has been determined
as if the Company had accounted for its employee stock options using the
Black-Scholes fair value option pricing model with the following
weighted-average assumptions for the three month fiscal periods ended June
25, 2004 and June 27, 2003:
Three Months Ended
June 25, June 27,
2004 2003
-------- --------
Weighted average fair value price of the
options granted during the quarter $ 1.97 $ 2.31
Risk free interest rate 4.06% 3.19%
Dividend yield Nil Nil
Volatility factor of the expected market
price of the Company's common stock 65.4% 68.2%
Weighted-average expected life of the options 4.1 Years 3.3 Years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period on a
straight-line basis.
3. Inventories
June 25, March 26,
2004 2004
-------- ---------
Raw materials $ 2.7 $ 2.2
Work-in-process 16.8 13.3
Finished goods 5.6 5.3
------- -------
$ 25.1 $ 20.8
======= =======
4. Fixed assets
June 25, March 26,
2004 2004
-------- ---------
Cost $ 194.7 $ 193.6
Accumulated depreciation (154.7) (152.5)
--------- ---------
$ 40.0 $ 41.1
========= =========
5. Note receivable
June 25, March 26,
2004 2004
-------- ---------
Note receivable, non-interest bearing $ 10.4 $ 17.2
Less: Deferred gain (10.3) (17.1)
------- -------
0.1 0.1
Less: current portion (0.1) (0.1)
------- -------
$ -- $ --
======= =======
Based upon the terms of the Plymouth Foundry sale agreement with X-FAB
Semiconductor Foundries AG (X-FAB), payment of the note receivable was
scheduled to occur in two installments of $10.0 and $8.0. During the first
quarter of Fiscal 2005, X-FAB exercised its option to make early payments
totaling $7.0 against the $10.0 installment due in the second quarter of
Fiscal 2005. As a result of the early payments, the Company recognized a
gain on sale of business of $7.0 during the first quarter of Fiscal 2005.
Based upon the terms of the sale agreement, the note receivable was
discounted by $0.1 as a result of the early payments made by X-FAB. This
discount was applied against the remaining $3.0 installment due in the
second
7
quarter of Fiscal 2005. On July 1, 2004, the Company received a payment of
$2.9 from X-FAB, to settle the installment due at that time. The Company
will recognize a gain on sale business of $2.9 during the second quarter
of Fiscal 2005 (See also Note 17).
The final installment payment of $8.0 is due from X-FAB in the first
quarter of Fiscal 2006.
6. Provisions for exit activities
The remaining balance in the restructuring provision relates to idle and
excess space as a result of exit activities implemented and completed in
previous years, and will be paid over the lease term unless settled
earlier.
The following table summarizes the continuity of these restructuring
provisions for the three months ended June 25, 2004:
Workforce Lease and contract
Reduction settlement Total
--------- ------------------ -----
Balance, March 26, 2004 $ 0.7 $ 2.0 $ 2.7
Cash drawdowns during quarter (0.7) (0.5) (1.2)
------ ------ ------
Balance, June 25, 2004 $ -- $ 1.5 $ 1.5
====== ====== ======
7. Guarantees
Performance guarantees are contracts that contingently require the
guarantor to make payments to the guaranteed party based on another
entity's failure to perform under an obligating agreement. The Company has
an outstanding performance guarantee related to a managed services
agreement (project agreement) undertaken by the Systems business, which
was sold to companies controlled by Dr. Terence H. Matthews on February
16, 2001 and is now operated as Mitel Networks Corporation (Mitel). This
performance guarantee remained with the Company following the sale of the
Systems business to Dr. Matthews. The project agreement and the Company's
performance guarantee extend until July 16, 2012. The terms of the project
agreement continue to be fulfilled by Mitel. The maximum potential amount
of future undiscounted payments the Company could be required to make
under the guarantee, at June 25, 2004, was $36.4 (20.0 British Pounds),
assuming the Company is unable to secure the completion of the project.
The Company was not aware of any factors as at June 25, 2004 that would
prevent the project's completion under the terms of the agreement. In the
event that Mitel is unable to fulfill the commitments of the project
agreement, the Company believes that an alternate third-party contractor
could be secured to complete the agreement requirements. The Company has
not recorded a liability in its consolidated financial statements
associated with this guarantee.
The Company periodically has entered into agreements with customers and
suppliers that include limited intellectual property indemnifications that
are customary in the industry. These guarantees generally require the
Company to compensate the other party for certain damages and costs
incurred as a result of third party intellectual property claims arising
from these transactions. The nature of the intellectual property
indemnification obligations prevents the Company from making a reasonable
estimate of the maximum potential amount it could be required to pay to
its customers and suppliers. Historically, the Company has not made any
significant indemnification payments under such agreements and no amount
has been accrued in the accompanying consolidated financial statements
with respect to these indemnification obligations.
In connection with the sale of the Systems business on February 16, 2001,
the Company provided to the purchaser certain income tax indemnities with
an indefinite life and with no maximum liability for the taxation periods
up to February 16, 2001, the closing date of the sale. As at June 25,
2004, the taxation years 2000 to February 16, 2001 were subject to audit
by taxation authorities in certain foreign jurisdictions.
On November 19, 2002, the Company provided security to the financial
institution of a subsidiary in the form of a guarantee in relation to the
subsidiary's liability for custom and excise duties. As at June 25, 2004,
the maximum amount of the guarantee was $2.9 ($1.6 British Pounds).
The Company records a liability based on its historical experience with
warranty claims. The warranty accrual was immaterial for the quarter ended
June 25, 2004.
8
Based upon the transition rules outlined in FASB Interpretation no. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees of Indebtedness of Others", no amounts have been recorded by
the Company related to the above-mentioned items.
8. Commitments
The Company had letters of credit outstanding as at June 25, 2004 of
approximately $9.4 (June 27, 2003 - $6.2), which expire within seven
months. Cash and cash equivalents of $9.4 have been pledged as security
against certain outstanding letters of credit, and are presented as
restricted cash. Of this amount, $8.0 was issued to secure letters of
credit related to the Company's pension plan in Sweden, and $0.7 of
letters of credit were outstanding related to the Company's Senior
Executive Retirement Plan (SERP). In addition, $0.7 was issued to secure
certain obligations under a performance guarantee and office lease
arrangement. The Company has also pledged $0.6 as security for a custom
bond and related credit facilities.
9. Redeemable Preferred Shares
There were no preferred shares purchased during the three months ended
June 25, 2004. As at June 25, 2004, there were 13,200 repurchased
preferred shares that had not been cancelled by the transfer agent. These
preferred shares were repurchased during Fiscal 2004.
During the first quarter of Fiscal 2005, the Company declared and paid
dividends on its redeemable preferred shares of $0.5 based on a quarterly
dividend of $0.37 (Cdn $0.50) per share.
10. Capital stock
a) The Company has not declared or paid any dividends on its common
shares.
b) A summary of the Company's stock option activity is as follows:
Three Months Ended
-----------------------------
June 25, June 27,
2004 2003
---------- ----------
Outstanding Options:
Balance, beginning of period 11,534,680 10,828,557
Granted 298,000 106,500
Exercised (1,562) (8,582)
Forfeited (156,321) (646,022)
---------- ----------
Balance, end of period 11,674,797 10,280,453
========== ==========
As at June 25, 2004, there were 2,830,225 (March 26, 2004 - 2,971,904)
options available for grant under the stock option plan approved by the
Company's shareholders on December 7, 2001. The exercise price of
outstanding stock options ranges from $2.52 to $27.69 per share with
exercise periods extending to June 2010. The exercise price of stock
options issued in Canadian dollars was translated at the U.S. dollar
exchange rate on June 25, 2004.
c) The net income (loss) per common share figures were calculated based on
the net income (loss) after the deduction of preferred share dividends and
using the weighted monthly average number of shares outstanding during the
respective periods. Diluted earnings per share is computed in accordance
with the treasury stock method based on the average number of common
shares and dilutive common share equivalents.
9
The common shares and dilutive common share equivalents used in the
computation of the Company's basic and diluted earnings per common share
are as follows:
Three Months Ended
--------------------------
June 25, June 27,
2004 2003
----------- -----------
Weighted average common shares outstanding 127,302,973 127,273,898
Dilutive effect of stock options 149,619 --
----------- -----------
Weighted average common shares outstanding,
assuming dilution 127,452,592 127,273,898
=========== ===========
For the three months ended June 27, 2003, 612,952 stock options have been
excluded from the computation of diluted loss per share because they were
anti-dilutive due to the reported net loss for the period.
The following stock options were excluded from the computation of common
share equivalents because the options' exercise price exceeded the average
market price of the common shares, thereby making them anti-dilutive:
Three Months Ended
------------------------------
June 25, June 27,
2004 2003
-------- --------
Number of outstanding options 8,965,608 7,698,178
Average exercise price per share $ 8.85 $ 10.63
The average exercise price of stock options granted in Canadian dollars
was translated at the closing period-end U.S. dollar exchange rate.
11. Accumulated other comprehensive income (loss)
The components of total comprehensive income (loss) were as follows:
Three Months Ended
June 25, June 27,
2004 2003
-------- --------
Net income (loss) for the period $ 7.5 $ (6.2)
Other comprehensive income (loss):
Realized net derivative loss on cash flow hedges 0.2 0.1
Unrealized net derivative gains on cash flow hedges -- 0.1
------ ------
Total comprehensive income (loss) for the period $ 7.7 $ (6.0)
====== ======
The changes to accumulated other comprehensive loss for the three months
ended June 25, 2004 were as follows:
Realized and
Cumulative Unrealized Net
Translation Gain (Loss) on
Account Derivatives Total
----------- --------------- -----
Balance, March 26, 2004 $ (32.4) $ (0.2) $ (32.6)
Change during the three months
ended June 25, 2004 -- 0.2 0.2
------- ------ -------
Balance, June 25, 2004 $ (32.4) $ -- $ (32.4)
======= ====== =======
10
The Company recorded an increase in other comprehensive income in the
three months ended June 25, 2004 of $0.2, as compared to a decrease in
other comprehensive loss of $0.2 in the three months ended June 27, 2003.
These changes were attributable to the change in the fair value of
outstanding foreign currency option and forward contracts related to the
Company's hedging program that were designated as cash flow hedges. There
were no material derivative gains or losses included in other
comprehensive income at June 25, 2004.
12. Other expense - net
Three Months Ended
June 25, June 27,
2004 2003
---- ----
Interest income $ 0.2 $ 0.3
Foreign exchange loss (0.3) (1.0)
------- ------
Other expense - net $ (0.1) $ (0.7)
====== ======
13. Income taxes
An income tax recovery of $1.0 was recorded for the first quarter of
Fiscal 2005, as a result of a recovery of domestic and foreign income
taxes, compared with an expense of $0.3 for the corresponding period in
Fiscal 2004. The recovery of $1.0 related to the release of previously
recognized provision no longer required as a result of settlements with
tax authorities. In addition, the Company recorded a recovery of $0.2
relating to income tax refunds received in excess of provisions previously
recorded, offset by income tax expense of $0.2.
The Company has a valuation allowance against its deferred tax assets at
June 25, 2004 of $174.5 (March 26, 2004 - $176.8). The decrease relates
mainly to the reversal of temporary differences and losses incurred in the
Company's foreign jurisdictions and temporary differences in the Company's
foreign and domestic operations. Management has determined that sufficient
uncertainties exist regarding the realization of certain of its deferred
tax assets.
Management periodically reviews the Company's valuation allowance to
determine whether the overall tax estimates are reasonable. When
management performs its quarterly assessments of the valuation allowance,
it may be determined that an adjustment is required to the valuation
allowance, which may have a material impact on the Company's financial
position and results of operations.
14. Information on business segments
Business Segments
The Company's operations are comprised of three reportable business
segments - Network Communications, Consumer Communications, and Ultra
Low-Power Communications. Reportable segments are business units that
offer different products and services, employ different production
processes and methods of distribution, sell to different customers, and
are managed separately because of these differences.
The Company targets the communications industry with products that
specialize in broadband connectivity solutions over wired, wireless and
optical media, as well as through ultra low-power communications
solutions. The Network Communications business segment offers products
that provide connectivity to the enterprise and metro sectors such as
feeder, aggregation and transmission applications, and products that
address the multi-protocol physical and network layers. The Consumer
Communications business segment offers products that allow users to
connect to the network. These products include wireless (for example,
cellular chipsets) and infotainment applications (for example, set-top
boxes and digital TV). The Ultra Low-Power Communications business segment
provides Application-Specific Integrated Circuit (ASIC) and
Application-Specific Standard Product (ASSP) solutions for applications
such as pacemakers, hearing aids, portable instruments and electronic
shelf labels.
11
The Chief Executive Officer (CEO) is the chief operating decision maker in
assessing the performance of the segments and the allocation of resources
to the segments. The CEO evaluates the financial performance of each
business segment and allocates resources based on operating income. The
Company does not allocate stock compensation expense, special charges or
gains, interest income, interest expense or income taxes to its reportable
segments. In addition, the Company does not use a measure of segment
assets to assess performance or allocate resources. As a result, segmented
asset information is not presented; however, depreciation of fixed assets
is allocated to the segments based on the estimated asset usage. The
accounting policies of the reportable segments are the same as those of
the Company as reflected in the consolidated financial statements.
Three Months Ended June 25, 2004 Network Consumer Ultra Low-Power Unallocated
Communications Communications Communications Recoveries Total
(Costs)
----------------- ------------------- ------------------ ------------- -------------
Total external sales revenue $ 25.9 $ 19.2 $ 10.7 $ -- $ 55.8
Depreciation of buildings and equipment
1.0 0.8 0.5 -- 2.3
Gain on sale of business -- -- -- 7.0 7.0
Stock compensation expense -- -- -- (0.1) (0.1)
Segment's operating income (loss) $ 2.1 $ (2.0) $ (0.4) $ 6.9 $ 6.6
Network Consumer Ultra Low-Power Unallocated
Three Months Ended June 27, 2003 Communications Communications Communications Costs Total
------------------- ------------------- ------------------ ------------- -------------
Total external sales revenue $ 29.3 $ 13.4 $ 11.0 $ -- $ 53.7
Depreciation of buildings and equipment 1.8 1.1 0.7 -- 3.6
Segment's operating income (loss) $ (1.7) $ (4.5) $ 1.0 -- (5.2)
15. Supplementary cash flow information
The following table summarizes the Company's other non cash changes in
operating activities:
Three Months Ended
----------------------
June 25, June 27,
2004 2003
---- ----
Cash provided by (used in)
Gain on disposal of fixed assets $ (0.1) $ --
Gain on sale of business (7.0) --
Change in pension liabilities 0.2 1.1
Other (0.1) (0.1)
------ ------
Other non cash changes in operating activities $ (7.0) $ 1.0
====== ======
16. Comparative figures
Certain of the Fiscal 2004 comparative figures have been reclassified to
conform to the presentation adopted in Fiscal 2005.
17. Subsequent event
Based upon the terms of the Plymouth Foundry sale agreement, the note
receivable was discounted by $0.1 as a result of the early payments made
by X-FAB. This discount was applied against the remaining $3.0 installment
due in the second quarter of Fiscal 2005. On July 1, 2004, the Company
received a payment of $2.9 from X-FAB, to settle the installment due at
that time. The Company will recognize a gain on sale business of $2.9
during the second quarter of Fiscal 2005 (See also Note 5).
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in millions of U.S. dollars, except per share amounts,
and in accordance with U.S. GAAP)
Overview
For almost 30 years, Zarlink Semiconductor has delivered the integrated circuit
(IC) building blocks that drive the capabilities of voice, enterprise, broadband
and wireless communications. Zarlink is a global provider of microelectronics
for voice and data networks, and consumer and ultra low-power communications.
The following discussion and analysis explains trends in Zarlink's financial
condition and results of operations for the three months ended June 25, 2004,
compared with the corresponding period in the previous fiscal year. This
discussion is intended to help shareholders and other readers understand the
dynamics of Zarlink's business and the key factors underlying its financial
results. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q, and
with the Company's audited consolidated financial statements and notes thereto
for the fiscal year ended March 26, 2004.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") that are based on current expectations, estimates and
projections about the industries in which the Company operates, management's
beliefs and assumptions made by management. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions,
which are difficult to predict. Accordingly, actual outcomes and results may
differ materially from results forecasted or suggested in such forward-looking
statements.
Such risks, uncertainties and assumptions include, among others, the following:
increasing price and product/service competition by foreign and domestic
competitors, including new entrants; rapid technological developments and
changes; the ability to continue to introduce competitive new products on a
timely, cost-effective basis; delays in product development; product mix; the
ability to ensure continuity of supply from outside fabrication services;
changes in environmental and other domestic and foreign governmental
regulations; protection and validity of patent and other intellectual property
rights; import protection and regulation; industry competition; industry
capacity and other industry trends; the ability of the Company to attract and
retain key employees; demographic changes and other factors referenced in the
Company's Annual Report on Form 10-K for the fiscal year ended March 26, 2004.
The above factors are representative of the risks, uncertainties and assumptions
that could affect the outcome of the forward-looking statements. In addition,
such statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions, including
interest rate and currency exchange rate fluctuations and other risks,
uncertainties and assumptions, as described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 26, 2004, including those identified
under "Forward-Looking Statements and Risk Factors". In making these
forward-looking statements, which are identified by words such as "will",
"expects", "intends", "anticipates" and similar expressions, the Company claims
the protection of the safe-harbor for forward-looking statements contained in
the Reform Act. The Company undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise.
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 25, 2004
Summary of Results from Operations Three Months Ended
-----------------------------
(millions of U.S. dollars, except per share amounts) June 25, 2004 June 27, 2003
- ---------------------------------------------------- ------------- -------------
Consolidated revenue $ 55.8 $ 53.7
Network Communications segment revenue 25.9 29.3
Consumer Communications segment revenue 19.2 13.4
Ultra Low-Power Communications segment revenue 10.7 11.0
Operating income (loss) 6.6 (5.2)
Network Communications segment operating income (loss) 2.1 (1.7)
Consumer Communications segment operating loss (2.0) (4.5)
Ultra Low-Power Communications segment operating income (loss) (0.4) 1.0
Unallocated recoveries - net 6.9 --
Net income (loss) for the period 7.5 (6.2)
Net income (loss) per common share
Basic and diluted 0.05 (0.05)
Weighted average common shares outstanding - millions
Basic 127.3 127.3
Diluted 127.5 127.3
Revenue in the first quarter of Fiscal 2005 was $55.8, up 4% from revenue of
$53.7 in the first quarter of Fiscal 2004. Despite continuing challenges in the
semiconductor industry, significant revenue improvements were achieved in the
Company's Consumer Communications business segment.
In addition, the Company experienced higher sequential bookings in the first
quarter of Fiscal 2005, as well as higher bookings than those experienced during
the same period in Fiscal 2004.
In the first quarter of Fiscal 2005, the Company recorded net income of $7.5, or
$0.05 per share. This compares to a net loss of $6.7, or $0.05 per share, in the
first quarter of Fiscal 2004. The net income in the first quarter of Fiscal 2005
included a gain on sale of foundry business of $7.0, and lower operating
expenses as a result of the cost reduction activities implemented in Fiscal
2004.
Zarlink's operations are comprised of three reportable business segments -
Network Communications, Consumer Communications, and Ultra Low-Power
Communications. Zarlink targets the network and consumer communications
industries with offerings that specialize in broadband connectivity solutions
over wired, wireless and optical media. Zarlink's Ultra Low-Power communications
segment provides ultra low-power ASIC solutions for applications such as
pacemakers, hearing aids and portable instruments. Zarlink sells its products
through both direct and indirect channels of distribution. Factors affecting the
choice of distribution include, among others, end-customer type, the level of
product complexity, the stage of product introduction, geographic presence and
location of markets, and volume levels.
Network Communications
Three Months Ended
------------------------
Network Communications June 25, June 27,
(millions of U.S. dollars) 2004 2003
-------- --------
Revenue: $ 25.9 $ 29.3
====== ======
As a % of total revenue 47% 55%
Operating income (loss) $ 2.1 $ (1.7)
====== ======
Zarlink's Network Communications segment specializes in microelectronic
solutions for broadband connectivity over wired and optical media. The product
line enables voice and data convergence for high-speed internet systems,
switching
14
systems, and subscriber access systems. In simple terms, Network Communications
semiconductor products connect network equipment together.
Revenue for the first quarter of Fiscal 2005 totaled $25.9, down 12% from the
first quarter of Fiscal 2004 as a result of production issues at the Company's
foundry suppliers which delayed shipment of certain orders in the quarter.
Reduced capital spending in the market continues to impact demand by networking
companies. Revenue declines were a result of decreased sales volumes of the
Company's packet processing, voice processing, and specialty products during the
quarter. The overall decline in revenue was predominantly due to lower revenue
from the Asia/Pacific region.
Despite lower revenues, the segment had operating income of $2.1 in the first
quarter of Fiscal 2005, as compared to an operating loss of $1.7 in the first
quarter of Fiscal 2004. During Fiscal 2005, the segment benefited from savings
realized from headcount and cost reductions implemented during Fiscal 2004.
Consumer Communications
Three Months Ended
----------------------
Consumer Communications June 25, June 27,
(millions of U.S. dollars) 2004 2003
---- ----
Revenue:
$ 19.2 $ 13.4
====== ======
As a % of total revenue 34% 25%
Operating loss $ (2.0) $ (4.5)
====== ======
Zarlink's Consumer Communications products allow users to connect to the
network. These products include wireless (for example, cellular chipsets) and
infotainment applications (for example, terrestrial and satellite set-top boxes
and digital TV).
Revenue for the first quarter of Fiscal 2005 totaled $19.2, up 43% from the
first quarter of Fiscal 2004. Revenue improvements were driven by increased
shipments of the Company's tuners and demodulators, despite price pressure on
these products. These improvements were partially offset by a decrease in the
sales volumes of the Company's specialty products.
The segment's operating loss during the first quarter of Fiscal 2005 decreased
to $2.0, down $2.5 from the same period of Fiscal 2004. This was due primarily
to revenue improvements as well as savings realized from cost reduction
activities implemented during Fiscal 2004.
Ultra Low-Power Communications
Three Months Ended
----------------------
Ultra Low-Power Communications June 25, June 27,
(millions of U.S. dollars) 2004 2003
---- ----
Revenue:
$ 10.7 $ 11.0
====== ======
As a % of total revenue 19% 20%
Operating income (loss) $ (0.4) $ 1.0
====== ======
Zarlink's Ultra Low-Power Communications business provides ASIC and ASSP
solutions for applications such as cardiac pacemakers, hearing aids, portable
instruments, electronic shelf labels, and personal area communications devices.
Revenue for the first quarter of Fiscal 2005 totaled $10.7, down 3% from the
first quarter of Fiscal 2004, due mainly to decreased sales volumes of hearing
aid components and pacemaker circuits, partially offset by an increase in the
sales volume of wireless products.
15
The segment had an operating loss of $0.4 in the first quarter of Fiscal 2005,
as compared to operating income of $1.0 in the same period of Fiscal 2004, due
principally to a product mix resulting in lower margins, as well as revenue
decreases.
GEOGRAPHIC REVENUE
Revenue, based on the geographic location of customers, was distributed as
follows:
Three Months Ended
-----------------------------------------
(millions of U.S. dollars) June 25, % of June 27, % of
2004 Total 2003 Total
---- ----- ---- -----
Asia/Pacific $ 24.0 43% $ 22.5 42%
Europe 16.0 29 16.8 31
United States 11.6 20 12.3 23
Canada 2.1 4 1.6 3
Other Regions 2.1 4 0.5 1
------ ---- ------ ----
Total $ 55.8 100% $ 53.7 100%
====== ==== ====== ====
Asia/Pacific
Asia/Pacific revenue increased by 7% during the first quarter of Fiscal 2005
compared to the first quarter of Fiscal 2004, and continues to represent the
largest geographic segment of customer revenues. The increase in the first
quarter of Fiscal 2005 was driven primarily by increased shipments of the
Company's tuners and demodulators, partially offset by a revenue decrease in
voice processing and specialty products within the Network Communications
segment.
Europe
European revenues decreased by 5% in the first quarter of Fiscal 2005 compared
to the first quarter of Fiscal 2004 due to revenue declines of the Company's
packet processing and specialty products within the Network Communications
segment. These declines were partially offset by increased wireless product
revenues in the Ultra Low-Power Communications segment.
United States
Revenue to customers in the United States decreased by 6% during the first
quarter of Fiscal 2005 compared to the first quarter of Fiscal 2004, due
primarily to lower shipments of the Company's hearing aid products.
Canada
Canadian revenue in the first quarter of Fiscal 2005 increased by 31% as
compared to the same period in Fiscal 2004 due to higher specialty product
revenue within the Network Communications segment.
Other
Revenue to customers in other regions increased by $1.6 during the first quarter
of Fiscal 2005 compared to the first quarter of Fiscal 2004 as a result of
higher wireless product revenues within the Consumer Communications segment.
GROSS MARGIN
Three Months Ended
----------------------
(millions of U.S. dollars) June 25, June 27,
2004 2003
---- ----
Gross margin $ 25.2 $ 25.6
As a percentage of revenue 45% 48%
Gross margin in the first quarter of Fiscal 2005 was 45%, a decrease of 3% from
the same period in Fiscal 2004. The margin decreases were driven primarily from
unfavorable product mixes across all of the Company's business segments,
16
particularly in the Company's Timing, TDM switching, Optoelectronic, and
Wireless product lines. The Company was unable to ship certain higher-margin
Network Communications products due to production issues at one of the Company's
foundry suppliers. In addition, the Company experienced increasing price
pressure on the sale of tuners and demodulators. These negative impacts were
partially offset by a more favorable product mix within the Company's specialty
product lines.
OPERATING EXPENSES
Research and Development ("R&D")
Three Months Ended
----------------------
(millions of U.S. dollars) June 25, June 27,
2004 2003
---- ----
R&D expenses $ 14.9 $ 19.2
As a percentage of revenue 27% 36%
R&D expenses decreased by 22%, or $4.3, in the first quarter of Fiscal 2005 from
the same period in Fiscal 2004. The decreases resulted mainly from savings
generated as a result of cost reduction activities and headcount reductions
implemented during Fiscal 2004. During Fiscal 2004, the Company reduced its R&D
headcount by 147 employees. The Company continues to refocus its R&D resources
on programs and products that demonstrate superior potential for near and
medium-term revenue. In the Network Communications business segment, R&D
activities focused on the following areas:
o Network Timing and Synchronization - Digital and Analog Phase Lock
Loops (PLL) solutions for T1/E1 to SONET/SDH equipment requiring
accurate and standards driven timing and synchronization;
o TDM over Internet Protocol (IP) Processing Solutions - Meeting
network convergence with TDM over IP processing solutions for
applications requiring Circuit Switched Traffic over Packet Domains;
o Packet Switching - Fast Ethernet (FE) to Gigabit Ethernet (GbE)
switching for communication backplanes and linecards;
o Voice Processing Solutions - Low, medium and high-density voice echo
cancellation solutions meeting G.168 standards for wireless, wired
and enterprise segments;
o Time Division Multiplex (TDM) Switching - Solutions to set new
industry standards for channel density, levels of integration,
feature sets and power density for enterprise, edge and metro
segments; and
o Receivers and transmitters for single mode fiber (SMF) targeting the
access network as well as industrial applications where
customization is required.
In the Consumer Communications business segment, R&D activities focused on the
following areas:
o Providing tuner, demodulator and peripheral chips for satellite,
cable and terrestrial digital set-top boxes, integrated digital
televisions and adapter boxes; and
o Development of the most highly integrated system-on-a-chip solution
for integrated Digital Terrestrial Televisions, Digital Terrestrial
Set-top boxes, adapter boxes and media centers, compliant with the
Digital Video Broadcasting - Terrestrial (DVB-T) standard.
In the Ultra Low-Power Communications business segment, R&D activities focused
on semiconductor solutions and technologies for a variety of applications where
low-power consumption is an important differentiating feature, including:
o More application-specific standard products (ASSPs) as opposed to
custom products;
o Surge protection ASSPs used in implantable pacemakers and
defibrillators for cardiac rhythm management;
o High performance custom Coder/Decoders (CODECs) chips for major
hearing aid companies;
17
o High performance, ultra low-power audio data converter ASSPs,
intended for use in digital microphones, for high growth
communications and entertainment applications; and
o Ultra low-power integrated circuits supporting short-range wireless
communications for industrial applications such as electronic shelf
labels, and healthcare applications such as implantable devices and
swallowable camera capsules.
Selling and Administrative ("S&A")
Three Months Ended
----------------------
(millions of U.S. dollars) June 25, June 27,
2004 2003
---- ----
S&A Expenses $ 10.6 $ 11.6
As a percentage of revenue 19% 22%
S&A expenses decreased by 9%, or $1.0, in the first quarter of Fiscal 2005 from
the same period in Fiscal 2004. The Company reduced its headcount within sales,
marketing, and other administrative functions in France, Canada, and various
other geographic regions in Fiscal 2004. These headcount reductions, as well as
other cost reduction activities implemented during Fiscal 2004 resulted in a
reduction of S&A expense in the first quarter of Fiscal 2005.
Stock Compensation
The Company records stock compensation expense arising from certain stock
options subjected to option exchange programs and from stock options awarded to
former employees. During the three months ended June 25, 2004, the Company
recorded stock compensation expense of $0.1 (2003 - nil), representing
amortization of the fair value of stock options awarded to a former employee.
Gain on Sale of Business
During Fiscal 2002, the Company sold its wafer fabrication facility in Plymouth,
U.K., as well as certain intellectual property and related foundry businesses to
companies controlled by X-FAB Semiconductor Foundries AG (X-FAB) of Erfurt,
Germany for $30.0, represented by $12.0 in cash on closing and a note of $18.0
repayable over three years. At the time of the sale, the gain on sale was
deferred and netted against the carrying value of the note receivable. The
Company will recognize the gain as payments are made on the note receivable.
Based upon the terms of the Plymouth Foundry sale agreement with X-FAB, payment
of the note receivable was scheduled to occur in two installments of $10.0 and
$8.0. During the first quarter of Fiscal 2005, X-FAB exercised its option to
make early payments totaling $7.0 against the $10.0 installment due in the
second quarter of Fiscal 2005. As a result of the early payments, the Company
recognized a gain on sale of business of $7.0 during the first quarter of Fiscal
2005.
Based upon the terms of the sale agreement, the note receivable was discounted
by $0.1 as a result of the early payments made by X-FAB. This discount was
applied against the remaining $3.0 installment due in the second quarter of
Fiscal 2005. On July 1, 2004, the Company received a payment of $2.9 from X-FAB,
to settle the installment due at that time. The Company will recognize a gain on
sale business of $2.9 during the second quarter of Fiscal 2005 (See also Note
17).
The final installment payment of $8.0 is due from X-FAB in the first quarter of
Fiscal 2006.
18
OTHER EXPENSE - NET
Other expense was comprised of interest income and foreign exchange gains and
losses.
Interest income was $0.2 for the three months ended June 25, 2004 as compared to
$0.3 in the same period of Fiscal 2004. The decrease was mainly due to reduced
average cash balances in Fiscal 2005.
Foreign exchange losses in the first quarter of Fiscal 2005 amounted to $0.3 as
compared to $1.0 for the same period in Fiscal 2004. Net foreign exchange losses
were recorded on monetary assets and liabilities denominated in currencies other
than the U.S. dollar functional currency, and according to month-end market
rates.
INCOME TAXES
An income tax recovery of $1.0 was recorded for the first quarter of Fiscal
2005, as a result of a recovery of domestic and foreign income taxes, compared
with an expense of $0.3 for the corresponding period in Fiscal 2004. The
recovery of $1.0 related to the release of previously recognized provision no
longer required as a result of settlements with tax authorities. In addition,
the Company recorded a recovery of $0.2 relating to income tax refunds received
in excess of provisions previously recorded, offset by income tax expense of
$0.2.
The Company has a valuation allowance against its deferred tax assets at June
25, 2004 of $174.5 (March 26, 2004 - $176.8). The decrease relates mainly to the
reversal of temporary differences and losses incurred in the Company's foreign
jurisdictions and temporary differences in the Company's foreign and domestic
operations. Management has determined that sufficient uncertainties exist
regarding the realization of certain of its deferred tax assets.
Management periodically reviews the Company's valuation allowance to determine
whether the overall tax estimates are reasonable. When management performs its
quarterly assessments of the valuation allowance, it may be determined that an
adjustment is required to the valuation allowance, which may have a material
impact on the Company's financial position and results of operations.
NET INCOME (LOSS)
The Company recorded net income, after preferred share dividends, of $7.0, or
$0.05 per share, in the first quarter of Fiscal 2005. This compares to a net
loss, after preferred share dividends, of $6.7, or $0.05 per share, in the same
period in Fiscal 2004.
The net income for the three month period ended June 25, 2004, was primarily a
result of the gain on sale of business of $7.0, as well as improved operating
results due to operating expense savings realized from the cost reduction
activities implemented during Fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
At June 25, 2004, the Company held cash and cash equivalents totaling $23.3
(March 26, 2004 - $27.0). In addition, the Company held short-term investments
of $54.6 at June 25, 2004 (March 26, 2004 - $54.8). The Company's restricted
cash balance of $10.0 was unchanged from March 26, 2004, to June 25, 2004.
Cash used in operating activities for the three months ended June 25, 2004 was
$10.0, as compared to $9.7 used in the same period of Fiscal 2004. Cash provided
by operating activities before working capital changes amounted to $3.1 for the
three months ended June 25, 2004, as compared to $1.2 used in the first three
months of Fiscal 2004. Cash provided by operations resulted primarily from
improved operating results during the quarter. Since March 26, 2004, the
Company's working capital increased by $10.0, mainly as a result of increases in
accounts receivable of $6.1, inventory of $4.3, and other prepaid expenses
totaling $3.2. The increase in accounts receivable was a result of the timing of
sales late in the quarter, resulting in the cash inflow not occurring until the
second quarter of Fiscal 2005. Inventory levels increased to accommodate
expected sales demand in the second quarter of Fiscal 2005. The increase in
other prepaid expenses was due to scheduled payments for software license design
tools and other annual payments. In comparison, the Company's working capital
increased by $8.5 during the first three months of Fiscal 2004, as a result of
increases in accounts receivable and prepaid expenses resulting from the timing
of cash collections and payments during the quarter.
Cash provided from investing activities was $6.8 for the three months ended June
25, 2004, primarily from proceeds of $7.0 received as payment against a note
receivable from X-FAB. Cash provided from investing activities was $26.4 for the
three months ended June 27, 2003, primarily from matured short-term investments
totaling $89.5, partially offset by purchases of short-term investments of
$62.3. Cash used in financing activities during the first three months of Fiscal
19
2005 was $0.6. The use of cash was primarily the result of the payment of $0.5
for dividends on the preferred shares. Cash used in financing activities during
the first three months of Fiscal 2004 was $1.1, resulting primarily from the
repurchase of $0.4 of the Company's redeemable preferred shares, and the payment
of $0.5 for dividends on the preferred shares.
During Fiscal 2002, the Company took steps to wind up its defined benefit
pension plan in the United Kingdom and replaced it with a defined contribution
plan. The Company expects to make a final payment of approximately $2.7 later in
Fiscal 2005 after the final adjustments are determined. This amount was included
in other accrued liabilities as at June 25, 2004.
During the first three months of Fiscal 2005, the Company declared and paid
dividends of $0.5 on its redeemable preferred shares based on a $0.37 (Cdn$0.50)
per share dividend. There were no preferred shares purchased during the three
months ended June 25, 2004. As at June 25, 2004, there were 13,200 repurchased
preferred shares that had not been cancelled by the transfer agent. These
preferred shares were repurchased during Fiscal 2004.
In addition to the Company's cash, cash equivalents, short-term investment and
restricted cash balances, the Company had a credit facility which was fully
utilized as at June 25, 2004. Cash and cash equivalents totaling $9.4 were
hypothecated under the credit facility to cover outstanding letters of credit.
Of this amount, $8.0 was issued to secure letters of credit related to the
Company's pension plan in Sweden, and $0.7 of letters of credit were outstanding
related to the Company's SERP. In addition, $0.7 was issued to secure certain
obligations under a performance guarantee and office lease arrangement. The
Company has also pledged $0.6 as a security for a custom bond and related credit
facilities. The credit facilities are subject to periodic review, including the
determination of compliance with certain financial covenants. It is uncertain if
the Company will be able to meet these financial covenants in the future and, if
not, to obtain a waiver from the bank, which may result in the availability of
the credit facility being reduced or restricted. Management does not anticipate
that this would have a material adverse effect on the financial position of the
Company. Management believes the Company is in a position to meet all
foreseeable business cash requirements and capital lease and preferred share
payments from its cash balances on hand, existing financing facilities and cash
flow from operations.
The Company's liquidity is impacted by contractual obligations. There have been
no significant changes to the Company's contractual obligations included in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the Company's Annual Report on Form 10-K for the year ended March
26, 2004.
BACKLOG
The Company's 90-day backlog as at June 25, 2004 was $44.1 (March 26, 2004 -
$38.7). Generally, manufacturing lead times for semiconductor products are
longer because of the nature of the production process. However, as orders are
sometimes booked and shipped within the same fiscal quarter (often referred to
as "turns"), order backlog is not necessarily indicative of a sales outlook for
the quarter or year. Backlog increased from the prior quarter due to increased
bookings across the Consumer and Network Communications segments.
OTHER
Critical Accounting Policies and Significant Estimates
The Company's consolidated financial statements are based on the selection and
application of significant accounting policies, which require management to make
significant estimates and assumptions. There is no change in the Company's
critical accounting policies included in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, of the Company's
Annual Report on Form 10-K for the year ended March 26, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk represents the risk of loss that may impact the financial statements
of the Company due to adverse changes in financial market prices and rates.
Zarlink is exposed to market risk from changes in foreign exchange and interest
rates. To manage these risks, the Company uses certain derivative financial
instruments including foreign exchange forward contracts and other derivative
instruments from time to time, which have been authorized pursuant to
board-approved policies and procedures. Zarlink does not hold or issue financial
instruments for trading or speculative purposes
20
The Company currently uses forward contracts, and to a lesser extent foreign
currency options, to reduce the exposure to foreign exchange risk. The most
significant foreign exchange exposures for the Company relate to the Canadian
dollar, the Swedish Krona, and the U.K. pound sterling. At June 25, 2004, there
were no material unrealized gains or losses on the forward contracts and foreign
currency options relating to Fiscal 2005. The unrealized gain is calculated as
the difference between the actual contract rates and the applicable current
market rates that would be used to terminate the forward contracts and foreign
currency options on June 25, 2004, if it became necessary to unwind these
contracts. Management believes that the established hedges are effective against
its known and anticipated cash flows, and that potential future losses from
these hedges being marked to market would be largely offset by gains on the
underlying hedged transactions.
The Company's primary exposure to interest rates is expected to be in the
rollover of its short-term investment portfolio. In accordance with Company
policy, cash equivalents and short-term investment balances are primarily
comprised of high-grade money market instruments with original maturity dates of
less than one year. The Company does not hedge the re-investment risk on its
short-term investments.
Management does not foresee any significant changes in the strategies used to
manage foreign exchange and interest rate risks in the near future.
As at June 25, 2004, there were no material changes in information about market
risks as disclosed in the Company's Annual Report on Form 10-K for the fiscal
year ended March 26, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management carried out an evaluation, with the participation of
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures as of June 25, 2004. Based upon
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
There has not been any change in the Company's internal controls over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended June 25, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 302(a) of The Sarbanes-Oxley Act of 2002, President and Chief
Executive Officer
31.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 302(a) of The Sarbanes-Oxley Act of 2002, Senior Vice President of
Finance and Chief Financial Officer
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
President and Chief Executive Officer
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
Senior Vice President of Finance and Chief Financial Officer
99.1 Selected Consolidated Financial Statements in U.S. Dollars and in
accordance with Canadian Generally Accepted Accounting Principles
99.2 Management's Discussion and Analysis of Financial Condition and Results of
Operations - Canadian Supplement
b) Reports on Form 8-K
Date of Filing Description
- -------------- --------------------------------------------------------
May 6, 2004 Item 12 - Press Release: "Financial Results for the
Fourth Quarter and Year Ended March 26, 2004"
June 10, 2004 Items 5 and 7 - Press Release: "Receipt of X-Fab
Payment"
June 21, 2004 Items 7 and 9 - Press Release: "Notice of Annual General
Meeting and Proxy Circular dated June 8, 2004"
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, Zarlink Semiconductor Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Zarlink Semiconductor Inc.
(Registrant)
Name Title Date
- ------------------------ ---------------------------- ------------------------
/s/ SCOTT MILLIGAN
- -------------------------
Scott Milligan Senior Vice President of Finance July 23, 2004
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
22