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 December 24, 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 January 28, 2005 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 ................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 25
ITEM 4. CONTROLS AND PROCEDURES ........................................... 26
PART II - OTHER INFORMATION ............................................... 27
ITEM 5. OTHER INFORMATION ................................................. 27
ITEM 6. EXHIBITS .......................................................... 27
SIGNATURES ................................................................ 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Zarlink Semiconductor Inc.
CONSOLIDATED BALANCE SHEETS
(In millions of U.S. dollars, except share amounts, U.S. GAAP)
(Unaudited)
Dec. 24, March 26,
2004 2004
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 29.7 $ 27.0
Short-term investments 39.6 54.8
Restricted cash 13.9 10.0
Trade accounts receivable, less allowance for
doubtful accounts of $0.3
(March 26, 2004 - $0.3) 25.4 24.1
Other receivables 5.1 2.9
Note receivable - net of deferred gain of $7.7
(March 26, 2004 - $17.1) 0.1 0.1
Inventories 28.1 20.8
Prepaid expenses and other 6.8 4.5
-------- --------
148.7 144.2
Fixed assets - net of accumulated depreciation of
$158.4 (March 26, 2004 - $152.5) 37.4 41.1
Deferred income tax assets - net 8.0 7.5
Other assets 5.1 4.6
-------- --------
$ 199.2 $ 197.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 18.3 $ 15.0
Employee-related accruals 9.9 11.1
Income and other taxes payable 7.7 7.9
Provisions for exit activities 1.1 2.7
Other accrued liabilities 8.1 10.9
Deferred credits 0.3 0.7
Current portion of long-term debt -- 0.1
-------- --------
45.4 48.4
Long-term debt 0.1 0.1
Pension liabilities 19.2 16.7
-------- --------
64.7 65.2
-------- --------
Redeemable preferred shares, unlimited shares
authorized; 1,377,100 shares issued and
outstanding (March 26, 2004 - 1,390,300) 17.6 17.6
-------- --------
Commitments (Note 9)
Shareholders' equity:
Common shares, unlimited shares authorized;
no par value; 127,308,973 shares
issued and outstanding (March 26, 2004
- 127,301,411 768.4 768.4
Additional paid-in capital 2.4 2.3
Deficit (622.0) (623.5)
Accumulated other comprehensive loss (31.9) (32.6)
-------- --------
116.9 114.6
-------- --------
$ 199.2 $ 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 Nine Months Ended
----------------------- -------------------------
Dec. 24, Dec 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
--------- ---------- ---------- -----------
Revenue $ 51.2 $ 47.0 $ 165.8 $ 147.3
Cost of revenue 28.8 26.0 91.4 81.3
--------- ---------- ---------- ----------
Gross margin 22.4 21.0 74.4 66.0
--------- ---------- ---------- ----------
Expenses:
Research and development 15.7 19.5 46.2 57.9
Selling and administrative 12.7 11.9 34.4 37.7
Asset impairment and other -- 1.7 -- 7.0
Gain on sale of business -- -- (9.9) --
--------- ---------- ---------- ----------
28.4 33.1 70.7 102.6
--------- ---------- ---------- ----------
Income (loss) from operations (6.0) (12.1) 3.7 (36.6)
Interest income 0.3 0.3 0.7 0.9
Foreign exchange loss (1.8) (1.2) (2.2) (2.1)
Gain on sale of long-term investments -- 0.6 -- 0.6
Interest expense -- (0.2) -- (0.5)
--------- ---------- ---------- ----------
Income (loss) before income taxes (7.5) (12.6) 2.2 (37.7)
Income tax (expense) recovery (0.1) 1.4 0.9 1.4
--------- ---------- ---------- ----------
Net income (loss) for the period $ (7.6) $ (11.2) $ 3.1 $ (36.3)
========= ========== ========== ==========
Net income (loss) attributable to common shareholders after
preferred share dividends $ (8.2) $ (11.8) $ 1.5 $ (37.9)
========= ========== ========== ==========
Net income (loss) per common share:
Basic and diluted $ (0.06) $ (0.09) $ 0.01 $ (0.30)
========= ========== ========== ==========
Weighted-average number of common shares outstanding (millions):
Basic and diluted 127.3 127.3 127.3 127.3
========= ========== ========== ==========
(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)
Nine Months Ended
-------------------
Dec. 24, Dec. 26,
2004 2003
-------- --------
CASH PROVIDED BY (USED IN)
Operating activities:
Net income (loss) for the period $ 3.1 $(36.3)
Depreciation of fixed assets 6.6 9.7
Amortization of other assets -- 1.2
Other non cash changes in operating activities (8.5) 8.8
Stock compensation expense 0.1 0.1
Deferred income taxes (0.5) (1.2)
Decrease (increase) in working capital:
Trade accounts and other receivables (3.6) (8.4)
Inventories (7.3) 0.5
Prepaid expenses and other (2.1) (2.5)
Payables and other accrued liabilities (2.0) 2.7
Deferred credits (0.3) 0.1
------ ------
Total (14.5) (25.3)
------ ------
Investing activities:
Purchased short-term investments (94.2) (134.8)
Matured short-term investments 109.4 164.6
Expenditures for fixed and other assets (3.2) (4.7)
Proceeds from disposal of fixed and other assets 0.6 0.8
Proceeds from sale of long-term investments -- 0.6
Proceeds from repayment of note receivable 9.9 --
------ ------
Total 22.5 26.5
------ ------
Financing activities:
Repayment of capital lease liabilities
and long-term debt (0.1) (0.5)
Payment of dividends on preferred shares (1.6) (1.6)
Repurchase of preferred shares -- (1.2)
Increase in restricted cash (3.9) (3.3)
------ ------
Total (5.6) (6.6)
------ ------
Effect of currency translation on cash 0.3 0.5
------ ------
Increase (decrease) in cash and cash equivalents 2.7 (4.9)
Cash and cash equivalents, beginning of period 27.0 23.5
------ ------
Cash and cash equivalents, end of period $ 29.7 $ 18.6
====== ======
(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 share and 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 December 24, 2004,
the results of operations of the Company for the three and nine month
periods ended December 24, 2004 and December 26, 2003, and cash flows of
the Company for the nine month periods ended December 24, 2004 and
December 26, 2003, 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. Recently issued accounting pronouncements
In December 2004 the Financial Accounting Standards Board (FASB) published
a revision to Statement of Financial Accounting Standards (SFAS) No. 123
(SFAS 123R), Share-Based Payments. The revision requires all companies to
measure compensation cost for all share-based payments, including employee
stock options, at fair value. Under the new standard, companies will not
be able to account for share-based payments using the intrinsic method in
accordance with Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees. The revisions to SFAS 123R are
effective for public companies in the first interim or annual period
beginning after June 15, 2005. The Company has not yet determined which
fair-value method or transitional provision it will follow. The impact on
the Company's financial statements of applying one of the acceptable
fair-value based methods of accounting for stock-based compensation is
disclosed in Note 4.
In November 2004 the FASB issued SFAS No. 151, Inventory Costs. SFAS 151
clarifies that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The Company is currently evaluating the impact of SFAS
151 on its financial statements.
3. Significant accounting policies
a) Revenue recognition
The Company recognizes revenue from the sale of semiconductor products,
which are primarily non-commodity, specialized products that are
proprietary in design and used by multiple customers. Customer acceptance
provisions for performance requirements are generally based on
seller-specified criteria, and are demonstrated prior to shipment.
6
The Company generates revenue through direct sales and sales to
distributors, of which distributor sales account for approximately 48%,
48%, and 35% of semiconductor product sales in Fiscal 2004, 2003, and
2002, respectively.
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, and
SAB No. 104, Revenue Recognition, the Company recognizes product revenue
through direct sales and sales to distributors when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement
exists, (ii) transfer of title has occurred, (iii) the price to the
customer is fixed or determinable, and (iv) collection of the resulting
receivable is reasonably assured.
In addition, the Company has agreements with its distributors that cover
two sales programs, specifically ship and debit claims, which relate to
pricing adjustments based upon distributor resale, and stock rotations
claims, which relate to certain stock return rights earned against
subsequent sales. The Company accrues for these programs as a reduction of
revenue at the time of shipment, based on historical sales returns,
analysis of credit memo data, and other factors known at the time. The
Company believes that these programs are common to distributor agreements
in the industry, and it is appropriate that the distributor sales are
recognized as revenue at the time of shipment in accordance with SFAS No.
48, Revenue Recognition When Right of Return Exists, because of the
following:
i) The Company's price to the buyer is substantially fixed or
determinable at the date of sale.
ii) The distributor is obligated to pay the Company, and the obligation
is not contingent on resale of the product.
iii) The distributor's obligation to the Company would not be changed in
the event of theft or physical destruction or damage of the product.
iv) The distributor has economic substance apart from that provided by
the Company.
v) The Company does not have significant obligations for future
performance to directly bring about resale of the product by the
distributor.
vi) The amount of future returns can be reasonably estimated.
b) Income taxes
Income taxes are accounted for using the liability method of accounting
for income taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between the tax and
accounting bases of assets and liabilities as well as for the benefit of
losses available to be carried forward to future years for tax purposes
that are more likely than not to be realized. Deferred income tax assets
and liabilities are measured using enacted tax rates that apply to taxable
income in the years in which temporary differences are expected to be
recovered or settled. Deferred income tax assets are recognized only to
the extent, in the opinion of management, it is more likely than not that
the deferred income tax assets will be realized in the future.
Management periodically reviews the Company's provision for income taxes
and valuation allowance to determine whether the overall tax estimates are
reasonable. When management performs its quarterly assessments of the
provision and valuation allowance, it may be determined that an adjustment
is required. This adjustment may have a material impact on the Company's
financial position and results of operations.
c) Inventories
Inventories are valued at the lower of average cost and net realizable
value for work-in-process and finished goods, and lower of average cost
and current replacement cost for raw materials. The cost of inventories
includes material, labor and manufacturing overhead.
7
4. Stock-based compensation
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS 123, Accounting for Stock-Based
Compensation, 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 pricing 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 Nine Months Ended
------------------ -----------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss), as reported $ (7.6) $(11.2) $ 3.1 $(36.3)
Adjustments:
Stock compensation expense,
as reported -- 0.1 0.1 0.1
Pro forma stock
compensation expense (3.3) (3.4) (9.2) (9.6)
------------------------------------
Pro forma net loss $(10.9) $(14.5) $ (6.0) $(45.8)
------------------------------------
Net income (loss) per common
share, as reported
Basic and diluted $(0.06) $(0.09) $ 0.01 $(0.30)
------------------------------------
Pro forma net income (loss) per
common share
Basic and diluted $(0.09) $(0.12) $(0.06) $(0.37)
------------------------------------
Based upon the fair value method of accounting for stock compensation
expense, for the three and nine month fiscal periods ended December 24,
2004, the pro forma net loss was increased by $3.3 and the pro forma net
income was decreased by $9.1, respectively, as compared to the reported
net loss and net income. For the three and nine month fiscal periods ended
December 26, 2003, the pro forma net loss was increased by $3.3 and $9.5,
respectively.
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 option pricing model with the following weighted-average
assumptions for the three and nine month periods ended December 24, 2004
and December 26, 2003:
Three Months Ended Nine Months Ended
------------------- -------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
--------- -------- -------- --------
Weighted-average fair value price
of the options granted during
the period $ 1.46 $ 1.50 $ 1.89 $ 1.74
Risk free interest rate 3.52% 3.26% 3.80% 3.15%
Dividend yield Nil Nil Nil Nil
Volatility factor of the expected
market price of the
Company's common stock 60.2% 70.1% 63.4% 69.2%
Weighted-average expected
life of the options 4.7 years 3.3 years 4.3 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.
In December 2004, the FASB revised Statement No. 123 (SFAS 123R),
"Share-Based Payment," which requires companies to expense the estimated
fair value of employee stock options and similar awards. See also Note 2.
8
5. Inventories
Dec. 24, March 26,
2004 2004
--------------------------
Raw materials $ 2.8 $ 2.2
Work-in-process 19.4 13.3
Finished goods 5.9 5.3
--------------------------
$ 28.1 $ 20.8
==========================
6. Note receivable
Dec. 24, March 26,
2004 2004
--------------------------
Note receivable, non-interest bearing $ 7.8 $ 17.2
Less: Deferred gain (7.7) (17.1)
--------------------------
$ 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. In the first six
months of Fiscal 2005, X-FAB exercised its option to make early payments
on the $10.0 installment. As a result of the early payments, the note
receivable was discounted by $0.1 and the Company recognized a total gain
on sale of business of $9.9 for the nine month period ended December 24,
2004.
On January 28, 2005, the Company received an early payment of $2.0 on the
$8.0 final installment of the note receivable that is due from X-FAB in
the first quarter for Fiscal 2006. The Company will recognize a gain on
sale of business of $2.0 in the fourth quarter of Fiscal 2005.
7. Provisions for exit activities
In response to economic downturns in the semiconductor industry, the
Company implemented restructuring activities in Fiscal 2002 and Fiscal
2004.
During Fiscal 2004, the Company incurred workforce reduction costs of $7.0
as a result of reducing the Company's employee base by approximately 240
employees, globally across all job categories and business units. As a
result of this workforce reduction program and the streamlining of its
operations, the Company also recorded a charge of $0.6 in Fiscal 2004,
included in asset impairment and other, related to excess space under
lease contract in Canada. Of the $7.6 of restructuring provision recorded,
$4.6 related to the Network Communication segment, $2.4 related to the
Consumer Communications segment, and $0.6 related to the Ultra Low-Power
segment. In Fiscal 2005, the Company paid the remaining $0.7 related to
these workforce reductions.
The remaining balance in the restructuring provision relates to idle and
excess space as a result of exit activities implemented and completed in
Fiscal 2002 and Fiscal 2004. The cumulative amount recorded to date
related to these activities is $9.5. Costs of $8.9 were recorded as
special charges in Fiscal 2002, and costs of $0.6 were reflected in asset
impairment and other charges in Fiscal 2004.
With the exception of lease payments on the idle and excess space
estimated at $1.1, which will be paid over the lease term unless settled
earlier, the Company has completed substantially all of the activities
associated with these restructuring plans.
9
The following table summarizes the continuity of these restructuring
provisions for the three and nine months ended December 24, 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
Cash drawdowns during quarter -- (0.1) (0.1)
-------------------------------------
Balance, September 24, 2004 -- 1.4 1.4
Cash drawdowns during quarter -- (0.3) (0.3)
-------------------------------------
Balance, December 24, 2004 $ -- $ 1.1 $ 1.1
=====================================
8. 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 Communications Systems
business (Systems), 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 December 24,
2004, was $38.5 (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 December 24, 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.
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 December 24,
2004, the taxation years 2000 to February 16, 2001 are still subject to
audit by taxation authorities in certain foreign jurisdictions and are
therefore still subject to the above noted tax indemnities.
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.
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 December 24,
2004, the maximum amount of the guarantee was $3.1 ($1.6 British Pounds).
The Company records a liability based on its historical experience with
warranty claims. The warranty accrual was insignificant for the three and
nine month periods ended December 24, 2004.
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.
10
9. Commitments
The Company had letters of credit outstanding as at December 24, 2004 of
$13.3 (March 26, 2004 - $9.5), which expire within 13 months. Cash and
cash equivalents of $13.3 have been pledged as security against certain
outstanding letters of credit, and are presented as restricted cash. Of
this amount, $11.6 was issued to secure letters of credit related to the
Company's pension plan in Sweden, and $1.0 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, which is presented as restricted cash, as security for a
custom bond and related credit facilities.
The Company has committed to fully secure its outstanding pension
liability in Sweden of $14.1 by December 2005. In December 2004, the
Company increased its letters of credit related to its pension plan in
Sweden by $3.6, with an equivalent increase expected to occur in December
2005, depending upon foreign exchange rates at that time.
10. Redeemable preferred shares
During the three months ended December 24, 2004, there were no preferred
shares purchased or cancelled by the Company. During the nine months ended
December 24, 2004, there were no preferred shares purchased and 13,200
shares cancelled. These cancelled preferred shares had been repurchased
during Fiscal 2004.
During the third quarter of Fiscal 2005, the Company declared dividends on
its redeemable preferred shares of $0.6 based on a quarterly dividend of
$0.41 (Cdn $0.50) per share, and paid second quarter dividends of $0.6.
11. Capital stock
a) The Company has not declared nor paid any dividends on its common
shares.
b) A summary of the Company's stock option activity is as follows:
Nine Months Ended
----------------------------
Dec. 24, Dec. 26,
2004 2003
----------------------------
Outstanding Options:
Balance, beginning of period 11,534,680 10,828,557
Granted 386,000 379,500
Exercised (7,562) (10,617)
Forfeited (465,690) (1,396,565)
----------------------------
Balance, end of period 11,447,428 9,800,875
============================
As at December 24, 2004, there were 3,051,594 (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 $2.68 to
$30.38 per share with exercise periods extending to December 2010.
The exercise price of stock options issued in Canadian dollars was
translated at the U.S. dollar exchange rate on December 24, 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.
11
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 Nine Months Ended
------------------------------ -----------------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
------------------------------ -----------------------------
Weighted-average common shares outstanding 127,308,973 127,275,933 127,306,975 127,274,768
Dilutive effect of stock options -- -- 36,721 --
----------------------------------------------------------------
Weighted-average common shares outstanding,
assuming dilution 127,308,973 127,275,933 127,343,696 127,274,768
================================================================
For the three months ended December 24, 2004, 1,600 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 (three and
nine months ended December 26, 2003 - 19,599 and 328,532 stock options,
respectively).
The following stock options were excluded from the computation of common
share equivalents because the options' exercise prices exceeded the
average market price of the common shares, thereby making them
anti-dilutive:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
---------------------------- ----------------------------
Number of outstanding options 11,394,428 9,488,938 11,057,990 7,126,213
Average exercise price per share $ 8.38 $ 9.13 $ 8.54 $ 10.87
The average exercise price of stock options granted in Canadian dollars
was translated at the closing period-end U.S. dollar exchange rate.
12. Accumulated other comprehensive income (loss)
The components of total comprehensive income (loss) were as follows:
Three Months Ended Nine Months Ended
------------------ ------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
----------------- ------------------
Net income (loss) for the period $(7.6) $(11.2) $3.1 $(36.3)
Other comprehensive income (loss):
Unrealized net derivative gains
on cash flow hedges 0.6 0.7 0.5 1.1
Realized net derivative (gains)
losses on cash flow hedges -- (0.3) 0.2 (0.3)
---------------------------------
Total comprehensive income (loss)
for the period $(7.0) $(10.8) $3.8 $(35.5)
==================================
12
The changes to accumulated other comprehensive loss for the nine months
ended December 24, 2004 were as follows:
Unrealized
Cumulative Net Gain
Translation (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)
Change during the three months ended
September 24, 2004 -- (0.1) (0.1)
---------------------------------
Balance, September 24, 2004 (32.4) (0.1) (32.5)
Change during the three months ended
December 24, 2004 -- 0.6 0.6
---------------------------------
$(32.4) $ 0.5 $(31.9)
=================================
The Company recorded an increase in other comprehensive income in the nine
months ended December 24, 2004 of $0.7 as compared to a decrease in other
comprehensive loss of $0.8 in the nine months ended December 26, 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. The
Company estimates that $0.5 of net derivative gains included in other
comprehensive income at December 24, 2004 will be reclassified into
earnings within the next quarter.
13. Income taxes
A $0.1 income tax expense was recorded for the third quarter of Fiscal
2005, compared with a recovery of $1.4 for the corresponding period in
Fiscal 2004. During the nine months ended December 24, 2004, an income tax
recovery of $0.9 was recorded, compared with a $1.4 recovery in the same
period of Fiscal 2004. The recovery of $0.9 related to the release of
previously recognized provisions no longer required as a result of
settlements with tax authorities, in addition to a recovery of $0.3
relating to income tax refunds received in excess of provisions previously
recorded, offset by income tax expense of $0.3.
The Company establishes a valuation allowance against deferred tax assets
when management has determined that it is more likely than not that some
or all of its deferred tax assets may not be realized. Based on historical
taxable income and uncertainties relating to future taxable income over
the periods in which the deferred tax assets are deductible, the Company
has established a valuation allowance of $186.4 as at December 24, 2004
(March 26, 2004 - $176.8). The increase in the valuation allowance relates
mainly to losses incurred, partially offset by temporary differences in
the Company's domestic and foreign 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 provides
semiconductor solutions for enterprise, access, edge and metro networks
over wired, wireless, and optical media. The product lines enable voice
and data for traditional, convergent, and packet networks. 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 custom Integrated Circuit and Application Specific Standard
Product (ASSP) solutions for healthcare applications such as cardiac
pacemakers, hearing-aids, swallowable camera capsules and portable
13
medical instruments. The Ultra-Low Power Communications business segment
also provides ultra low-power solutions for commercial applications, such
as electronic shelf labels, radio frequency tagging and personal area
communications devices.
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 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 Dec. 24, 2004 Network Consumer Ultra Low-Power Unallocated
Communications Communications Communications Gains Total
----------------------------------------------------------------------------
Total external sales revenue $23.8 $18.9 $ 8.5 $ -- $51.2
Depreciation of buildings and equipment 1.0 0.7 0.3 -- 2.0
Segment's operating loss $(1.0) $(2.0) $(3.0) $ -- $(6.0)
Three Months Ended Dec. 26, 2003 Network Consumer Ultra Low-Power Unallocated
Communications Communications Communications Gains Total
----------------------------------------------------------------------------
Total external sales revenue $24.2 $14.9 $7.9 $ -- $ 47.0
Depreciation of buildings and equipment 1.8 0.6 0.4 -- 2.8
Asset impairment and other 1.6 0.1 -- -- 1.7
Segment's operating income (loss) $(5.9) $(6.5) $0.3 $ -- $(12.1)
Nine Months Ended Dec. 24, 2004 Network Consumer Ultra Low-Power Unallocated
Communications Communications Communications Gains Total
----------------------------------------------------------------------------
Total external sales revenue $76.6 $58.7 $30.5 $ -- $165.8
Depreciation of buildings and equipment 3.1 2.3 1.2 -- 6.6
Gain on sale of business -- -- -- (9.9) (9.9)
Segment's operating income (loss) $ 4.1 $(5.8) $(4.5) $9.9 $ 3.7
Nine Months Ended Dec. 26, 2003 Network Consumer Ultra Low-Power Unallocated
Communications Communications Communications Gains Total
----------------------------------------------------------------------------
Total external sales revenue $78.5 $42.1 $26.7 $ -- $147.3
Depreciation of buildings and equipment 5.5 2.7 1.5 -- 9.7
Asset impairment and other 4.6 2.0 0.4 -- 7.0
Segment's operating loss $(18.3) $(17.6) $(0.7) $ -- $(36.6)
15. Pension plans
The Company has defined benefit pension plans in Sweden and Germany. As at
December 24, 2004, the Swedish pension liability of $14.1 was partially
secured by letters of credit of $11.6. As at December 24, 2004, the German
pension liability of $5.1 was insured with the Swiss Life Insurance
Company, and the related asset was recorded in other assets.
The total pension expense under these plans consisted of interest costs on
projected plan benefits. Total pension expense on the defined benefit
pension plans for the three and nine month periods ended December 24, 2004
was $0.7 and $1.1, respectively (three and nine month periods ended
December 26, 2003 - $0.2 and $0.6, respectively).
As of December 24, 2004, the Company had not made any contributions to
these pension plans in Fiscal 2005.
14
16. Supplementary cash flow information
The following table summarizes the Company's other non cash changes in
operating activities:
Nine Months Ended
--------------------
Dec. 24, Dec. 26,
2004 2003
-------- --------
(Gain) loss on disposal of fixed assets $(0.3) $0.1
Gain on sale of business (9.9) --
Gain on sale of long-term investments -- (0.6)
Change in pension liabilities 2.5 2.8
Impairment of fixed assets -- 6.4
Provision for excess space under lease contract -- 0.6
Other (0.8) (0.5)
--------------------
Other non cash changes in operating activities $(8.5) $8.8
====================
17. Comparative figures
Certain of the Fiscal 2004 comparative figures have been reclassified to
conform to the presentation adopted in Fiscal 2005.
18. Subsequent events
On January 26, 2005, the Board of Directors of the Company announced the
appointment of Kirk K. Mandy, Vice-Chairman of the Board, as interim
President and Chief Executive Officer. The Board also announced that
Patrick J. Brockett resigned to pursue other interests, effective
immediately.
On January 28, 2005, the Company received an early payment of $2.0 on the
$8.0 final installment of the note receivable that is due from X-FAB in
the first quarter for Fiscal 2006. The Company will recognize a gain on
sale of business of $2.0 in the fourth quarter of Fiscal 2005.
15
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 Inc. 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 and nine months ended December
24, 2004, compared with the corresponding periods 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 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; exposure to currency exchange rate fluctuations; 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.
16
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 24, 2004
Summary of Results from Operations Three Months Ended Nine Months Ended
------------------- -------------------
(millions of U.S. dollars, except per share amounts) Dec. 24, Dec. 26, Dec. 24, Dec. 26,
2004 2003 2004 2003
-------- -------- -------- --------
Consolidated revenue: $ 51.2 $ 47.0 $ 165.8 $ 147.3
Network Communications 23.8 24.2 76.6 78.5
Consumer Communications 18.9 14.9 58.7 42.1
Ultra Low-Power Communications 8.5 7.9 30.5 26.7
Income (loss) from operations: (6.0) (12.1) 3.7 (36.6)
Network Communications (1.0) (5.9) 4.1 (18.3)
Consumer Communications (2.0) (6.5) (5.8) (17.6)
Ultra Low-Power Communications (3.0) 0.3 (4.5) (0.7)
Unallocated gain -- -- 9.9 --
Net income (loss) for the period (7.6) (11.2) 3.1 (36.3)
Net income (loss) per common share:
Basic and diluted (0.06) (0.09) 0.01 (0.30)
Weighted average common shares outstanding (millions):
Basic and diluted 127.3 127.3 127.3 127.3
Revenue in the third quarter of Fiscal 2005 was $51.2, up 9% from revenue of
$47.0 in the third quarter of Fiscal 2004. In the first nine months of Fiscal
2005, revenue was $165.8, an increase of 13% from revenue of $147.3 in the same
period of Fiscal 2004. Despite continuing challenges in the semiconductor
industry, revenue improvements were achieved in the Company's Consumer
Communications and Ultra Low-Power business segments.
The Company experienced slightly lower sequential bookings in the third quarter
of Fiscal 2005 given the economic slowdown in the semiconductor industry.
Bookings in the third quarter of Fiscal 2005 were also slightly lower than those
experienced during the same period in Fiscal 2004.
In the third quarter of Fiscal 2005, the Company recorded a net loss of $7.6, or
$0.06 per share. This compares to a net loss of $11.2, or $0.09 per share, in
the third quarter of Fiscal 2004. Although the Company experienced higher
revenues and lower expenses in the quarter as compared to the same period in
Fiscal 2004, the net loss in the third quarter of Fiscal 2005 resulted from
lower sequential revenues due to weaker customer demand in the quarter, as well
as increased expenses primarily related to corporate governance costs. In
addition, foreign exchange losses of $1.8 contributed to the net loss in the
quarter. The loss in the third quarter of Fiscal 2004 included costs of $2.9
related to reducing the Company's global workforce by approximately 100
employees across all regions and business units. In addition, the third quarter
Fiscal 2004 loss included an impairment of fixed assets of $1.7 resulting from
the review of the ongoing usage of the Company's testing equipment and
enterprise resource planning system.
For the nine months ended December 24, 2004, the Company recorded net income of
$3.1, or $0.01 per share. This compares to a net loss of $36.3, or $0.30 per
share, for the same period of Fiscal 2004. Net income for the first nine months
of Fiscal 2005 includes a gain on sale of foundry business of $9.9. In addition,
higher revenues and margins in the Company's Consumer Communications and Ultra
Low-Power business segments and lower operating expenses due to cost reduction
activities implemented in Fiscal 2004 resulted in net income improvements as
compared to the same period in Fiscal 2004. The loss incurred in the nine months
ended December 26, 2003 resulted primarily from lower revenues and margins, as
well as expenses of $6.3 incurred in the workforce reduction and $7.0 in asset
impairment and excess space related activities undertaken in Fiscal 2004. The
Company has substantially completed all of the activities associated with the
Fiscal 2004 restructuring plans.
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.
17
Network Communications
Three Months Ended Nine Months Ended
-------------------------------------------
Dec. 24, Dec. 26, Dec. 24, Dec.26,
(millions of U.S. dollars) 2004 2003 2004 2003
-------- -------- -------- -------
Revenue $ 23.8 $ 24.2 $ 76.6 $ 78.5
======= ======= ======= =======
As a % of total revenue 46% 51% 46% 53%
Operating income (loss) $ (1.0) $ (5.9) $ 4.1 $ (18.3)
======= ======= ======= =======
Zarlink's Network Communications segment provides semiconductor solutions for
enterprise, access, edge and metro networks over wired, wireless and optical
media. The product lines enable voice and data for traditional, convergent and
packet networks.
Revenue for the third quarter of Fiscal 2005 totaled $23.8, down 2% from the
third quarter of Fiscal 2004. Reduced capital spending in the market continues
to impact demand by networking companies. Revenue declines were driven primarily
by lower sales volumes of the Company's legacy and voice processing products,
which accounted for approximately 9% and 4%, respectively, of the decline. This
decline was partially offset by higher sales volumes in the Company's Timing and
Time Slot Interchange (TSI) and Optical product lines, which accounted for
revenue increases of approximately 9% and 2%, respectively. During the first
nine months of Fiscal 2005 revenue decreased to $76.6, down 2% from the same
period in Fiscal 2004, due primarily to decreased sales volumes of the Company's
legacy products.
The segment had an operating loss of $1.0 and operating income of $4.1 in the
three and nine months ended December 24, 2004, respectively, as compared to
operating losses of $5.9 and $18.3 in the three and nine months ended December
26, 2003, respectively. During Fiscal 2005, the segment benefited from savings
realized from headcount and cost reductions implemented during Fiscal 2004. The
losses in Fiscal 2004 were driven primarily by higher R&D expenses, asset
impairment and other costs of $4.6, and R&D related severance costs of $1.4
incurred in the first nine months of Fiscal 2004.
Consumer Communications
Three Months Ended Nine Months Ended
--------------------------------------------
Dec. 24, Dec. 26, Dec. 24, Dec.26,
(millions of U.S. dollars) 2004 2003 2004 2003
-------- -------- -------- -------
Revenue $18.9 $14.9 $58.7 $42.1
===== ===== ===== ======
As a % of total revenue 37% 32% 36% 29%
Operating loss $(2.0) $(6.5) $(5.8) $(17.6)
===== ===== ===== ======
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, set-top boxes and digital TV).
During the third quarter of Fiscal 2005, revenue increased 27% over the third
quarter of Fiscal 2004, to $18.9. Revenue in the nine months ended December 24,
2004 totaled $58.7, an increase of 39% over the same period of Fiscal 2004.
Revenue improvements were driven primarily by increased sales volumes of the
Company's demodulators.
The segment had an operating loss of $2.0 in the three month period ended
December 24, 2004, as compared to $6.5 in the same period of Fiscal 2004. The
segment's operating loss during the first nine months of Fiscal 2005 decreased
to $5.8, down $11.8 from the same period of Fiscal 2004. These improvements were
driven primarily by revenue improvements as well as savings realized from cost
reduction activities implemented during Fiscal 2004. The operating loss in the
nine month period ended December 26, 2003 included asset impairment and other
costs of $2.0 and severance costs of $1.9.
18
Ultra Low-Power Communications
Three Months Ended Nine Months Ended
-------------------------------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
(millions of U.S. dollars) 2004 2003 2004 2003
-------- -------- -------- --------
Revenue $ 8.5 $ 7.9 $30.5 $26.7
===== ===== ===== =====
As a % of total revenue 17% 17% 18% 18%
Operating income (loss) $(3.0) $ 0.3 $(4.5) $(0.7)
===== ===== ===== =====
Zarlink's Ultra Low-Power Communications business segment provides custom
Integrated Circuit and Application Specific Standard Product (ASSP) solutions
for healthcare applications such as cardiac pacemakers, hearing-aids,
swallowable camera capsules and portable medical instruments. The segment also
provides ultra low-power solutions for commercial applications, such as
electronic shelf labels, radio frequency tagging and personal area
communications devices.
Revenue for the third quarter of Fiscal 2005 totaled $8.5, an increase of 8%
from the third quarter of Fiscal 2004. Revenue improvements were driven by
higher sales volumes within the wireless product line, which accounted for
approximately 16% of the revenue increase. These improvements were partially
offset by lower shipments of implantable products, which accounted for a
decrease of 7% of revenue. During the first nine months of Fiscal 2005, revenue
increased 14% over the same period in Fiscal 2004, to $30.5. Revenue increases
were due mainly to increased sales volumes of wireless products, which
contributed approximately 18% towards the segment's revenue increase. These
improvements were partially offset by lower shipments in the audiologic product
line, which accounted for a revenue decrease of approximately 4%.
For the three months ended December 24, 2004, the segment had an operating loss
of $3.0 as compared to operating income of $0.3 in the three months ended
December 26, 2003. The segment had an operating loss of $4.5 in the first nine
months of Fiscal 2005 as compared to an operating loss of $0.7 in the same
period of Fiscal 2004. Despite revenue improvements in Fiscal 2005, net losses
were incurred in both periods primarily due to higher R&D expenses. The loss
incurred in Fiscal 2004 was due mainly to the asset impairment and severance
costs incurred during the period.
GEOGRAPHIC REVENUE
Revenue, based on the geographic location of customers, was distributed as
follows:
Three Months Ended Nine Months Ended
--------------------------------------------------------------------------------------------------
(millions of U.S. dollars) Dec. 24, % of Dec. 26, % of Dec. 24, % of Dec. 26, % of
2004 Total 2003 Total 2004 Total 2003 Total
--------------------------------------------------------------------------------------------------
Revenue:
Asia / Pacific $ 21.9 42% $ 20.4 44% $ 69.9 42% $ 60.6 41%
Europe 14.2 28% 13.8 29% 48.6 29% 44.3 30%
United States 12.9 25% 10.0 21% 37.5 23% 32.9 23%
Canada 1.9 4% 2.5 5% 6.4 4% 6.4 4%
Other Regions 0.3 1% 0.3 1% 3.4 2% 3.1 2%
--------------------------------------------------------------------------------------------------
Total $ 51.2 100% $ 47.0 100% $ 165.8 100% $ 147.3 100%
==================================================================================================
Asia/Pacific
Asia/Pacific revenue increased by 7% during the third quarter of Fiscal 2005
compared to the third quarter of Fiscal 2004, and continues to represent the
largest geographic segment of customer revenues. During the first nine months of
Fiscal 2005, revenue in the Asia/Pacific region increased by 15% compared to the
same period in Fiscal 2004. The revenue increases in Fiscal 2005 were driven
primarily by increased shipments in the Consumer Communications segment, which
accounted for approximately 18% and 24%, respectively, of the increase in the
three and nine months ended December 24, 2004. This was partially offset by
lower sales volumes within the Network Communications segment, which accounted
for revenue decreases of approximately 9% and 7%, respectively, of the decrease
in the same period of Fiscal 2004.
19
Europe
European revenues increased by 3% in the third quarter of Fiscal 2005 compared
to the third quarter of Fiscal 2004. The Company had higher sales volumes of
electronic shelf labels in the Ultra-Low Power segment, which were partially
offset by lower sales volumes of legacy products in the Network Communications
segment. In the first nine months of Fiscal 2005, revenue increased by 10%
compared to the same period of Fiscal 2004. Improvements were driven primarily
by increased shipments of electronic shelf labels within the Ultra Low-Power
Communications segment.
United States
Revenue to customers in the United States increased by 29% during the third
quarter of Fiscal 2005 compared to the third quarter of Fiscal 2004. Increased
sales volumes were seen predominantly in the Company's Timing and TSI and legacy
Consumer product lines, which accounted for approximately 15% and 10%,
respectively, of the revenue increase. In the first nine months of Fiscal 2005,
revenue increased by 14% compared to the same period of Fiscal 2004. The
increases were due primarily to higher sales volumes within the Network
Communications segment.
Canada
Canadian revenue in the third quarter of Fiscal 2005 decreased by $0.6 compared
to the same period in Fiscal 2004, primarily due to lower sales volumes of
wireless products within the Ultra Low-Power segment. Revenue in the first nine
months of Fiscal 2005 was in line with revenue in the same period of Fiscal
2004.
Other Regions
Revenue to customers in other regions during the third quarter of Fiscal 2005
was consistent with revenue in the third quarter of Fiscal 2004. In the first
nine months of Fiscal 2005, revenue decreased by $0.3 as compared to the same
period in Fiscal 2004 due to lower shipments of wireless products within the
Consumer Communications segment.
GROSS MARGIN
Three Months Ended Nine Months Ended
------------------ --------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
(millions of U.S. dollars) 2004 2003 2004 2003
-------- -------- -------- --------
Gross Margin $22.4 $21.0 $74.4 $66.0
As a percentage of revenue 44% 45% 45% 45%
Gross margin in the three month period ended December 24, 2004 was 44%, a
decrease of one percentage point from gross margin in the same period in Fiscal
2004. Gross margin in the nine month period ended December 24, 2004 was 45% and
was unchanged from gross margin in the nine months ended December 26, 2003.
Despite savings realized in Fiscal 2005 from cost reduction activities
implemented in the previous year, margins in Fiscal 2005 remained consistent
with levels in Fiscal 2004 due to product mix in Fiscal 2005. Products within
the Company's Consumer Communications segment generally have lower margins than
products in the Company's other business segments, and increased revenue in this
segment has decreased overall margins. Fiscal 2004 margins for the three and
nine month periods ended December 26, 2003 were unfavorably impacted by $0.4 and
$1.0, respectively, of severance costs incurred as part of the Company's cost
reduction efforts.
OPERATING EXPENSES
Research and Development ("R&D")
Three Months Ended Nine Months Ended
------------------ --------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
(millions of U.S. dollars) 2004 2003 2004 2003
-------- -------- -------- --------
R&D Expenses $15.7 $19.5 $46.2 $57.9
As a percentage of revenue 31% 41% 28% 39%
20
R&D expenses decreased by 19%, or $3.8, in the third quarter of Fiscal 2005 from
the same period in Fiscal 2004. In the first nine months of Fiscal 2005, R&D
expenses were $46.2, a decrease of 20% as compared to the same period in Fiscal
2004. The decreases resulted mainly from savings generated as a result of
headcount reductions and other cost reduction activities implemented during
Fiscal 2004, primarily in the Network Communications and Consumer Communications
segments. During the three and nine month periods ended December 26, 2003,
severance costs of $1.4 and $2.4, respectively, were incurred resulting from R&D
headcount reductions. These savings were partially offset by increased R&D
activity in the Ultra Low-Power segment. 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;
o Receivers and transmitters for single mode fiber (SMF) targeting the
access network as well as various applications where customization
is required; and
o Parallel optical modules for high speed short reach applications
using multi mode fiber (MMF).
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
ultra low power consumption is an important differentiating feature, including:
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;
o Ultra low-power integrated circuits supporting short-range wireless
communications for industrial applications such as electronic shelf
labels and radio frequency tagging, and healthcare applications such
as implantable devices, swallowable camera capsules, and personal
area communications devices; and
o High performance, ultra low-power audio data converter ASSPs,
intended for use in digital microphones, for high growth
communications and entertainment applications.
21
Selling and Administrative ("S&A")
Three Months Ended Nine Months Ended
------------------ --------------------
Dec. 24, Dec. 26, Dec. 24, Dec. 26,
(millions of U.S. dollars) 2004 2003 2004 2003
-------- -------- -------- --------
S&A Expenses $12.7 $11.9 $34.4 $37.7
As a percentage of revenue 25% 25% 21% 26%
S&A expenses increased by 7%, or $0.8, in the third quarter of Fiscal 2005 from
the same period in Fiscal 2004. The increase was primarily due to higher
corporate governance costs. These increases were partially offset by savings
realized from cost reductions implemented in Fiscal 2004, when the Company
reduced its headcount within sales, marketing, and other administrative
functions in France, Canada, and various other geographic regions. These
headcount reductions resulted in severance costs of $1.1 in the three months
ended December 26, 2003.
For the nine months ended December 24, 2004, S&A expense was $34.4, a decrease
of 9% over the first nine months of Fiscal 2004. Headcount reductions resulted
in severance costs of $2.9 in the nine months ended December 26, 2003. These
costs as well as other cost reduction activities implemented during Fiscal 2004
resulted in a reduction of S&A expense in 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 and nine months ended December 24, 2004, the
Company recorded stock compensation expense of nil and $0.1, respectively (three
and nine months ended December 26, 2003 - $0.1 and $0.1, respectively). The
expense resulted from amortization of the fair value of stock options awarded to
a former employee. Stock compensation expense was recorded as a component of S&A
expense during the periods.
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 recognizes 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. In the first six months of Fiscal 2005, X-FAB exercised its option to make
early payments on the $10.0 installment. As a result of the early payments, the
note receivable was discounted by $0.1 and the Company recognized a total gain
on sale of business of $9.9 for the nine month period ended December 24, 2004.
On January 28, 2005, the Company received an early payment of $2.0 on the $8.0
final installment of the note receivable that is due from X-FAB in the first
quarter for Fiscal 2006. The Company will recognize a gain on sale of business
of $2.0 in the fourth quarter of Fiscal 2005.
NON-OPERATING INCOME AND EXPENSE
Interest Income
Interest income was $0.3 for the three months ended December 24, 2004 and $0.3
in the same period of Fiscal 2004. During the first nine months of Fiscal 2005,
interest income was $0.7 as compared to $0.9 in the first nine months of Fiscal
2004. The decreases were mainly due to reduced average cash and short-term
investment balances in Fiscal 2005.
22
Foreign Exchange Gains and Losses
Foreign exchange losses in the third quarter of Fiscal 2005 amounted to $1.8 as
compared to losses of $1.2 for the same period in Fiscal 2004. During the nine
months ended December 24, 2004, foreign exchange losses amounted to $2.2 as
compared to $2.1 for the nine months ended December 26, 2003. Net foreign
exchange gains and 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. The foreign exchange losses incurred relate
primarily to the Company's pension liability denominated in Swedish Krona.
Interest Expense
Interest expense was nil for the three and nine month fiscal periods ended
December 24, 2004, as compared to $0.2 and $0.5, respectively, for the three and
nine month fiscal periods ended December 26, 2003.
INCOME TAXES
A $0.1 income tax expense was recorded for the third quarter of Fiscal 2005,
compared with a recovery of $1.4 for the corresponding period in Fiscal 2004.
During the nine months ended December 24, 2004, an income tax recovery of $0.9
was recorded, compared with a $1.4 recovery in the same period of Fiscal 2004.
The recovery of $0.9 related to the release of previously recognized provisions
no longer required as a result of settlements with tax authorities, in addition
to a recovery of $0.3 relating to income tax refunds received in excess of
provisions previously recorded, offset by income tax expense of $0.3.
The Company establishes a valuation allowance against deferred tax assets when
management has determined that it is more likely than not that some or all of
its deferred tax assets may not be realized. Based on historical taxable income
and uncertainties relating to future taxable income over the periods in which
the deferred tax assets are deductible, the Company has established a valuation
allowance of $186.4 as at December 24, 2004 (March 26, 2004 - $176.8). The
increase in the valuation allowance relates mainly to losses incurred, partially
offset by temporary differences in the Company's domestic and foreign
operations.
Management periodically reviews the Company's provision for income taxes and
valuation allowance to determine whether the overall tax estimates are
reasonable. When management performs its quarterly assessments of the provision
and valuation allowance, it may be determined that an adjustment is required. An
adjustment may have a material impact on the Company's financial position and
results of operations.
NET INCOME (LOSS)
The Company recorded a net loss, after preferred share dividends, of $8.2, or
$0.06 per share, in the third quarter of Fiscal 2005. This compares to a net
loss, after preferred share dividends, of $11.8, or $0.09 per share, in the same
period of Fiscal 2004. For the nine month period ended December 24, 2004, net
income after preferred share dividends was $1.5, or $0.01 per share, as compared
to a net loss after preferred share dividends of $37.9, or $0.30 per share, in
the same period of Fiscal 2004.
The net income for the nine month period ended December 24, 2004, was primarily
a result of the gain on sale of business of $9.9, as well as improved results
due to improved revenues and margins and operating expense savings realized from
the cost reduction activities implemented during Fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
At December 24, 2004, the Company held cash and cash equivalents totaling $29.7
(March 26, 2004 - $27.0). In addition, the Company held short-term investments
of $39.6 at December 24, 2004 (March 26, 2004 - $54.8). The Company's restricted
cash balance at December 24, 2004 was $13.9 (March 26, 2004 - $10.0).
Cash used in operating activities for the nine months ended December 24, 2004
was $14.5, as compared to $25.3 used in the same period of Fiscal 2004. Cash
provided by operating activities before working capital changes amounted to $0.8
for the nine months ended December 24, 2004, as compared to $17.7 used in the
first nine months of Fiscal 2004. Cash provided by operations resulted primarily
from improved operating results during Fiscal 2005. Since March 26, 2004, the
Company's working capital increased by $15.3, mainly as a result of increases in
inventory of $7.3, other accounts receivable of $2.2, prepaid expenses of $2.1,
and trade accounts receivable of $1.4, and decreases in accounts payable and
accrued liabilities totaling $2.0. Inventory levels increased to accommodate
expected sales demand in upcoming quarters. Prepaid expenses increased due
primarily to the timing of payments for software design tool contracts. Other
23
accounts receivable increases resulted from claims with certain of the Company's
foundry suppliers. The increase in trade accounts receivable was a result of the
timing of cash receipts at the end of the quarter. Accounts payable and accrued
liabilities decreased primarily due to the timing of payments made to the
Company's foundry suppliers. In comparison, the Company's working capital
increased by $7.6 during the nine months of Fiscal 2004, primarily as a result
of increases in accounts receivable of $8.4 and prepaid expenses of $2.5
resulting from the timing of cash collections and payments during the quarter,
partially offset by an increase in accounts payable and accrued liabilities of
$2.7.
Cash provided from investing activities was $22.5 for the nine months ended
December 24, 2004, primarily from proceeds of $9.9 received as payment against a
note receivable from X-FAB. In addition, cash increased from the maturity of
short-term investments totaling $109.4, partially offset by purchases of
short-term investments totaling $94.2. Cash provided from investing activities
was $26.5 for the nine months ended December 26, 2003, primarily from matured
short-term investments totaling $164.6, partially offset by purchases of
short-term investments of $134.8.
Cash used in financing activities during the first nine months of Fiscal 2005
was $5.6. The use of cash was primarily the result of an increase in restricted
cash of $3.9, and $1.6 payment of dividends on preferred shares. Cash used in
financing activities during the first nine months of Fiscal 2004 was $6.6,
resulting from an increase in restricted cash of $3.3, $1.6 payment of dividends
on preferred shares, the repurchase of $1.2 of the Company's redeemable
preferred shares, and the repayment of $0.5 of capital leases.
During Fiscal 2002, the Company took steps to wind up its defined benefit
pension plan in the United Kingdom and replace it with a defined contribution
plan. The Company expects to make a final payment of approximately $2.2 in the
fourth quarter of Fiscal 2005 after the final adjustments are determined. This
amount was included in other accrued liabilities as at December 24, 2004.
During the first nine months of Fiscal 2005, the Company declared and paid
dividends of $1.6 on its redeemable preferred shares based on quarterly
dividends averaging $0.39 (Cdn $0.50) per share. During the nine months ended
December 24, 2004, there were no preferred shares purchased by the Company, and
13,200 preferred shares cancelled. These cancelled preferred shares had been
repurchased during Fiscal 2004.
In addition to the Company's cash, cash equivalents, short-term investment and
restricted cash balances, the Company has a credit facility of $14.1 available
for letters of credit. Prior to the second quarter of Fiscal 2005, a credit
facility in Canadian dollars was available. During the second quarter of Fiscal
2005, the facility agreement was amended to reflect the limit as $10.0 U.S.
dollars, to better reflect the nature of the Company's activities. During the
third quarter of Fiscal 2005, an additional $4.1 (Cdn $5.0) credit facility was
obtained to secure an additional letter of credit related to the Company's
pension plan in Sweden. As at December 24, 2004, cash and cash equivalents
totaling $13.3 were hypothecated under the credit facility to cover outstanding
letters of credit, and were reported as restricted cash. Accordingly, the
Company had an unused facility of $0.8 available for letters of credit. The $3.9
increase in restricted cash during the first nine months of Fiscal 2005 was
required to secure additional letters of credit related to the Company's pension
plan in Sweden and to further secure changes in existing letters of credit due
to changes in foreign exchange rates. Of the $13.3 restricted cash balance,
$11.6 was issued to secure letters of credit related to the Company's pension
plan in Sweden, and $1.0 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 security for a custom bond and related credit facilities.
The Company has committed to fully secure its outstanding pension liability in
Sweden of $14.1 by December 2005. In December 2004, the Company increased its
letters of credit related to its pension plan in Sweden by $3.6, with an
equivalent increase expected to occur in December 2005, depending upon foreign
exchange rates at that time. 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. The Company's
wafer supply agreements stipulate wafer pricing based upon quantities ordered.
Although these agreements do not have minimum unit volume purchase requirements,
one of the Company's supply agreements contains contractual obligations in the
event of an order cancellation. This agreement states that if the Company
decreases the total quantity of an order containing fixed price and quantity,
the Company is committed to a higher fixed unit price for those wafers purchased
on that order. In this situation, the overall obligation is dependent upon the
volume and type of wafers purchased, and the remaining purchase period of
24
this pricing agreement. Based upon the number of wafers purchased to date under
this agreement, as at December 24, 2004, the maximum value of the price
adjustment was $0.4.
During the third quarter of Fiscal 2005, the Company renegotiated certain
contracts related to design tools and software for use in product development.
Under the new agreements, the Company's purchase obligations as at December 24,
2004 were as follows:
Payments due by period
--------------------------------
Less than 1 1 - 3
Total year years
--------------------------------
Purchase Obligations 19.7 8.9 10.8
There have been no other 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 December 24, 2004 was $32.6 (September 24,
2004 - $36.6). 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 decreased from the prior quarter due to
decreased bookings within the Ultra-Low Power and Consumer 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.
The Company currently uses forward contracts and foreign currency options to
reduce the exposure to foreign exchange risk on operating cash flows. The most
significant foreign exchange exposures for the Company relate to the U.K. pound
sterling, Canadian dollar, and the Swedish Krona. The change in market value of
the derivatives resulted in an unrealized gain of $0.5. 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 assets and liabilities denominated in foreign currencies are
subject to the effects of exchange rate fluctuations of those currencies
relative to the U.S. dollar. The most significant liability denominated in a
foreign currency is the Company's pension liability denominated in Swedish
Krona. The Company is currently assessing alternatives to reduce its exposure to
foreign currency fluctuations on this liability.
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-
25
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.
Other than the planned review of alternatives to reduce exposure to foreign
currency fluctuations on the Swedish pension liability, 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 December 24, 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 December 24, 2004. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures:
(i) 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 are recorded, processed, summarized
and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission; and
(ii) include controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including
the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
In conjunction with the Company's review and evaluation of its internal controls
during the quarter ended December 24, 2004, the Company identified and initiated
a number of measures to improve the internal controls over the existence and
valuation of inventory. In general, these measures included improved
reconciliation procedures, and documented reviews and approvals of work
performed or procedures executed.
In connection with the evaluation required by Rule 13a-15(d) under the Exchange
Act that occurred during the quarter ended December 24, 2004, the Company's
management has assessed that these control improvements have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
26
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company has been made aware of certain payroll work performed from November
1999 to August 2002 by an affiliate of its Independent Registered Public
Accounting Firm, Ernst & Young LLP (E&Y) in the Netherlands that has raised
issues regarding E&Y's independence with respect to its performance of audit
services. During this period, E&Y's Netherlands affiliate transferred payroll
disbursements to a Zarlink employee on behalf of the Company. To facilitate the
payroll disbursements, a bank account was opened by the Company, in which E&Y
Netherlands was assigned as power of attorney. These services were terminated in
August 2002 at which time there was no further activity in the account until
July 2004 when the remaining account balance of 50,000 euros was transferred
back to the Company and the payroll account was closed. These services are not
permitted under the auditor independence rules. The Company, its Audit Committee
and Ernst & Young have considered the impact the providing of these services may
have had on Ernst & Young's independence with respect to the Company and
concluded there has been no impairment of Ernst & Young's independence.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a) Certification, President and Chief Executive Officer
31.2 Rule 13a-14(a) Certification, Senior Vice President of Finance and
Chief Financial Officer
32.1 Section 1350 Certification, President and Chief Executive Officer
32.2 Section 1350 Certification, 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
27
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 February 2, 2005
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28