Zarlink Grows Revenue and Cash Position in First Quarter

First Quarter Highlights

* Q1 Fiscal 2011 revenue grew to $58.7 million, exceeding the company's guidance range of $57.0 to $58.5 million, up 6% from Q4 Fiscal 2010 and 18% from the same quarter last year;
* Increasing customer demand across all core segments of the business, with Communications Products revenue growing sequentially by $3.9 million and Medical Products revenue growing sequentially by $1.3 million;
* Cash increased by $24.5 million, including net proceeds of $13.5 million from the sale of the Optical Products Group, to reach $98.9 million as at June 25, 2010;
* Basic earnings per share of $0.08 and $0.07 per diluted share.

Continuing customer demand for our timing, line circuit and medical wireless products helped deliver strong sequential and year-on-year revenue growth and record non-GAAP operating income, said Kirk Mandy, President and CEO, Zarlink Semiconductor. We are continuing to strengthen our balance sheet, with our cash position now approaching $100 million, as we generated significant cash from operations and recognized the net proceeds from the strategic sale of our Optical Products Group.

Mr. Mandy continued: As demonstrated by our results this quarter, we are successfully capitalizing on key trends in the communications market, including voice-over-broadband deployments and capacity constraints created by higher bandwidth mobile Internet applications. We are expanding our position in these segments of the communications markets, while investing in our next-generation timing and medical wireless expertise to address longer-term technology trends to support our continuing progress.

First Quarter Fiscal 2011 Financial Results
First quarter revenue was $58.7 million, an increase of $3.5 million or 6% compared with Q4 Fiscal 2010 revenue of $55.2 million, and an increase of $9 million or 18% from Q1 Fiscal 2010 revenue of $49.7 million.

Gross margin in Q1 Fiscal 2011 was 51% of revenue, which included $0.3 million in supply chain harmonization costs, compared with gross margin of 53% in the previous quarter which included $0.3 million in supply chain harmonization costs. Gross margin in Q1 Fiscal 2010 was 50%, which included $1.1 million in supply chain harmonization costs.

R&D expenses in Q1 Fiscal 2011 were $10.6 million, or 18% of revenue, compared with Q4 Fiscal 2010 R&D expenses of $10.7 million, or 19% of revenue. S&A expenses in Q1 Fiscal 2011 were $10.1 million, or 17% of revenue, compared with Q4 Fiscal 2010 S&A expenses of $11.0 million, or 20% of revenue.

Operating income in Q1 Fiscal 2011 was $5.5 million, compared with Q4 Fiscal 2010 operating income of $5.0 million and Q1 Fiscal 2010 operating income of $4.3 million.

Net income in Q1 Fiscal 2011 was $10.3 million or $0.08 per basic share and $0.07 per diluted share. Q1 Fiscal 2011 net income includes:

* Income of $5.9 million from discontinued operations;
* A non-cash foreign exchange gain of $0.5 million related primarily to Zarlink's Canadian dollar denominated debenture;
* A one-time $1.9 million expense related to settlement of a Swedish employee pension. The payable related to this settlement was paid using the restricted cash balance on July 15, 2010. After this payment there is no further liability under this plan.

In Q4 Fiscal 2010 Zarlink recorded net income of $6.8 million or $0.05 per share, which included a non-cash foreign exchange loss of $1.2 million. In Q1 Fiscal 2010 Zarlink recorded a net loss of $0.5 million, or $0.01 per share, which included a non-cash foreign exchange loss of $3.9 million.

As a supplement to Zarlink's consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), the Company provides additional non-GAAP measures for operating income, net income (loss), and basic and diluted net earnings (loss) per share from continuing operations. For full reconciliation of GAAP to non-GAAP measures, refer to the schedule included with this press release.

Non-GAAP operating income for Q1 Fiscal 2011 was $9.8 million, compared with Q4 Fiscal 2010 non-GAAP operating income of $7.8 million and Q1 Fiscal 2010 non-GAAP operating income of $8.3 million. Non-GAAP net income in Q1 Fiscal 2011 was $8.6 million, or $0.06 per share. For Q4 Fiscal 2010, non-GAAP net income was $6.8 million, or $0.05 per share. For Q1 Fiscal 2010, non-GAAP net income was $7.3 million, $0.06 per basic share and $0.05 per diluted share.

Cash and cash equivalents increased by $24.5 million, including net proceeds from the sale of the Optical Products Group of $13.5 million, to $98.9 million at the end of Q1 Fiscal 2011. In comparison, Zarlink had cash and cash equivalents totaling $74.4 million at the end of Q4 Fiscal 2010.

On July 28, 2010 Zarlink declared a quarterly dividend of CDN$0.50 per share on its preferred shares (TSX:ZL.PR.A) payable on September 28, 2010 to preferred shareholders of record as of September 3, 2010. Dividends paid by Zarlink to Canadian residents are eligible dividends for Canadian income tax purposes.