Zilog Announces Third Quarter Fiscal 2010 Financial Results

SAN JOSE, Calif., Jan. 27 /PRNewswire-FirstCall/ -- Zilog, Inc. (Nasdaq: ZILG), a trusted supplier of application specific, embedded control products including energy management solutions for industrial and consumer markets, today reported financial results for its three- and nine-month periods ended December 26, 2009.

Net sales from continuing operations for the fiscal 2010 third quarter were $8.7 million, a sequential increase of 7 percent and a year-over-year decrease of 4 percent. Licensing royalties were $0.8 million in the third fiscal quarter, compared to $1.0 million in the previous quarter and $0.6 million in Q3 a year ago. The sequential increase in sales reflects a continued improvement in global demand for products following the global economic downturn that commenced in 2008. The financial results exceeded our previous guidance in both top and bottom line performance. On February 18, 2009, the Company sold its universal remote control and secured transaction processor businesses ("sale businesses"). In accordance with FASB ASC 205, the comparative financial statements for its previous fiscal periods ended December 27, 2008, have been restated to reflect the sold businesses as discontinued operations. Further, on December 4, 2009, the Company signed a definitive merger agreement ("Merger Agreement") in which Ixys Corporation ("Ixys") agreed to acquire all of the outstanding shares of the Company for $3.5858 per share in cash, subject to customary closing conditions. The Company expects to hold a special meeting of shareholders on February 17, 2010 to vote on the merger. If the merger is approved the Company expects to close shortly thereafter.

GAAP net income for the fiscal third quarter ended December 26, 2009 was $0.3 million, or 1 cent per share, compared to GAAP net income of $1.6 million, or 9 cents per share, in the previous fiscal quarter and a GAAP net loss of $5.7 million, or 33 cents per share, for fiscal Q3 a year ago. Net income for the fiscal 2010 third quarter includes special charges of $0.6 million, or 3 cents per share, which included $0.5 million in legal and other costs associated with the Merger Agreement. The previous quarter's results included $1.55 million in income from discontinued operations. Results for the third fiscal quarter a year ago included special charges of $1.7 million and net losses from discontinued operations of $0.4 million. Special charges in Q3 fiscal 2009 included costs associated with reductions in headcount as a result of declining sales driven by the downturn in the global economy.  

On a year-to-date basis for the nine months ended December 26, 2009, sales were $24.0 million and GAAP net income was $2.2 million, or 13 cents per share, compared to sales of $29.1 million and a GAAP net loss of $9.0 million, or 53 cents per share for the nine months ended December 27, 2008.  The financial results reflect an $11.2 million favorable improvement in net income for the fiscal 2010 nine-month period as compared to the comparable period in 2009. This improvement reflects a $5.1 million reduction in sales offset by improved product gross margins from 40 percent to 45 percent, a $10.5 million or 49 percent reduction in operating expenses, a $2.6 million reduction in special charges and amortization of intangible assets and the benefit of $1.0 million in patent sales. Additionally, fiscal 2010 year to date net income as compared to fiscal 2009 was negatively impacted by a $3.1 million reduction in net income from discontinued operations offset by a $1.6 million discontinued operations gain on sale reflecting the receipt of 50 percent of an escrow receivable related to the sale businesses. Fiscal 2009 results for the nine months ended December 27, 2008 included special charges of $2.8 million reflecting severance and other related costs associated with the global economic downturn resulting in a significant worldwide reduction in force. Additionally, special charges included costs associated with the production test outsource activities as well as expenses associated with the strategic alternatives review.  

The Company reported cash, cash equivalents and long-term investments of $37.4 million at December 26, 2009, compared to $36.4 million and $33.3 million at September 26, 2009 and March 31, 2009, respectively. Net cash provided by continuing operating activities was $3.2 million for the year to date nine months of fiscal 2010, as compared to net cash used in continuing operating activities of $6.9 million for the comparative nine month period a year ago. On a non-GAAP basis, adjusted EBITDA from continuing operations, as defined below, was positive $1.4 million for the fiscal 2010 third quarter, as compared to positive $0.7 million in the prior fiscal quarter and negative $2.6 million in the third fiscal quarter a year ago. On a year to date basis, adjusted EBITDA from continuing operations was positive $2.8 million for the nine months ended December 26, 2009 as compared to negative $6.4 million for the comparative nine months a year ago.

The outlook for this quarter reflects the traditional seasonal slowdown in demand with an expected sequential reduction in sales. As was the case in Q3, the Company expects distribution end-demand to be the key to determining final sales levels for Q4 and for fiscal 2010 as a whole. The Company expects net sales for its fiscal 2010 fourth quarter ending March 31, 2010, to be lower by 3 percent to 5 percent, as compared to the third fiscal quarter ended December 26, 2009. Additionally in the fourth quarter, the Company expects $1.55 million in cash receipts from its remaining 50 percent of an escrow amount associated with the sale of its discontinued business in February 2009.  

NON-GAAP FINANCIAL INFORMATION (Unaudited)

The Company may make reference to certain Non-GAAP financial measures. Management believes that these Non-GAAP measures are useful measures of operating performance and liquidity because they may exclude the impact of certain items, such as amortization of intangible assets, stock-based compensation, depreciation, non-operating interest, income taxes and special charges. However, these Non-GAAP measures should be considered in addition to, not as a substitute for, or superior to, net income (loss) and net cash provided by (used in) operating activities, or other financial measures prepared in accordance with GAAP.

Non-GAAP Net Income (Loss) from continuing operations (Unaudited)

Non-GAAP net income (loss) from continuing operations (Non-GAAP net income (loss)) excludes special charges and non-cash charges relating to the amortization of intangible assets and stock-based compensation. Following the sale of the universal remote control and secured transaction processor businesses in February 2009, Non-GAAP net income (loss) was restated to exclude amounts related to the Company's discontinued operations. We believe that Non-GAAP net income (loss) is a useful measure as it excludes certain special charge items as well as certain non-cash charges, which facilitates a comparison of the Company's operating performance. However, this Non-GAAP measure should be considered in addition to, not as a substitute for, or superior to, the net loss measured in accordance with GAAP.

Non-GAAP EBITDA (Unaudited)

Management believes that Non-GAAP EBITDA ("EBITDA"), that is Earnings or loss Before Interest, Taxes, Depreciation and Amortization, is a useful measure of financial performance. Following the sale of the universal remote control and secured transaction processor businesses in February 2009, EBITDA was restated to exclude amounts related to the Company's discontinued operations. We believe that the disclosure of EBITDA helps investors more meaningfully evaluate our liquidity position by the elimination of non-cash related items such as depreciation and amortization. We believe that our investors regularly use EBITDA as a measure of the liquidity of our business. Our management uses EBITDA as a supplement to cash flows from operations as a way to assess the cash generated from our business available for capital expenditures and the servicing of other requirements including working capital.

Non-GAAP Adjusted EBITDA (Unaudited)

EBITDA reflects our Earnings or loss Before Interest, Taxes, Depreciation and Amortization.  Additionally, management uses separate "Adjusted EBITDA" calculations for purposes of determining certain employees' incentive compensation and subject to meeting specified Adjusted EBITDA amounts. Adjusted EBITDA, as we define it, excludes interest, income taxes, effects of changes in accounting principles and non-cash charges such as depreciation, amortization, in-process research and development, and stock-based compensation expense.  It also excludes cash and non-cash charges associated with reorganization items and special charges and credits, which represent operational restructuring charges, including asset write-offs, employee termination costs, relocation costs, lease termination costs, costs associated with selling our discontinued operations and costs associated with our merger with Ixys.  Adjusted EBITDA also excludes changes in operating assets and liabilities, which are included in net cash provided by (used in) operating activities. Following the sale of the universal remote control and secured transaction processor businesses in February 2009, Adjusted EBITDA was restated to exclude amounts related to the Company's discontinued operations. Our management uses Adjusted EBITDA as a supplement to cash flows from operations as a way to assess the cash generated from our business available for capital expenditures and the servicing of other requirements including working capital.  This Non-GAAP Adjusted EBITDA measure allows management to monitor cash generated from the operations of the business. However, this Non-GAAP measure should be considered in addition to, not as a substitute for, or superior to, net loss and net cash provided or used in operating activities prepared in accordance with GAAP.

Earnings conference call

The Company will be conducting a conference call with analysts and investors today, January, 27, 2010 at 2:00 p.m. PST (5:00 p.m. EST) to review the details of its financial results. Analysts and investors may access the call by dialing (866) 203-2528 within the United States or (617) 213-8847 from outside the United States, using participant pass code 31603197. The webcast will be distributed in a listen-only mode through Zilog's website at http://www.zilog.com. Additionally, institutional investors can access the call via StreetEvents at www.streetevents.com.

Following the completion of the earnings call, an audio MP3 replay will be available from the Company's investor relations website at www.zilog.com. A telephone replay of the conference call will also be available for one week after the conference call at (888) 286-8010 (U.S.) and (617) 801-6888 (international) and can be accessed using pass code 30666050.

About Zilog, Inc.

Zilog is a trusted supplier of application specific, embedded system-on-chip (SoC) solutions for the industrial and consumer markets. From its roots as an award-winning architect in the microprocessor and microcontroller industry, Zilog has evolved its expertise beyond core silicon to include SoCs, single board computers, application specific software stacks and development tools that allow embedded designers quick time to market in areas such as energy management, monitoring and metering and motion detection. For more information, visit http://www.zilog.com.

EZ80ACCLAIM!, Zilog, Z8, Z80, eZ80, Z8 ENCORE!, Encore!XP and Zneo are registered trademarks of Zilog, Inc. in the United States and in other countries.

Other product and or service names mentioned herein may be trademarks of the companies with which they are associated.

Cautionary Statements

This release contains forward-looking statements (including those related to our expectations for our March 2010 quarter, the timing and outcome of our shareholder vote, the timing of the merger if approved, the expected receipt of the remaining escrow receivable and our position as the global economy recovers) relating to expectations, plans or prospects for Zilog, Inc. that are based upon the current expectations and beliefs of Zilog's management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For example, weakness in our 8-bit classic or embedded flash products could negatively impact our March 2010 fiscal quarter.  Changes in requirements for supporting the Transition Services Agreement with Maxim Integrated Products, Inc., which was as a result of selling the universal remote control and secured transaction processor businesses and is currently scheduled to terminate on February 18, 2010, could impact our cash projections. Any major claims against the escrow fund resulting in the delay or reduction of the amount to be received could negatively impact our cash flow expectations. We are being sued in Delaware and California for certain claims relating to our proposed merger with Ixys. These claims are disclosed in our proxy statement filed with U.S. Securities and Exchange Commission ("SEC") on January 15, 2010. Further legal actions may be made by these parties or other parties that could impact the timing of our shareholder vote and the closing of the proposed merger. Additionally, our ability to attract and retain technical employees may be negatively impacted by uncertainties relating to potential future changes in the ownership and control of the Company which may make it difficult to execute on our long-term strategy.  

Notwithstanding changes that may occur with respect to customer matters relating to the forward-looking statements, Zilog does not expect to, and disclaims any obligation to update such statements until release of its next quarterly earnings announcement or in any other manner. Zilog, however, reserves the right to update such statement, or any portion thereof, at any time for any reason.

The financial information presented herein is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the Company's Form 10-Q for the periods ended December 26, 2009.

For a detailed discussion of these and other cautionary statements, please refer to the risk factors discussed in filings with the SEC, including but not limited to, the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2009, and any subsequently filed reports. All documents also are available through the SEC's Electronic Data Gathering Analysis and Retrieval system (EDGAR) at http://www.sec.gov or from the Company's website at www.Zilog.com and can be found under the investor section.

SOURCE Zilog, Inc.