Monday, 21 December 2009

Zarlink - the next high tech train wreck? Hopefully not!

MoneySense's The Top 22 Pensions in Danger in October rated 181 Canadian public companies on their pension underfunding and their likelihood of going under based on Z-Score (a reasonably reliable accounting ratio-based bankruptcy predictor - see Wikipedia article). High tech company Zarlink came out second worst on the Z-score at a really horrible -3.69 (positive numbers above 1.8 are safe according to the MoneySense rating, though the original z-score safe level is 2.6 or over) and 6th from bottom at 74% underfunding.

So is Zarlink set to become the next pension train wreck, following on the leadership, if one can call it that, of Nortel? Digging through Zarlink's financial statements suggests, thank goodness, no, it will not. It has set aside in restricted cash covering about 89% of the unfunded pension liability. Interestingly, this is not for Canadian employees but ones in Sweden. The Swedish obligation was funded with krona, not dollars, so though exchange rate shifts have driven up the liability in dollars (used by Zarlink in its accounting) the real obligation in krona hasn't changed much. Another unfunded pension liability, this one in Germany, has been dealt with by a contract with an insurance company to cover the liability. So the employees/pensioners over in Europe don't need to worry as much about their pensions. One caveat is how restricted the 'restricted' cash is. In the event of bankruptcy, is it really kept away from other creditors?

On the bankruptcy-avoidance side, Zarlink seems to have made some progress according to its second quarter financial statement by reducing operating expenses, accumulating rather than burning cash and eeking out small profits but there is no dramatic turn-around evident. It's still in a precarious position. Though I don't own any shares, as an Ottawa company I wish them success.

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