Norsat Announces 2013 Third Quarter Financial Results

Third Quarter 2013 Overview

• Third quarter revenue was $8.8 million, compared to $11.0 million during the same period in 2012
• Gross margin remained consistent at 41% in the third quarter of 2013 compared to Q3 2012
• Third quarter EBITDA was $1.4 million compared to $1.7 million in Q3 2012

“We continued to broaden our product and service portfolio, diversify our customer base, and maintain tight control of costs as we responded to challenging market conditions in the third quarter of 2013,” said Dr. Amiee Chan, President and CEO of Norsat.

“The ongoing US government budget sequestration has significantly impacted our business by delaying customer projects and purchasing activity. Our total third quarter sales declined to $8.8 million, from $11.0 million a year ago, primarily as a result of the US situation, and to a lesser degree, ongoing economic uncertainty in some of our markets.”

“By maintaining strict cost discipline across our operations, we were successful in decreasing total third quarter expenses, excluding government funding and foreign exchange gains/losses, by $0.7 million, or 18%, compared to a year ago. This, in turn, helped us maintain positive EBITDA results.”

“Our efforts to diversify our business have also begun to gain traction. So far this year, we have successfully increased our market penetration in Europe, the Middle East and Latin America.”

“Our acquisition of CVG is also proving very positive, augmenting our product portfolio and enhancing our intellectual property within the Satellite Solutions and Microwave segments. As a result, we have been able to immediately enter new and additional markets for solid state power amplifiers (“SSPAs”), high power block upconverters (“BUCs”), SATCOM baseband kits and Microsatellite terminals.”

“The CVG portfolio contributed approximately $320,000 in revenues by the third quarter and has since led to a major new contract win. On October 9, 2013, we announced a $6.3 million order from Harris Corporation for the compact and efficient ATOM series solid state power amplifiers we acquired as part of the CVG transaction. Harris is an acknowledged industry leader and we believe this partner’s recognition of our product strengths will bolster Norsat’s reputation and could further our expansion into the BUC market for high power block upconverters.”

“In addition to these developments, we are seeing a general increase in customer activity in the Sinclair and Microwave segments. Taken together, we expect to see modest revenue improvements in the fourth quarter, compared to the third quarter just completed,” said Dr. Chan.

Financial Review

For the three months ended September 30, 2013

For the three months ended September 30, 2013, Norsat recorded total sales of $8.8 million, compared to $11.0 million in Q3 2012.

Sales from the Sinclair Technologies segment were $5.4 million, compared to $6.0 million during the third quarter of 2012, reflecting reduced government spending in Canada and the negative impact of the US government budget sequestration.

Third quarter Satellite Solutions sales were $0.9 million, compared to $2.4 million in Q3 2012. The year-over-year change primarily reflects reduced equipment and services sales to US government agencies impacted by budget sequestration.

Third quarter Microwave Products sales were also negatively affected by sequestration with sales declining to $2.5 million, from $2.7 million in Q3 2012.

On a consolidated basis, third quarter gross margin percentages were 41%, on par with Q3 2012 results. Gross margins from the Sinclair Technologies segment also held steady at 41% in both the 2013 and 2012 periods. Satellite Solutions gross margins declined significantly to 29% in the third quarter of 2013, from 40% in Q3 2012, impacted by higher proportion of lower-margin equipment and airtime sales. Microwave gross margins remained consistent at 44% in the third quarters of 2013 and 2012.

For the three months ended September 30, 2013, total expenses decreased to $2.9 million, from $3.8 million last year, as the Company tightened spending. Selling and distributing expenses decreased to $1.5 million, from $2.0 million in Q3 2012, reflecting reductions in personnel costs and sales commissions as a result of lower sales volumes.

Third quarter general and administrative expenses decreased to $0.8 million, from $1.0 million. This year-over-year reduction reflects employee-related cost savings and a reduction in bonuses accrued due to lower sales volumes and earnings, partially offset by $0.1 million in acquisition costs related to the CVG transaction.

Third quarter direct product development expenses remained constant at $0.6 million as Norsat continued to invest in its product lines. Net product development costs declined to $0.2 million, from $0.3 million last year, reflecting slightly higher SADI claims in the third quarter of 2013.

For the three months ended September 30, 2013, other expenses decreased to $0.4 million, from $0.6 million in Q3 2012. The year-over-year change reflects a $0.2 million reduction in foreign exchange loss, together with a $0.1 million reduction in interest expenses as Norsat reduced its acquisition loan and promissory note payable balances.

The Company reported third quarter earnings before income taxes of $0.6 million, down slightly from $0.7 million in the same period last year. Third quarter net earnings from continuing operations were $0.7 million, or $0.01 per share basic and diluted, compared to $0.8 million, or $0.01 per share basic and diluted, in Q3 2012.

EBITDA for the three months ended September 30, 2013, was $1.4 million, compared to $1.7 million last year. The year-over-year change in EBITDA reflects a $1.0 million decrease in gross profit, partially offset by a $0.7 million reduction in operating expenses. The decrease in expenses reflects reduced sale commissions and bonuses accrued as a result of lower sales volumes and lower earnings in Q3 2013, lower G&A expenses from employee-related cost savings and slightly higher government contributions.

For the nine months ended September 30, 2013

For the nine months ended September 30, 2013, total sales were $25.7 million, compared to $31.8 million for the same period last year.

Sales from the Sinclair Technologies segment were $16.2 million, compared to $18.5 million during the first nine months of 2012. The year-over-year decrease reflects reduced government spending in Canada and the negative impact of US government budget sequestration.

Satellite Solutions sales were $3.9 million year-to-date, compared to $6.2 million during the same period in 2012. Sales from this segment were significantly impacted by reduced US military ordering of satellite equipment and services as a result of budget sequestration. Service revenues also declined as warranties and post-service contracts expired.

Microwave Products sales for the first nine months of 2013 were $5.7 million, compared to $7.1 million during the same period last year, again reflecting the impact of US budget sequestration.

On a consolidated basis, gross margin percentage was 41% for the nine months ended September 30, 2013, compared to 43% during the same period in 2012. The Microwave Products segment achieved gross margin of 44%, comparable with results from 2012. Margins from the Sinclair Technologies segment were 42%, compared to 44% in the first nine months of 2012, reflecting increased product warranty provision during the 2013 period. Satellite Solutions gross margin decreased to 33% from 38%, primarily reflecting a greater proportion of lower-margin revenues in the mix during 2013, especially related to airtime.

For the nine months ended September 30, 2013, total expenses decreased to $8.7 million, from $11.9 million during the same period in 2012.

Selling and distributing expenses decreased to $4.7 million, from $5.7 million during the first nine months of 2012, reflecting reduced personnel expenses and a decrease in sales commissions as a result of lower sales volumes.

General and administrative expenses decreased to $3.0 million year-to-date, from $3.8 million during the same period in 2012. The reduction in G&A expenses reflects the absence of approximately $0.3 million in severance costs paid in Q1 2012 for the former President of Sinclair, together with a $0.5 million reduction in bonuses accrued due to lower sales volumes and earnings in 2013. These savings were partially offset by CVG transaction-related costs of approximately $0.1 million.

Direct product development expenses increased to $2.5 million during the nine months ended September 30, 2013, from $2.1 million during the same period in 2012. This increase reflects investments made to accelerate development of the newly acquired CVG product lines. On March 28, 2013, Norsat secured a new repayable government contribution under the SADI program, which enables the Company to claim eligible costs incurred between July 27, 2012 and December 31, 2017. The timing of the award meant that over two quarters worth of government contributions were recorded in Q1 2013, compared to just one quarter of contribution in the first quarter of 2012. Accordingly, claims for the nine months ended September 30, 2013 were $1.7 million, compared to $0.9 million during the same period in 2012. As a result, net product development costs declined to $1.0 million for the nine months ended September 30, 2013, from $1.6 million during the same period in 2012.

Other income for the first nine months of 2013 was $31,094, compared to other expenses of $0.8 million during the same period in 2012. This increase in other income was driven by a $0.7 million foreign exchange gain realized as the US dollar strengthened against the Canadian dollar, and by a $0.2 million decrease in interest expenses resulting from the reduction in acquisition loan and promissory note payable balances.

For the nine months ended September 30, 2013, earnings before income taxes increased to $1.9 million, from $1.7 million during the same period in 2012.

Net income tax recovery was $0.1 million in the first nine months of 2013, compared to $2.5 million during the same period in 2012. The significant income tax recovery in the 2012 period resulted from the reorganization of Norsat’s legal structure.

Nine month net earnings from continuing operations decreased to $2.0 million, or $0.03 per share, basic and diluted, from $4.3 million, or $0.07 per share, basic and diluted, during the same period in 2012. The higher earnings in the 2012 period reflect the positive impact of the $2.5 million net income tax recovery.

EBITDA for the nine months ended September 30, 2013, was $3.0 million, compared to $3.6 million last year. The change in EBITDA reflects a $2.9 million reduction in gross profit contributions resulting from lower sales volumes in the current period, partially offset by a $2.3 million decrease in operating expenses. The decrease in expenses reflects reduced sale commissions as a result of lower sales volumes, lower G&A expenses from the reduction in bonuses accrued due to lower sales volumes and lower earnings, and higher government contributions.

Financial Position

Norsat ended the third quarter with cash and cash equivalents of $2.6 million, compared to $5.1 million as at December 31, 2012. The $0.5 million purchase price for the CVG transaction was financed with cash from operations.

In connection with its acquisition of Sinclair in January 2011, the Company secured a non-revolving acquisition loan of $12.0 million and a promissory note payable of $0.7 million, for a total of $12.7 million. As at September 30, 2013, the promissory note had been fully repaid and the acquisition loan balance had been reduced to $5.0 million. Norsat is fully in compliance with its bank covenants.

The Company also had access to undrawn credit facilities totaling $4.2 million as at November 5, 2013. Working capital as at September 30, 2013 was $9.3 million, compared to $7.5 million at December 31, 2012. The current ratio as at September 30, 2013 was 1.8 times, compared to 1.5 times as at December 31, 2012.

Outlook

While the US government budget sequestration and ongoing economic uncertainties continue to have a negative impact on market demand, Norsat anticipates modest revenue improvement in the fourth quarter of 2013 as customer activity in the Sinclair and Microwave segments begins to increase. Sales in the Microwave segment should be further supported by the Company’s diversification activities, including the addition of the CVG product portfolio and the recent and related win of the $6.3 million Harris contract.

Going forward, Norsat will continue to diversify its business by broadening its product portfolio and expanding its customer base on a geographic and market sector basis. The Company is continuing to focus on markets beyond the US, as well as on the commercial, resource, transportation and public safety segments. It is also continuing to pursue other new revenue opportunities.

The current global economic uncertainties, coupled with Norsat’s stable financial position and capital structure, are creating excellent conditions for realizing growth through business combinations. Norsat will continue to actively pursue merger and acquisition opportunities that provide strong value, further the Company’s strategic objectives and have the potential to be accretive to shareholders.

Norsat will also continue to execute a balanced growth strategy that incorporates investment in staffing levels, new product introductions, continued enhancement of existing product lines, greater diversification by geographic region as well as by industry verticals, and a broadening of the solutions provided to customers. In addition, the Company continues to evaluate other strategic opportunities for improving its overall operating and financial performance.