“In 2013 we continued to broaden our product and service portfolio,
diversify our customer base, and maintaining tight control of costs as
we responded to challenging market conditions,” said Dr. Amiee Chan,
President and CEO of Norsat.
“The US government budget sequestration continued to significantly
impact our business by delaying customer projects and purchasing
activity. Our total annual sales declined to $36 million, from $42
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. We
finally began to see market improvements in the fourth quarter, with our
sales increasing to $10.7 million, from $10.6 million during the same
period in 2012. This gain reflects the easing of the budget
sequestration in the latter part of 2013 and higher US spending as a
result of pent-up demand.”
“By maintaining strict cost discipline across our operations, we were
successful in decreasing total expenses by $4.8 million or 30%, compared
to a year ago.”
“2013 was a challenging year for our Satellite Solutions division,
culminating in a $1.2 million write-down of our satellite inventory
during the fourth quarter. This assessment resulted from a comprehensive
review of certain satellite product lines due to changing market demand,
new information indicating decreased future prospects and the expiry of
various long-term US government contracts. As a result of the review, we
have reallocated resources from Satellite Solutions to other market
segments where we see more promising prospects.”
“In particular, we are benefiting from a general increase in customer
activity in the Sinclair and Microwave segments. In 2013 we successfully
increased our market penetration with these products in Europe, the
Middle East and Latin America.”
“Our acquisition of CVG also continues to be very positive for us,
augmenting our product portfolio and enhancing our intellectual property
and diversification within the Microwave segment. The CVG portfolio
contributed approximately $1.5 million in revenues in 2013 and has
resulted in a significant order from Harris Corporation for the ATOM
series solid state power amplifiers we acquired as part of the CVG
transaction.”
“Taken together, we expect to see modest revenue improvements in
2014, compared to the year just completed,” said Dr. Chan.
Financial Review
For the three months ended December 31, 2013
For the three months ended December 31, 2013, Norsat recorded total
sales of $10.7 million, up from $10.6 million in Q4 2012.
Sales from the Sinclair Technologies segment increased 12% to $6.3
million, from $5.7 million during the same period in 2012. The
improvement was attributable to the easing of the budget sequestration
in the latter part of 2013 and higher US government spending due to
pent-up demand.
Satellite Solutions sales, which now include sales of Maritime
antennas, were $0.9 million, compared to $2.5 million in Q4 2012
reflecting the continuing decrease in US military demand and budget
constraints among other non-military customers.
Fourth quarter sales of Microwave Products improved 39% to $3.4
million, from $2.5 million in 2012. The $1 million increase was mainly
driven by the win of a large contract in the fourth quarter of 2013.
This contract win was a result of the addition of the CVG Product
portfolio and our strong reputation in the microwave communications
market.
On a consolidated basis, fourth quarter gross margin percentages were
30%, compared to 44% in Q4 2012. The Sinclair Technologies segment
achieved a fourth quarter gross profit margin of 43%, down slightly from
the 45% achieved in Q4 2012, but ahead of the historical norm. The
Satellite Solutions segment recorded a negative gross margin of $0.9
million, compared to positive gross margin of $0.9 million during the
same period of 2012. The year-over-year change in gross margin reflects
a $1.2 million inventory write-down in the Satellite Solution segment
and overall lower sales volumes.
Fourth quarter total expenses decreased to $2.1 million, from $3.8
million in Q4 2012. Selling and distributing expenses in 2013 were
comparable to the same period in 2012. General and administrative
expenses decreased to $0.7 million, from $1.3 million in 2012,
reflecting reductions in personnel costs and sales commissions as a
result of the lower sales volumes.
Fourth quarter net product development expenses decreased by 49%, to
$0.4 million, largely reflecting an increased government contribution
with the new SADI program obtained in 2013, compared to the lesser
government contribution of the previous SADI program in the same quarter
in 2012.
Other income increased to $0.5 million, from other expense of $0.1
million in the fourth quarter of 2012. The $0.6 million improvement
primarily reflects a favourable foreign exchange gain of $0.5 million
from translating Canadian dollar-denominated payables and loans into US
dollars and a $0.1 million reduction in interest expenses. The reduced
interest expense reflects a lower effective interest rate and an overall
lower bank loan principal balances outstanding in the fourth quarter of
2013 in comparison to the same period in 2012.
Fourth quarter earnings before income taxes increased to $1.0
million, from $0.9 million in Q4 2012, reflecting a lower gross margin
offset by lower operating expenses and higher foreign exchange gain.
Fourth quarter net earnings increased to $1.7 million, or $0.03 per
share, basic and diluted, inclusive of $0.02 of income tax recovery,
from $0.9 million, or $0.02 per share, basic and diluted, inclusive of
$0.06 of income tax recovery, during the same period in 2012.
Adjusted EBITDA for the three months ended December 31, 2013 improved
by 69% to $2.1 million, primarily reflecting lower total expenses in the
fourth quarter of 2013 compared to the same period in 2012.
For the year ended December 31, 2013
For the year ended December 31, 2012, Norsat recorded total sales of
$36.4 million, compared to $42.2 million in 2012.
Sinclair Technologies sales were $22.5 million, compared to $24.2
million in 2012. The year-over-year change in sales was largely the
result of reduced government spending in Canada and the negative impact
of US government budget sequestration.
Satellite Solutions sales were $4.8 million in 2013, compared to $8.6
million in 2012. Sales from this segment were significantly impacted by
reduced US military ordering of satellite equipment and services,
reflecting the impact of US budget sequestration. Service revenues also
declined as warranties and post-service contracts expired.
Microwave Products sales were $9.1 million, compared to $9.6 million
in 2012. Our Microwave segment was significantly impacted by the US
budget sequestration, which resulted in some customers delaying
projects. The negative sales impact was partially offset by the fourth
quarter win of the large new contract for our CVG products.
On a consolidated basis, gross profit margin percentage was 38% in
2013, compared to 43% in 2012. Sinclair Technologies maintained a gross
profit margin percentage of 43%, comparable to the 44% achieved in 2012.
Gross profit margins from the Satellite Solutions segment were 9%,
compared to 38% in 2012, reflecting a greater proportion of lower-margin
revenues in the mix and a $1.2 million inventory write-down. Gross
profit margins from Microwave Products were 42%, compared to 44% in
2012, reflecting lower margin products in the sales mix.
For the year ended December 31, 2013, total expenses decreased to
$10.8 million, from $15.6 million in 2012.
Selling and distributing expenses decreased to $6.3 million in 2013,
from $7.2 million in 2012, reflecting reduced personnel expenses and
decreased sales commissions as a result of lower sales volumes in 2013.
General and administrative expenses decreased to $3.7million, from
$5.1 million in 2012. The $1.4 million decrease reflects a $0.5 million
reduction in bonuses accrued due to lower sales volumes and earnings in
2013, the absence of approximately $0.3 million in severance costs paid
in 2012 for the former President of Sinclair, and other employee-related
cost savings.
Direct expenses increased by $0.2 million year over year, reflecting
investments made to accelerate development of the newly acquired CVG
product lines. On March 28, 2013, we secured a new repayable government
contribution under the SADI program, which enables us to claim eligible
costs incurred between July 27, 2012 and December 31, 2017. The timing
of the award meant that five quarters worth of government contributions
were recorded in 2013, compared to less than four quarters recorded in
2012. Claims for the year ended December 31, 2013 were $2.2 million,
compared to $1.0 million during the same period in 2012. As a result,
net product development costs declined to $1.4 million for 2013, from
$2.4 million during the same period in 2012.
Other income for the year ended December 31, 2013 was $0.6 million,
compared to other expenses of $0.9 million in 2012. The $1.5 million
increase in other income was mainly driven by a $1.1 million foreign
exchange gain realized as the US dollar strengthened against the
Canadian dollar, and by a $0.3 million decrease in interest expenses
resulting from the reduction in acquisition loan balances and the
redeemed promissory note in the second quarter of 2013.
For the year ended December 31, 2013, earnings before income taxes
increased to $3.0 million, from $2.6 million in 2012, reflecting lower
operating expenses and a higher foreign exchange gain, partially offset
by a lower gross margin.
Net income tax recovery was $0.7 million, compared to $2.5 million in
2012. The significant income tax recovery in the 2012 period resulted
from the reorganization of our legal structure.
Net earnings for the year ended December 31, 2013 were $3.7 million,
compared to $5.1 million in 2012, reflecting the reduced income tax
recovery. Earnings per share were $0.06 per share, basic and diluted,
inclusive of $0.01 of income tax recovery, compared to $0.09 per share,
basic and diluted, during the same period in 2012.
Adjusted EBITDA for 2013 improved by $0.3 million or 6% to $5.1
million, from $4.8 million the same period in 2012. The year-over-year
improvement in Adjusted EBITDA reflects the $3.3 million decrease in
operating expenses, partially offset by a $3.0 million reduction in
gross profit margin. The decrease in operating expenses reflects reduced
sale commissions as a result of lower sales volumes, lower G&A expenses
from reduction in bonuses accrued due to lower sales volumes and lower
earnings, and higher government contributions.
Financial Position
Norsat ended the fourth quarter of 2013 with cash and cash
equivalents of $3.3 million, compared to $5.1 million as at December 31,
2012.
The Company also has access to undrawn credit facilities totaling
$4.2 million as at December 31, 2013 and February 25, 2014.
Working capital as at December 31, 2012 was $10.0 million, compared
to $10.5 million at December 31, 2012. The current ratio as at December
31, 2013 was 2.0 times, compared to 1.5 times as at December 31, 2012.
Outlook
While there has been some easing of the US government budget cuts in
recent months, market conditions remain challenging. Management
anticipates modest revenue improvement in the first quarter of 2014
driven by increased customer activity in the Sinclair and Microwave
segments. Sales in the Microwave segment should be further supported by
Norsat’s diversification activities, including the addition of the CVG
product portfolio and related win of the Harris contract. Harris
Corporation is an acknowledged industry leader and we believe this
partner’s recognition of the Company’s product strengths will bolster
Norsat’s reputation and could further its expansion into the BUC market
for high power block up-converters. Sales in the Satellite Solution
business are expected to remain constrained as a result of weak customer
demand. In addition a significant airtime contract has recently expired
and another airtime contract is scheduled to expire at the end of Q1
2014. Norsat does not expect it will be able to replace the recurring
revenue from these contracts in the near future.
Going forward, the Company will continue to work to diversify its
business by broadening its product portfolio and expanding its customer
base on a geographic and market sector basis. Norsat continues to focus
on markets beyond the US, as well as on the commercial, resource,
transportation and public safety segments. The Company is also
continuing to pursue other new revenue opportunities.
The current global economic uncertainties, coupled with Norsat’s
stable financial position and capital structure, continue to create
excellent conditions for realizing growth through business combinations.
The Company will continue to actively pursue merger and acquisition
opportunities that provide strong value, further key strategic
objectives and have the potential to be accretive to shareholders.
Management 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 we provide to customers. In addition,
the Company continues to evaluate other strategic opportunities for
improving overall operating and financial performance.
