talk Satellite

Norsat's Revenues up 11% to $9.6 million and posts Adjusted EBITDA of $1.3 million

Norsat reported financial results for the second quarter ended June 30, 2014. Norsat serves global customers primarily through three business units: Sinclair Technologies, Satellite Solutions and Microwave Products. All financial results are reported in U.S. dollars and have been prepared in accordance with International Financial Reporting Standards ("IFRS"), unless otherwise stated.

Dr. Amiee Chan, president and chief executive officer of Norsat, commented, "I am pleased with the second quarter results, which showed solid revenue growth, strong increases in operating earnings and improvements in cash flow. Our microwave products division experienced accelerated growth in the quarter with revenues doubling from a year ago, reflecting sizable deliveries of the new line of ATOM products to Harris Corporation and other customers. This growth, combined with a slight improvement in our Sinclair Technologies segment, helped offset decreased revenues from military customers during the quarter. The Company continues to diversify its business by broadening its product portfolio through development, and expanding its customer base on a geographic and market sector basis. Specifically, the Company is focusing on markets beyond the U.S., as well as on the commercial, resource, transportation and public safety segments that we believe will lead to growth for the Company in the coming years."

Dr. Chan continued, "We continue to reap the rewards from our strategic investments. The ATOM series of BUCs and SSPAs are the most compact, lightweight, and energy efficient transmitters available on the market. While we essentially completed the delivery of our ATOM series of Ku-Band BUCs and Solid State Power Amplifiers (SSPAs) to Harris during the second quarter, we continue to see strong demand in the marketplace for the product and expect to see continued solid sales for this product line in the coming quarters. We have always been a company at the leading edge of technological advancements and we will continue to be in the coming years."

Arthur Chin, chief financial officer of Norsat, commented, "Norsat continues 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 it provides to customers. These strategies have resulted in improved revenue growth during the second quarter, less dependency on certain market segments, and improvements in operating profitability. The improvement in cash flows during the quarter allowed for us to continue paying down our acquisition loan, affording us the flexibility to continue to consider and opportunistically pursue strategic acquisitions that we believe can leverage the strengths of Norsat going forward."

Dr. Chan concluded, "While we are pleased with the results of the second quarter, we know there is still more work to be done. We continue to expect some near-term challenges for the remainder of the year, due largely to reduced US spending. However, the long-term outlook for our products and offerings looks very promising, especially our ATOM Series, which has a new band in development and expected for launch in spring 2015. Looking ahead, the Company has made significant progress over the years and continues to be at the forefront of the most innovative products and applications for wireless communications in remote and challenging settings. Our strategy of becoming a complete solutions provider is gaining traction as demonstrated by the financial results of the first half of 2014. We continue to focus on research and development, the pursuit of strategic acquisitions to diversify our product offerings, expanding into other markets and driving revenue growth."

For the three months ended June 30, 2014, total sales were $9.6 million, compared to $8.6 million in Q2 2013.

Sales from the Sinclair Technologies segment were $5.6 million for the second quarter of 2014, compared to $5.2 million during the same period in 2013.

Second quarter Satellite Solutions sales were $0.5 million, compared to $1.6 million in Q2 2014, reflecting the continuing decrease in military demand and budget constraints among other non-military customers. Other service revenues were also $0.4 million lower year-over-year due to the non-renewal of significant airtime contracts.

Second quarter Microwave Products sales were $3.5 million, compared to $1.8 million in Q2 2013. The $1.7 million increase was mainly driven by the product deliveries on the Atom new line of products.

On a consolidated basis, second quarter gross margin percentages were 42% which is comparable to Q2 2013 margins of 43%. Gross margins in our Microwave Products segment were 44%, compared to 48% in Q2 2013, which reflects a greater portion of lower-margin revenues in the mix. Gross margins in our Satellite Solutions segment was 35% compared to 38% in Q2 2013, which also reflects a greater portion of lower-margin revenues in the mix. Our Sinclair margins were 42% for the second quarter in 2014 which are comparable to the gross margins of 43% for the same period in 2013.

For the three months ended June 30, 2014, total expenses increased to $3.3 million, from $2.8 million in Q2 2013.

The increase is mainly attributable to a $0.3 million in other expenses in the second quarter of 2014 compared to a other income of $0.5 million in the same period in 2013, reflected by the change of the US dollar against the Canadian dollar. In Q2 2014 the US dollar weakened against the Canadian dollar whereas in Q2 2013 the US dollar strengthened against the Canadian dollar.

Second quarter selling and distributing expenses decreased to $1.4 million, from $1.6 million in 2013, reflecting the strengthening of the US dollar against the Canadian dollar, as a significant portion of the Company's expenses are in Canadian Dollars, and employee-related costs savings. Second quarter general administration expenses decreased to $1.0 million, from $1.2 million incurred in 2013. The decrease reflects the strengthening of the US dollar against the Canadian Dollar. This was partially offset by the increase in investments in the business, and higher accrued bonuses, reflecting higher sales for Q2 2014 compared to Q2 2013.

Second quarter direct product development expenses decreased to $0.7 million in 2014, from $1.0 million during the same period last year. This decrease reflects a temporary $0.4 million in labour costs in Q2 2013, not incurred in Q2, 2014, as Norsat accelerated development of the newly acquired CVG product lines, and the strengthening of the US dollar against the Canadian dollar as a significant portion of the Company's product development costs are in Canadian Dollars, this was offset by the decrease of government contributions to $0.2 million in the second quarter of 2014 compared to $0.6 million for the same period in 2013. In Q2 2013 government contributions were higher, reflecting the higher direct product development expenses for the CVG product lines.

Second quarter earnings before income taxes were $0.7 million, compared to $0.9 million during the same period last year, reflecting higher gross profits and lower operating expenses.

Income tax recovery for the second quarter of 2014 was $0.3 million compared to $27,641 in the second quarter of 2013.

Second quarter 2014 net earnings were $1.0 million, or $0.02 per share, basic and diluted, which is slightly higher than $0.9 million for the second quarter in 2013 as a result of the $0.3 million income tax recovery in Q2 2014 compared to $27,641 income tax recovery in 2013.

Adjusted EBITDA for the three months ended June 30, 2014 improved by 63% to $1.3 million, compared to the same period last year, reflecting a $0.4 million increase in gross profit contributions from higher sales volume, and lower total operating expenses of approximately $0.3 million in the second quarter of 2014 compared to the same period in 2013. The decrease in operating expenses mainly reflects the strengthening of the US dollar against the Canadian dollar, as a significant portion of the Company's expenses are in Canadian Dollars, and lower expenses from employee-related cost savings in the second quarter of 2014 compared to the same period in 2013. This was partially offset by approximately $0.4 million less government contributions for the second quarter of 2014 compared to the same period in 2013.

For the six months ended June 30, 2014, total sales were $18.7 million, compared to $17.0 million for the same period last year.

Sales from our Sinclair Technologies segment were $11.2 million in the first six months of 2014, comparable to $10.8 million during the same period in 2013.

Satellite Solutions sales were $1.1 million for the six months ended June 30, 2014, compared to $3.0 million for the same period in 2013. Sales from this segment were impacted by reduced military ordering of satellite equipment and services. In addition, service revenues declined by $0.6 million as warranties and post-service contracts expired.

Microwave Products sales were $6.4 million in the first six months of 2014, compared to $3.2 million during the same period in 2013. The $3.2 million increase was mainly driven by the product deliveries on the ATOM new line of products and the easing of government budget constraints experienced in Q2 2013.

On a consolidated basis, gross margin percentage was 42% for the six months ended June 30, 2014, on par with 42% from the same period in 2013. Our Microwave Products segment achieved a first-half 2014 gross margin of 45%, comparable with results of 44% from the first half of 2013. Margins from the Sinclair Technologies segment were 41%, compared to 43% in first six months of 2013, reflecting a greater proportion of lower-margin revenues for the first 6 months in 2014. Satellite Solutions gross margin decreased slightly to 32% year-to-date, from 34% in the first six months of 2013. The change in Satellite Solutions gross margin reflects a greater proportion of lower-margin revenues and lower sales volume.

For the six months ended June 30, 2014, total expenses decreased to $5.0 million, from $5.8 million during the same period in 2013.

First-half selling and distributing expenses decreased to $2.7 million, from $3.2 million, reflecting the strengthening of the US dollar against the Canadian dollar, as a significant portion of the Company's expenses are in Canadian Dollars, and employee-related costs savings.

General and administrative expenses were $1.9 million in the first half of 2014, from $2.2 million in the same period in 2013. The decrease reflects the strengthening of the US dollar against the Canadian Dollar, as a significant portion of the Company's expenses are in Canadian dollars. This was partially offset by the increase in investments in the business, and higher accrued bonuses, reflecting higher sales in for the first half of 2014 compared to the first half of 2013.

Direct product development expenses for the first six months of 2014 decreased to $1.3 million from $1.8 million during the same period last year. In Q2 2013 investments were made to accelerate development of the newly acquired CVG product lines, costs not incurred in 2014. The decrease also reflects the strengthening of the US dollar against the Canadian Dollar, as a significant portion of the Company's expenses are in Canadian Dollars, and employee-related costs savings. Government contributions decreased to $0.6 million in the first six months of 2014 from $1.2 million in the same period in 2013. In 2013 we secured a new repayable government contribution under the SADI program, which enables us to claim eligible costs incurred between July 27, 2013 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 in the first quarter of 2014. As a result the direct expense decrease of $0.7 million for the six months of 2014 compared to 2013 was offset by the decrease in government contributions of $0.6 million, resulting in a net product development expenses decrease of $0.1 million.

Other net other income for the first six months of 2014 increased to $0.5 million from $0.4 million during the same period last year. The increase reflects lower interest expenses resulting from the reduction in the Company's acquisition loan, partially offset by a $0.5 million lesser gain on foreign exchange in the first half of 2014 compared to the same period in 2013.

For the six months ended June 30, 2014 earnings before income taxes increased to $2.8 million, from $1.3 million during the same period in 2013.

Income tax recovery for the first half of 2014 was $0.4 million compared to income tax recovery of $36,758 for the same period in 2013.

For the six months ended June 30, 2014, net earnings increased to $3.2 million, or $0.06 per share, basic and diluted, from net earnings of $1.3 million, or $0.02 per share, basic and diluted, during the same period in 2013.

Adjusted EBITDA for the six months ended June 30, 2014 was $2.9 million, compared to $1.6 million during the same period in 2013. The change in EBITDA reflects a $0.8 million increase in gross profit contributions from higher sales volume, and lower total operating expenses of approximately $0.7 million in the first six months of 2014 compared to the same period in 2013. The decrease in operating expenses mainly reflects the strengthening of the US dollar against the Canadian dollar, as a significant portion of the Company's expenses are in Canadian Dollars, and lower expenses from employee-related cost savings in the first six months of 2014 compared to the same period in 2013. This was partially offset by approximately $0.6 million less government contributions for the first six months of 2014 compared to the same period in 2013.

Norsat ended the second quarter with cash and cash equivalents of $3.2 million, comparable to $2.9 million as of March 31, 2014 and to $3.3 million as at December 31, 2013. Norsat continues to repay its acquisition loan, at a loan balance of $3.4 million as of June 30, 2014, down from $3.8 million as of March 31, 2014 and $5.4 million as of June 30, 2013. The Company also has access to undrawn credit facilities totaling $4.2 million as at June 30, 2014 and August 6, 2014. Adjusted Working Capital, which excludes the acquisition loan, at June 30, 2014 was $16.3 million, compared to $14.5 million at December 31, 2013. The Adjusted Current Ratio, which excludes the acquisition loan, at June 30, 2014 was 5.1 times, compared to 3.5 times at December 31, 2013.

By segment, in the near term, the Microwave segment is expected to continue to have modest revenue improvement, driven by the ATOM Series of Ku-Band BUCs and SSPAs. While Sinclair RF segment has shown consistent revenues in the first half of 2014, the infrastructure and public safety markets have shown signs of recent softness that may impact the success of winning certain larger orders and revenues during the second half of fiscal 2014. In addition, sales in the Satellite Solution segment are expected to remain constrained as a result of weak customer demand, stemming from lower military spending.

Norsat continues to actively pursue merger and acquisition opportunities that provide strong value, advance its strategic objectives and have the potential to be accretive to shareholders.