Norsat Announces 2013 Second Quarter Financial Results

Norsat Announces 2013 Second Quarter Financial Results

Company posts EBITDA of $0.8 million and Revenue of $8.6 million
- Management to Host Conference Call at 8:30 am Pacific Time (11:30 am Eastern Time) -

VANCOUVER, British Columbia--(BUSINESS WIRE)-- Norsat International Inc. (TSX: NII and OTC QB: NSATF):

Conference Call Details

Norsat will host a conference call today, August 8, 2013, at 8:30 am Pacific Time (11:30 am Eastern Time) to discuss 2013 first quarter financial results. To access the conference call, please dial toll-free 1-888-396-8049 or 416-764-8646. The conference call ID is: 'Norsat Investor Call'. Please connect approximately 10 minutes prior to the beginning of the call to ensure participation. A digital recording and transcript of the call will be available later today at:http://www.norsat.com/investors/financial-information/conference-call-recordings/

Norsat International Inc. ("Norsat" or "the Company"), a leading provider of innovative communication solutions that enable the transmission of data, audio and video for remote and challenging applications, today reported financial results for the second quarter ended June 30, 2013. 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.

(1) EBITDA is a Non-IFRS Measure that is defined in the Q2 2013 Management's Discussion and Analysis posted on Norsat's website and SEDAR.

Second Quarter 2013 Overview

• On April 16, 2013, Norsat acquired certain business assets and assumed certain liabilities of CVG, Incorporated ("CVG"), a US-based satellite communication systems company, for cash consideration of $0.5 million

• Second quarter revenue was $8.6 million, compared to $10.4 million during the same period in 2012

• Gross margin increased to 43%, from 42% in Q2 2012

• Second quarter EBITDA increased to $0.8 million, from $0.7 million in Q2 2012

"The second quarter of 2013 brought continued market challenges, with sales negatively affected by the US government's budget sequestration and by ongoing economic uncertainty in some of our markets," said Dr. Amiee Chan, President and CEO of Norsat.

"Total second quarter sales declined to $8.6 million, from $10.4 million a year ago, reflecting customers continuing to cut back inventory levels and delay programs. Although we have a relatively fixed cost structure, we continue to maintain strict cost discipline across our operations. We were successful in decreasing total second quarter expenses, excluding government funding and foreign exchange gains/losses, by $0.5 million, or 11%, compared to a year ago. This, in turn, helped us maintain positive EBITDA results."

"We also continued to implement our strategy of broadening our portfolio of products and services, while diversifying our customer base. We successfully increased our market penetration in Europe, the Middle East and Latin America during the second quarter. Additionally, we acquired certain assets of a US-based satellite communication systems company, which has augmented our product portfolio and enhanced intellectual property (IP) for our Satellite Solutions and Microwave Products business units. We have now successfully transitioned the CVG assets to our Richmond, BC facility, where we are making good progress on integration. We have since accelerated development of some of our new product lines. By the end of the second quarter, we had recognized $70,000 in revenues from these new products and we are optimistic about their future prospects." said Dr. Chan.

Financial Review

For the three months ended June 30, 2013

For the three months ended June 30, 2013, Norsat recorded total sales of $8.6 million, compared to $10.4 million in Q2 2012.

On a segmented basis, second quarter sales from the Sinclair Technologies segment were $5.2 million, compared to $6.4 million during the same period in 2012. The year-over-year change reflects reduced government spending in Canada and the negative impact of the US government budget sequestration.

Satellite Solutions sales were $1.6 million, which is comparable to $1.7 million in Q2 2012.

Second quarter Microwave Products sales declined to $1.8 million, from $2.3 million last year. The Microwave segment was significantly impacted by the US budget sequestration, which has caused delays on customer projects and reduced purchasing activity.

On a consolidated basis, second quarter gross profit margin increased to 43%, from 42% in Q2 2013. This increase reflects increased margins on Satellite Solutions and Microwave Products sales, in part due to a greater proportion of higher-margin products and services in the revenue mix. The increase also reflects the reversal of the $0.2 million accrual for SADI royalties recorded in the first quarter of 2013. Management now believes it is unlikely the Company will meet the revenue growth requirements that would trigger royalty payment obligations under the terms of the SADI I contract. As a result of this assessment, the first quarter royalty accrual was reversed, which in turn, decreased cost of sales and accrued liabilities in the second quarter.

Second quarter gross margins from the Sinclair Technologies segment were 43%, compared to 45% in Q2 2012. The year-over-year change reflects a higher product warranty provision in the current period, partially offset by the reversal of the accrual for SADI I royalties recorded in the first quarter of 2013.

For the three months ended June 30, 2013, total expenses decreased to $2.8 million, from $4.2 million in Q2 2012 as the Company tightened spending.

Second quarter selling and distributing expenses decreased to $1.6 million, from $2.0 million in Q2 2012, reflecting a reduction in personnel costs and reduced sales commissions as a result of lower sales volumes.

General and administrative expenses decreased to $1.2 million, from $1.3 million in 2012, reflecting employee-related cost savings and reduction in bonuses accrued due to lower sales volumes, partially offset by acquisition costs of $0.1 million related to the CVG transaction.

Second quarter direct product development expenses increased to $1.0 million in 2013, from $0.9 million during the same period last year. This increase reflects a temporary $0.4 million increase in labour costs as Norsat accelerated development of the newly acquired CVG product lines, partially offset by $0.2 million employee-related cost savings and reduction in bonuses accrued due to lower sales volumes, and $0.1 reduction in supplies and materials. Product development expense claims under the SADI contract were higher in Q2 2013 compared to the same period last year. The contract enables the Company to claim eligible costs incurred between July 27, 2012 and December 31, 2017. Claims for the three months ended June 30, 2013 were $0.6, million compared to $0.2 million during the same period in 2012. As a result, net product development costs of $0.5 million for the three months ended June 30, 2013 were lower than the $0.8 million for the same period in 2012.

For the three months ended June 30, 2013, Norsat recorded other income of $0.5 million, compared to an expense of $0.2 million during the same period last year. The increase in other income reflects a $0.5 million foreign exchange gain resulting from the strengthening of the US dollar relative to the Canadian dollar, together with lower interest expenses as the Company reduces its acquisition loan and promissory note payable balances.

Second quarter earnings before income taxes increased to $0.9 million, from $0.2 million during the same period last year. This improvement reflects the foreign exchange gain, lower selling and distributing expenses, and decreased net product development expenses.

Second quarter net earnings from continuing operations were $0.9 million, or $0.02 per share basic and diluted, compared to $2.8 million, or $0.05 per share, basic and diluted, in Q2 2012. Net earnings in the 2012 period benefited from a deferred income tax recovery of $3.0 million (net income tax recovery of $2.6 million) related to the reorganization of the Company's legal structure.

EBITDA for the three months ended June 30, 2013 increased to $0.8 million, from $0.7 million during the same period in 2012. Gross profit was $0.7 lower year over year, reflecting lower sales volumes, partially offset by the reduction in total expenses.

For the six months ended June 30, 2012

For the six months ended June 30, 2013, total sales were $17.0 million, compared to $20.8 million for the same period last year.

Sales from the Sinclair Technologies segment were $10.8 million in the first six months of 2013, compared to $12.6 million during the same period in 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 $3.0 million in the first half of 2013, compared to $3.8 million during the same period in 2012. Sales from this segment were impacted by reduced military orders for satellite equipment and services. In addition, service revenues declined by $0.5 million as warranties and post-service contracts expired.

Microwave Products sales were $3.2 million in the first six months of 2013, compared to $4.4 million during the same period in 2012. The Microwave segment was significantly impacted by the US budget sequestration.

On a consolidated basis, Norsat achieved a gross profit margin of 42% for the six months ended June 30, 2013, on par with results from the first half of 2012. The Microwave Products segment achieved a gross margin of 44%, comparable with results from the first half of 2012. First-half gross margins from the Sinclair Technologies segment declined to 43%, from 45% last year, reflecting an increase in the product warranty provision. First-half 2013 gross margins from Satellite Solutions segment decreased to 34%, from 37% in the first six months of 2012. The year-over-year change reflects a greater proportion of lower-margin revenues in the mix during the first half of 2013, especially related to airtime.

For the six months ended June 30, 2013, total expenses decreased to $5.8 million, from $8.0 million during the same period in 2012.

First-half selling and distributing expenses decreased to $3.2 million from $3.7 million, reflecting reduced personnel expenses and a decrease in sales commissions as a result of lower sales volumes.

General and administrative expenses decreased to $2.2 million year-to-date, from $2.8 million in the first half of 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 approximately $0.4 million reduction in bonuses accrued due to lower sales volumes, partially offset by CVG acquisition-related costs of $0.1 million.

Direct product development expenses increased to $1.8 million during the first six months of 2013, from $1.5 million during the same period in 2012. This increase reflects higher costs to accelerate development of the newly acquired CVG product lines. On March 28, 2013, the Company secured a new repayable government contribution under the SADI program, which enables it 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 in the first quarter of 2012. Claims for the six months ended June 30, 2013 were $1.2 million, compared to $0.4 million during the same period in 2012. As a result, net product development costs declined to $0.8 million for the six months ended June 30, 2013, from $1.3 million during the same period in 2012.

Other income for the first six months of 2013 increased to $0.4 million, from an expense of $0.2 million during the same period last year. This increase was driven by a $0.5 million foreign exchange gain, together with lower interest expenses resulting from a reduction in acquisition loan and promissory note payable balances.

For the six months ended June 30, 2013, earnings before income taxes increased to $1.3 million, from $1.0 million during the same period in 2012. Net earnings decreased to $1.3 million, or $0.02 per share, basic and diluted, from net earnings of $3.3 million, or $0.06 per share, basic and diluted, last year. The decline in net earnings reflects a net income tax recovery of $36,758 for the 2013 period, compared to a net income tax recovery of $2.4 million in the first half of 2012.

EBITDA for the six months ended June 30, 2013 was $1.6 million, compared to $1.9 million last year. The year-over-year change in EBITDA reflects reduced gross profit contributions resulting from lower sales volumes, partially offset by a $1.6 million reduction in total expenses due to reduced sale commissions as a result of lower sales volumes, lower G&A expenses from employee-related cost savings and higher government contributions.

Financial Position

Norsat ended the second quarter with cash and cash equivalents of $2.8 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 June 30, 2013, the promissory note had been fully repaid and the acquisition loan balance had been reduced to $5.2 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 August 7, 2013. Working capital as at June 30, 2013 was $8.4 million, compared to $7.5 million at December 31, 2012. The current ratio as at June 30, 2013 was 1.7 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 second half of 2013 driven by our diversification activities.

Going forward, the Company will continue to diversify its business by broadening its product portfolio and expanding its customer base on a geographic and market sector basis. Currently, Norsat is focusing on militaries 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 recent acquisition of certain assets and certain liabilities of a US-based satellite communications business is another example of Norsat's strategy in action. The acquired assets include new products and associated IP that align with Norsat's existing product roadmap and have allowed Norsat to immediately enter new and additional areas within the satellite communications markets.

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 strategic opportunities that will improve its overall operating and financial performance.

A full set of financial statements and Management's Discussion and Analysis for Norsat is available at www.norsat.com and at www.sedar.com.