Norsat International Inc. | Management’s Discussion & Analysis |
Table of Contents | ||
1.0 INTRODUCTION | 3 | |
2.0 BUSINESS OVERVIEW | 4 | |
2.1 OVERVIEW OF THE BUSINESS | 4 | |
2.2 COMPANY PRODUCTS AND SERVICES | 4 | |
2.3 MARKETS AND TRENDS | 6 | |
2.4 STRATEGY | 9 | |
3.0 OVERVIEW | 11 | |
3.1 OUTLOOK | 12 | |
4.0 FINANCIAL REVIEW | 13 | |
4.1 NON-IFRS MEASUREMENTS | 13 | |
4.2 RESULTS OF OPERATIONS FOR THE THREE M ONTHS ENDED MARCH 31, 2012 | 14 | |
4.3 SUMMARY OF QUARTERLY RESULTS | 17 | |
4.4 LIQUIDITY AND FINANCIAL CONDITION | 18 | |
4.5 CAPITAL RESOURCES | 19 | |
4.6 CONTRACTUAL OBLIGATIONS | 20 | |
5.0 OFF BALANCE SHEET ARRANGEMENTS | 21 | |
6.0 TRANSACTIONS WITH RELATED PARTIES | 21 | |
7.0 PROPOSED TRANSACTIONS | 21 | |
8.0 CRITICAL ACCOUNTING ESTIMATES | 21 | |
9.0 OUTSTANDING SHARE DATA | 22 | |
10.0 RISKS AND UNCERTAINTIES | 22 | |
11.0 | DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING | 22 |
11.1 DISCLOSURE CONTROLS AND PROCEDURES | 22 | |
11.2 INTERNAL CONTROLS OVER FINANCIAL REPORTING | 22 | |
11.3 CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING | 22 | |
12.0 EVENTS AFTER THE REPORTING DATE | 23 |
Norsat International Inc. | Management’s Discussion & Analysis |
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The following discussion and analysis of the financial conditions and results of operations contains forward-looking statements concerning anticipated developments in our operations in future periods, the adequacy of our financial resources and other events or conditions that may occur in the future. Forward-looking statements are frequently, but not always, identified by words such as “expects,” “anticipates,” “believes,” “intends,” “estimates,”, “predicts,” “potential,” “targeted,” “plans,” “possible” and similar expressions, or statements that events, conditions or results “will,” “may,” “could” or “should” occur or be achieved. These forward-looking statements include, without limitation, statements about our market opportunities, strategies, competition, expected activities and expenditures as we pursue our business plan, the adequacy of our available cash resources and other statements about future events or results. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, such as business and economic risks and uncertainties. Our forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made. Consequently, all forward-looking statements made in this discussion and analysis of the financial conditions and results of operations or the documents incorporated by reference are qualified by this cautionary statement and there can be no assurance that actual results or developments we anticipate will be realized. Some of these risks, uncertainties and other factors are described herein under the heading “Risks and Uncertainties” and in the most recent Annual Information Form under the heading “Risk Factors”. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.
Norsat International Inc. | Management’s Discussion & Analysis |
Norsat International Inc. | Management’s Discussion & Analysis |
Our Microwave Products segment designs, develops and markets receivers, transmitters and power amplifiers that enable the transmission, reception and amplification of signals to and from satellites. Our product portfolio of microwave components includes a comprehensive range of satellite receivers (“LNBs”), transmitters (“BUCs”), transceivers, solid-state power amplifiers (“SSPAs”) and other customized products.
Norsat International Inc. | Management’s Discussion & Analysis |
Ø | Public safety and military network operators, including several police forces, military and paramilitary organizations, such as the coast guards and navies, and a large set of ambulance and fire dispatch services; |
Ø | Private Sector Networks including rail, ground and air transportation networks used by natural resource, utility, taxi, trucking, and construction companies, as well as other dedicated network operators, generally served through an extensive set of dealers specializing in radio systems; |
Ø | Mobile radio, public safety, military, cellular, aviation and heavy transport industries; and |
Ø | Original equipment manufacturers. |
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Norsat International Inc. | Management’s Discussion & Analysis |
Ø | Limited availability of licensed and unlicensed frequencies is causing governments to re-assign spectrum for public safety networks. As an example, US Broadcasters were recently required to vacate the 700 MHz frequency band to allow spectrum for new public safety networks; |
Ø | Demand by mobile radio users for more radio channels is causing network operators to reduce channel spacing and increase demand for filter products; |
Ø | Large competitors are more focused on the larger cellular market and appear to be reducing investment in new product development for the PMR market; and |
Ø | Original equipment manufacturers (OEMs) are driving greater efficiencies and bargaining power by favouring fewer vendors with a broad product portfolio. |
Norsat International Inc. | Management’s Discussion & Analysis |
Ø | There is a growing expectation that organizations and individuals are always “connected” to some type of communications infrastructure, regardless of where they may be positioned geographically. |
Ø | As companies are increasingly required to look beyond traditional locations to meet the world’s demand for natural resources, there has been a proliferation of remote sites far removed from existing infrastructure. Demand for bandwidth is ever-expanding as users increasingly expect that video and audio files are capable of being transmitted, and that the transmissions will occur in real time. |
Ø | In the era of 24-hour news coverage, viewers have come to expect media to cover a breaking story nearly instantaneously, regardless of where it occurs around the world. Media outlets need to be able to deploy quickly to meet this expectation. |
Ø | Major media are experiencing competition from alternative news sources that typically make content available over the Internet. Partly in response, governments and non-governmental organizations are increasingly producing their own content relating to events they deem significant, and making this available to third parties or directly to the public. |
Ø | The nature of modern military operations is such that mobility and rapid establishment of communication links in the field are increasingly considered vital. |
Ø | Major organizations that have global operations are increasingly aware of, and plan for, natural or man-made crisis events. Their plans often include establishing communication capabilities that are not dependent on terrestrial infrastructure as part of their contingency or emergency action plans. |
Ø | A number of large-scale disasters in recent years have proven the critical importance of first responders being able to establish rapid communication links to coordinate recovery efforts. |
Ø | Experience with information technology and communication equipment in recent decades has conditioned users generally to expect related hardware to become smaller and more portable over time, while offering improved functionality. Providers who are able to meet this expectation can realize competitive advantages. |
Ø | Applications for satellite technology are becoming ubiquitous. From their traditional role in the broadcast and telecommunications fields, communications satellites have more recently been extended to such applications as broadband services, cellular and Internet backhaul, location-based services and satellite imagery. As a result, a broader base of users has a need for ground-based satellite equipment. |
Norsat International Inc. | Management’s Discussion & Analysis |
Ø | enhancing our ability to provide communications solutions in remote and austere regions; |
Ø | providing access to high-end commercial markets; and |
Ø | increasing our ability to generate a stable revenue stream. |
Norsat International Inc. | Management’s Discussion & Analysis |
Norsat International Inc. | Management’s Discussion & Analysis |
Ø | For the three months ended March 31, 2012, revenue increased 21%, gross profit increased 20%, EBITDA (1) increased by 6% and net earnings grew 377% compared to the same period in 2011. The significant improvement in results reflects the positive impact of the Sinclair acquisition, strong demand for many of our products and a favourable product mix which supported stable gross profit margins. |
Ø | The Sinclair Division, which was acquired on January 21, 2011, continued to perform above historical norms, reflecting a favourable product mix and strong demand, particularly from the transportation sector. The new division has helped to diversify our product lines with antenna and RF conditioning products, and has also firmly positioned Norsat in the commercial market. |
Ø | As anticipated, the Satellite Solutions division experienced a reduction in order activity related to cuts in US military spending. This was partially offset by $0.3 million in new revenue under the First Nations’ Emergency Services Society of British Columbia (“FNESS”) contract. |
Ø | Our Microwave Division posted a 14% increase in revenue and we achieved stable results in our Maritime Products Division. |
Norsat International Inc. | Management’s Discussion & Analysis |
Ø | In February 2012 we established a new business segment called Norsat Power Solutions. The new business segment will provide turnkey, project-specific power conversion and energy storage solutions for high-integrity applications in the communications, transportation and resource sectors. It will also develop complementary products for Norsat’s other segments, including power supplies and DC-DC converters for our Microwave Products segment and portable power products for our Satellite Solutions segment. We believe Norsat Power Solutions will help us diversify into a new market segment while leveraging a number of our existing Norsat/Sinclair customer relationships, especially in the utility and rail sectors. The new segment will also allow us to expand our existing product offerings and may create some modest cost synergies. As an added benefit, the power solutions market segment includes projects that have ongoing monitoring or service requirements, as well as regular upgrade and renewal cycles. These projects, if won, would create new recurring revenue streams for Norsat, which is a key strategic objective. |
Ø | Mr. Ivan Gissing was appointed General Manager of both the Sinclair Division and the new Norsat Power Solutions division. |
Norsat International Inc. | Management’s Discussion & Analysis |
Currently, we are working to execute a balanced growth strategy which incorporates investment in staffing levels, new product introductions, and continued enhancement of existing product lines, diversification by region and by industry vertical, and a broadening of the solutions we provide to customers. We expect to realize a portion of these objectives through organic growth.
EBITDA (1) | |||||||||||||||
('000) | Three months ended March 31, | ||||||||||||||
2012 | 2011 | Change | |||||||||||||
EBITDA | $ | 1,119 | $ | 1,053 | $ | 66 | 6 | % | |||||||
Interest | (136 | ) | (119) | (17 | ) | 14 | % | ||||||||
Amortization | (370 | ) | (151) | (219 | ) | 145 | % | ||||||||
Taxes | (206 | ) | (387) | 181 | (47 | %) | |||||||||
Foreign exchange | 111 | (181) | 292 | (161 | %) | ||||||||||
Reorganization | - | (402) | 402 | (100 | %) | ||||||||||
Net earnings (loss) for the period | $ | 518 | $ | (187) | $ | 705 | (377 | %) |
Norsat International Inc. | Management’s Discussion & Analysis |
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | Change | ||||||||||||||
Sales (in '000s) | ||||||||||||||||
Sinclair Technologies | $ | 6,167 | $ | 4,347 | $ | 1,820 | 42% | |||||||||
Satellite Solutions | 2,105 | 2,358 | (253) | (11%) | ||||||||||||
Microwace Products | 2,099 | 1,839 | 260 | 14% | ||||||||||||
Maritime Solutions | 169 | 171 | (2) | (1%) | ||||||||||||
Total | $ | 10,540 | $ | 8,715 | $ | 1,825 | 21% | |||||||||
Gross Profit Margin | ||||||||||||||||
Sinclair Technologies | 45% | 42% | 3% | |||||||||||||
Satellite Solutions | 42% | 50% | (8%) | |||||||||||||
Microwave Products | 43% | 44% | (1%) | |||||||||||||
Maritime Solutions | 39% | 18% | 21% | |||||||||||||
Total | 44% | 44% | 0% |
Norsat International Inc. | Management’s Discussion & Analysis |
('000s) | Three months ended March 31 | |||||||||||||||
2012 | 2011 | Change | ||||||||||||||
Selling and distributing expenses | $ | 1,831 | $ | 1,250 | $ | 581 | 46% | |||||||||
General and administrative expenses | 1,477 | 1,748 | (271) | (16%) | ||||||||||||
Product development expenses, net | 530 | 355 | 175 | 49% | ||||||||||||
Other expenses | 52 | 300 | (248) | (83%) | ||||||||||||
Total expenses | $ | 3,890 | $ | 3,654 | $ | 236 | 6% |
Norsat International Inc. | Management’s Discussion & Analysis |
('000s) | Three months endedMarch 31, | |||||||||||||||
2012 | 2011 | Change | ||||||||||||||
Direct expenses | $ | 679 | $ | 557 | $ | 122 | 22% | |||||||||
Amortization | 111 | 80 | 31 | 39% | ||||||||||||
Transfer to Cost of Sales | (18) | - | (18) | N/A | ||||||||||||
Less: Government contribution | (242) | (282) | 40 | (14%) | ||||||||||||
Total product development expenses, net | $ | 530 | $ | 355 | $ | 175 | 49% |
('000s), except per share amounts | Three months ended March 31 | |||||||||||||||
2012 | 2011 | Change | ||||||||||||||
Earnings before income taxes | $ | 724 | $ | 200 | $ | 523 | 261% | |||||||||
Income tax expense/(recovery) | $ | 206 | $ | 387 | $ | (181) | (47%) | |||||||||
Net earnings (loss) for the period | $ | 518 | $ | (187) | $ | 704 | 377% |
Norsat International Inc. | Management’s Discussion & Analysis |
Quarterly Financial Data | ||||||||||||||||
('000s), except for earnings per share | Three months ended | |||||||||||||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | |||||||||||||
2012 | ||||||||||||||||
Sales | $ | 10,540 | ||||||||||||||
EBITDA (1) | 1,119 | |||||||||||||||
Net earnings (loss) for the period | 518 | |||||||||||||||
Net earnings (loss) per share - basic | 0.01 | |||||||||||||||
Net earnings (loss) per share - diluted | 0.01 | |||||||||||||||
Weighted average common shares outstanding - | # | |||||||||||||||
Basic ('000s) | 58,317 | |||||||||||||||
Diluted ('000s) | 58,343 | |||||||||||||||
2011 | ||||||||||||||||
Sales | $ | 8,715 | $ | 8,644 | $ | 11,381 | $ | 9,616 | ||||||||
EBITDA (1) | 1,053 | 486 | 1,683 | 961 | ||||||||||||
Net earnings (loss) for the period | (187 | ) | (285 | ) | 1,102 | (221 | ) | |||||||||
Net earnings (loss) per share - basic | (0.00 | ) | (0.00 | ) | 0.02 | (0.00 | ) | |||||||||
Net earnings (loss) per share - diluted | (0.00 | ) | (0.00 | ) | 0.02 | (0.00 | ) | |||||||||
Weighted average common shares outstanding - | # | # | # | # | ||||||||||||
Basic ('000s) | 57,082 | 58,364 | 58,351 | 58,317 | ||||||||||||
Diluted ('000s) | 57,082 | 58,364 | 58,380 | 58,317 | ||||||||||||
2010 | ||||||||||||||||
Sales | $ | 4,887 | $ | 5,199 | $ | 4,492 | $ | 5,655 | ||||||||
EBITDA (1) | 666 | 895 | 659 | 443 | ||||||||||||
Net earnings for the period | 514 | 817 | 609 | 215 | ||||||||||||
Net earnings per share - basic | 0.01 | 0.02 | 0.01 | 0.00 | ||||||||||||
Net earnings per share - diluted | 0.01 | 0.02 | 0.01 | 0.00 | ||||||||||||
Weighted average common shares outstanding - | # | # | # | # | ||||||||||||
Basic ('000s) | 53,677 | 53,591 | 53,439 | 53,556 | ||||||||||||
Diluted ('000s) | 53,855 | 53,758 | 53,551 | 53,651 |
Norsat International Inc. | Management’s Discussion & Analysis |
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Norsat International Inc. | Management’s Discussion & Analysis |
Norsat International Inc. | Management’s Discussion & Analysis |
('000s) | Remaining 2012 | 2013 | 2014 | 2015 | 2016 | Total | ||||||||||||||||||
and later | ||||||||||||||||||||||||
Acquisition loan | $ | 2,400 | $ | 3,000 | $ | 3,000 | $ | 590 | $ | - | $ | 8,990 | ||||||||||||
Promissory note payable | - | 750 | - | - | - | 750 | ||||||||||||||||||
Inventory purchase obligations | 3,848 | 993 | 162 | - | - | 5,003 | ||||||||||||||||||
Operating lease obligations | 530 | 706 | 722 | 303 | 277 | 2,538 | ||||||||||||||||||
Total | $ | 6,778 | $ | 5,449 | $ | 3,884 | $ | 893 | $ | 277 | $ | 17,281 |
Norsat International Inc. | Management’s Discussion & Analysis |
Three months ended March, | ||||||||
('000s) | 2012 | 2011 | ||||||
Short-term employee benefits | $ | 809 | $ | 241 | ||||
Share based payments | 12 | 4 | ||||||
Total | $ | 821 | $ | 245 | ||||
Norsat International Inc. | Management’s Discussion & Analysis |
Norsat International Inc. | Management’s Discussion & Analysis |