ATS reports first quarter fiscal 2011 results
TSX: ATA
CAMBRIDGE, ON, Aug. 4 /CNW/ - ATS Automation Tooling Systems Inc. ("ATS" or the "Company") today reported its financial results for the three months ended June 27, 2010.
First Quarter Summary
- Consolidated revenue was $151.1 million, 1% lower than $152.7 million
a year ago;
- Consolidated earnings from operations increased to $9.7 million from
$0.5 million a year ago;
- Earnings increased to $0.07 per share (basic and diluted) compared to
$0.00 per share (basic and diluted) a year ago;
- A strong balance sheet was maintained with cash net of debt of $83.5
million at June 27, 2010.
- On June 1, 2010, the acquisition of Sortimat Group ("Sortimat") was
completed.
"Our Automation Systems Group ("ASG") operating earnings remained strong and Photowatt was breakeven, despite the ongoing challenging market conditions that have continued to negatively impact our Order Bookings and revenues," said Anthony Caputo, Chief Executive Officer. "As we move forward with our plans for growth, we are taking actions including organizing our ASG divisions by capability and segment and organizing our global sales and marketing group to mirror the markets we serve."
Subsequent to the completion of the Sortimat acquisition, the Company launched its Life Sciences group. As ASG continues to build critical mass in other markets, other divisions will be organized into operational groups: Products, Services, Transportation, Energy, and Consumer Products & Electronics. This new functional-based structure, combined with ASG's strong business processes, will support the Company's organic and acquisition-based growth strategy.
The Company has initiated a formal process to separate Photowatt and has engaged advisors to assist the Company in identifying and evaluating strategic alternatives. Conditions in the solar and capital markets will be a consideration in the timing and form of separation.
Financial Results
3 months 3 months
ended ended
In millions of Canadian dollars, June 27, June 28,
except per share data 2010 2009
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Revenues Automation Systems Group $ 106.6 $ 115.2
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Photowatt Technologies 48.8 40.1
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Inter-segment (4.3) (2.6)
----------------------------------------------------
Consolidated $ 151.1 $ 152.7
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EBITDA Automation Systems Group $ 17.7 $ 16.7
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Photowatt Technologies 3.2 (3.4)
----------------------------------------------------
Corporate and Inter-segment
elimination (5.9) (6.6)
----------------------------------------------------
Consolidated $ 15.0 $ 6.7
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Net income Consolidated $ 6.4 $ 0.3
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Earnings per share From continuing operations
(basic & diluted) $ 0.07 $ 0.00
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ASG First Quarter Results
- Revenue increased to $106.6 million in the first quarter of fiscal
2011 compared to fiscal 2010 fourth quarter revenue of $91.5 million,
but decreased from $115.2 million a year ago;
- Fiscal 2011 first quarter EBITDA was $17.7 million compared to EBITDA
of $21.1 million in the fourth quarter and $16.7 million a year ago;
- Earnings from operations were $15.9 million (operating margin of
15%), compared to $19.5 million (operating margin of 21%) in the
fourth quarter of fiscal 2010 and $14.8 million (operating margin of
13%) in the first quarter a year ago;
- Period end Order Backlog was up 3% to $215 million from $209 million
in the fourth quarter of fiscal 2010, but 7% below the Order Backlog
of $230 million a year ago;
- Order Bookings declined to $85 million compared to $105 million and
$96 million in the fourth and first quarter of last year,
respectively;
- Order Bookings were $48 million during the first five weeks of the
second quarter.
Despite the year-over-year decline in revenues, operating margins were maintained at 15% consistent with both the first and fourth quarters of fiscal 2010 (excluding severance and restructuring charges of $2.1 million incurred in the first quarter and the investment tax credit benefit of $6.1 million realized in the fourth quarter). Revenue increased year over year by 9% in life sciences (formerly referred to as healthcare), primarily as a result of revenue earned by Sortimat subsequent to its June 1, 2010 acquisition. The increase in life sciences revenue was offset by declines of 2% in computer-electronics, 1% in energy, 35% in transportation (formerly referred to as automotive), and 66% in "other" markets (primarily consumer products).
Photowatt First Quarter Results
- Revenue was $48.8 million, consistent with fiscal 2010 fourth quarter
revenue of $48.6 million and 22% higher than revenue of $40.1 million
a year ago;
- EBITDA was $3.2 million compared to EBITDA of negative $38.3 million
in the fourth quarter of fiscal 2010 and negative $3.4 million a year
ago;
- Loss from operations was $0.1 million compared to loss from
operations of $42.4 million in the fourth quarter of fiscal 2010 and
loss from operations of $7.5 million in the first quarter a year
ago;
- Total megawatts (MWs) sold decreased 10% to 11.4 MWs from 12.7 MWs in
the fourth quarter of fiscal 2010, but were 37% higher than the 8.3
MWs sold in the first quarter of fiscal 2010.
Higher year-over-year revenues reflected $7.1 million of revenue generated primarily from the sale of previously written-down raw material inventory, which was sold for approximately its net book value. Revenue from system sales in the first quarter of fiscal 2011 increased to $26.2 million from $24.8 million a year ago. Photowatt's operating margin improved to breakeven from negative 19% a year ago. Included in Photowatt's first quarter operating loss a year ago was a $4.7 million warranty charge related to a specific customer contract which contained an incremental performance clause beyond Photowatt's standard warranty terms. Excluding this expense, the year-over-year improvement in operating results reflected the higher MWs sold, increased system sales, and lower direct manufacturing costs-per-watt. These improvements were partially offset by a decrease in average selling prices per watt and costs related to the start-up of Photowatt Ontario.
Quarterly Conference Call
ATS's quarterly conference call begins at 10 am eastern today and can be accessed over the Internet at www.atsautomation.com or on the phone at 416 644 3422 five minutes prior.
Annual Meeting of Shareholders
ATS will hold its Annual Meeting of Shareholders on August 5, 2010 at 10:00 a.m. (eastern) at the Holiday Inn Hotel and Conference Centre, 30 Fairway Road South, Kitchener, Ontario, Canada.
About ATS
ATS Automation provides innovative, custom designed, built and installed manufacturing solutions to many of the world's most successful companies. Founded in 1978, ATS uses its industry-leading knowledge and global capabilities to serve the sophisticated automation systems' needs of multinational customers in industries such as life sciences, computer/electronics, energy, automotive and consumer products. It also leverages its many years of experience and skills to fulfill the specialized automation product manufacturing requirements of customers. Through Photowatt, ATS participates in the growing solar energy industry. ATS employs approximately 2,700 people at 17 manufacturing facilities in Canada, the United States, Europe, Southeast Asia and China. The Company's shares are traded on the Toronto Stock Exchange under the symbol ATA. Visit the Company's website at www.atsautomation.com.
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") for the three months ended June 27, 2010 (first quarter of fiscal 2011) is as of August 3, 2010 and provides information on the operating activities, performance and financial position of ATS Automation Tooling Systems Inc. ("ATS" or the "Company") and should be read in conjunction with the unaudited interim consolidated financial statements of the Company for the first quarter of fiscal 2011. The Company assumes that the reader of this MD&A has access to, and has read the audited consolidated financial statements and MD&A of the Company for the year ended March 31, 2010 (fiscal 2010) and, accordingly, the purpose of this document is to provide a first quarter update to the information contained in the fiscal 2010 MD&A. These documents and other information relating to the Company, including the Company's fiscal 2010 audited consolidated financial statements, MD&A and annual information form may be found on SEDAR at www.sedar.com.
Notice to Reader
The Company has two reportable segments: Automation Systems Group ("ASG") and Photowatt Technologies ("Photowatt") which includes Photowatt France ("PWF") and Photowatt Ontario ("PWO"). References to Photowatt's cell ''efficiency'' means the percentage of incident energy that is converted into electrical energy in a solar cell. Solar cells and modules are sold based on wattage output. "Silicon" refers to a variety of silicon feedstock, including polysilicon, upgraded metallurgical silicon ("UMG-Si") and polysilicon powders and fines.
Non-GAAP Measures
Throughout this document the term "operating earnings" is used to denote earnings (loss) from operations. EBITDA is also used and is defined as earnings (loss) from operations excluding depreciation and amortization (which includes amortization of intangible assets). The term "margin" refers to an amount as a percentage of revenue. The terms "earnings (loss) from operations", "operating earnings", "margin", "operating loss", "operating results", "operating margin", "EBITDA", "Order Bookings" and "Order Backlog" do not have any standardized meaning prescribed within Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies. Operating earnings and EBITDA are some of the measures the Company uses to evaluate the performance of its segments. Management believes that ATS shareholders and potential investors in ATS use non-GAAP financial measures such as operating earnings and EBITDA in making investment decisions about the Company and measuring its operational results. A reconciliation of operating earnings and EBITDA to total Company net income for the first quarters of fiscal 2011 and 2010 is contained in this MD&A (See "Reconciliation of EBITDA to GAAP Measures"). EBITDA should not be construed as a substitute for net income determined in accordance with GAAP. Order Bookings represent new orders for the supply of automation systems and products that management believes are firm. Order Backlog is the estimated unearned portion of ASG revenue on customer contracts that are in process and have not been completed at the specified date. A reconciliation of Order Bookings and Order Backlog to total Company revenue for the first quarters of fiscal 2011 and 2010 is contained in the MD&A (See "ASG Order Backlog Continuity").
Acquisition of Sortimat
On June 1, 2010, ATS completed its acquisition of 100% of Sortimat Group ("Sortimat"). Sortimat is a manufacturer of assembly systems for the life sciences market. Headquartered in Germany, and established in 1959, Sortimat also has locations in Chicago and a small, 60% owned subsidiary in India. Sortimat will be integrated with the Company's ASG segment.
The Sortimat acquisition aligns with ATS' strategy of expanding its position in the global automation market and enhancing growth opportunities, particularly in strategic segments, such as life sciences. The Company will benefit from Sortimat's significant experience and products in advanced system development, manufacturing, handling, and feeder technologies. This acquisition has provided ATS with the scale required to further organize its marketing and divisions into a group focused on life sciences with the objective to grow its exposure to this market segment and help customers differentiate themselves from their competitors. To implement the integration and effect margin improvements, the Company has deployed people to apply best practices, command and control, program management and advance approach to market.
The total cash consideration for Sortimat is $51.6 million (40.2 million Euro), which includes acquisition related costs, primarily for advisory services, of $2.2 million. Potential future payments of up to $8.5 million (6.6 million Euro), which are payable subject to the achievement of milestones related to operating performance and specific management services to be provided over the next two and a half years, are not included in the cost of acquisition and future amounts, if any, will be recorded as compensation expense in the period accrued.
AUTOMATION SYSTEMS GROUP SEGMENT
ASG Revenue
(In millions of dollars. Figures include intersegment revenue)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Revenue by market
Life sciences $ 39.4 $ 36.0
Computer-electronics 14.0 14.3
Energy 40.9 41.3
Transportation 9.1 14.1
Other 3.2 9.5
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Total ASG revenue $ 106.6 $ 115.2
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ASG first quarter revenue was 7% lower than for the same period a year ago as a result of lower Order Bookings during fiscal 2010 and the resulting lower Order Backlog entering the current fiscal year. Quarter-over-quarter foreign exchange rate changes negatively impacted ASG revenues for the first quarter, compared to a year ago, primarily reflecting the strengthening of the Canadian dollar relative to the U.S. dollar and Euro.
By industrial market, revenue from life sciences (formerly referred to as healthcare) increased 9% year-over-year primarily as a result of the $5.4 million of revenue earned by Sortimat in the last month of the first quarter of fiscal 2011, the majority of which was earned in the life sciences market. Excluding Sortimat's revenue contribution, revenue in the life sciences market decreased 5% due to lower Order Backlog entering the first quarter. The 2% decrease in computer-electronics revenues, despite higher Order Backlog entering the first quarter compared to a year ago, reflected a longer performance period on certain programs. Revenue generated in the energy market decreased 1% on lower Order Backlog entering the fiscal year. The 35% decline in transportation (formerly referred to as automotive) revenue compared to a year ago reflected the 41% lower Order Backlog entering the fiscal year, as a number of customer programs have been delayed. "Other" revenues decreased 66% year over year primarily due to lower revenues in the consumer products market and a longer period of performance for certain programs in this market.
ASG Operating Results
(In millions of dollars. Figures include intersegment revenue)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Earnings from operations $ 15.9 $ 14.8
Depreciation and amortization 1.8 1.9
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EBITDA $ 17.7 $ 16.7
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Fiscal 2011 first quarter earnings from operations were $15.9 million (operating margin of 15%) compared to earnings from operations of $14.8 million (operating margin of 13%) in the first quarter of fiscal 2010. There were no severance and restructuring charges included in the first quarter of fiscal 2011 operating earnings compared to $2.1 million in the prior year related to division closures and workforce reductions made primarily in ASG's North American operations. Sortimat's operating results did not have a material impact on first quarter earnings from operations.
Excluding prior year severance and restructuring charges, the decline in year-over-year earnings from operations was due primarily to lower sales volumes. ASG depreciation and amortization expense was $1.8 million in the first quarter of fiscal 2011 compared to $1.9 million in the same period a year ago.
ASG Order Bookings
ASG Order Bookings in the first quarter were $85 million, 11% lower than in the first quarter of fiscal 2010, which included two significant life sciences orders worth approximately $24 million and $10 million. Lower Order Bookings also reflected a reduction in sales opportunities as customers continued to spend at reduced levels and/or delay capital programs. Order Bookings in the first five weeks of the second quarter of fiscal 2011 were $48 million.
ASG Order Backlog Continuity
(In millions of dollars)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Opening Order Backlog $ 209 $ 255
Revenue (107) (115)
Order Bookings 85 96
Order Backlog adjustments(1) 28 (6)
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Total $ 215 $ 230
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(1) Order Backlog adjustments include foreign exchange adjustments,
cancellations and incremental Order Backlog of $27 million acquired
through the Sortimat transaction.
ASG Order Backlog by Industry
(In millions of dollars)
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Life sciences $ 87 $ 120
Computer-electronics 14 15
Energy 54 62
Transportation 15 18
Other 45 15
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Total $ 215 $ 230
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At June 27, 2010, ASG Order Backlog was $215 million, 7% lower than at June 28, 2009, primarily reflecting lower Order Bookings throughout the past four quarters compared to the prior year.
ASG Outlook
In the short term, management believes business investment and capital spending by customers will remain low. As the global economy and some of the Company's markets have strengthened, activity in ASG's front-end of the business has increased. However despite signs of improvement in some of ASG's customers' markets, many customers are continuing to push-out spending and delay investment decisions. This will continue to cause volatility in Order Bookings and put pressure on revenues in the short term. Overall, management believes that increased capital spending will continue to lag the general economic recovery as companies are hesitant to invest until their markets stabilize and/or show signs of growth.
The consolidation and restructuring initiatives undertaken have allowed ASG to maintain profitable operating margins, despite lower revenues. However, low volume and revenues due to current market conditions and competitive pressures will continue to present challenges to maintaining margins at current levels. Management expects that the implementation of its strategic initiatives to improve leadership, business processes and supply chain management will continue to have a positive impact on ASG operations. However, the impact of these initiatives will also be affected by current market conditions and lower Order Bookings and Order Backlog. Management expects that until Sortimat is fully integrated, ASG operating margins will be negatively impacted.
Management believes the Company's strengthened balance sheet, approach to market and operational improvements will provide a solid foundation for ASG to improve performance when the general business environment, including capital investment, stabilizes and returns to growth.
The Company's strong financial position also provides ASG with the flexibility to pursue its growth strategy. The Company is actively seeking to expand its position in the global automation market organically and through acquisition. Management is continuing to review a number of opportunities and is actively in discussions and conducting due diligence with respect to certain of these opportunities. The completion and timing of any transaction resulting from such discussions is dependent on a number of factors, including; completion of satisfactory due diligence, negotiation of agreements and requisite Board of Director and other approvals.
PHOTOWATT TECHNOLOGIES SEGMENT
Photowatt Revenue
(In millions of dollars)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Total Revenue $ 48.8 $ 40.1
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Photowatt's fiscal 2011 first quarter revenue of $48.8 million was 22% higher than in the first quarter of fiscal 2010. Higher year-over-year revenues reflected $7.1 million of revenue generated primarily from the sale of previously written-down raw material inventory, which was sold for approximately its net book value.
Excluding the revenue from raw material sales, Photowatt's first quarter revenue was 4% higher than the corresponding period a year ago. Total megawatts ("MWs") sold at PWF increased to 11.4 MWs (exclusive of raw material sales) from 8.3 MWs in the same period a year ago, resulting from increased demand due partially to improved credit markets compared to the same period a year ago. Fiscal 2011 first quarter revenue from system sales increased to $26.2 million from $24.8 million in the corresponding period a year ago. Systems include modules, combined with installation kits, solar power system design and/or other value-added services. These year-over-year increases were partially offset by foreign exchange rate changes due to strengthening of the Canadian dollar relative to the Euro, which negatively impacted the translation of revenue in the first quarter of fiscal 2011 compared to the same period a year ago and a decrease in average selling prices per watt.
Photowatt Operating Results
(In millions of dollars)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Earnings (loss) from operations $ (0.1) $ (7.5)
Depreciation and amortization 3.3 4.1
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EBITDA $ 3.2 $ (3.4)
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Photowatt fiscal 2011 first quarter loss from operations was $0.1 million (operating margin of 0%) compared to a loss from operations of $7.5 million (operating margin of negative 19%) a year ago. The year-over-year improvement in operating results reflected the higher MWs sold, increased system sales, and lower direct manufacturing costs-per-watt. These increases were partially offset by lower average selling prices. Included in last year's first quarter operating loss was a $4.7 million warranty charge related to a specific customer contract which contained an incremental performance clause beyond Photowatt's standard warranty terms.
Photowatt's fiscal 2011 first quarter loss from operations included costs related to the PWO start-up, which was initiated during the third quarter of fiscal 2010.
Photowatt's fiscal 2011 first quarter amortization expense was $3.3 million compared to $4.1 million in the first quarter of fiscal 2010 reflecting foreign exchange as the Canadian dollar strengthened relative to the Euro when compared to the prior year.
Photowatt Outlook
The Company has initiated a formal process to separate Photowatt and has engaged advisors to assist the Company in identifying and evaluating strategic alternatives. The Company has determined it does not meet all of the criteria to classify Photowatt as assets held for sale and its results as discontinued operations in its interim Consolidated Financial Statements as at June 27, 2010. As a result, these assets continue to be classified as held and used. As the form of separation is uncertain, adjustments to carrying value may result and a write-down, if any, will be recorded in the period determined. Conditions in the solar and capital markets will be a consideration in the timing and form of separation.
Solar power is, and for the foreseeable future will be, affected by and largely dependent on the existence of government incentives. Reductions in feed-in tariffs for solar energy announced in the Company's fiscal 2010 fourth quarter in Germany and France, and increased industry inventory levels and capacity, particularly from low-cost manufacturers in Asia, are expected to have a negative impact on average selling prices per watt.
In France, Photowatt has secured sales for a significant portion of its capacity over the next two quarters, however revenues will be impacted by lower year-over-year average selling prices.
In Ontario, Photowatt has secured conditional feed-in tariff approvals totalling approximately 65 MWs related to large scale renewable energy applications made by a project development joint venture, Ontario Solar PV Fields ("OSPV") in which ATS holds a 50% interest. OSPV will utilize a range of solar solutions including modules manufactured by ATS in Cambridge. OSPV's next steps include efforts to arrange financing and ultimate project ownership, as well as obtaining necessary joint venture partner approvals and other requisite approvals. PWO has signed agreements with developers who are in the process of securing conditional feed-in tariff approvals for a number of projects. PWO will provide modules and other related services into these projects. During the first quarter, the first test modules were produced on PWO's Cambridge based 100 MW module line. Production will ramp-up to meet demand in the latter part of the fiscal year.
Management is pursuing other downstream alternatives to create an additional market for Photowatt's products, including working with manufacturing partners to identify and expand its pipeline of both ground-mount and roof-top solar energy projects. Management expects improvements in cell efficiency, manufacturing yields and throughput will continue to reduce Photowatt's direct manufacturing costs-per-watt. Management does not know to what extent planned cost reductions will offset the impact of decline in average selling prices on operating earnings. Second quarter fiscal 2011 operating performance is expected to be negatively impacted by the usual three week PWF factory shutdown.
To keep Photowatt cost competitive, management is now proceeding with a plan to reduce the cost structure, which may cost up to $10 million. Management is actively monitoring the changing market conditions and will continue to modify plans accordingly.
CONSOLIDATED RESULTS FROM OPERATIONS
(In millions of dollars, except per share data)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
Revenue $ 151.1 $ 152.7
Cost of revenue 120.8 132.6
Selling, general and administrative 20.1 18.8
Stock-based compensation 0.5 0.8
-------------------------------------------------------------------------
Earnings from operations $ 9.7 $ 0.5
-------------------------------------------------------------------------
Interest expense $ 0.5 $ 0.5
Provision for (recovery of) income taxes 2.7 (0.3)
-------------------------------------------------------------------------
Net income $ 6.4(1) $ 0.3
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Earnings per share
Basic and diluted $ 0.07 $ 0.00
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(1) Rounding
Revenue. At $151.1 million, consolidated revenue for fiscal 2011 first quarter was 1% lower than a year ago. The decrease in revenues resulted from a 7% decrease in ASG revenues, partially offset by a 22% increase in Photowatt revenues.
Cost of revenue. Fiscal 2011 first quarter cost of revenue decreased on a consolidated basis by $11.8 million or 9% from a year ago to $120.8 million. Consolidated gross margin as a percentage of revenue increased to 20% in the first quarter of fiscal 2011 from 13% in the first quarter of fiscal 2010 resulting from improved profitability at both ASG and Photowatt.
Selling, general and administrative ("SG&A") expenses. For the first quarter of fiscal 2011, SG&A expenses increased 7% or $1.3 million to $20.1 million compared to the respective prior-year period. Higher SG&A costs reflected higher costs due to acquisition-related activities and incremental amortization expenses. SG&A expenses for the first quarter of fiscal 2011 included $0.2 million of Company-wide severance and restructuring costs compared to $2.3 million in the first quarter of fiscal 2010.
Stock-based compensation cost. For fiscal 2011 first quarter, stock-based compensation expense decreased to $0.5 million from $0.8 million a year earlier primarily reflecting the revaluation of deferred stock units.
The expense associated with the Company's performance-based stock options is recognized in income over the estimated assumed vesting period at the time the stock options are granted. Upon the Company's stock price trading at or above a stock price performance threshold for a specified minimum number of trading days, the options vest. When the performance-based options vest, the Company is required to recognize all previously unrecognized expenses associated with the vested stock options in the period in which they vest.
As at June 27, 2010, the following performance-based stock options were un-vested:
Weighted
average Current Remaining
Stock price Number of Grant date remaining year expense to
performance options value per vesting expense recognize
threshold outstanding option period (in '000s) (in 000's)
-------------------------------------------------------------------------
$8.41 266,667 2.11 0.8 years 45 137
$8.50 889,333 1.41 2.4 years 63 604
$9.08 218,666 2.77 0.3 years 59 54
$9.49 41,667 1.66 4.4 years 3 53
$10.41 266,667 2.11 2.2 years 31 270
$10.50 889,333 1.41 3.3 years 54 698
$11.08 218,667 2.77 1.5 years 38 249
$12.41 266,666 2.11 3.2 years 26 319
$13.08 218,667 2.77 2.5 years 31 316
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Earnings from operations. First quarter fiscal 2011 consolidated earnings from operations were $9.7 million, compared to earnings from operations of $0.5 million a year ago. Fiscal 2011 first quarter performance reflected: operating earnings of $15.9 million at ASG (operating earnings of $14.8 million a year ago); Photowatt Technologies operating loss of $0.1 million (operating loss of $7.5 million a year ago); and inter-segment eliminations and corporate expenses of $6.1 million ($6.8 million of costs a year ago).
Interest expense and interest income. Net interest expense was $0.5 million in the first quarter of fiscal 2011 compared to $0.5 million a year ago. The net interest expense is primarily related to credit facilities at Photowatt.
Provision for income taxes. For the three months ended June 27, 2010, the Company's effective income tax rate differs from the combined Canadian basic federal and provincial income tax rate of 30.2% (June 28, 2009 - 33.0%) primarily as a result of losses incurred in Europe, the benefit of which was not recognized for financial statement reporting purposes.
Net income. For first quarter of fiscal 2011, net income was $6.4 million (0.7 cents earnings per share basic and diluted) compared to net income of $0.3 million (0 cents earnings per share basic and diluted) for the same period last year.
Reconciliation of EBITDA to GAAP measures
(In millions of dollars)
Three Three
months months
ended ended
June 27, June 28,
2010 2009
-------------------------------------------------------------------------
EBITDA
Automation Systems $ 17.7 $ 16.7
Photowatt Technologies 3.2 (3.4)
Corporate and inter-segment (5.9) (6.6)
-------------------------------------------------------------------------
Total EBITDA $ 15.0 $ 6.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Less: Depreciation and amortization expense
Automation Systems $ 1.8 $ 1.9
Photowatt Technologies 3.3 4.1
Corporate and inter-segment 0.2 0.2
-------------------------------------------------------------------------
Total depreciation and amortization expense $ 5.3 $ 6.2
-------------------------------------------------------------------------
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Earnings (loss) from operations
Automation Systems $ 15.9 $ 14.8
Photowatt Technologies (0.1) (7.5)
Corporate and inter-segment (6.1) (6.8)
-------------------------------------------------------------------------
Total earnings from operations $ 9.7 $ 0.5
-------------------------------------------------------------------------
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Less: Interest expense $ 0.5 $ 0.5
Provision for (recovery of) income taxes 2.7 (0.3)
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Net income $ 6.4(1) $ 0.3
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(1) Rounding
FOREIGN EXCHANGE
Strengthening in the value of the Canadian dollar relative to the U.S. dollar and the Euro had a negative impact on the Company's revenue and operating earnings in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. ATS follows a transaction hedging program to help mitigate the impact of short-term foreign currency movements. This hedging activity consists primarily of forward foreign exchange contracts used to manage foreign currency exposure. Purchasing third-party goods and services in U.S. dollars by Canadian operations also acts as a partial offset to U.S. dollar exposure. The Company's forward foreign exchange contract hedging program is intended to mitigate movements in currency rates primarily over a four-to-six month period. See note 12 to the interim consolidated financial statements for details on the derivative financial instruments outstanding at June 27, 2010.
Period Average Market Exchange Rates in CDN$
Three months ended
June 27, June 28,
2010 2009 % change
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US $ 1.0277 1.1660 -11.9%
Euro 1.3071 1.5881 -17.7%
Singapore $ 0.7382 0.7919 -6.8%
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LIQUIDITY, CASH FLOW AND FINANCIAL RESOURCES
At June 27, 2010, the Company had cash and short-term investments of $152.5 million compared to $211.8 million at March 31, 2010. In the first quarter of fiscal 2011, cash flows provided by operating activities were $5.9 million, compared to cash flows used in operating activities of $13.8 million in the first quarter of fiscal 2010. The Company's total debt to total equity ratio at June 27, 2010 was 0.1:1. At June 27, 2010, the Company had $77.0 million of unutilized credit available under existing operating and long-term credit facilities and another $29.2 million available under letter of credit facilities.
In the first quarter of fiscal 2011, the Company's investment in non-cash working capital increased by $7.9 million or 9%. Consolidated accounts receivable increased 53% or $45.5 million, due to increased billings on contracts in progress in the first quarter of fiscal 2011 at ASG and Photowatt as well as due to the sale of previously written-down raw material inventory at PWF, for which payment was received subsequent to June 27, 2010. The acquisition of Sortimat also increased the Company's accounts receivable balance at June 27, 2010. Net contracts in progress decreased by 80% or $10.2 million compared to March 31, 2010. The Company actively manages its accounts receivable and net contracts in progress balances through billing terms on long-term contracts and by focusing on collection efforts. Inventories decreased year over year by 1% or $1.0 million. Deposits and prepaid assets decreased by 1% or $0.2 million due primarily to a decrease in the fair value of forward foreign exchange contracts, partially offset by an increase in vendor deposits, and restricted cash being used to secure letters of credit. Accounts payable and accrued liabilities increased 30% primarily due to timing of purchases and the assumption of Sortimat's accounts payable and accrued liabilities.
Property, plant and equipment purchases totalled $10.5 million in the first quarter of fiscal 2011. Expenditures at Photowatt, totalling $5.1 million, were used for production equipment and facility improvements, primarily at PWO. Total ASG and Corporate capital expenditures were $5.4 million, primarily related to the purchase of a new building in the U.S.A.
The Company's primary credit facility (the "Credit Agreement") provides total credit facilities of up to $85 million, comprised of an operating credit facility of $65 million and a letter of credit facility of up to $20 million for certain purposes. The operating credit facility is subject to restrictions regarding the extent to which the outstanding funds advanced under the facility can be used to fund certain subsidiaries of the Company. The Credit Agreement, which is secured by the assets, including real estate, of the Company's North American legal entities and a pledge of shares and guarantees from certain of the Company's legal entities, is repayable in full on April 30, 2011.
The operating credit facility is available in Canadian dollars by way of prime rate advances, letter of credit for certain purposes and/or bankers' acceptances and in U.S. dollars by way of base rate advances and/or LIBOR advances. The interest rates applicable to the operating credit facility are determined based on certain financial ratios. For prime rate advances and base rate advances, the interest rate is equal to the bank's prime rate or the bank's U.S. dollar base rate in Canada, respectively, plus 1.25% to 2.25%. For bankers' acceptances and LIBOR advances, the interest rate is equal to the bankers' acceptance fee or the LIBOR, respectively, plus 2.25% to 3.25%
Under the Credit Agreement, the Company pays a standby fee on the un-advanced portions of the amounts available for advance or draw-down under the credit facilities at rates ranging from 0.675% to 0.975% per annum, as determined based on certain financial ratios.
The Credit Agreement is subject to debt leverage tests, a current ratio test, and a cumulative EBITDA test. Under the terms of the Credit Agreement, the Company is restricted from encumbering any assets with certain permitted exceptions. The Credit Agreement also partially restricts the Company from repurchasing its common shares, paying dividends and from acquiring and disposing certain assets. The Company is in compliance with these covenants and restrictions.
As of June 27, 2010 there is no amount borrowed under the Company's primary credit facility (March 31, 2010 - $nil).
The Company's subsidiary, Photowatt International S.A.S., has credit facilities including capital lease obligations of $57.6 million (44.9 million Euro). The total amount outstanding on these facilities is $50.7 million (March 31, 2010 - $55.9 million), of which $21.8 million is classified as bank indebtedness (March 31, 2010 - $26.0 million), $7.1 million is classified as long-term debt (March 31, 2010 - $7.7 million) and $21.8 million is classified as obligations under capital lease (March 31, 2010 - $22.3 million). The interest rates applicable to the credit facilities range from Euribor plus 0.5% to Euribor plus 1.8% and 4.9% per annum. Certain of the credit facilities are secured by certain assets of Photowatt International S.A.S. and a commitment to restrict payments to the Company and are subject to debt leverage tests. The credit facilities which are classified as current bank indebtedness, are subject to either annual renewal or 60 day notification. At June 27, 2010, Photowatt International S.A.S. was not in compliance with the debt leverage tests on certain of its credit facilities. The lenders have not waived their right to demand repayment of the outstanding principal balances and consequently the entire balance of $7.1 million (5.5 million Euro) has been included in the current portion of long-term debt.
The Company has additional credit facilities of $17.7 million (11.7 million Euro, 31.7 million Indian Rupee and 2.0 million Swiss Francs). The total amount outstanding on these facilities is $10.5 million (March 31, 2010 - $nil), of which $6.9 million is classified as bank indebtedness and $3.6 million is classified as long-term debt. The interest rates applicable to the credit facilities range from 0.0% to 8.5% and EONIA plus 4.0% per annum. A portion of the long-term debt is secured by certain assets of the Company and a portion of the 2.0 million Swiss Francs credit facility is secured by a letter of credit under the primary credit facility.
The Company expects that continued cash flows from operations, together with cash and short-term investments on hand and credit available under operating and long-term credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets, which are listed under the heading Contractual Obligations, and to fund strategic investment plans including potential acquisitions.
During the first quarter of fiscal 2011, 1,000 stock options were exercised. As of August 3, 2010 the total number of shares outstanding was 87,279,155.
Contractual Obligations
Information on the Company's lease and contractual obligations is detailed in the Consolidated Annual Financial Statements and MD&A for the year ended March 31, 2010 found at www.sedar.com. The Company' off-balance sheet arrangements consist of purchase obligations, various operating lease financing arrangements related primarily to facilities and equipment, and derivative financial instruments which have been entered into in the normal course of business.
There are no other significant off-balance sheet arrangements that management believes will have a material effect on the results of operations or liquidity.
In accordance with industry practice, the Company is liable to the customer for obligations relating to contract completion and timely delivery. In the normal conduct of its operations, the Company may provide bank guarantees as security for advances received from customers pending delivery and contract performance. In addition, the Company may provide bank guarantees as security on equipment under lease and on order. As of June 27, 2010, the total value of outstanding bank guarantees available under bank guarantee facilities was approximately $34.6 million (March 31, 2010 - $11.9 million).
Consolidated Quarterly Results
($ in thousands, except
per share amounts) Q1 2011 Q4 2010 Q3 2010 Q2 2010
-------------------------------------------------------------------------
Revenue $ 151,114 $ 138,774 $ 138,133 $ 148,169
Earnings (loss) from
operations $ 9,655 $ (25,994) $ 4,756 $ 9,305
Net income from
continuing operations $ 6,438 $ 2,084 $ 3,742 $ 6,012
Net income $ 6,438 $ 2,084 $ 3,742 $ 6,012
Basic earnings per share
from continuing
operations $ 0.07 $ 0.03 $ 0.04 $ 0.07
Diluted earnings per
share from continuing
operations $ 0.07 $ 0.03 $ 0.04 $ 0.07
Basic earnings per share $ 0.07 $ 0.03 $ 0.04 $ 0.07
Diluted earnings per
share $ 0.07 $ 0.03 $ 0.04 $ 0.07
ASG Order Bookings $ 85,000 $ 105,000 $ 92,000 $ 71,000
ASG Order Backlog $ 215,000 $ 209,000 $ 203,000 $ 197,000
($ in thousands, except
per share amounts) Q1 2010 Q4 2009 Q3 2009 Q2 2009
-------------------------------------------------------------------------
Revenue $ 152,701 $ 201,774 $ 221,739 $ 219,071
Earnings (loss) from
operations $ 502 $ 17,743 $ 18,472 $ 13,563
Net income from
continuing operations $ 325 $ 14,041 $ 15,814 $ 12,688
Net income $ 325 $ 13,506 $ 12,316 $ 9,272
Basic earnings per share
from continuing
operations $ 0.00 $ 0.17 $ 0.20 $ 0.16
Diluted earnings per
share from continuing
operations $ 0.00 $ 0.16 $ 0.20 $ 0.16
Basic earnings per share $ 0.00 $ 0.16 $ 0.16 $ 0.12
Diluted earnings per
share $ 0.00 $ 0.15 $ 0.16 $ 0.12
ASG Order Bookings $ 96,000 $ 126,000 $ 157,000 $ 133,000
ASG Order Backlog $ 230,000 $ 255,000 $ 282,000 $ 247,000
Interim financial results are not necessarily indicative of annual or longer-term results because many of the individual markets served by the Company tend to be cyclical in nature. General economic trends, product life cycles and product changes may impact ASG Order Bookings, Photowatt sales volumes, and the Company's earnings in its markets. ATS typically experiences some seasonality with its revenue and earnings due to the summer plant shutdown at PWF. In Photowatt, slower sales may occur in the winter months, when the weather may impair the ability to install its products in certain geographical areas.
Accounting Changes
Business Combinations
CICA Handbook Section 1582 "Business Combinations" which replaces Handbook Section 1581 "Business Combinations" and is converged with IFRS 3 "Business Combinations" establishes standards for the measurement of a business combination and the recognition and measurement of assets acquired and liabilities assumed. This standard is effective for fiscal years beginning on or after January 1, 2011. The Company is evaluating the impact of adoption of this new section in connection with its conversion to IFRS.
Consolidated Financial Statements
CICA Handbook Section 1601 "Consolidated Financial Statements" and Handbook Section 1602 "Non-Controlling Interests" replace Handbook Section 1600 "Consolidated Financial Statements". Handbook Section 1601 carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. Handbook Section 1602 establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. The standards are effective for fiscal years beginning on or after January 1, 2011. The Company is evaluating the impact of adoption of this new section in connection with its conversion to IFRS.
Multiple Deliverable Revenue Arrangements
CICA EIC 175 "Multiple Deliverable Revenue Arrangements" deals with arrangements that have multiple deliverables and provides guidance which is to be applied to determine how arrangement consideration should be measured, whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The standard is effective for fiscal years beginning on or after January 1, 2011. The Company is evaluating the impact of adoption of this new section.
Accrued Pension Obligation
In the first quarter of fiscal 2011, it was determined that a pension obligation that was assumed in 1998 should have been previously recognized. The arrangement has been recorded with an adjustment to decrease retained earnings as of April 1, 2009 by $2 million (net of tax of nil) with a corresponding increase in accounts payable and accrued liabilities. This adjustment had no material impact on reported earnings, cash flows or earnings per share in prior periods reported.
International Financial Reporting Standards
The CICA's Accounting Standards Board has announced that Canadian publicly-accountable enterprises will adopt International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board effective January 1, 2011. Although IFRS uses a conceptual framework similar to Canadian GAAP, differences in accounting policies and additional required disclosures will need to be addressed. This change is effective for the Company for interim and annual financial statements beginning April 1, 2011.
The Company commenced its IFRS conversion project in fiscal 2009. The project consists of four phases: diagnostic; design and planning; solution development; and implementation. The diagnostic phase was completed in fiscal 2009 with the assistance of external advisors. This work involved a high-level review of the major differences between current Canadian GAAP and IFRS and a preliminary assessment of the impact of those differences on the Company's accounting and financial reporting, systems and other business processes. The areas of highest potential impact include: property, plant and equipment; provisions and contingencies; and IFRS 1: first time adoption, as well as more extensive presentation and disclosure requirements under IFRS.
The Company's IFRS conversion project is progressing according to plan. The Company is currently in the implementation phase and has completed a detailed review of all relevant IFRS standards and the identification of information gaps and necessary changes in reporting, internal controls over financial reporting, processes and systems. The Company is now confirming the selection of new accounting policies including IFRS 1 transition date first time adoption exemptions, developing model IFRS financial statements and processes to prepare IFRS comparative information and providing on-going training for employees. The Company expects to be in a position to report on the impact of the adoption of IFRS on its opening balance sheet as of April 1, 2010, by March 31, 2011.
The Company is continuing to monitor standards to be issued by the International Accounting Standards Board ("IASB"). Pending completion of some of these projects by the IASB, and until the Company's accounting policy choices are finalized and approved, the Company will be unable to quantify the impact of IFRS on its Consolidated Financial Statements.
Although the implementation activities are well underway and proceeding according to plan, continued progress is necessary before the Company can prudently increase the specificity of the disclosure of IFRS changeover accounting policy differences. In addition, due to anticipated changes in Canadian GAAP and IFRS prior to the Company's transition to IFRS, the full impact of adopting IFRS on the Company's future financial position and results of operations cannot be reasonably determined at this time.
CONTROLS AND PROCEDURES
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Company. The control framework used in the design of disclosure controls and procedures and internal control over financial reporting is the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management, including the CEO and CFO, does not expect that the Company's disclosure controls or internal controls over financial reporting will prevent or detect all errors and all fraud or will be effective under all potential future conditions. A control system is subject to inherent limitations and, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met.
During the three months ended June 27, 2010, other than as noted below, there have been no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
As noted, ATS acquired the Sortimat Group on June 1, 2010. Management has not yet assessed the design or operating effectiveness of Sortimat's disclosure controls and procedures and internal control over financial reporting.
Note to Readers: Forward-Looking Statements
This news release and management's discussion and analysis of financial conditions, and results of operations of ATS contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of ATS, or developments in ATS's business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Forward-looking statements include all disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. Forward-looking statements may also include, without limitation, any statement relating to future events, conditions or circumstances. ATS cautions you not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made. Forward-looking statements relate to, among other things: ATS's intention to integrate Sortimat with its ASG segment; expected benefit from Sortimat's experience and products; potential future payments related to purchase of Sortimat; management's belief with respect to business investment and capital spending on automation and the impact on order bookings and revenues; impact of current market conditions and competitive pressures on operating margins; management's expectations as to impact of strategic initiatives; impact of Sortimat acquisition on ASG operating margins until it is fully integrated; management's belief that the Company's strengthened balance sheet, approach to market and operational improvements will provide a solid foundation for ASG to improve performance when the general business environment, including capital investment, stabilizes and returns to growth; the Company's plans to expand its position in the global automation market organically and through acquisition and the completion and timing of any potential acquisitions with respect to which discussion are currently in progress; Company's initiation of a process to consider an appropriate strategy to separate Photowatt from ATS and impacts on the timing and form of separation; expectation of negative impact on average selling prices per watt as a result of certain feed-in tariff reductions and increased industry inventory levels and capacity; impact of lower average selling prices on revenues; OSVP's intentions and next steps in relation to certain Ontario solar projects; PWO provision of modules and related services into solar projects currently seeking FIT conditional approval; the expected ramping up of module output at PWO facilities; management's pursuit of other downstream alternatives for Photowatt; expectations of continued improvements in cell efficiency, manufacturing yields and throughput and impact thereof; impact of usual three week PWF factory shutdown; plan to reduce Photowatt cost structure; intention to modify plans to address changing market conditions; ATS's expectations with respect to cash flows; seasonality of revenues; and the introduction, evaluation and adoption of new accounting policies and standards. The risks and uncertainties that may affect forward-looking statements include, among others: general market performance including capital market conditions and availability and cost of credit; economic market conditions; impact of factors such as increased pricing pressure and possible margin compression; foreign currency and exchange risk; the relative strength of the Canadian dollar; performance of the market sectors that ATS serves; the success of ATS's efforts to integrate Sortimat; the ability of ATS to exploit and realize upon the benefits from Sortimat experience and products; receptivity of customers, suppliers, employees, and market to the Sortimat transaction; that one or more customers experience bankruptcy despite focus on credit terms; that continuing strategic initiatives will not have the intended impact on ASG operations; unanticipated issues in relation to, or inability to successfully negotiate and conclude, one or more M&A activities; near-term performance of Photowatt and impact on divestiture efforts; ability to execute on Photowatt divestiture initiative in current market environment; that PWF's downstream market initiatives are not successful; ability of ATS to acquire the needed expertise and financial partners necessary to effectively develop Ontario solar projects; the financial attractiveness of, and demand for, those solar projects; ATS's ability to conclude relationships with third parties in order to implement its plans for solar projects; the success of developers with whom ATS has signed agreements in obtaining FIT contracts and ultimately developing the projects; that the plans to cut costs at Photowatt are not successful; extent of market demand for solar products; the availability and possible reduction or elimination of government subsidies and incentives for solar products in various jurisdictions; ability to obtain necessary government certifications and approvals for solar projects in a timely fashion; political, labour or supplier disruptions in manufacturing and supply of silicon; the development of superior or alternative technologies to those developed by ATS; the success of competitors with greater capital and resources in exploiting their technology; market risk for developing technologies; risks relating to legal proceedings to which ATS is or may becomes a party; exposure to product liability claims of Photowatt Technologies; risks associated with greater than anticipated tax liabilities or expenses; and other risks detailed from time to time in ATS's filings with Canadian provincial securities regulators. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and ATS does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change.
August 3, 2010
ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Balance Sheets
(in thousands of Canadian dollars - unaudited)
June 27 March 31
2010 2010
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 152,452 $ 211,786
Accounts receivable 131,467 85,995
Costs and earnings in excess of billings on
contracts in progress (note 4) 43,917 42,924
Inventories (note 4) 79,317 80,280
Future income taxes 634 553
Deposits and prepaid assets (note 5) 27,287 27,492
-------------------------------------------------------------------------
435,074 449,030
Property, plant and equipment 179,637 171,451
Goodwill 68,048 34,350
Intangible assets 28,743 4,864
Investment tax credits 20,884 20,878
Future income taxes 33,763 35,243
Portfolio investments 4,131 3,602
Other assets (note 6) 33,555 33,380
-------------------------------------------------------------------------
$ 803,835 $ 752,798
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (note 10) $ 28,774 $ 26,034
Accounts payable and accrued liabilities 154,249 118,518
Billings in excess of costs and earnings on
contracts in progress (note 4) 41,423 30,216
Future income taxes 12,043 12,326
Current portion of long-term debt (note 10) 11,166 10,830
Current portion of obligations under capital
leases (note 10) 4,178 4,260
-------------------------------------------------------------------------
251,833 202,184
Long-term debt (note 10) 7,237 4,420
Long-term portion of obligations under capital
leases (note 10) 17,637 17,985
Shareholders' equity
Share capital 479,547 479,542
Contributed surplus 11,848 11,244
Accumulated other comprehensive loss (note 13) (45,562) (37,434)
Retained earnings (restated - note 2(d)) 81,295 74,857
-------------------------------------------------------------------------
527,128 528,209
-------------------------------------------------------------------------
$ 803,835 $ 752,798
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (notes 3 and 16)
See accompanying notes to interim consolidated financial statements
ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Statements of Operations
(in thousands of Canadian dollars,
except per share amounts - unaudited)
Three months ended
-------------------------------------------------------------------------
June 27 June 28
2010 2009
-------------------------------------------------------------------------
Revenue $ 151,114 $ 152,701
-------------------------------------------------------------------------
Operating costs and expenses
Cost of revenue 120,800 132,623
Selling, general and administrative 20,145 18,766
Stock-based compensation (note 7) 514 810
-------------------------------------------------------------------------
Earnings from operations 9,655 502
-------------------------------------------------------------------------
Other expenses
Interest on long-term debt 240 301
Other interest 264 239
-------------------------------------------------------------------------
504 540
-------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes 9,151 (38)
Provision for (recovery) of income taxes (note 15) 2,713 (363)
-------------------------------------------------------------------------
Net income $ 6,438 $ 325
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share (note 8)
Basic $ 0.07 $ 0.00
Diluted $ 0.07 $ 0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Statements of Shareholders' Equity and Other
Comprehensive Loss
(in thousands of Canadian dollars - unaudited)
Three months ended June 27, 2010
-------------------------------------------------------------------------
Accumu-
lated
Other
Compre-
hensive Total
Contri- Income Share-
Share buted (Loss) Retained holders'
Capital Surplus (note 13) Earnings Equity
-------------------------------------------------------------------------
Balance, beginning
of period $ 479,542 $ 11,244 $ (37,434) $ 74,857 $ 528,209
Comprehensive
income (loss)
Net income - - - 6,438 6,438
Currency
translation
adjustment - - (7,503) - (7,503)
Net unrealized
gain on
available
for-sale
financial assets
(net of income
taxes of $nil) - - 528 - 528
Net unrealized
loss on
derivative
financial
instruments
designated as
cash flow
hedges (net of
income taxes of
$215) - - (380) - (380)
Gains transferred
to net income
for derivatives
designated as
cash flow hedges
(net of income
tax recovery of
$357) - - (773) - (773)
----------
Total comprehensive
loss (1,690)
Stock-based
compensation
(note 7) - 606 - - 606
Exercise of stock
options 5 (2) - - 3
-------------------------------------------------------------------------
Balance, end of
the period $ 479,547 $ 11,848 $ (45,562) $ 81,295 $ 527,128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended June 28, 2009
-------------------------------------------------------------------------
Accumu-
lated
Other
Compre-
hensive Total
Contri- Income Share-
Share buted (Loss) Retained holders'
Capital Surplus (note 13) Earnings Equity
-------------------------------------------------------------------------
Balance, beginning
of period
(restated - note
2(d)) $ 479,537 $ 8,722 $ 15,494 $ 62,694 $ 566,447
Comprehensive
income (loss)
Net income - - - 325 325
Currency
translation
adjustment - - (12,185) - (12,185)
Net unrealized
gain on
available
for-sale
financial assets
(net of income
taxes of $nil) - - 658 - 658
Net unrealized
gain on
derivative
financial
instruments
designated as
cash flow hedges
(net of income
taxes of $nil) - - 377 - 377
Losses
transferred to
net income for
derivatives
designated as
cash flow hedges
(net of income
taxes of $nil) - - 1,406 - 1,406
----------
Total comprehensive
loss (9,419)
Stock-based
compensation
(note 7) - 574 - - 574
-------------------------------------------------------------------------
Balance, end of
the period $ 479,537 $ 9,296 $ 5,750 $ 63,019 $ 557,602
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars - unaudited)
Three months ended
-------------------------------------------------------------------------
June 27 June 28
2010 2009
-------------------------------------------------------------------------
Operating activities:
Net income $ 6,438 $ 325
Items not involving cash
Depreciation of property, plant and equipment 4,589 5,641
Amortization of intangible assets 744 562
Future income taxes 1,843 (872)
Investment tax credit receivable (6) (3,000)
Other items not involving cash (102) 11
Stock-based compensation (note 7) 514 810
Loss (gain) on disposal of property, plant and
equipment (175) 52
-------------------------------------------------------------------------
Cash flow from operations 13,845 3,529
Change in non-cash operating working capital (7,921) (17,290)
-------------------------------------------------------------------------
Cash flows provided by (used in) operating
activities 5,924 (13,761)
-------------------------------------------------------------------------
Investing activities:
Acquisition of property, plant and equipment (10,478) (6,023)
Acquisition of intangible assets (1,092) (96)
Investments, silicon deposits and other (3,184) (1,426)
Business acquisition (note 3) (48,720) -
Proceeds from disposal of property, plant and
equipment 505 165
-------------------------------------------------------------------------
Cash flows used in investing activities (62,969) (7,380)
-------------------------------------------------------------------------
Financing activities:
Restricted cash (note 5) (1,476) 2,576
Bank indebtedness (note 10) (2,716) 22,625
Proceeds from long-term debt (note 10) 1,411 1,135
Proceeds from sale and leaseback of property, plant
and equipment 1,747 -
Repayment of long-term debt (note 10) (844) (131)
Repayment of obligations under capital leases
(note 10) (691) (811)
Issuance of common shares 3 -
-------------------------------------------------------------------------
Cash flows provided by (used in) financing
activities (2,566) 25,394
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 277 (1,522)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (59,334) 2,731
Cash and cash equivalents, beginning of period 211,786 142,361
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 152,452 $ 145,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental information
Cash income taxes paid $ 361 $ 383
Cash interest paid $ 409 $ 85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
ATS AUTOMATION TOOLING SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts - unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
(a) The accompanying interim consolidated financial statements of ATS
Automation Tooling Systems Inc. and its subsidiary companies
(collectively "ATS" or the "Company") have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") and the
accounting policies and method of their application are consistent with
those described in the annual consolidated financial statements for the
year ended March 31, 2010. These interim consolidated financial
statements do not include all disclosures required by GAAP for annual
financial statements and should be read in conjunction with the Company's
annual consolidated financial statements for the year ended March 31,
2010.
(b) The preparation of these interim consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the interim consolidated financial statements and the reported
amount of revenue and expenses during the reporting period. Actual
results could differ from these estimates. Significant estimates and
assumptions are used when determining fair values of assets and
liabilities acquired in a business combination and when accounting for
items such as impairment of long-lived assets, recoverability of deferred
development costs, fair value of reporting units and goodwill,
warranties, income taxes, future income tax assets, determination of
estimated useful lives of intangible assets and property, plant and
equipment, impairment of portfolio investments, contracts in progress,
inventory obsolescence provisions, revenue recognition, contingent
liabilities, and allowances for uncollectible accounts receivable.
(c) Interim financial results are not necessarily indicative of annual or
longer-term results because many of the individual markets served by the
Company tend to be cyclical in nature. General economic trends, product
life cycles and product changes may impact Automation Systems order
bookings, Photowatt Technologies volumes, and the Company's earnings in
any of its markets. ATS typically experiences some seasonality with its
revenue and earnings due to the summer shutdown at its subsidiary in
France, Photowatt International S.A.S. In Photowatt Technologies, slower
sales may occur in the winter months, when the weather may impair the
ability to install its products in certain geographical areas.
The Company follows a 13 week per quarter schedule, where the first
fiscal month of a new quarter contains 5 weeks and each subsequent month
contains 4 weeks, with the exception of its fiscal year-end, which falls
on March 31. This results in some periods containing a different number
of days than comparative periods. The three months ended June 27, 2010
contained 88 days (three months ended June 28, 2009 - 89 days).
2. ACCOUNTING CHANGES:
(a) CICA Handbook Section 1582 "Business Combinations" which replaces
Handbook Section 1581 "Business Combinations" and is converged with IFRS
3 "Business Combinations" establishes standards for the measurement of a
business combination and the recognition and measurement of assets
acquired and liabilities assumed. This standard is effective for fiscal
years beginning on or after January 1, 2011. The Company is evaluating
the impact of adoption of this new section in connection with its
conversion to IFRS.
(b) CICA Handbook Section 1601 "Consolidated Financial Statements" and
Handbook Section 1602 "Non-Controlling Interests" replace Handbook
Section 1600 "Consolidated Financial Statements". Handbook Section 1601
carries forward the existing Canadian guidance on aspects of the
preparation of consolidated financial statements subsequent to
acquisition other than non-controlling interests. Handbook Section 1602
establishes standards for the accounting of non-controlling interests of
a subsidiary in the preparation of consolidated financial statements
subsequent to a business combination. The standards are effective for
fiscal years beginning on or after January 1, 2011. The Company is
evaluating the impact of adoption of this new section in connection with
its conversion to IFRS.
(c) CICA EIC 175 "Multiple Deliverable Revenue Arrangements" deals with
arrangements that have multiple deliverables and provides guidance which
is to be applied to determine how arrangement consideration should be
measured, whether the arrangement should be divided into separate units
of accounting and how the arrangement consideration should be allocated
among the separate units of accounting. The standard is effective for
fiscal years beginning on or after January 1, 2011. The Company is
evaluating the impact of adoption of this new section.
(d) In the three months ended June 27, 2010, it was determined that a
pension obligation that was originally assumed in 1998 should have been
previously recognized. This arrangement has been recorded with an
adjustment to decrease retained earnings as of April 1, 2009 by $2,000
(net of tax of $nil) with a corresponding increase in accounts payable
and accrued liabilities. This adjustment had no material impact on
reported earnings, cash flows or earnings per share in prior periods.
3. ACQUISITION OF SORTIMAT
On June 1, 2010, the Company completed its acquisition of 100% of
Sortimat Group ("Sortimat"). Sortimat is a manufacturer of assembly
systems for the life sciences market, and is headquartered in Germany
with locations in Chicago and a small, 60% owned subsidiary in India.
Sortimat has been integrated with the Company's existing Automation
Systems Group ("ASG"). The Sortimat acquisition aligns with ATS' strategy
of expanding its position in the global automation market and enhancing
growth opportunities, particularly in strategic segments, such as life
sciences. The financial results of Sortimat are included in the ASG
segment from the date of acquisition.
The total cash consideration for Sortimat is $51,623 (40,165 Euro), which
includes acquisition-related costs, primarily for advisory services, of
$2,173. Potential future payments of up to $8,495 (6,610 Euro) which are
payable subject to the achievement of milestones related to operating
performance and specific management services to be provided over the next
two and a half years are not included in the cost of the acquisition and
future amounts, if any, will be recorded as compensation expense in the
period accrued.
Cash used in the investment is determined as follows:
Cash consideration(i) $ 51,623
Less cash acquired (1,473)
-------------------------------------------------------------------------
$ 50,150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Includes $1,430 of cash paid subsequent to June 27, 2010.
The purchase cost was allocated to the underlying assets acquired and
liabilities assumed based upon the fair value at the date of acquisition.
The company determined the fair values based on discounted cash flows,
market information, independent valuations and management's estimates.
Final valuations of certain items are not yet complete due to the
inherent complexity associated with valuations. Therefore, the purchase
price allocation is preliminary and subject to adjustment over the course
of fiscal 2011 on completion of the valuation process and analysis of
resulting tax effects.
The preliminary allocation of the purchase price at fair value is as
follows:
Purchase price allocation
-------------------------------------------------------------------------
Cash $ 1,473
Current assets 18,685
Property, plant and equipment 9,159
Other long term assets 385
Intangible assets with a definite life
Technology 7,906
Customer relationships 8,137
Other 908
Intangible assets with an indefinite life
Brand 6,812
Current liabilities (31,978)
Long term debt (3,590)
-------------------------------------------------------------------------
Net identifiable assets 17,897
Residual purchase price allocated to goodwill 33,726
-------------------------------------------------------------------------
$ 51,623
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-cash working capital includes accounts receivable of $8,601,
representing gross contractual amounts receivable of $9,279 less
managements best estimate of the contractual cash flows not expected to
be collected of $678.
The primary factors that contributed to a purchase price that resulted in
the recognition of goodwill are: the existing Sortimat business; the
acquired workforce; significant experience and products in advanced
system development, manufacturing, handling and feeder technologies;
time-to-market benefits of acquiring an established organization in key
international markets such as Europe, Asia and the United States; and the
combined strategic value to the Company's growth plan. The amount
assigned to goodwill is not expected to be deductible for tax purposes.
The cash consideration of the purchase price along with transaction costs
were funded with existing cash on hand. This acquisition was accounted
for as a business combination with the Company as the acquirer of
Sortimat. The purchase method of accounting was used and the earnings
have been consolidated from the acquisition date, June 1, 2010. Sortimat
has contributed approximately $5,407 in revenue and the effect on net
income is not material.
4. CONTRACTS IN PROGRESS AND INVENTORIES:
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Contracts in progress:
Costs incurred on contracts in progress $ 433,073 $ 338,624
Estimated earnings 100,474 80,766
-------------------------------------------------------------------------
533,547 419,390
Progress billings (531,053) (406,682)
-------------------------------------------------------------------------
$ 2,494 $ 12,708
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Disclosed as:
Costs and earnings in excess of bilings on
contracts in progress $ 43,917 $ 42,924
Billings in excess of costs and earnings on
contracts in progress (41,423) (30,216)
-------------------------------------------------------------------------
$ 2,494 $ 12,708
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Inventories are summarized as follows:
Raw materials $ 37,979 $ 45,984
Work in process 11,330 8,585
Finished goods 30,008 25,711
-------------------------------------------------------------------------
$ 79,317 $ 80,280
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The amount of inventory recognized as an expense and included in cost of
revenue accounted for other than by the percentage-of-completion method
during the three months ended June 27, 2010 was $58,593 (three months
ended June 28, 2009 - $48,030). The amount charged to net income and
included in cost of revenue for the write-down of inventory for valuation
issues during the three months ended June 27, 2010 was $541 (three months
ended June 28, 2009 - $991). The amount recognized in net income and
included in cost of revenue for the reversal of previous inventory write-
downs due to rising prices during the three months ended June 27, 2010
was $69 (three months ended June 28, 2009 - $nil).
5. DEPOSITS AND PREPAID ASSETS:
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Prepaid assets $ 4,778 $ 4,231
Restricted cash(i) 1,809 582
Silicon and other deposits 17,657 16,335
Forward contracts and other 3,043 6,344
-------------------------------------------------------------------------
$ 27,287 $ 27,492
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Restricted cash consists of cash collateralized to secure letters of
credit.
6. OTHER ASSETS:
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Silicon deposits $ 30,537 $ 32,389
Other 3,018 991
-------------------------------------------------------------------------
$ 33,555 $ 33,380
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. STOCK-BASED COMPENSATION PLANS:
In the calculation of the stock-based compensation expense in the interim
consolidated statements of operations, the fair values of the Company's
stock option grants were estimated using the Black-Scholes option pricing
model for time vesting stock options and binomial option pricing models
for performance based stock options.
During the three months ended June 27, 2010 the Company granted 325,000
time vesting stock options (350,000 in the three months ended June 28,
2009). The stock options granted vest over 4 years and expire on the
seventh anniversary from the date of issue. During the three month
periods ended June 27, 2010 and June 28, 2009, no performance based
options were granted. Performance based stock options vest based on the
Company's stock trading at or above certain thresholds for a specified
number of minimum trading days. The performance based stock options
expire on the seventh anniversary after the date that the options vest.
During the three month periods ended June 27, 2010 and June 28, 2009, no
performance based options vested.
Three months ended June 27, 2010 June 28, 2009
-------------------------------------------------------------------------
Weighted Weighted
Number of average Number of average
stock exercise stock exercise
options price options price
-------------------------------------------------------------------------
Stock options outstanding,
beginning of year 6,368,674 $ 7.89 6,112,562 $ 8.18
Granted 325,000 6.34 350,000 5.10
Exercised (1,000) 3.49 - -
Forfeited/cancelled (90,696) 22.31 (11,021) 13.42
-------------------------------------------------------------------------
Stock options outstanding,
end of period 6,601,978 $ 7.62 6,451,541 $ 8.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options exercisable,
end of period, time vested
options 1,027,511 $ 9.63 1,006,902 $ 12.01
Stock options exercisable,
end of period,
performance-options 991,448 $ 6.14 908,115 $ 6.38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of time vesting options issued during the period were
estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
Three months ended
-------------------------------------------------------------------------
June 27 June 28
2010 2009
-------------------------------------------------------------------------
Weighted average risk-free interest rate 2.28% 2.11%
Dividend yield 0% 0%
Weighted average expected volatility 58% 60%
Weighted average expected life 4.75 years 4.55 years
Number of stock options granted:
Time vested 325,000 350,000
Weighted average exercise price per option $ 6.34 $ 5.10
Weighted average value per option:
Time vested $ 3.16 $ 2.56
-------------------------------------------------------------------------
8. EARNINGS PER SHARE:
Weighted average number of shares used in the computation of earnings per
share is as follows:
Three months ended
-------------------------------------------------------------------------
June 27 June 28
2010 2009
-------------------------------------------------------------------------
Basic 87,278,632 87,277,155
Diluted 87,647,717 87,277,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended June 27, 2010, stock options to purchase
5,262,983 common shares are excluded from the weighted average common
shares in the calculation of diluted earnings per share as they are anti-
dilutive (all stock options were excluded in the three months ended June
28, 2009).
9. SEGMENTED DISCLOSURE:
The Company evaluates performance based on two reportable segments:
Automation Systems and Photowatt Technologies. The Automation Systems
segment produces custom-engineered turn-key automated manufacturing
systems and test systems. The Photowatt Technologies segment is a turn-
key solar project developer and integrated manufacturer of photovoltaic
products. The business segments are strategic business units that offer
different products and services and each is managed separately.
The Company accounts for inter-segment revenue at current market rates,
negotiated between the segments.
Three months ended
-------------------------------------------------------------------------
June 27 June 28
2010 2009
-------------------------------------------------------------------------
Revenue
Automation Systems $ 106,627 $ 115,201
Photowatt Technologies 48,787 40,082
Inter-segment revenue (4,300) (2,582)
-------------------------------------------------------------------------
Total Company Revenue $ 151,114 $ 152,701
-------------------------------------------------------------------------
Earnings from operations
Automation Systems $ 15,883 $ 14,752
Photowatt Technologies (138) (7,533)
Inter-segment operating loss (939) (675)
Stock-based compensation (514) (810)
Other expenses (4,637) (5,232)
-------------------------------------------------------------------------
Total Company earnings from operations $ 9,655 $ 502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 27, March 31,
2010 2010
-------------------------------------------------------------------------
Assets
Automation Systems $ 517,254 $ 459,730
Photowatt Technologies 277,498 280,305
Corporate assets and inter-segment 9,083 12,763
-------------------------------------------------------------------------
Total Company assets $ 803,835 $ 752,798
-------------------------------------------------------------------------
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10. BANK INDEBTEDNESS, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES:
The Company's primary credit facility (the "Credit Agreement") provides
total credit facilities of up to $85,000, comprised of an operating
credit facility of $65,000 and a letter of credit facility of up to
$20,000 for certain purposes. The operating credit facility is subject to
restrictions regarding the extent to which the outstanding funds advanced
under the facility can be used to fund certain subsidiaries of the
Company. The Credit Agreement, which is secured by the assets, including
real estate, of the Company's North American legal entities and a pledge
of shares and guarantees from certain of the Company's legal entities, is
repayable in full on April 30, 2011.
The operating credit facility is available in Canadian dollars by way of
prime rate advances, letter of credit for certain purposes and/or
bankers' acceptances and in U.S. dollars by way of base rate advances
and/or LIBOR advances. The interest rates applicable to the operating
credit facility are determined based on certain financial ratios. For
prime rate advances and base rate advances, the interest rate is equal to
the bank's prime rate or the bank's U.S. dollar base rate in Canada,
respectively, plus 1.25% to 2.25%. For bankers' acceptances and LIBOR
advances, the interest rate is equal to the bankers' acceptance fee or
the LIBOR, respectively, plus 2.25% to 3.25%.
Under the Credit Agreement, the Company pays a standby fee on the
unadvanced portions of the amounts available for advance or draw-down
under the credit facilities at rates ranging from 0.675% to 0.975% per
annum, as determined based on certain financial ratios.
The Credit Agreement is subject to debt leverage tests, a current ratio
test, and a cumulative EBITDA test. Under the terms of the Credit
Agreement, the Company is restricted from encumbering any assets with
certain permitted exceptions. The Credit Agreement also partially
restricts the Company from repurchasing its common shares, paying
dividends and from acquiring and disposing of certain assets. The Company
is in compliance with these covenants and restrictions.
There is no amount borrowed under the Company's primary credit facility
(March 31, 2010 - $nil).
The Company's subsidiary, Photowatt International S.A.S. has credit
facilities including capital lease obligations of $57,576 (44,876 Euro).
The total amount outstanding on these facilities is $50,713 (March 31,
2010 - $55,940), of which $21,841 is classified as bank indebtedness
(March 31, 2010 - $26,034), $7,057 is classified as long-term debt
(March 31, 2010 - $7,661) and $21,815 is classified as obligations under
capital lease (2010 - $22,245). The interest rates applicable to the
credit facilities range from Euribor plus 0.5% to Euribor plus 1.8% and
4.9% per annum. Certain of the credit facilities are secured by certain
assets of Photowatt International S.A.S. and a commitment to restrict
payments to the Company and are subject to debt leverage tests. The
credit facilities which are classified as current bank indebtedness, are
subject to either annual renewal or 60 day notification. At June 27,
2010, Photowatt International S.A.S. was not in compliance with the debt
leverage tests on certain of its credit facilities. The lenders have not
waived their right to demand repayment of the outstanding principal
balances and consequently the entire balance of $7,057 (5,500 Euro) has
been included in the current portion of long-term debt.
The PV Alliance joint venture has additional credit facilities as
described in note 14.
The Company has additional credit facilities of $17,675 (11,746 Euro,
31,663 Indian Rupee and 2,000 Swiss Francs). The total amount outstanding
on these facilities is $10,523 (March 31, 2010 - $nil), of which $6,933
is classified as bank indebtedness and $3,590 is classified as long-term
debt. The interest rates applicable to the credit facilities range from
0.0% to 8.5% and EONIA plus 4.0% per annum. A portion of the long-term
debt is secured by certain assets of the Company and a portion of the
2,000 Swiss Francs credit facility is secured by a letter of credit under
the primary credit facility.
The following amounts were outstanding:
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Bank indebtedness:
Photowatt International S.A.S. $ 21,841 $ 26,034
Other facilities 6,933 -
-------------------------------------------------------------------------
$ 28,774 $ 26,034
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long-term debt:
PV Alliance $ 7,756 $ 7,589
Photowatt International S.A.S. 7,057 7,661
Other facilities 3,590 -
-------------------------------------------------------------------------
$ 18,403 $ 15,250
Less: current portion 11,166 10,830
-------------------------------------------------------------------------
$ 7,237 $ 4,420
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Obligations under capital lease:
Photowatt International S.A.S. future minimum
lease payments $ 24,733 $ 25,201
Less: amount representing interest (at rates
ranging from 1.9% to 4.9%) 2,918 2,956
-------------------------------------------------------------------------
$ 21,815 $ 22,245
Less: current portion 4,178 4,260
-------------------------------------------------------------------------
$ 17,637 $ 17,985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest of $142 (three months ended June 28, 2009 - $148) relating to
obligations under capital lease has been included in interest on long-
term debt expense in the current period.
11. RESTRUCTURING:
In fiscal 2008, the Company commenced a restructuring program to improve
operating performance. The restructuring program included workforce
reductions, and the closure of underperforming, non-strategic divisions.
In fiscal 2009, the Company accelerated and expanded its previous
restructuring program. In the three months ended June 28, 2009, severance
and restructuring expenses associated with the closure of two divisions
and other workforce reductions were $2,299, primarily in the Automation
Systems group.
In the three months ended June 27, 2010, severance and restructuring
expenses associated with workforce reductions were $167, primarily in the
Photowatt Technologies segment.
The following is a summary of the changes in the provision for
restructuring costs:
June 27 June 28
2010 2009
-------------------------------------------------------------------------
Balance, beginning of period $ 2,190 $ 4,535
Severance and restructuring expense 167 2,299
Cash payments (1,008) (2,964)
Foreign exchange (21) (33)
-------------------------------------------------------------------------
Balance, end of period $ 1,328 $ 3,837
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. FINANCIAL INSTRUMENTS:
Derivative financial instruments
The Company uses forward foreign exchange contracts to manage foreign
currency exposure. Forward foreign exchange contracts that are not
designated in hedging relationships are classified as held-for-trading,
with changes in fair value recognized in selling, general and
administrative expenses in the interim consolidated statements of
operations. During the three months ended June 27, 2010, the fair value
of derivative financial assets classified as held-for-trading and
included in deposits and prepaid assets decreased by $625 (decreased by
$232 during the three months ended June 28, 2009) and the fair value of
derivative financial liabilities classified as held-for-trading and
included in accounts payable and accrued liabilities increased by $355
(increased by $1,391 during the three months ended June 28, 2009).
Cash flow hedges
During the three months ended June 27, 2010, there was no unrealized gain
or loss recognized in selling, general and administrative expense for the
ineffective portion of cash flow hedges (unrealized gain of $21 during
the three months ended June 28, 2009). After-tax unrealized gains of $903
and $5 are included in accumulated other comprehensive income at June 27,
2010 and are expected to be reclassified to earnings over the next 12
months when the revenue and purchases are recorded respectively
(unrealized gains of $450 and unrealized losses of $23 respectively at
June 28, 2009).
13. ACCUMULATED OTHER COMPREHENSIVE LOSS:
The components of accumulated other comprehensive loss are as follows:
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Accumulated currency translation adjustment $ (46,998) $ (39,495)
Accumulated unrealized gain on available-for-sale
financial assets(i) 528 -
Accumulated unrealized net gain on derivative
financial instruments designated as cash flow
hedges(ii) 908 2,061
-------------------------------------------------------------------------
Accumulated other comprehensive loss $ (45,562) $ (37,434)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the year ended March 31, 2010, the Company determined that
the impairment in one of its portfolio investments was other than
temporary and therefore the accumulated unrealized loss of $951 was
allocated to net income.
(ii) The accumulated unrealized net gain on derivative financial
instruments designated as cash flow hedges is net of future income
taxes of $364 at June 27, 2010 (March 31, 2010 - $935).
14. INVESTMENT IN JOINT VENTURE:
During the year ended March 31, 2010, Photowatt Ontario Inc. entered into
an agreement to establish Ontario Solar PV Fields Inc., a joint venture.
In fiscal 2008, Photowatt International S.A.S. entered into an agreement
to establish the PV Alliance, a joint venture.
These are jointly-controlled enterprises and accordingly, the Company
proportionately consolidates its 50% and 40% share of assets,
liabilities, revenues and expenses for Ontario Solar PV Fields Inc. and
PV Alliance, respectively, in the interim consolidated financial
statements.
The following is a summary of the Company's proportionate share of the
joint ventures:
June 27 March 31
2010 2010
-------------------------------------------------------------------------
Balance Sheets
Current assets $ 4,349 $ 4,933
Property and equipment 4,646 4,960
Intangible assets 2,865 2,107
Investment tax credits 105 562
Current liabilities (6,208) (6,130)
Long-term debt (3,887) (4,419)
-------------------------------------------------------------------------
Net assets $ 1,870 $ 2,013
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 27 June 28
Three months ended 2010 2009
-------------------------------------------------------------------------
Statement of Operations
Net income (loss) $ 120 $ (145)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 27 June 28
Three months ended 2010 2009
-------------------------------------------------------------------------
Cash flows from (used in)
Operating activities $ 1,117 $ 2,342
Investing activities (1,007) (2,669)
Financing activities 673 1,009
-------------------------------------------------------------------------
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The PV Alliance has loans from a shareholder proportionately worth 4,921
Euro (March 31, 2010 - 4,407 Euro). The loans are repayable over five
years, guaranteed by the signing of a Pledge Agreement, and bear interest
at the maximum fiscally deductible rate.
During the year ended March 31, 2010, the PV Alliance established a
credit facility proportionately worth 8,015 Euro. The total amount
outstanding on the facility is 1,124 Euro (March 31, 2010 - 1,124 Euro).
The credit facility bears interest of 6.19% per annum and is received
upon the program meeting certain efficiency milestones.
The PV Alliance maintains an operating lease for a portion of the
Photowatt International S.A.S. building used by PV Alliance which results
in annual lease payments proportionately worth 83 Euro. The contract with
the lessee expires in 2018 with an option to terminate the lease in 2016.
The lease contains an option to extend the lease for an additional nine
years.
During the year ended March 31, 2010, the PV Alliance entered into an
agreement under which the regional government of Rhône-Alpes in France
committed to providing the PV Alliance with funding of 15,000 Euro over a
five-year period, conditional on certain employment levels being met in
the region. During the three months ended June 28, 2010, the PV Alliance
received government assistance of 192 Euro (three months ended June 28,
2009 - 192 Euro) which has been included in operating earnings.
15. INCOME TAXES:
For the three months ended June 27, 2010, the Company's effective income
tax rate differs from the combined Canadian basic federal and provincial
income tax rate of 30.17% (June 28, 2009 - 33.0%) primarily as a result
of losses incurred in Europe, the benefit of which was not recognized for
financial statement reporting purposes.
16. COMMITMENTS AND CONTINGENCIES:
In accordance with industry practice, the Company is liable to the
customer for obligations relating to contract completion and timely
delivery. In the normal conduct of its operations, the Company may
provide bank guarantees as security for advances received from customers
pending delivery and contract performance. In addition, the Company may
provide bank guarantees as security on equipment under lease and on
order. At June 27, 2010, the total value of outstanding bank guarantees
available under bank guarantee facilities was approximately $34.6 million
(March 31, 2010 - $11.9 million).
In the normal course of operations, the Company is party to a number of
lawsuits, claims and contingencies. Accruals are made in instances where
it is probable that liabilities have been incurred and where such
liabilities can be reasonably estimated. Although it is possible that
liabilities may be incurred in instances for which no accruals have been
made, the Company does not believe that the ultimate outcome of these
matters will have a material impact on its consolidated financial
position.
%SEDAR: 00002017E
For further information: Maria Perrella, Chief Financial Officer, Carl Galloway, Vice-President and Treasurer, 519 653 6500
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