ATS reports fiscal 2007 second quarter: ASG results increase, performance improvement actions continue
CAMBRIDGE, ON, Nov. 14 /CNW/ - ATS Automation Tooling Systems Inc. today
reported its financial results for the second quarter of fiscal 2007 (three
months ended September 30, 2006) and announced further measures to improve
performance.
Second Quarter Financial Highlights
- Consolidated revenues in the second quarter grew 8.0% to
$164.4 million compared to $152.0 million a year ago and consolidated
loss from operations was $2.5 million compared to $3.9 million a year
ago.
- Continued strengthening of the Canadian dollar over the past year
reduced consolidated revenue and operating earnings by an estimated
$10.1 million and $3.6 million, respectively compared to the second
quarter of fiscal 2006.
- Automation Systems Group (ASG) operating earnings were $5.7 million
compared to a loss of $3.1 million a year ago, while ASG revenue
increased 10% to $117.3 million compared to the second quarter of
fiscal 2006.
- Photowatt International's revenue increased 5% to $28.5 million,
compared to the second quarter of fiscal 2006, despite an extended
summer plant shutdown to facilitate its capacity expansion to 60 MW
of fully integrated capacity and the negative impact of foreign
exchange. Primarily as a result of costs related to this expansion
and extended summer shutdown, Photowatt International's second
quarter operating earnings were $0.9 million compared to $3.1 million
a year ago.
- Spheral Solar's operating loss was reduced 23% sequentially from the
first quarter of fiscal 2007 to $3.4 million reflecting its focus on
process development.
- Reflecting provisions for a bankrupt customer, PCG's operating loss
was $1.7 million compared to a loss of $1.4 million of the second
quarter last year.
Management Commentary
"ATS made good progress during the summer, which is often our weakest
quarter because of the negative impact of summer plant shutdowns and
vacations," said Ron Jutras, President and CEO. "In spite of the significant
drag created by the stronger Canadian dollar, we generated higher operating
earnings from all of our ASG regions reflecting early and tangible benefits
from our strategic improvement initiatives. More work is clearly necessary and
we believe many more gains will be registered from numerous steps we have
already taken to strengthen our performance in all areas of our business."
ATS also announced today that it is closing its 35,000 sq ft ASG
manufacturing facility in Livermore, California.
Said Mr. Jutras: "Our decision to close this facility is one part of a
broader strategic initiative to adjust our capacity to better match shifting
global demand and potential. This overall initiative is necessary to allow us
to better serve customers, capture new opportunities, improve our cost
structure and utilization rates in both our ASG and PCG operations and greatly
enhance performance for our shareholders. As a result of these strategic
adjustments, our capacity is now beginning to better reflect our needs."
The California facility incurred an operating loss of $1.4 million during
the second quarter on revenues of $2.6 million and one-time costs to close the
facility are expected to be in the range of $2 million including $1 million
that relates to a lease obligation. This announcement follows closely on the
recently announced consolidation of the Bowmanville PCG plastic injection
moulding operation into existing ATS Cambridge and Shanghai, China PCG
operations, the first quarter sale of the ASG Berlin facility, the expansion
of the Company's REM business and the opening of two new ASG facilities in
China.
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$ million, except 3 months ended 3 months ended
per share Sept 30, 2006 Sept 30, 2005
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Revenue from ASG $ 117.3 $ 106.6
continuing ---------------------------------------------------------
operations Photowatt Technologies 28.5 27.2
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PCG 19.3 21.1
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Inter-segment elimination (0.7) (2.9)
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Consolidated $ 164.4 $ 152.0
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Earnings ASG $ 5.7 $ (3.1)
(loss) from ---------------------------------------------------------
operations Photowatt International 0.9 3.1
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Spheral Solar and
other solar costs (4.0) -
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PCG (1.7) (1.4)
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Inter-segment elimination
and corporate costs (3.4) (2.5)
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Consolidated $ (2.5) $ (3.9)
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Net earnings From continuing operations $ (0.04) $ (0.05)
(loss) per ---------------------------------------------------------
share After discontinued operations $ (0.04) $ (0.06)
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Other ASG New Order Bookings $ 101.3 $ 163.0
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ASG Order Backlog $ 162.5 $ 206.9
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Solar Developments
Capacity Expansion: Photowatt Technologies' current capacity expansion
program is progressing on schedule and new capacity is expected to begin to
come on line in the third quarter with the balance in the fourth. The
expansion is expected to increase Photowatt's estimated annual integrated
capacity to 60 MW of fully integrated capacity by the end of fiscal 2007 at an
estimated capital cost of (euro)26.5 million (approximately $37.5 million).
Silicon Supply: Management believes it has secured or identified silicon
for Photowatt International's planned capacity to the end of fiscal 2008.
Please refer to the second quarter MD&A for more detailed discussion.
Refined Metallurgical-Grade Silicon: During the second quarter and to
date in the third, Photowatt International has successfully manufactured over
3,200 solar modules - with an average efficiency of 12% to 13% - that were
made from refined metallurgical silicon. So far in the third quarter it has
already received initial orders for the sale of over 400 of these modules at
prevailing market prices.
Funding Strategy: A preliminary prospectus for an initial public offering
of shares of the Company's subsidiary, Photowatt Technologies Inc., was filed
in Canada and the U.S. during the second quarter and ATS received shareholder
approval at its recent annual meeting to proceed with its funding strategy.
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 416 915
5783.
Note to Reader
Statements in this press release concerning Photowatt Technologies shall
not constitute an offer to sell or the solicitation of an offer to buy any
securities.
About ATS
ATS Automation Tooling Systems Inc. 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 healthcare, computer/electronics, automotive and
consumer products. Through its solar business, ATS participates in the
rapidly-growing solar energy industry. It also leverages its many years of
repetitive manufacturing experience and skills to produce, in high volume,
precision components and subassemblies and to answer the specialized
repetitive equipment manufacturing requirements of customers. ATS employs
approximately 3,700 people at 26 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 and six
months ended September 30, 2006 (second quarter of fiscal 2007) provides
detailed information on the Company's operating activities of the second
quarter of fiscal 2007 and should be read in conjunction with the unaudited
interim consolidated financial statements of the Company for the three and six
months ended September 30, 2006 and the Company's fiscal 2006 annual report.
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
fiscal 2006 and the unaudited interim consolidated financial statements and
MD&A for the first quarter of fiscal 2007 and, accordingly, the purpose of
this document is to provide a second quarter update to the information
contained in the fiscal 2006 MD&A and first quarter of fiscal 2007 MD&A. These
documents and other information relating to the Company, including the
Company's fiscal 2006 audited consolidated financial statements, MD&A and
Annual Information Form, may be found on SEDAR at www.sedar.com.
Notice to Readers
The Company has three reportable segments: Automation Systems Group
("ASG"), Photowatt Technologies, and Precision Components Group ("PCG").
Photowatt Technologies is comprised of Photowatt International and Spheral
Solar(TM). Photowatt International consists of an integrated solar ingot,
wafer, cell and module production facility in France ("Photowatt France") and
a small module assembly and sales operation in the USA ("Photowatt USA").
Spheral Solar (also referred to as Photowatt Canada) is a development project
that is based on a spheral technology that uses thousands of tiny silicon
spheres instead of silicon wafers. The terms operating income, operating
earnings, earnings from operations, operating loss, operating results,
operating margin, Order Backlog and New Order Bookings used in this MD&A have
no standardized meanings prescribed within Generally Accepted Accounting
Principles ("GAAP") and therefore may not be comparable to similar measures
presented by other companies.
Any reference to Photowatt International production capacity assumes the
use of polysilicon at currently experienced levels of efficiency.
Certain fiscal 2006 comparative figures including revenues, operating
earnings (loss), New Order Bookings and Order Backlog, have been restated to
reflect the presentation of the Berlin coil winding business as a discontinued
operation. This business was divested during the first quarter of fiscal 2007
(see below).
Automation Systems Group
ASG Revenue
ASG's revenue of $117.3 million increased 10% in the second quarter
compared to $106.6 million in the second quarter last year, more than
offsetting the estimated $8.2 million negative foreign exchange impact. By
industrial market, computer-electronics and healthcare were ASG's
fastest-growing segments with revenue increases of 64% and 47% respectively
compared to the second quarter a year ago, as the Company continued to
strategically grow in these targeted markets. These gains were partially
offset by a 39% decline in revenue from automotive customers, reflecting
challenging conditions in the North American automotive industry and the
Company's decision, made several quarters ago, to be selective in bidding on
assignments in this market. Year-to-date, the healthcare segment represents
ASG's largest market at 36% of ASG revenue, up from 29% of revenue in the
comparable prior year period.
Automation Systems Group Revenue by Industry
($ millions)
Three months ended Six months ended
9/30/2006 9/30/2005 9/30/2006 9/30/2005
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Healthcare $ 39.3 $ 26.7 $ 86.8 $ 67.7
Computer-electronics 37.8 23.0 71.7 48.1
Automotive 27.8 45.3 58.2 94.7
Other 12.4 11.6 22.4 21.8
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Total $ 117.3 $ 106.6 $ 239.1 $ 232.3
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On a regional basis, compared to the second quarter last year, Asian
operations generated significant revenue increases, reflecting the Company's
continued profitable expansion in this region. In North America, strong
healthcare and computer-electronics activity more than offset the decline in
automotive revenue. The relative value of the Canadian to US dollar also
continued to have a significant negative impact on ASG operations in
Cambridge.
Revenue from Repetitive Equipment Manufacturing ("REM") increased 22% in
the second quarter to $9.6 million from $7.9 million a year ago. All REM
revenue is currently generated in the Company's Cambridge facilities. The
Company intends to grow its REM business in North America and establish a
strong REM presence in China. To support the development of REM in China, the
Company began to establish REM infrastructure at its Dongguan facility during
the second quarter. Management believes the development of a global business
model for REM is a key element of its growth strategy. REM is a growth
initiative that combines the competitive advantages and capabilities of the
Company's ASG and PCG operations.
Revenue for the six months ended September 30, 2006 increased 3% to
$239.1 million compared to the prior year, as significant increases in
revenues from healthcare and computer-electronics customers more than offset
declines in automotive revenue and the estimated negative impact of foreign
exchange on ASG revenue of $20.3 million.
ASG Operating Earnings
ASG second quarter operating earnings were $5.7 million, compared to an
operating loss of $3.1 million in the second quarter of fiscal 2006, an
improvement of $8.8 million. Excluding the impact of $5.8 million of
provisions related to automotive customers taken in the second quarter a year
ago, ASG operating earnings increased $3.0 million or 111%. Significantly
improved ASG operating results reflected a number of factors including certain
early benefits of cost reduction initiatives put in place over the past year,
including substantial savings realized from supply chain management and value
engineering and other cost reduction and rationalization efforts. Compared to
the second quarter of fiscal 2006, the estimated negative impact of foreign
currency on ASG operating earnings for the three months ended September 30,
2006 was $3.2 million.
On a regional basis, excluding the impact of the aforementioned
automotive customer provision taken in the second quarter last year, ASG North
American operations generated significantly increased levels of operating
earnings during the second quarter of fiscal 2007 compared to the prior year,
due to strong healthcare and computer-electronics revenue growth. These
improved results were generated despite substantial operating losses within
its California operation and costs that began to be incurred related to the
decision to close this facility (see below). In the second quarter, ASG Europe
achieved breakeven results, compared to an operating loss a year ago, due to
its cost reduction initiatives, improved project performance and other
operational enhancements.
Subsequent to the second quarter, ATS announced it was closing its 35,000
sq. ft. leased manufacturing facility in Livermore, California. This facility
incurred an operating loss of $1.4 million during the second quarter on
revenues of $2.6 million. This loss includes $0.2 million of severance
incurred during the second quarter. Additional closure costs, including
severance, relocation and facility costs totalling approximately $2.0 million,
of which approximately $1.0 million relates to the lease obligation on the
facility, are anticipated to be incurred related to this closure which is
expected to be complete by the end of the fiscal year. Management also expects
ATS California to incur operating losses until the closure is complete. The
phased closure of this facility is intended to allow ASG to provide a seamless
transition for existing customers and contracts in progress. This action is
expected to lower the cost base and improve utilization of its other ASG North
American operations. ATS will continue to retain a strategic presence in
California through a small sales and applications team dedicated to the
California market. Total revenue and employment in fiscal 2006 related to the
ATS California facility were approximately US$15 million and 50, respectively.
ASG operating margins (5% in the second quarter) improved significantly
over the operating margins of the second quarter of last year, despite the
$1.4 million operating loss related to ATS California. Excluding the operating
loss at ATS California, ASG's second quarter operating margin was 6%.
Management remains focused on its efforts to improve its operating margins and
continues to take aggressive action to remove costs and streamline operations
to combat the continuing challenges posed by foreign currency translation,
migration of manufacturing to low labour cost regions and North American
automotive restructuring (see "ASG Outlook").
ASG's operating earnings for the first six months of fiscal 2007 were
$8.5 million (4% margin) compared to $3.9 million (2% margin) in the same
period of fiscal 2006. The estimated negative impact of foreign currency on
ASG operating earnings for the six months ended September 30, 2006 was
$6.7 million.
ASG Order Backlog
New ASG Order Bookings in the second quarter were $101 million, 38% lower
than in the second quarter a year ago reflecting the factors discussed below.
New Order Bookings for the first six weeks of the third quarter of fiscal 2007
were $35 million. Order Backlog and New Order Bookings in the comparative
numbers have been adjusted to remove contributions from the recently divested
Berlin business (see "Loss from Discontinued Operations, Net of Tax").
At September 30, 2006, ASG Order Backlog was $162 million, 8% lower than
at June 30, 2006 and 22% lower than at September 30, 2005. Period end Order
Backlog levels primarily reflected a 48% ($35 million) decrease in automotive
Order Backlog due to ASG's selective approach in pursuing certain automotive
orders and the substantial restructuring underway in the North American
automotive industry. Year over year, healthcare Order Backlog decreased
$18 million (21% decrease) to $66 million, a decline that management believes
reflects customer order delays that are typical of the healthcare sector, its
longer sales cycle and propensity for changes in product launch schedules.
Reflecting this propensity for change, one healthcare assignment in Order
Backlog- for $14 million - was put on hold during the second quarter.
Management has assessed the cancellation risk of this order as low. Despite
the healthcare Order Backlog decline, management believes ASG's healthcare
order prospects are strong and is continuing to devote significant resources
in this large market. Management believes the 28% ($12 million) decrease in
computer-electronics Order Backlog reflects normal variations in order
patterns. The four fold ($20 million) increase in Order Backlog from "other"
customers is a result of ASG's strategic focus to continue to diversify its
revenues into other markets.
Automation Systems Order Backlog by Industry
($ millions)
Percentage
9/30/2006 9/30/2005 Change
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Healthcare $ 66 $ 84 (21)%
Automotive 38 73 (48)%
Computer-electronics 31 43 (28)%
Other 27 7 286%
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Total $ 162 $ 207 (22)%
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ASG Outlook
ASG's outlook continues to be tempered by the negative impact of the
continued strength of the Canadian dollar on its Canadian operations, lower
Order Backlog levels entering the second half of the year, the migration of
manufacturing into lower labour cost regions and the challenging North
American automotive market.
To overcome these challenges, ASG continues to progress with its market
diversification and internal cost reduction and improvement initiatives.
Market Diversification: The Company's strategy seeks to take advantage of
new revenue growth opportunities. Management intends to continue to make
targeted investments to further diversify its revenue base in selected
industrial markets, including healthcare, as well as geographic regions in
Asia. Asian expansion is progressing according to plan as the Company
continues to rapidly build critical mass in China and win new business.
Cost Reduction: As part of its performance improvement efforts this
fiscal year, ASG sold its small Berlin coil winding facility (see "Loss from
Discontinued Operations, Net of Tax") in the first quarter and subsequent to
the end of the second quarter announced the closure of its underperforming
California operations (see "ASG Operating Earnings"). The planned closure of
ATS California is expected to reduce costs associated with operating in a
high-cost area and improve utilization of the other North American ASG
facilities.
Improvement: To improve performance and in support of the Company's
strategic plan, implementation of a detailed organizational restructuring plan
for ASG North America began in the second quarter. The reorganization began
with the consolidation of all of the Company's North American ASG operations
under a single senior executive, Jim Sheldon (President, ASG North America),
with profit and loss responsibility and accountability for the region. A major
organizational restructuring of the Company's flagship ASG facilities located
in Cambridge, Ontario was also implemented. In October, management completed a
second step in its implementation plan with the appointment of new leaders in
four functional areas: Sales and Business Development for North America, and
Engineering, Project Management and Manufacturing for the Cambridge ASG
facilities. The organizational restructuring of ASG's Cambridge operations is
expected to be largely complete by the end of December. As a result of this
restructuring, the Cambridge operations have entered into a period of intense
change creating a risk of possible temporary setbacks in performance. However
management believes the restructuring is appropriate to address short-term
challenges and over time is designed to provide numerous long-term benefits in
the form of significantly stronger financial performance, improved project
execution, increased customer satisfaction and higher employee morale.
With this new structure in place, combined with improved sales processes
and forecasting, management expects ASG to continue to streamline its
operations this fiscal year, improve project execution and resource
utilization, reduce its cost base and gain further benefits from its
improvement initiatives.
Photowatt Technologies
Photowatt Technologies Revenue
Photowatt Technologies' consolidated revenue in the second quarter
continued to be derived solely from Photowatt International (comprised of its
operations in France and USA). Revenue of $28.5 million, was 5% higher than in
the same period last year as growth more than offset the longer than usual
annual summer factory shutdown in support of planned capacity expansion and
the negative impact of foreign exchange translation. Excluding the translation
effect of foreign exchange, Photowatt Technologies' revenue would have been an
estimated 7% higher than the second quarter a year ago. Higher revenue
reflected new product offerings, increased selling prices, and strong market
demand for solar products, primarily as a result of attractive government
incentive programs in Europe, and increasing consumer interest in clean,
sustainable energy sources. Higher unit selling prices increased revenue in
the second quarter by approximately $2.4 million, compared to the same quarter
a year ago. The Company's broadened product offerings generated revenue in the
second quarter of approximately $1.8 million and included the sale of solar
module installation kits and a turnkey contract for the sale and installation
of solar powered water pumping systems. Revenue from these new product
offerings was insignificant in the comparative prior year period.
The Photowatt International facility located near Lyon, France
historically shuts down production for approximately four weeks during the
second quarter in accordance with customary French vacation practice. Related
to its previously announced capacity expansion from 40 MW of cell capacity to
60 MW of integrated manufacturing capacity, this summer production shutdown
affecting cell and module production was extended for approximately one
additional week during the second quarter of this year. The extension allowed
Photowatt International to complete the planned reorganization of existing
equipment during the shutdown period. Management estimates that the lost
revenue potential from this additional one week shutdown during the second
quarter was approximately $1.7 million (or 6% of actual second quarter
revenue). Photowatt International's production returned to expected levels
following the end of the shutdown period.
Revenue for the six months ended September 30, 2006 increased to
$72.9 million, or 4%, from $70.1 million in the comparable prior year period,
despite the aforementioned impact of the extended shutdown in the second
quarter of this year. Revenue growth during the first six months of fiscal
2007 reflects the factors noted above including higher selling prices and
increased production output from Photowatt France's vertically integrated
manufacturing facility. Over the first half of fiscal 2007, Photowatt
International has also diversified its revenue by putting a greater focus on
penetrating geographic markets outside Germany, in particular Spain. As a
result, Spain has become its largest market, representing 38% of revenue, with
Germany representing 31% of revenue for the six months ended September 30,
2006. This compares to 14% and 58% for Spain and Germany respectively for the
six months ended September 30, 2005. This decision to target markets outside
Germany (traditionally Photowatt International's largest market) reflects
increased government subsidies in Spain and the reduction of government
subsidies for solar products in Germany.
During the first six months of fiscal 2007, Photowatt International also
increased its revenues from new solar product offerings as described above.
Revenue from these items accounted for approximately $4.8 million of revenue
during the first six months, compared to insignificant amounts in the
comparable prior year period.
Photowatt Technologies Operating Earnings
Photowatt Technologies Operating Earnings
($ millions)
Three months ended Six months ended
9/30/2006 9/30/2005 9/30/2006 9/30/2005
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Photowatt International $ 0.9 $ 3.1 $ 11.0 $ 9.7
Spheral Solar (3.4) - (7.9) -
Solar Corporate Costs (0.5) - (1.0) -
Intersolar Eliminations (0.1) - (0.6) -
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Total $ (3.1) $ 3.1 $ 1.5 $ 9.7
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Photowatt Technologies' second quarter operating results include both
Photowatt International and Spheral Solar (also referred to as Photowatt
Canada). Prior to October 1, 2005, operating costs incurred by Spheral Solar
were capitalized on the Company's balance sheet as deferred development costs
and excluded from operating earnings.
Photowatt International's operating earnings for the second quarter were
$0.9 million, $2.2 million lower than in the comparable period last year
primarily reflecting the impact of the new capacity expansion program.
Additional expenses, totalling approximately $0.6 million, included costs to
prepare the manufacturing facility for capacity expansion, incremental labour
costs, and costs to train employees on new equipment and manufacturing
processes. As well, management estimates the lost operating earnings potential
from lower production resulting from the extended shutdown period was
approximately $0.6 million. Photowatt International's amortization expense for
the three months ended September 30, 2006 was $2.3 million, or $0.5 million
more than the comparable period of the prior year, relating primarily to
capital expenditures made over the past year.
To date, Photowatt International has mitigated a significant amount of
the impact of silicon supply shortages and higher silicon prices on its
operating income by achieving improved internal operating efficiencies and
through increased selling prices for its products. However, Photowatt
International's silicon costs are expected to continue to increase in fiscal
2007 as its inventory of lower-priced silicon is consumed and new silicon
purchases are made at higher prices. There remains a risk that the Company's
strategy of obtaining selling price increases and improving production
efficiencies may not fully offset higher silicon costs and silicon shortages.
The Spheral Solar operating loss in the second quarter of fiscal 2007
included research and development costs related to the Spheral Solar
technology initiative, net of the intercompany profits that Spheral Solar
generated on the sale of reclaimed silicon (see "Silicon Supply") to Photowatt
International.
Spheral Solar's operating loss was $3.4 million in the second quarter
compared to a loss of $4.4 million in the first quarter. This reduced
operating loss reflects cost savings realized from the approximately 40%
reduction in Spheral Solar's staff (60 positions) during the first and second
quarters as part of management's revised development plan for Spheral Solar.
Included in second quarter results were estimated severance costs of
$0.7 million. Substantially all of Spheral Solar's development costs for the
second quarter of fiscal 2006 were capitalized.
Spheral Solar amortization expense for the three months ended
September 30, 2006 was $0.3 million compared to $nil in the comparable period
of the prior year. Amortization costs of Spheral Solar have decreased
significantly from the third and fourth quarters of fiscal 2006 reflecting the
write down of Spheral Solar production equipment in the fourth quarter of
fiscal 2006 (see fiscal 2006 consolidated financial statements and MD&A for
further details).
Photowatt Technologies' corporate costs in the second quarter were
$0.5 million. These costs remained constant compared to the first quarter but
are expected to increase as Photowatt Technologies builds out its management
team to prepare to become a standalone public company. Corporate costs were
insignificant during the comparable prior year quarter. Intersolar
eliminations in the second quarter totalled $0.1 million ($0.5 million in the
first quarter of fiscal 2007). These eliminations represent profit that is
deferred until the underlying shipments of silicon between Spheral Solar and
Photowatt International are converted to external revenue.
Operating earnings for the six months ended September 30, 2006 were
$1.5 million compared to $9.7 million in the comparable prior year period,
primarily reflecting the Spheral Solar operating loss of $7.9 million and
$1.0 million of Photowatt Technologies' corporate costs.
Photowatt Technologies Outlook
Management believes solar product demand will remain strong based upon
ongoing European subsidy programs, newly introduced North American subsidy
programs and continued demand for clean, renewable energy products that can
augment or replace increasingly scarce fossil fuels. Management believes that
any changes in government solar subsidy programs will likely have an impact on
demand for its solar products.
Photowatt International Capacity Expansions: The Company's current
expansion initiative is progressing on schedule and is expected to increase
the estimated annual production capacity of Photowatt International from
approximately 40 megawatts of cell capacity to approximately 60 megawatts of
vertically integrated capacity by the end of fiscal 2007, at a capital cost
estimated to be (euro)26.5 million. At the end of the second quarter,
(euro)10.8 million of investment had been made in support of this expansion
and incremental new capacity is expected to begin to come on line in the third
quarter, with the balance in the fourth quarter.
Silicon Supply: Management believes that it has now secured or identified
sources of silicon for Photowatt International's planned capacity to the end
of fiscal 2008. The majority of the fiscal 2008 silicon requirements are
expected to be filled by inventory on hand and by firm supply contracts.
Management expects that the balance of the fiscal 2008 requirements will be
satisfied by outstanding purchase orders with existing suppliers, which are
expected to be confirmed before the end of the calendar year, and by expected
shipments under the Photosil project (see "Contractual Obligations").
Reclaimed Silicon (Powder and Fines): Spheral Solar shipped approximately
21 metric tonnes of reclaimed silicon to Photowatt France during the second
quarter. During the first quarter, 17 metric tonnes were shipped to Photowatt
France. Reclaimed silicon is produced by sorting and then converting
lower-cost silicon powder and fines into silicon usable by Photowatt France.
Reclaimed silicon is expected to be an important, incremental source of
silicon supply for Photowatt France and management is currently negotiating
for additional long-term supply of these lower-cost forms of silicon.
Refined Metallurgical Silicon: A key element of the Company's silicon
supply and growth strategy is the use of lower cost refined metallurgical
silicon to produce and sell a separate line of solar products. During the
second quarter and to date in the third quarter, Photowatt France successfully
manufactured over 3,200 solar modules using refined metallurgical grade
silicon of which the Company has received initial orders for the sale of over
400 so far in the third quarter at prevailing market prices. These cells
currently achieve an average efficiency of approximately 12% to 13% using
refined metallurgical grade silicon compared to 15% average cell efficiency
using conventional polysilicon. Management believes that the use of refined
metallurgical grade silicon, while less profitable, provides Photowatt France
with an economically viable alternative to using traditional polysilicon
during the current period of silicon shortages. Management also believes that
there are opportunities to further improve the efficiency of solar products
produced using refined metallurgical grade silicon. In the fourth quarter
management expects that approximately half of Photowatt International's
capacity will be dedicated to the production of refined metallurgical grade
silicon solar products. Receipt of government certifications for refined
metallurgical solar modules is expected in the third quarter.
Strategic Partnerships: A further element of Photowatt Technologies'
silicon supply strategy is continued development of strategic supply
alliances. In October 2006, Photowatt International entered into a 10-year
silicon supply contract with Deutsche Solar AG, a subsidiary of SolarWorld AG
for the supply of solar-grade, multi-crystalline polysilicon wafers beginning
in the first half of calendar 2009. Under the agreement, Deutsche Solar is
obliged to deliver, and Photowatt is obliged to accept, approximately four
million polysilicon wafers per annum. These wafers will be processed into
solar cells and modules and are estimated to support the manufacture of
approximately 15 MW of solar power products per annum. Advance payments to be
made under the contract will be applied against the price of silicon wafers
received during the life of the commitment.
Spheral Solar Technology: Spheral Solar continues to work on further
in-depth engineering and process development on its technology. SRI
International (formerly Stanford Research Institute), a leading research and
development group, has been engaged to assist in the effort to achieve
reliable outputs at the desired efficiency level. Management's development
schedule for Spheral Solar technology is based on milestones for the
achievement of certain technical objectives and resolution of process issues,
which are reviewed on an ongoing basis. The next review of progress for
Spheral Solar technology development is scheduled for January 2007 and is
expected to include technical reports from both SRI and management's internal
development team. The technological and commercialization challenges
associated with the development of Spheral Solar technology are substantial.
Solar Funding Strategy. The Company continues to advance toward an
initial public offering of its solar business. During the second quarter, the
Company's subsidiary, Photowatt Technologies Inc., filed a registration
statement with the United States Securities and Exchange Commission and a
preliminary prospectus with Canadian securities regulators relating to the
initial public offering of common shares of Photowatt Technologies Inc.
Subsequent to the second quarter, the Company received shareholder approval
for the reorganization of the Company to facilitate this initial public
offering.
Precision Components Group
PCG Revenue
PCG's revenue decreased 9% or $1.8 million in the second quarter of
fiscal 2007 to $19.3 million, from $21.1 million in the comparable prior year
period. This decrease reflected lower volumes on existing customer programs
resulting from significant production cuts by the Big Three North American
automakers, and the negative impact of foreign exchange estimated to be
$1.1 million compared to the second quarter of fiscal 2006. These factors more
than offset increases in revenues from new programs launched and price
increases obtained on current programs during the past year. As in prior
years, PCG revenue in the second quarter of fiscal 2007 reflected the
traditional summer plant shut downs.
PCG's revenue was $44.6 million for the six months ended September 30,
2006 compared to prior year revenue of $44.9 million. The continued strength
of the Canadian dollar reduced PCG revenue by an estimated $3.0 million during
the first six months of fiscal 2007 verses the first six months of fiscal
2006.
PCG Operating Results
PCG's operating loss for the second quarter increased by $0.3 million to
$1.7 million from $1.4 million in the second quarter last year. This loss
would have been much higher except for PCG's significant facility
rationalization and consolidation efforts over the past 14 months that, along
with the positive impact of ongoing cost reductions, have largely offset lower
program volumes and the ongoing challenge of foreign currency. The negative
impact of the strong Canadian dollar has reduced operating income by an
estimated $0.3 million compared to the second quarter last year.
Significantly affecting PCG's operating results during the second quarter
were unanticipated production reductions announced by the North American Big
Three automakers. Also affecting PCG's operating results was a $0.4 million
provision related to an automotive customer that filed for Chapter 11
bankruptcy subsequent to quarter end, severance costs of $0.2 million, and
$0.2 million of non-recurring costs associated with the previously announced
relocation of PCG's profitable Omex operations in Stratford, Ontario, to a
larger leased facility. PCG is progressing as planned with its Omex expansion
and expects to complete the occupation of the new 74,000 sq.ft. leased
facility by the end of fiscal 2007. Approximately $0.5 million of additional
non-recurring moving expenses associated with this relocation are expected to
be incurred during the third quarter and into the fourth quarter.
PCG's operating loss of $0.8 million during the first six months of
fiscal 2007 represented a $1.5 million dollar improvement over the operating
loss of $2.3 million in the comparable prior year period. Improved PCG
performance reflected significant operational improvements that have been made
over the past year, including: closure of PCG's McAllen, Texas facility;
manufacturing efficiency gains; price increases on programs; and, increased
benefits from supply chain management. These improvements more than offset the
negative impact of foreign exchange, which reduced PCG's operating results by
an estimated $1.3 million during the first six months of fiscal 2007 versus
the comparable prior year period. Operating loss in the first quarter of
fiscal 2006 included $1.0 million of costs related to the consolidation of the
McAllen, Texas facility into PCG's Cambridge operations.
PCG Outlook
Management expects that recent production cuts by the Big Three North
American automakers will continue to negatively impact PCG revenue and
profitability into the third quarter of fiscal 2007. It is difficult to
forecast when volumes under these programs will stabilize, however, management
continues to believe that PCG's prospects have been strengthened due to
operational improvements, rationalization, plant consolidation, and the
addition of business from non-Big Three automotive parts manufacturers. PCG is
aggressively targeting attractive new programs that increase utilization of
existing capacity. Management believes PCG's potential is stronger than it has
been in the past two years due to its leaner operations and more focused
approach.
As part of its ongoing improvement program, early in the third quarter
PCG announced it would close its Bowmanville, Ontario-based precision plastic
injection moulding operations ("MPP") and consolidate these capabilities into
existing PCG facilities in Shanghai, China and Cambridge, Ontario. This
consolidation is expected to be complete by the first quarter of fiscal 2008.
MPP currently employs approximately 90 people at its 34,000 sq. ft. leased
facilities and had revenues of approximately $12 million in fiscal 2006.
MPP's operating earnings in the first half of fiscal 2007 were $0.1 million.
Management expects one-time costs associated with consolidating this business,
including relocation, employee, and other expenses, will reduce the Company's
operating income by approximately $1.8 million over the next three quarters as
the operations are consolidated. This consolidation is expected to reduce
PCG's cost base and further strengthen its operations and prospects as
manufacturing capabilities become more closely aligned geographically to
customer locations.
Consolidated Results From Operations
Revenue. At $164.4 million, consolidated revenue from continuing
operations for the three months ended September 30, 2006 was 8% higher than a
year ago. A 10% increase in ASG revenue and a 5% increase in Photowatt
Technologies' revenue more than offset the 9% reduction in PCG revenue. The
estimated effect on revenue of changes in effective foreign exchange rates was
a reduction in revenue of $10.1 million for the three months ended
September 30, 2006 compared to the same period of the prior year. Excluding
the impact of foreign exchange, consolidated revenue was an estimated 15%
higher compared to the second quarter of fiscal 2006.
Consolidated Revenue by Region
($ millions)
Three months ended Six months ended
9/30/2006 9/30/2005 9/30/2006 9/30/2005
-------------------------------------------------------------------------
U.S. & Mexico $ 76.1 $ 82.0 $ 158.3 $ 180.8
Europe 51.4 43.9 120.7 105.9
Canada 12.0 12.2 24.4 25.1
Asia-Pacific and other 24.9 13.8 51.9 29.0
-------------------------------------------------------------------------
Total $ 164.4 $ 152.0 $ 355.3 $ 340.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated loss from operations. For the three months ended
September 30, 2006, consolidated loss from operations was $2.5 million,
compared to a loss from operations of $3.9 million a year ago. This
year-over-year improvement reflected ASG's operating earnings of $5.7 million
(operating loss $3.1 million a year ago); offset by lower operating earnings
($0.9 million compared to $3.1 million a year ago) at Photowatt International;
an operating loss of $4.0 million for Spheral Solar and solar corporate costs
and solar eliminations (development costs a year ago were capitalized on the
Company's balance sheet); operating loss of $1.7 million ($1.4 million loss a
year ago) at PCG; and, corporate eliminations and operating costs of $3.4
million ($2.5 million of costs a year ago). Excluding both the costs
associated with Spheral Solar technology incurred in the second quarter and
the estimated impact of foreign currency, consolidated earnings from
operations for the three months ended September 30, 2006 would have been $4.5
million, compared to a $3.9 million loss a year ago.
Selling, general and administrative ("SG&A") expenses. For the second
quarter, SG&A expenses decreased $0.8 million to $22.0 million compared to the
respective prior year period. Second quarter SG&A expenses included
$1.4 million of Spheral Solar costs and $0.5 million of Photowatt Technologies
corporate costs compared to $nil in the same quarter of the prior year. Fiscal
2007 second quarter SG&A expenses also included the aforementioned
$0.4 million PCG provision for receivables as well as increased costs compared
to the second quarter of fiscal 2006 associated with incentive compensation at
divisions with improved results, and consulting and compensation costs
associated with internal controls certification. The second quarter of fiscal
2006 included a $4.7 million provision related to certain automotive
customers.
Stock-based compensation cost. For the second quarter of fiscal 2007,
stock-based compensation expense increased $0.3 million from the second
quarter of last year primarily reflecting the change in value of the
directors' deferred stock units outstanding as well as the issuance and
cancellation of employee stock options and deferred stock units under the
directors' compensation plan.
Interest expense. For the three months ended September 30, 2006, interest
expense increased $0.1 million compared to a year ago to $0.9 million,
primarily reflecting higher interest rates and greater use of the Company's
credit facilities.
Loss from discontinued operations, net of tax. In June 2006, the Company
sold the key operating assets and liabilities - including equipment, current
assets, trade accounts payable and certain other assets and liabilities - of
its Berlin, Germany coil winding business for net proceeds of
(euro)0.6 million consisting of cash of (euro)0.3 million and an interest
bearing note receivable of (euro)0.3 million. Accordingly, the results of
operations and financial position of the Berlin subsidiary have been
segregated and presented separately as discontinued operations and as assets
held for sale. The loss from discontinued operations includes a non-cash
charge of $2.0 million ($2.2 million before taxes) incurred during the three
months ended June 30, 2006 to write down the assets sold to their net
realizable value. Results for comparable periods have been restated to reflect
this discontinued operation.
In the fourth quarter of fiscal 2006, the Company completed the sale of
PCG's precision metals division ("Precision Metals"). The results and
financial position of Precision Metals for fiscal 2006 have been segregated
and presented separately as "discontinued operations" and "assets held for
sale" in the accompanying interim financial statements. The Company retained
the land and building related to the Precision Metals operations expects to
sell the land and building, and, as such the assets continue to be classified
as 'held for sale'. See note 2 to the Consolidated Interim Financial
Statements for further details on the net loss from discontinued operations.
Provision for income taxes. The effective rate of income tax reflects the
tax rates of different countries and jurisdictions where future tax assets are
not recognized.
Net loss from continuing operations. For the second quarter of fiscal
2007, net loss from continuing operations was $2.1 million (4 cents per share
basic and diluted) compared to net loss from continuing operations of
$3.0 million (5 cents per share basic and diluted) a year ago. Net earnings
from continuing operations for the first six months of fiscal 2007 were
$0.3 million (1 cent per share basic and diluted) compared to net earnings
from continuing operations of $2.8 million (5 cents per share basic and
diluted) for the same period last year.
Net loss. For second quarter of fiscal 2007, net loss was $2.1 million (4
cents per share basic and diluted) compared to net loss of $3.3 million (6
cents per share basic and diluted) for the same period last year. The net loss
for the first six months of fiscal 2007 was $1.8 million (3 cents per share
basic and diluted) compared to net earnings of $2.1 million (4 cents per share
basic and diluted) for the same period last year. Excluding the impact of
Spheral Solar, consolidated net earnings for the quarter ended September 30,
2006 would have been $0.1 million ($nil cents per share basic and diluted).
Impact of Foreign Exchange
The sustained strength of the Canadian dollar, particularly against the
US dollar and the euro, continued to have a significant and negative impact on
the Company's revenue and earnings in the second quarter of fiscal 2007. In
the second quarter, the effective rate of exchange on the US dollar and euro
currencies declined 10% and 2% respectively, while average market rates
declined 7% and 2% respectively compared to the same quarter of last year.
Estimated Foreign Exchange Impact
For the three months ended September 30, 2006
($ millions)
Estimated
negative % Change
impact of vs. last
foreign year
exchange excluding
% Change included in foreign
vs. last reported exchange
Reported year results impact
-------------------------------------------------------------------------
Revenue
Automation Systems $ 117.3 10% $ 8.2 18%
Photowatt Technologies 28.5 5% 0.8 7%
Precision Components 19.3 (9)% 1.1 (3)%
Elimination of
Inter-Segment Revenue (0.7)
-------------------------------------------------------------------------
Consolidated $ 164.4 8% $ 10.1 15%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) from Operations
Automation Systems $ 5.7 N/M $ 3.2 N/M
Photowatt International 0.9 (71)% 0.1 (68)%
Precision Components (1.7) (21)% 0.3 0%
Spheral Solar and
Other Solar Costs (4.0) - - -
Inter-Segment Elimination
and Corporate Expenses (3.4) 36% - 36%
-------------------------------------------------------------------------
Consolidated $ (2.5) (36)% $ 3.6 128%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2006 the Company had, on hand, unrealized forward
exchange contracts for the future sale of US dollars related to anticipated
revenue and balance sheet transaction exposure totalling US $133 million at an
average exchange rate of Cdn $1.1250. The unrecognized gain on these forward
contracts totalled approximately $1.4 million at September 30, 2006.
Period Average Market Exchange Rates in CDN$
Three months ended Six months ended
9/30/2006 9/30/2005 % change 9/30/2006 9/30/2005 % change
-------------------------------------------------------------------------
US $ 1.1210 1.1996 (7)% 1.1205 1.2223 (8)%
Euro 1.4276 1.4633 (2)% 1.4193 1.5127 (6)%
Singapore $ 0.7093 0.7160 (1)% 0.7073 0.7330 (4)%
-------------------------------------------------------------------------
Liquidity, Cash Flow and Financial Resources
Cash balances, net of bank indebtedness, at September 30, 2006 decreased
$30.7 million during the second quarter compared to the first quarter of
fiscal 2006 and decreased $27.4 million during the first six months of fiscal
2007. The reduction of $30.7 million in the net cash balance from the first
quarter was largely as a result of increased investment in non-cash working
capital of $20.1 million and $10.2 million of investments in property, plant
and equipment. The change in the net cash balance in the first six months of
fiscal 2007 was largely as a result of increased working capital and
investments in property, plant and equipment, partially offset by increased
long-term debt.
In the second quarter of fiscal 2007, the Company invested a total of
$10.2 million in property, plant and equipment including deposits on
equipment. This total included property, plant and equipment investments at
Photowatt International of $8.5 million related to its previously announced
capacity expansion and $1.7 million for property, plant and equipment within
ASG and PCG.
The Company's debt to equity ratio at September 30, 2006 was 0.2:1. At
September 30, 2006 the Company had $63 million of unutilized credit available
under existing operating and term credit facilities. The Company is in
compliance with its loan covenants.
During the second quarter, approximately 2,600 stock options were
exercised for total proceeds of $27 thousand. At September 30, 2006 the total
number of shares outstanding was 59,247,822.
Subsequent to the end of the second quarter, Canadian Solar Inc. ("CSI"),
a portfolio investment of ATS, completed an initial public offering of common
shares at US $15 per share on the NASDAQ exchange. ATS owns 1,864,398 common
shares of CSI, which are subject to resale restrictions including a 180 day
lock-up period and restrictions under applicable securities laws, and are
carried at original cost of $0.2 million.
Contractual Obligations
Information on the Company's lease and contractual obligations is
detailed in the consolidated annual financial statements and MD&A for the year
ended March 31, 2006 found at www.sedar.com. The Company's off balance sheet
arrangements consist of operating lease financing related primarily to
facilities and equipment and forward exchange contracts. For the three months
ended September 30, 2006, the Company did not enter into any material leases
which would be considered outside the normal course of operations.
In September 2006, Photowatt Technologies entered into an agreement with
three partners for the Photosil project, whose primary objective is to develop
a commercial process for the production of solar grade silicon derived from
metallurgical silicon with a capacity of 200 tonnes per year. Pursuant to the
agreement, Photowatt Technologies' role in the project is to contribute
certain expertise and non-financial resources in order to improve and enhance
the silicon material developed during the project's development phase. Under
the contract, Photowatt Technologies is to be supplied, at predetermined
prices, with at least 80% of the volume of solar grade silicon or ingots
produced by the project through to April 20, 2008.
In October 2006, Photowatt Technologies entered into a 10 year
irrevocable commitment to purchase approximately 4,000,000 silicon wafers per
annum commencing in calendar 2009. Advance payments are required which will be
applied against the price of silicon wafers that will be received during the
life of the commitment and can only be refunded in the event of the supplier's
failure to deliver silicon wafers in accordance with the agreement. Commencing
in 2009, the price of the silicon wafers will be adjusted at the beginning of
each calendar year based on the agreed upon formula.
Consolidated Quarterly Results
($ in thousands, except Q2 Q1 Q4 Q3
per share amounts) 2007 2007 2006 2006
-------------------------------------------------------------------------
Revenue $ 164,433 $ 190,889 $ 208,675 $ 176,254
Net earnings (loss) from
continuing operations $ (2,104) $ 2,434 $ (64,295) $ (5,309)
Net earnings (loss) $ (2,110) $ 338 $ (65,589) $ (5,801)
Basic earnings (loss)
per share from
continuing operations $ (0.04) $ 0.04 $ (1.09) $ (0.09)
Basic earnings
(loss) per share $ (0.04) $ 0.01 $ (1.11) $ (0.10)
Diluted earnings (loss)
per share from
continuing operations $ (0.04) $ 0.04 $ (1.09) $ (0.09)
Diluted earnings (loss)
per share $ (0.04) $ 0.01 $ (1.11) $ (0.10)
($ in thousands, except Q2 Q1 Q4 Q3
per share amounts) 2006 2006 2005 2005
-------------------------------------------------------------------------
Revenue $ 152,050 $ 188,716 $ 206,853 $ 197,542
Net earnings (loss) from
continuing operations $ (3,019) $ 5,868 $ 14,615 $ 7,103
Net earnings (loss) $ (3,329) $ 5,426 $ 459 $ 5,627
Basic earnings (loss)
per share from
continuing operations $ (0.05) $ 0.10 $ 0.24 $ 0.12
Basic earnings
(loss) per share $ (0.06) $ 0.09 $ 0.01 $ 0.09
Diluted earnings (loss)
per share from
continuing operations $ (0.05) $ 0.10 $ 0.24 $ 0.12
Diluted earnings (loss)
per share $ (0.06) $ 0.09 $ 0.01 $ 0.09
Note: The above information has been restated for the Berlin, Precision
Metals and thermals discontinued operations.
Note to Readers
This press release and the second quarter MD&A and consolidated interim
financial statements accompanying it (collectively the "Press Release")
contain 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
improvement initiatives and anticipated outcomes; growth plans with respect to
ATS's REM business; the cost, timing, interim operating losses, and impact
associated with the closure of the Livermore, California facility;
cancellation risk associated with a healthcare order in ASG Order Backlog;
ASG's healthcare order prospects; factors tempering ASG's outlook; ASG market
diversification and cost reduction initiatives and expected benefits related
thereto; expected increases in silicon costs and ability to offset those
through increased selling prices and improved production efficiencies;
expected increase in Photowatt Technologies' corporate costs; demand for solar
products and impact of government solar subsidies thereon; increased
production capacity of Photowatt International, and the estimated capital cost
and timing thereof; management's beliefs with respect to silicon procurement
and expectations in regards to outstanding purchase orders and contracts for
silicon supply; importance of reclaimed silicon as an incremental source of
supply; management's beliefs with respect to the viability of refined
metallurgical grade silicon, the opportunity to improve the efficiency of
solar products produced using it, and the proportion of Photowatt
International's capacity dedicated to its use; timing of receipt of government
certifications for metallurgical solar modules; continued work on engineering
and process development of Spheral Solar technology; timing of completion of
technical reports and the next review in relation to the Spheral Solar
technology and the commercialization challenges associated with development of
that technology; Photowatt Technologies' continued advancement towards an
initial public offering; timing and expenses associated with Omex expansion;
impact of production cuts by the Big Three North American automakers on PCG
revenue and profitability; PCG's overall prospects and potential; timing, cost
of completion, and expected outcome of MPP consolidation; and expectations
surrounding sale of Precision Metals land and building. The risks and
uncertainties that may affect forward-looking statements include, among
others; general market performance; performance of the Canadian dollar;
performance of the market sectors that ATS serves; unforeseen problems with
the implementation of ATS's strategic improvement initiatives and/or the
failure of such initiatives to achieve stated goals; that current measures
being taken by ATS are not sufficient to overcome the negative impact of
currency; that ATS' REM business is unable to find new customers and/or
quality projects and growth and profitability are adversely impacted as a
result; delays and cost overruns associated with the closure of the Livermore
facility; unexpected cancellation of the healthcare order in the ASG Backlog;
weakening of the healthcare sector or inability of ATS to further penetrate
that sector; degree of migration of automation manufacturing to lower labour
cost regions; potential inability of ATS to penetrate diversified markets,
successfully reduce costs, and thereby realize expected benefits; possible
temporary setback at ATS facilities undergoing restructuring; reversal of
current silicon supply arrangements, inability to finalize strategic
partnerships or alliances, supply contracts, or beneficial spot market
purchases, to provide for silicon supply, and other problems that may be
encountered with silicon supply sources; potential for silicon prices to
decline in the face of long term silicon supply arrangements; possibility that
solar product selling price increases and improvements in production
efficiencies will not be obtained and/or, if they are, will not be sufficient
to offset higher silicon costs and shortages; the extent of market demand for
solar products such as those developed by the Photowatt Technologies; the
availability of government subsidies for solar products, 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
and marketing their products; the successful expansion of production
capability at Photowatt International and adoption of new production processes
and potential delay and cost overruns in relation thereto; rejection of
silicon purchase orders currently expected to be confirmed and delays and/or
technical or operational problems associated with Photosil's new facility;
equipment, labour or other issues that may arise with respect to the Sperhal
Solar technology being used in conversion of reclaimed silicon for Photowatt
France; unforeseen problems with Photowatt France's use of silicon produced by
the Spheral Solar conversion technology and/or refined metallurgical silicon;
the risk that efficiencies relating to refined metallurgical grade silicon
technology cannot be found and/or that the market is unreceptive to lower
efficiency cells and as a result it is not a profitable alternative to the use
of conventional polysilicon; delays in obtaining government certifications for
refined metallurgical solar modules and its potential negative impact on
revenues; ATS's ability to overcome process challenges currently facing
Spheral Solar technology and any new issues that may arise, and whether or not
process solutions exist, are available, can be discovered, and are
economically feasible, and potential delays in finding process solutions;
ability of Spheral Solar to achieve lower silicon usage relative to
conventional solar technology; delays in conducting the analysis of the
Spheral Solar technology; delays in realizing or absence of further cost
savings as a result of Photowatt Canada (Spheral Solar) staff reductions;
possibility that solar products will not be able to augment or replace the use
of fossil fuels, in whole or in part; the cost and availability of silicon and
other raw materials and certain specialized manufacturing tools and fixtures
used in the production of Photowatt Technologies' products; delays in filing
of the prospectus relating to the IPO; delays in or abandonment of pursuit of
initial public offering for Photowatt Technologies; unavailability of IPO
alternatives due to a change in market conditions; delays and cost overruns
with respect to the new leased facilities for PCG's Omex operations;
possibility that progress of PCG in strengthening its operations may be
delayed or reversed for unforeseen reasons; the ability of PCG to translate
operational improvements and new customer assignments into better financial
performance; delays and cost overruns with respect to the consolidation of MPP
and failure of this consolidation to strengthen prospects for the business;
delay in, abandonment of, or other problems encountered with the sale of the
property previously occupied by ATS's former Precision Metals division; and
other risks detailed from time to time in ATS' filings with Canadian
provincial securities regulators, including ATS' Annual Report and Annual
Information Form for the fiscal year ended March 31, 2006. 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.
November 13, 2006
Consolidated Statements of Earnings (Loss)
(in thousands, except per share amounts - unaudited)
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
(as restated) (as restated)
Revenue $ 164,433 $ 152,050 $ 355,322 $ 340,766
Operating costs and expenses:
Cost of revenue 137,131 125,934 293,691 276,969
Amortization 7,242 6,878 14,485 14,173
Selling, general
and administrative 21,960 22,775 43,300 43,097
Stock-based compensation
(note 4) 638 358 739 1,137
-------------------------------------------------------------------------
166,971 155,945 352,215 335,376
-------------------------------------------------------------------------
Earnings (loss) from operations (2,538) (3,895) 3,107 5,390
Other (income) expenses:
Interest on long-term debt 794 466 1,522 839
Other interest 89 285 (57) 334
Gain on sale of assets
held for sale - (101) - (101)
-------------------------------------------------------------------------
883 650 1,465 1,072
-------------------------------------------------------------------------
Earnings (loss) from continuing
operations before income taxes
and non-controlling interest (3,421) (4,545) 1,642 4,318
Provision for (recovery of)
income taxes (1,301) (1,601) 1,205 1,221
Non-controlling interest in
earnings of subsidiaries (16) 75 107 248
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (2,104) (3,019) 330 2,849
Loss from discontinued
operations, net of tax (note 2) (6) (486) (2,102) (928)
Extraordinary gain,
net of tax (note 3(ii)) - 176 - 176
-------------------------------------------------------------------------
Net earnings (loss) $ (2,110) $ (3,329) $ (1,772) $ 2,097
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per
share (note 6)
Basic and diluted - from
continuing operations $ (0.04) $ (0.05) $ 0.01 $ 0.05
Basic and diluted - from
discontinued operations 0.00 (0.01) (0.04) (0.01)
-------------------------------------------------------------------------
$ (0.04) $ (0.06) $ (0.03) $ 0.04
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
Consolidated Statements of Retained Earnings
(in thousands of dollars - unaudited)
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Retained earnings, beginning
of period $ 125,401 $ 199,782 $ 125,063 $ 208,120
Net earnings (loss) (2,110) (3,329) (1,772) 2,097
Reduction from share
repurchase (note 5) - - - (13,764)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 123,291 $ 196,453 $ 123,291 $ 196,453
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
Consolidated Balance Sheets
(in thousands of dollars - unaudited)
-------------------------------------------------------------------------
September 30 March 31
2006 2006
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $ 18,399 $ 27,921
Accounts receivable 134,031 133,450
Income taxes recoverable 17,727 19,984
Costs and earnings in excess of billings
on contracts in progress 91,081 102,759
Inventories 72,646 69,833
Other 11,363 4,887
-------------------------------------------------------------------------
345,247 358,834
Property, plant and equipment 192,840 198,863
Goodwill 33,205 33,686
Intangible assets 539 1,354
Future income tax assets 50,256 42,493
Deferred development costs 3,182 3,960
Assets held for sale (note 2) 1,485 1,485
Other assets 14,866 8,697
-------------------------------------------------------------------------
$ 641,620 $ 649,372
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 19,696 $ 1,812
Accounts payable and accrued liabilities 88,130 100,149
Billings in excess of costs and
earnings on contracts in progress 15,202 39,497
Current portion of long-term debt 403 -
Future income taxes 31,102 33,367
-------------------------------------------------------------------------
154,533 174,825
Long-term debt (note 8) 57,778 39,860
Future income taxes 1,876 3,121
Non-controlling interest 1,161 645
Shareholders' equity:
Share capital 327,351 326,840
Retained earnings 123,291 125,063
Contributed surplus 2,731 2,035
Cumulative translation adjustment (27,101) (23,017)
-------------------------------------------------------------------------
426,272 430,921
-------------------------------------------------------------------------
$ 641,620 $ 649,372
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
Consolidated Statements of Cash Flows
(in thousands of dollars - unaudited)
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Cash flows provided by (used in)
operating activities:
Net earnings (loss) $ (2,110) $ (3,329) $ (1,772) $ 2,097
Items not involving cash 5,351 4,588 6,727 18,637
Stock-based compensation 638 358 739 1,137
Write down of assets to net
realizable value (note 2(i)) - - 1,978 -
-------------------------------------------------------------------------
Cash flow from operations 3,879 1,617 7,672 21,871
Change in non-cash
operating working capital (20,126) (89) (32,287) (33,938)
-------------------------------------------------------------------------
(16,247) 1,528 (24,615) (12,067)
Cash flows provided by (used in)
investing activities:
Acquisition of property,
plant and equipment (10,222) (10,162) (16,368) (23,652)
Cash received upon acquisition
of subsidiary (note 3(ii)) - 461 - 461
Investments and other (4,022) (7,810) (6,363) (13,628)
Proceeds from disposal
of assets - 2,460 426 2,892
-------------------------------------------------------------------------
(14,244) (15,051) (22,305) (33,927)
Cash flows provided by (used in)
financing activities:
Bank indebtedness 11,666 (2,838) 17,884 29,504
Purchase of common shares
for cancellation (note 5) - - - (25,000)
Proceeds from long-term
debt (note 8) - 15,000 20,000 15,000
Issuance of common shares 8 80 511 2,234
-------------------------------------------------------------------------
11,674 12,242 38,395 21,738
Effect of exchange rate
changes on cash and
short-term investments (179) (1,144) (997) (1,646)
-------------------------------------------------------------------------
Decrease in cash and short-term
investments (18,996) (2,425) (9,522) (25,902)
Cash and short-term investments,
beginning of period 37,395 26,052 27,921 49,529
-------------------------------------------------------------------------
Cash and short-term investments,
end of period $ 18,399 $ 23,627 $ 18,399 $ 23,627
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information:
Cash income taxes paid $ 7,651 $ 415 $ 7,784 $ 855
Cash interest paid $ 1,253 $ 728 $ 2,372 $ 1,187
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
ATS AUTOMATION TOOLING SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
(tabular amounts in thousands, except per share amounts - unaudited)
These interim consolidated financial statements have not been reviewed or
audited by the Company's auditor.
1. Significant accounting policies:
(i) The accompanying unaudited interim consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in Canada ("GAAP") and the accounting policies are
consistent with those described in the annual consolidated financial
statements for the year ended March 31, 2006. The unaudited interim
consolidated financial statements presented in this interim report do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements and should be read
in conjunction with the Company's fiscal 2006 audited consolidated
financial statements.
(ii) Contract revenue in the Automation Systems segment is recognized
using the percentage of completion method. The degree of completion is
determined based on costs incurred, excluding costs that are not
representative of progress to completion, as a percentage of total costs
anticipated for each contract. Incentive awards, claims or penalty
provisions are recognized when such amounts are likely to accrue and can
reasonably be estimated. Complete provision is made for losses on
contracts in progress when such losses first become known. Revisions in
cost and profit estimates, which can be significant, are reflected in the
accounting period in which the relevant facts become known.
Revenue in the Precision Components and Photowatt Technologies segments
is primarily recognized when earned, which is generally at the time of
shipment and transfer of title to the customer, providing collection is
reasonably assured. Revenue on certain long-term contracts in the
Photowatt Technologies segment is recognized using the percentage of
completion method consistent with the Automation Systems segment
accounting policy.
(iii) 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 accounting for items such as impairment of
assets, recoverability of deferred development costs, fair value of
reporting units, fair value of assets held for sale, warranties, income
taxes, future tax assets, determination of estimated useful lives of
intangible assets and property, plant and equipment, impairment of long-
term investments, contracts in progress, inventory provisions, revenue
recognition, contingent liabilities, and allowances for accounts
receivable.
2. Discontinued operations and assets held for sale:
(i) During the six months ended September 30, 2006, the Company sold
the key operating assets and liabilities, including equipment, current
assets, trade accounts payable and certain other assets and liabilities
of its Berlin, Germany coil winding business for net proceeds of 600,000
euro consisting of cash of 300,000 euro and an interest bearing note
receivable of 300,000 euro. Accordingly, the results of operations and
financial position of the Berlin coil winding business have been
segregated and presented separately as discontinued operations in the
accompanying interim consolidated financial statements. The results of
the discontinued operations were as follows:
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Revenue $ - $ 2,460 $ 1,737 $ 4,244
Income (loss) from operations $ - $ 24 $ (180) $ (93)
Write-down to reduce assets
sold to net realizable value - - (1,978) -
-------------------------------------------------------------------------
Income (loss) from discontinued
operations, net of tax $ - $ 24 $ (2,158) $ (93)
-------------------------------------------------------------------------
The loss from discontinued operations includes a non-cash charge of
$1,978,000 ($2,173,000 before taxes) during the six months ended
September 30, 2006 to write down the assets sold to their net realizable
value.
(ii) During the year ended March 31, 2005, the Company committed to a
plan to sell the key operating assets, including certain working capital
and property, plant and equipment, of its precision metals division of
the Precision Components segment ("Precision Metals"). Accordingly, the
results of operations and financial position of Precision Metals have
been segregated and presented separately as discontinued operations and
as assets held for sale in the accompanying interim consolidated
financial statements. The results of the discontinued operations were as
follows:
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Revenue $ 165 $ 8,428 $ 472 $ 16,776
Income (loss) from operations $ (10) $ (1,158) $ 84 $ (1,752)
Income tax recovery 4 393 (28) 595
-------------------------------------------------------------------------
Income (loss) from
discontinued operations $ (6) $ (765) $ 56 $ (1,157)
-------------------------------------------------------------------------
Effective January 2, 2006, the Company completed the sale of Precision
Metals for net proceeds of $4,309,000, including transaction costs. The
fiscal 2006 loss from discontinued operations includes a charge of
$474,000 ($718,000 before taxes) to reduce the Precision Metals assets to
the estimated net realizable value including transaction costs.
The Company retained the land and building related to the Precision
Metals operations and has entered into a lease agreement with the
purchaser for use of the land and building. The Company expects to sell
this land and building and, as such, the assets continue to be classified
as held for sale.
(iii) During the year ended March 31, 2005, the Company sold the key
intellectual property, inventory and operating assets of its thermal
management products business of the Precision Components segment
("Thermals Business") for net proceeds of $8,600,000 resulting in a loss
of $1,738,000 ($3,173,000 before taxes). Accordingly, the results of
operations of the Thermals Business have been segregated as discontinued
operations in the accompanying interim consolidated financial statements.
The results of the discontinued Thermal Business were as follows:
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ -
Income from operations $ - $ 388 $ - $ 489
Income tax expense - (133) - (167)
-------------------------------------------------------------------------
Income from discontinued
operations $ - $ 255 $ - $ 322
-------------------------------------------------------------------------
3. Acquisition
(i) During the three months ended September 30, 2006, ATS reorganized
certain assets relating to Photowatt International S.A.S. which, as part
of its reorganization relating to the Photowatt Technologies segment,
diluted the interests of certain minority shareholders resulting in an
increase in the Company's goodwill in this segment by $441,000 and its
non-controlling interest by the same amount.
(ii) During the three months ended September 30, 2005, ATS acquired the
net assets and business of an automation business in the United Kingdom
in order to increase installation support and sales and service
capabilities in this region. The results of this business have been
included in the interim consolidated financial statements since
acquisition.
The following table summarizes the estimated fair value of assets
acquired and liabilities assumed as at the date of acquisition:
Accounts receivable $ 845
Costs and earnings in excess of billings on contracts
in progress and inventories 840
Current liabilities (1,568)
-------------------------------------------------------------------------
Net assets acquired excluding cash and long-term debt 117
Cash payment from vendor 220
Cash proceeds from long-term debt 439
Fair value of long-term debt assumed (402)
-------------------------------------------------------------------------
257
-------------------------------------------------------------------------
Net assets acquired 374
Less: acquisition costs (198)
-------------------------------------------------------------------------
Extraordinary gain, net of tax 176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The excess of the fair value of assets acquired less liabilities assumed
was first allocated to all of the acquired assets except current assets,
with the remaining amount presented as an extraordinary gain, net of
income tax.
In conjunction with the purchase of assets, the vendor provided an
unsecured non-interest bearing loan of GBP 200,000 that is due on
July 29, 2007. The fair value of the long-term debt was estimated using a
discount rate of 4.5%, based on other debt instruments with similar
characteristics.
4. Stock-based compensation:
In the calculation of the stock-based compensation expense in the interim
Consolidated Statements of Earnings (Loss), the fair values of the
Company's traditional time vested stock option grants were estimated
using the Black-Scholes option pricing model and the fair value of the
Company's performance based stock option grants were estimated using a
binomial option pricing model with the following weighted average
assumptions and data:
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Weighted average of risk-free
interest rate - 3.35 % 4.18 % 3.35 %
Dividend yield - 0.0 % 0.0 % 0.0 %
Weighted average of expected
life (years) - 5.4 yrs 5.3 yrs 5.2 yrs
Expected volatility - 31 % 31 % 31 %
Number of stock options
granted (thousands):
Time vested - 8 372 440
Performance based - - 175 173
Weighted average of exercise
price per option (dollars) - $ 13.98 $ 11.34 $ 14.40
Weighted average value
per option (dollars):
Time vested - $ 5.07 $ 4.17 $ 5.04
Performance based - $ 4.42 $ 3.68 $ 4.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarters ended June 30, 2006 and 2005, the Company issued
certain performance based options. The performance based options vest
based on the ATS stock trading at or above a threshold for a minimum of
20 trading days in a fiscal quarter. These performance options expire on
the seventh anniversary of the date of the award. During the first and
second quarters of fiscal 2007, no performance based options vested.
In September 2006, a subsidiary of ATS, Photowatt Technologies Inc.,
approved the grant of options to two executive officers of the subsidiary
to purchase, in aggregate, 302,860 of the subsidiary's common shares at
an exercise price of $5.00 per share. The aggregate number of common
shares underlying each of these options is subject to an automatic
adjustment that will increase or decrease the number such that it is
equal to 0.6883% of the common shares in the subsidiary held by ATS
immediately prior to Photowatt Technologies Inc.'s initial public
offering ("IPO") (note 10). The option to purchase 160,000 common shares
granted to one executive vests as to 20% on the completion of the IPO and
20% on each anniversary date of the completion of the IPO. The option to
purchase 142,860 common shares granted to the second executive vests as
to 20% on each anniversary date of the completion of the IPO. In addition
to the above mentioned grants, the two executives are eligible to receive
cash payment upon any exercise of these options if the number of shares
underlying these options exceeds 302,860 after the adjustment described
above. In the event that a change of control of Photowatt Technologies
Inc. occurs and the employment of the option holder is terminated or they
resign, in either case within three months from the date of such change
of control, the options granted to the two executive officers will
accelerate and become fully vested.
Furthermore, Photowatt Technologies Inc. has approved the grant to
certain directors, officers, employees and other key personnel of
Photowatt Technologies Inc., including one of the executives referred to
above, of options to purchase an aggregate of 844,000 common shares
exercisable at the public offering price at the closing of the IPO.
Included in the 844,000 above are options to purchase 292,000 common
shares that vest on the achievement of specific defined performance
objectives related to the development of Spheral Solar and options to
purchase 552,000 common shares that vest as to 20% on each anniversary
date of the completion of the IPO.
5. Share repurchase option:
During the year ended March 31, 2005, the Company received proceeds of
$25,000,000 and $2,000,000 related to a "key-man" life insurance policy
in respect of the death of Mr. Klaus Woerner. The insurance policy was
entered into to provide funding for the repurchase of certain of ATS's
shares.
Under an agreement entered into in 1998, the Company was granted the
option by 566226 Ontario Ltd., a corporation then controlled by Mr.
Woerner, to repurchase all or a portion of the shares held by 566226
Ontario Ltd. upon the death of Mr. Woerner, subject to certain
restrictions. This agreement was entered into to provide the Company the
ability to ensure an orderly disposition of shares controlled by Mr.
Woerner's estate. On April 18, 2005, the Company exercised its option to
purchase for cancellation 1,974,723 shares at a price of $12.66 per
share. The purchase price of these shares was funded by the $25,000,000
of life insurance proceeds.
As a result of the share repurchase, share capital was reduced during the
three-months ended June 30, 2005 by the value of $5.69 per share
totalling $11,200,000. The excess of cost to repurchase the shares over
the stated value was charged to retained earnings.
6. Weighted average number of shares:
Weighted average number of shares used in the computation of earning per
share is as follows:
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
Basic 59,245 59,069 59,232 59,176
Diluted 59,245 59,069 59,232 59,427
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Segmented disclosure:
The Company evaluates performance based on three reportable segments:
Automation Systems, Photowatt Technologies, and Precision Components. The
Automation Systems segment produces custom-engineered turn-key automated
manufacturing and test systems. The Photowatt Technologies segment is a
high volume manufacturer of photovoltaic products through its subsidiary
Photowatt International and also includes the Company's investment in the
Spheral Solar(TM) technology initiative. The Precision Components segment
is a high volume manufacturer of plastic and metal components and sub-
assemblies.
The Company accounts for inter-segment revenue at current market rates,
negotiated between the segments.
Three months ended Six months ended
-------------------------------------------------------------------------
September September September September
30 2006 30 2005 30 2006 30 2005
-------------------------------------------------------------------------
(as restated) (as restated)
Revenue
Automation Systems $ 117,302 $ 106,628 $ 239,086 $ 232,365
Photowatt Technologies 28,508 27,237 72,889 70,120
Precision Components 19,327 21,134 44,587 44,914
Elimination of inter-segment
revenue (704) (2,949) (1,240) (6,633)
-------------------------------------------------------------------------
Consolidated $ 164,433 $ 152,050 $ 355,322 $ 340,766
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) from operations
Automation Systems $ 5,666 $ (3,122) $ 8,452 $ 3,939
Photowatt Technologies (3,136) 3,070 1,451 9,696
Precision Components (1,716) (1,379) (846) (2,336)
Inter-segment elimination
and corporate expenses (3,352) (2,464) (5,950) (5,909)
-------------------------------------------------------------------------
Consolidated $ (2,538) $ (3,895) $ 3,107 $ 5,390
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Long-term debt:
During the six months ended September 30, 2006, the Company drew upon an
additional $20,000,000 of the unsecured revolving bank credit facility.
During the six months ended September 30, 2005, the Company drew upon an
additional $15,000,000 of the unsecured revolving bank credit facility.
9. Commitments:
In September 2006, a subsidiary of ATS, Photowatt International S.A.S.
(the "subsidiary"), entered into an agreement with three partners for a
project whose primary objective is to develop a commercial process for
the production of solar grade silicon derived from metallurgical silicon
with a capacity of 200 tonnes per year. Pursuant to the agreement, the
subsidiary's role in the project is to contribute certain expertise and
non-financial resources in order to improve and enhance the silicon
material developed during the project's development phase. Under the
contract, the subsidiary is to be supplied, at predetermined prices, with
at least 80% of the volume of solar grade silicon or ingots produced by
the project through to April 20, 2008.
In October 2006, a subsidiary of ATS, Photowatt International S.A.S.
entered into a 10 year irrevocable commitment to purchase approximately
4,000,000 silicon wafers per annum commencing in calendar 2009. Advance
payments are required which will be applied against the price of silicon
wafers that will be received during the life of the commitment and can
only be refunded in the event of the supplier's failure to deliver
silicon wafers in accordance with the agreement. Commencing in 2009, the
price of the silicon wafers will be adjusted at the beginning of each
calendar year based on a pre-agreed formula.
10. Photowatt Technologies Inc. initial public offering:
In August 2006, the Board of Directors approved the issuance of a
preliminary prospectus in connection with the initial public offering in
the United States and Canada of Photowatt Technologies Inc., a subsidiary
of the Company.
11. Cyclical nature of the business:
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 New Order
Bookings, Photowatt Technologies and Precision Components volumes, and
the Company's earnings in any of its markets.
%SEDAR: 00002017E
For further information: Carl Galloway, Vice President and Treasurer, Gerry Beard, Vice President and Chief Financial Officer, (519) 653-6500