ATS reports fiscal 2007 third quarter: improvement in ASG performance, Photowatt capacity expansion on track
TSX: ATA
CAMBRIDGE, ON, Feb. 14 /CNW/ - ATS Automation Tooling Systems Inc. today
reported its financial results for the third quarter of fiscal 2007 (three
months ended December 31, 2006).
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3 months 3 months
ended ended
$ million, except Dec 31, Dec 31,
per share 2006 2005
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Revenue from ASG $ 113.1 $ 118.3
continuing ---------------------------------------------------
operations Photowatt Technologies 39.2 35.2
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PCG 19.9 24.5
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Inter-segment elimination (0.4) (1.7)
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Consolidated $ 171.8 $ 176.3
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Earnings (loss) ASG $ 2.4 $ (0.8)
from operations ---------------------------------------------------
Photowatt International 4.3 5.1
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Spheral Solar and other
solar costs (5.1) (8.0)
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PCG (1.3) (0.5)
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Inter-segment elimination
and corporate costs (2.7) (2.4)
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Consolidated $ (2.4) $ (6.6)
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Net earnings (loss) From continuing operations $ (0.04) $ (0.09)
per share ---------------------------------------------------
After discontinued
operations $ (0.04) $ (0.10)
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Other ASG New Order Bookings $ 109 $ 145
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ASG Order Backlog $ 167 $ 236
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Third Quarter Financial Highlights
- Automation Systems Group (ASG) operating earnings, excluding closure
and wind up costs related to the previously announced closure of its
California facility, were $5.0 million on ASG revenue of
$113.1 million compared to a loss of $0.8 million on revenue of
$118.3 in the third quarter of fiscal 2006.
- Photowatt Technologies' revenue increased 11% to $39.2 million,
compared to the third quarter of fiscal 2006 and adjusted for
incremental labour, overhead and other costs associated with its
capacity expansion, Photowatt International's EBITDA for the third
quarter was $7.8 million (20% EBITDA margin). Photowatt
Technologies' operating loss was $0.8 million, a $2.1 million
improvement from the $2.9 million loss in the third quarter last
year.
- Precision Components Group (PCG) operating loss was $1.3 million
compared to a loss of $0.5 million in the third quarter last year
reflecting $0.8 million in restructuring costs associated with the
consolidation of its MPP operations into Cambridge and Shanghai
operations. Adjusted for MPP closure costs, third quarter PCG EBITDA
was $1.2 million (6% margin) compared to $1.4 million (6% EBITDA
margin) in the third quarter a year ago.
- Consolidated operating loss was $2.4 million on consolidated revenues
of $171.8 million compared to a consolidated operating loss of
$6.6 million on consolidated revenues of $176.3 million a year ago.
- Foreign exchange negatively impacted operating earnings and
consolidated revenues by an estimated $1.6 million and $0.6 million
respectively, compared to the third quarter of fiscal 2006.
Management Commentary
"ATS continues to take important steps to further improve its operating
performance both near term and strategically for our future," said Ron Jutras,
President and CEO. "During the third and into the fourth quarter, we
implemented a number of key changes to put our Company on much stronger
footing, including a substantial rationalization of North American ASG
capacity and additional investments in China. As a result, we believe our ASG
and PCG operations have been properly sized for expected volume in North
America and we are gaining the critical mass necessary to serve the rapidly
expanding needs of our multinational customers operating in China and Asia.
There is much work still to be done, but with North American rationalization
now implemented and its associated costs culminating in the fourth quarter, we
are optimistic that fiscal 2008 will a period of greater stability, and
stronger performance.
"With respect to solar, we expect to complete the IPO in the fourth
fiscal quarter. We believe that upon completion of the IPO, Photowatt will be
more appropriately capitalized to pursue its growth strategy."
Solar Developments
Refined Metallurgical-Grade Silicon: During the third quarter and to date
in the fourth, Photowatt continued to make progress validating its refined
metallurgical grade silicon solar cell strategy. To date Photowatt has
manufactured more than 8,200 solar modules using refined metallurgical grade
silicon in place of higher-priced polysilicon, including more than 4,900 in
the third quarter. These modules have an efficiency of approximately 13%. In
the third quarter, solar modules using refined metallurgical silicon
represented 7% of total production and Photowatt shipped approximately
2,300 of these modules to customers in the quarter. Customer orders for
approximately 29MW of modules produced using refined metallurgical silicon
have been received to date.
Capacity Expansion: Photowatt Technologies' capacity expansion program is
progressing on schedule. The expansion is expected to increase Photowatt's
estimated fully integrated annual capacity to 60 MW. This expansion is
expected to be completed by March 31, 2007 at an estimated capital cost of
(euro)26.5 million.
Silicon Supply: Management has remained focused on its silicon supply
strategy and believes it now has secured or identified silicon for Photowatt
International's planned capacity through to September 2008. Please refer to
the third quarter MD&A for a more detailed discussion.
Photowatt Funding Strategy: During the third quarter, the Company
received shareholder approval for the reorganization of the Company to
facilitate the planned Photowatt Initial Public Offering ("IPO"). On
February 14, 2007 Photowatt Technologies Inc. announced the filing of an
amended prospectus. The amended documents will be available at www.sec.gov and
www.sedar.com.
The Company expects the IPO to close by the end of March 2007.
Quarterly Conference Call
ATS's quarterly conference call begins at 10 am eastern today and can be
accessed over the Internet at www.atsautomation.com or on the phone at
416 644 3419.
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.
This press release is not an offer of securities for sale in the United
States and Canada. Photowatt Technologies Inc. intends to register the initial
public offering of its common shares in the United States. Common shares of
Photowatt Technologies Inc. may not be offered or sold in the United States
absent registration or an exemption from registration. The public offering of
common shares of Photowatt Technologies Inc. to be made in the United States
and Canada will be made by means of a prospectus that may be obtained from the
issuer and that will contain detailed information about Photowatt Technologies
Inc. and management, as well as financial statements.
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 3,500 people at 25 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 nine
months ended December 31, 2006 (third quarter of fiscal 2007) provides
detailed information on the Company's operating activities of the third
quarter of fiscal 2007 and should be read in conjunction with the unaudited
interim consolidated financial statements of the Company for the three and
nine months ended December 31, 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 and second quarters of fiscal 2007 and, accordingly,
the purpose of this document is to provide a third quarter update to the
information contained in the fiscal 2006 MD&A and first and second quarters 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 United States ("Photowatt
USA"). Spheral Solar (also referred to as Photowatt Canada) is a development
project based on a spheral technology that uses thousands of tiny silicon
spheres instead of silicon wafers. Any reference to Photowatt International's
production capacity assumes the use of polysilicon at currently experienced
levels of efficiency.
The terms operating income, operating earnings, earnings or loss from
operations, operating loss, operating results, operating margin, EBITDA
(operating earnings or loss excluding amortization), 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.
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 $113.1 million decreased 4% in the third quarter
compared to $118.3 million in the third quarter last year, primarily due to
the reduced revenue from North American automotive sector, the estimated
$2.1 million negative impact of foreign exchange and the previously announced
decision to wind-down and close ASG's California facility (see "ATS California
Closure" below). Revenue from the California facility was $0.8 million in the
third quarter, compared to $5.0 million in the third quarter last year.
Computer-electronics' revenue increased 36% compared to the third quarter
last year, primarily due to increased volumes in Asia. For the first nine
months of fiscal 2007, healthcare revenue increased 8% over the same period of
fiscal 2006. However, due primarily to lower healthcare Backlog entering the
third quarter of fiscal 2007, healthcare revenue declined 25% compared to the
third quarter a year ago. This lower level of healthcare revenue reflected
several factors outlined in the second quarter fiscal 2007 MD&A, including
$14 million of Order Backlog that a customer put on hold during the second
quarter. Year to date, healthcare represented ATS's largest market at 33% of
ASG revenue, up from 31% of revenue in the comparable prior year period.
Management believes that healthcare will continue to be a vital long-term
growth market for the Company. Revenue from "Other" markets in the third
quarter increased 121% over the prior year period as the Company continued to
strategically diversify its revenue sources to offset weakness in the North
American automotive sector. The 30% decline in third quarter revenue from
automotive customers relative to the comparable prior year period reflected
capacity reductions and supply chain rationalization within the North American
automotive sector and the decision to be more selective in bidding on
automotive assignments.
Automation Systems Group Revenue by Industry
($ millions)
Three months ended Nine months ended
12/31/2006 12/31/2005 12/31/2006 12/31/2005
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Healthcare $ 30.5 $ 40.9 $ 117.2 $ 108.7
Computer-electronics 37.4 27.4 109.1 75.7
Automotive 30.4 43.3 88.6 138.2
Other 14.8 6.7 37.2 28.1
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Total $ 113.1 $ 118.3 $ 352.1 $ 350.7
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On a regional basis, compared to the third quarter last year, revenue
from ASG's Asian operations increased more than 50%, reflecting the Company's
continued focus on expanding rapidly in this high-growth region. In North
America, gains in computer-electronics and "Other" revenue largely offset the
significant declines in automotive revenue, and the closure of ASG's
California facility. The relative value of the Canadian to US dollar and the
effect on revenue of the healthcare order that was put on hold in the second
quarter also continued to have a significant negative impact on ASG operations
in Cambridge.
Revenue from Repetitive Equipment Manufacturing ("REM") declined 29% in
the third quarter compared to a year ago, primarily due to a temporary
reduction in demand related to a key customer deferring shipments until the
beginning of calendar 2007. Subsequent to the end of the third quarter, REM
activity levels increased. REM revenue is primarily generated in the Company's
Cambridge facilities and REM revenue is recognized as the equipment is
shipped. The Company intends to grow its REM business in North America and is
actively establishing a strong REM capability in China. To support the
development of REM in China, the Company made good progress in establishing
REM infrastructure at its Dongguan facility during the third quarter. REM is a
growth initiative that combines the competitive advantages and capabilities of
the Company's ASG and PCG operations.
ASG revenue for the nine months ended December 31 2006 was $352.1 million
compared to $350.7 million in the prior year, as significant increases in
revenues from healthcare, computer-electronics, and "Other" markets more than
offset declines in automotive revenue and the estimated negative impact of
foreign exchange on ASG revenue of $22.4 million.
ASG Operating Earnings
Excluding restructuring costs in the third quarters of both fiscal years,
ASG third quarter operating earnings increased to $5.0 million compared to
operating earnings of $1.1 million a year ago. Including restructuring costs
in both periods, ASG operating earnings were $2.4 million compared to an
operating loss of $0.8 million in the third quarter of fiscal 2006, an
improvement of $3.2 million. Restructuring costs in the most recent quarter of
$2.6 million reflected operating losses and wind-up and closure costs at ASG's
Livermore, California facility (see "ATS California Closure" below).
Restructuring costs in the third quarter a year ago were $1.9 million and
reflected workforce reductions in Cambridge and the closure of the Niagara
facility. ASG's third quarter operating margin was 4%, excluding these
restructuring costs, a significant improvement over the comparable operating
margin a year ago of 1%. Adjusted for restructuring costs, ASG EBITDA
(operating earnings excluding amortization) for the third quarter was
$7.7 million (7% EBITDA margin) compared to $4.5 million (4% EBITDA margin) in
the third quarter a year earlier.
Significantly improved ASG operating earnings reflect a number of factors
including the benefits of aggressive cost reduction initiatives management has
implemented over the past year, including significant facility and capacity
rationalization. ASG's North American operations are also realizing increasing
benefits of value engineering and supply chain management initiatives and very
early benefits from organizational restructuring and enhanced project
execution processes implemented over the fall of 2006. During the third
quarter, ASG North America received proceeds from the sale of its Delphi
Chapter 11 claims. However, due to ongoing risk in the automotive sector,
management continued to maintain the reserves to offset other potential risks.
ASG Europe achieved breakeven results in the third quarter, compared to an
operating loss a year ago, due to its cost reduction initiatives, improved
project performance and improved Order Backlog levels. Asia, including the
expanded China operations, continued to perform profitably during this period
in spite of incurring expansion costs to support future growth.
Foreign exchange continued to have a significant negative impact on ASG
operating earnings. Compared to the third quarter of fiscal 2006, the
estimated negative impact of foreign currency on ASG operating earnings for
the three months ended December 31, 2006 was $1.7 million.
Included in ASG's operating earnings is amortization expense for the
third quarter of $2.7 million, compared to $3.5 million in the third quarter
of fiscal 2006. Year to date ASG amortization was $8.5 million, compared to
$10.3 million in the nine months ended December 31, 2005.
Management continues to take action to improve operating margins,
including the alignment of current capacity with expected business demand in
North America. Consequently, subsequent to the third quarter, ATS announced a
7% reduction in its global ASG workforce (affecting approximately
180 positions in its North American operations). Management believes this will
result in improved performance going forward (see "ASG Outlook") and is
consistent with the Company's aggressive ongoing improvement program to
strengthen performance.
For the first nine months of fiscal 2007, ASG's operating earnings,
excluding $5.0 million of restructuring costs, were $15.8 million compared to
$6.4 million in the same period of fiscal 2006. Restructuring costs in fiscal
2007 include ASG severance costs and California operating losses. The
$3.2 million of restructuring costs in fiscal 2006 included costs related to
the closure of the Niagara facility and severance in France and Cambridge. The
estimated negative impact of foreign currency on ASG operating earnings for
the nine months ended December 31, 2006 was $8.4 million.
ATS California Closure
During the third quarter, ATS announced it was closing its Livermore,
California operations (consisting of a 35,000 sq. ft. leased manufacturing
facility). This facility incurred an operating loss of $2.6 million on
revenues of $0.8 million in the third quarter. This operating loss included a
non-cash, $1.1 million provision related to the existing building lease. The
lease provision was calculated on the present value of future lease costs
associated with the facility and assumed that there will be minimal recovery
potential to sublet the facility. The closure of this facility 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. In fiscal 2006, ATS California revenue was approximately US$15 million
with a loss from operations of approximately US $0.3 million.
ASG Order Backlog and New Order Bookings
New ASG Order Bookings in the third quarter were $109 million, 8% higher
than the second quarter and 25% lower than in the third quarter a year ago.
New Order Bookings for the first six weeks of the fourth quarter of fiscal
2007 are $65 million. Order Backlog and New Order Bookings in the comparative
numbers have been adjusted for the ASG Berlin operation which was divested in
the first quarter (see "Loss from Discontinued Operations, Net of Tax.")
At December 31, 2006, ASG Order Backlog was $167 million, 3% higher than
at September 30, 2006, reflecting a 3% ($2 million) increase in healthcare
Order Backlog, a 10% ($3 million) increase in computer-electronics and a 4%
($1 million) increase from "Other" partially offset by a 3% ($1 million)
decrease in automotive Order Backlog. Year over year, period end Order Backlog
was down 29%, despite a more than four fold ($22 million) increase in "Other"
Order Backlog, which reflected ASG's strategic focus on diversifying its
industrial markets. This overall reduction reflected a number of factors,
including significant restructuring in the North American automotive industry.
With the decline in North American automotive industry prospects and the
Company's increased emphasis on the healthcare segment, management believes
overall Order Backlog has become more sensitive to healthcare industry trends,
the healthcare industry's longer sales cycle and propensity for rapid product
changes. Management believes ASG's healthcare order prospects are improving
and continues to devote significant resources to grow in this large market.
The Company's year-over-year decrease in computer-electronics Order Backlog
reflects reduced computer-electronics orders in North America as well as
normal order patterns in this sector, which more than offset the increase in
computer-electronics orders in Asia.
Automation Systems Order Backlog by Industry
($ millions)
Percentage
12/31/2006 12/31/2005 Change
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Healthcare $ 68 $ 100 (32)%
Automotive 37 71 (48)%
Computer-electronics 34 59 (42)%
Other 28 6 367%
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Total $ 167 $ 236 (29)%
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ASG Outlook
ASG's outlook for the fourth quarter is expected to be impacted by
reduced Order Backlog entering the fourth quarter and the costs of its
restructuring initiatives in North America.
North American Operational Improvement: To improve performance and in
support of the Company's strategic plan, management implemented a
comprehensive organizational restructuring of ASG North American operations
beginning 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). In the
third quarter ATS completed the management reorganization in the Company's
largest facility in Cambridge. The new organizational structure was designed
to improve performance, customer satisfaction and employee engagement and
support the Company's strategic plans.
The Company has recently taken additional steps to adjust the size of its
productive capacity in North America to better match expected demand and
improve future performance. In the third quarter the Company completed the
closure of its California facility (see ASG Operating Earnings). In January
the Company announced a reduction of its ASG North American workforce by
approximately 180 people (7% of ASG global workforce) at an estimated cost of
$5 million. Estimated severance and related costs of approximately $5 million
related to this reduction are expected to be incurred in the fourth quarter.
The workforce reduction is estimated to reduce ATS's annual payroll costs by
approximately $11 million pre-tax.
While the numerous changes taking place in the Company have increased the
risk of a temporary decline in performance, management believes that these
changes are necessary for the Company to overcome the challenges of changes in
foreign exchange rates and to better position the Company to take advantage of
shifts in global demand for the Company's products and services.
Asian Expansion: In China, the Company continues to progress with the
first phase of its major expansion program, which is intended to position ATS
with the capacity and skill sets necessary to effectively serve the growing
needs of multinational customers who are increasingly locating their
operations in this rapidly growing regional market.
During the third quarter, the Company's ASG facility in Dongguan, China
(opened earlier this year) began to expand its capabilities to provide REM
services in addition to its ASG capabilities. To support future growth of this
facility the Company is currently in negotiation to secure an additional
58,000 sq ft of leased space. In the third quarter, the Company's recently
established facility in Shanghai was also expanded by leasing an additional
13,000 square feet. Renovations on the Company's Tianjin ASG facility have
also been completed this year. In Singapore, the Company renovated and
expanded its leased facilities by 10,000 sq ft to support higher Order Backlog
levels and expected demand.
Photowatt Technologies
Photowatt Technologies Revenue
Photowatt Technologies consolidated revenue in the third quarter
continued to be derived solely from Photowatt International (comprised of its
operations in France and USA). Revenue of $39.2 million was 11% higher than in
the same period last year. This higher revenue reflected new product
offerings, increased selling prices, favorable foreign exchange rates and
strong market demand for solar products. Strong demand has been driven
primarily by attractive government incentive programs in Europe, and
increasing consumer interest in clean, renewable energy sources. Higher
average selling prices per watt increased revenue in the third quarter by
approximately $1.6 million, compared to the same quarter a year ago.
Photowatt's broadened product offerings, including solar module installation
kits and a turnkey contract for the sale and installation of solar powered
systems, generated revenue in the third quarter of approximately $0.9 million.
Revenue from these new product offerings was approximately $0.3 million in the
comparative prior year period.
Revenue for the nine months ended December 31, 2006 increased to
$112.1 million, or 6%, from $105.3 million in the comparable prior year
period, reflecting the factors noted above. This growth was achieved despite
the extended one week summer plan shutdown to accommodate the planned capacity
expansion during the second quarter (see second quarter MD&A). Management
estimates that the lost revenue potential from this one week shutdown
extension reduced revenue by approximately $1.7 million.
During fiscal 2007, Photowatt International has increased its revenue
diversification by penetrating geographic markets outside Germany, in
particular Spain. As a result, Spain has become its largest market,
representing 37% of year-to-date revenue, with Germany accounting for 33% of
revenue for the nine months ended December 31, 2006. This compares to 14% and
55% for Spain and Germany, respectively, for the nine months ended
December 31, 2005. In the third quarter of fiscal 2007 Spain and Germany
represented 38% and 37% of revenue, respectively. This decision to target
markets outside Germany (traditionally Photowatt International's largest
market) reflects increased government subsidies in Spain, and other countries,
and also the planned gradual reduction of government subsidies for solar
products in Germany. During the nine months ended December 31, 2006, Photowatt
International revenues from its new solar product offerings accounted for
approximately $4.9 million of revenue, compared to approximately $0.5 million
in the comparable prior year period.
Photowatt Technologies Operating Earnings
Photowatt Technologies Operating Earnings
($ millions)
Three months ended Nine months ended
12/31/2006 12/31/2005 12/31/2006 12/31/2005
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Photowatt International $ 4.3 $ 5.1 $ 15.3 $ 14.8
Spheral Solar (3.0) (7.8) (10.9) (7.8)
Solar Corporate Costs (1.1) (0.2) (2.1) (0.2)
Inter-solar Eliminations (1.0) - (1.6) -
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Total $ (0.8) $ (2.9) $ 0.7 $ 6.8
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Photowatt Technologies consolidated 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 third quarter were
$4.3 million, compared to $5.1 million in the third quarter last year and
$0.9 million in the second quarter of fiscal 2007. The third quarter results
reflect the cost of the new capacity expansion program and increased research
and development costs. Additional new capacity expenses totalling
approximately $1.3 million included costs to prepare the manufacturing
facility for capacity expansion, incremental labour costs, incremental
overhead costs associated with the installation of new equipment and
manufacturing processes. Photowatt France increased research and development
costs during the third quarter over the comparable prior year quarter by
approximately $0.5 million, consisting of increased labour, materials and
equipment rental costs in support of a number of initiatives designed to
increase cell efficiency of both solar grade and refined metallurgical grade
photovoltaic cells and modules, and initiatives to reduce overall costs of
production and improve manufacturing yields.
Photowatt International's amortization expense for the three months ended
December 31, 2006 was $2.2 million, or $0.4 million higher than the comparable
period of the prior year, relating primarily to the aforementioned capacity
expansion. Adjusted for new capacity expenses, Photowatt International EBITDA
(operating earnings excluding amortization) for the third quarter was
$7.8 million (20% EBITDA margin).
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 into fiscal
2008 as its inventory of lower-priced silicon is consumed and new silicon
purchases are made at higher prices.
Spheral Solar's operating loss was $3.0 million in the third quarter,
$0.4 million lower than the operating loss of $3.4 million in the second
quarter and $4.8 million lower than the third quarter of fiscal 2006. The
Spheral Solar operating loss in the third quarter of fiscal 2007 included
research and development costs related to the Spheral Solar technology
initiative, net of the inter-company profits that Spheral Solar generated on
the sale of reclaimed silicon (see "Silicon Supply") to Photowatt
International. The reduced operating loss in the third quarter primarily
reflected cost savings realized from the reduction in Spheral Solar's staff
during the first nine months of the year as part of management's revised
development plan for Spheral Solar. Third quarter fiscal 2006 operating loss
of $7.8 million reflected significantly higher labour, overhead and materials
costs.
Spheral Solar amortization expense for the three months ended
December 31, 2006 was $0.3 million compared to $1.7 million for 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 third quarter were
$1.1 million. This amount included approximately $0.6 million of one-time
option redemption costs associated with the corporate reorganization being
undertaken to prepare for the Company's solar funding strategy. Excluding
these one-time costs, Photowatt Technologies corporate costs remained constant
compared to the second quarter. Corporate costs were insignificant during the
comparable prior year quarter.
Inter-solar eliminations in the third quarter totalled $1.0 million
($1.6 million in the nine months ended December 31, 2006). These eliminations
represent profit that is deferred until the underlying shipments of silicon
between Spheral Solar and Photowatt International are converted to external
revenue.
Photowatt Technologies operating earnings for the nine months ended
December 31, 2006 were $0.7 million compared to $6.8 million in the comparable
prior year period, primarily reflecting the Spheral Solar operating loss of
$10.9 million and $2.1 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:
Photowatt International's current expansion includes the expansion of
Photowatt International's ingot, wafer, cell and module manufacturing capacity
from approximately 31 MW, 32 MW, 40 MW and 54 MW, respectively, to
approximately 60 MW of total integrated manufacturing capacity. Management
expects new capacity to be fully operational by March 2007. The capital cost
of this expansion phase is estimated to be (euro)26.5 million, of which
(euro)19.3 million was incurred at December 31, 2006. The Company expects to
incur incremental overhead, labour, and other costs during the fourth quarter
as new machinery, equipment, and processes continue to be brought on-line.
The next phase of Photowatt International's capacity expansion plan is to
increase its annual integrated manufacturing capacity from approximately 60 MW
to 100 MW. This next phase provides for construction of a second facility
near Lyon, France on land immediately adjacent to the Company's existing
facility and for construction of a module assembly facility in Eastern Europe
or another low-cost region. This second facility is expected to begin
production by the first quarter of fiscal 2009 and be fully ramped by the end
of fiscal 2009 at an estimated cost of approximately (euro)75 million.
Refined Metallurgical Silicon: A key element of the Company's silicon
supply and growth strategy is the use of lower cost refined metallurgical
grade silicon to produce and sell a separate line of solar products. In the
third quarter Photowatt International produced more than 4,900 solar modules
using refined metallurgical grade silicon (approximately 7% of total
production in the quarter) of which approximately 2,300 were sold generating
$0.9 million of revenue. To date over 8,200 modules have been manufactured
using refined metallurgical grade silicon. Management intends to continue to
expand the proportion of revenue Photowatt International derives from solar
cells produced from refined metallurgical grade silicon and expects that in
excess of two thirds of its production in fiscal 2008 will be from this form
of silicon. Customer orders for approximately 29MW of refined metallurgical
silicon modules have now been received.
Photowatt's solar cells produced from refined metallurgical grade silicon
are currently less efficient (currently averaging efficiencies of
approximately 13%) and currently use approximately 50% more grams per watt of
silicon material than its polysilicon solar cells. With selling prices per
watt currently less than prices of polysilicon modules, Photowatt
International's margins are currently lower for solar cells using refined
metallurgical grade silicon than those achieved for solar cells using
polysilicon. However, the use of metallurgical silicon has allowed and
management believes will continue to allow Photowatt International to expand
its production volumes in a time when it would have otherwise been constrained
by significant polysilicon shortages. Management believes the manufacture of
solar cells using refined metallurgical grade silicon is unique in the solar
industry. Management intends to further enhance and develop its ability to
improve the power efficiencies and reduce the grams per watt of silicon used
to produce refined metallurgical silicon cells.
Silicon Supply: Management believes that it has now secured or identified
sources of polysilicon and refined metallurgical silicon for Photowatt
International's planned capacity through to September 2008. The majority of
the silicon requirements to September 2008 are expected to be filled by
inventory on hand and by confirmed purchase orders. Management expects that
the balance of the requirements to September 2008 will be satisfied by
outstanding purchase orders with existing suppliers, and by expected shipments
under the Photosil project (see "Long-Term Silicon Supply Agreements" and
"Contractual Obligations.")
Reclaimed Silicon (Powder and Fines): Spheral Solar shipped approximately
21 metric tonnes of reclaimed silicon to Photowatt France during the third
quarter. During the first nine months of fiscal 2007, 59 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. Management is currently focused on securing a source of
long-term supply of this lower-cost form of silicon.
Long-Term Silicon Supply Agreements: A further element of Photowatt
Technologies silicon supply strategy is continued development of long-term
silicon supply agreements. 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.
As described in the third quarter financial statements, Photowatt
Technologies has entered into an agreement with three partners for the
"Photosil" project. The primary objective of this project 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. Under the
agreement, Photowatt Technologies is to be supplied with at least 80% of the
volume of solar grade silicon or ingots produced by the project through to
April 20, 2008.
Spheral Solar Technology: As announced on January 11, 2007, Photowatt
signed a non-binding letter of intent to enter into a proposed business
partnership and cross-licensing agreement with Clean Venture 21 Corporation
("CV21") of Kyoto, Japan and Fujipream Corporation ("Fujipream") of Hyogo,
Japan, in order to advance the development of its Spheral Solar(TM)
Technology. The goal of this proposed relationship is to share the significant
technology, knowledge and expertise of each of the parties in sphere-based
solar technologies. The companies intend to negotiate in order to enter into a
definitive agreement as soon as practical, subject to the completion of due
diligence and the receipt of certain approvals.
In January 2007, Spheral Solar Power reduced its workforce by
approximately 20 personnel. Severance costs of $0.7 million are expected to be
incurred in the fourth quarter. Spheral Solar Power's workforce now stands at
approximately 50.
Solar Funding Strategy. During the third quarter, the Company received
shareholder approval for the reorganization of the Company to facilitate the
planned Photowatt Initial Public Offering ("IPO"). On February 14, 2007
Photowatt Technologies Inc. announced the filing of an amended prospectus. The
amended documents will be available at www.sec.gov and www.sedar.com. The
Company expects the IPO to close by the end of March 2007.
Precision Components Group
PCG Revenue
PCG's revenue decreased 19% or $4.6 million in the third quarter of
fiscal 2007 to $19.9 million, from $24.5 million in the comparable prior year
period. This decrease primarily 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 $0.6 million compared to the third 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.
For the first nine months ended December 31, 2006, PCG's revenue was
$64.5 million compared to prior year revenue of $69.5 million. The continued
strength of the Canadian dollar reduced PCG revenue by an estimated
$3.6 million during the first nine months of fiscal 2007 verses the first
nine months of fiscal 2006.
PCG Operating Results
PCG's operating loss for the third quarter was $1.3 million compared to a
loss of $0.5 million in the third quarter a year ago. PCG's operating loss in
the most recent quarter was primarily due to lower revenues discussed above
and $0.8 million of costs (including severance) related to the previously
announced closure of the MPP facility (see below).
Included in PCG's operating income is amortization expense for the third
quarter of $1.7 million, compared to $1.9 million in the third quarter of
fiscal 2006. Year to date PCG amortization is $5.2 million, compared to
$5.6 million in the nine months ended December 31, 2005. Adjusted for the MPP
closure costs, PCG EBITDA (operating loss excluding amortization) for the
third quarter was $1.2 million (6% EBITDA margin) compared to $1.4 million (6%
EBITDA margin) in the third quarter a year earlier.
PCG's operating loss of $2.2 million during the first nine months of
fiscal 2007 represented a $0.6 million dollar improvement over the operating
loss of $2.8 million in the comparable prior year period despite the
aforementioned $0.8 million of MPP closure costs and a $4.6 million reduction
in PCG revenue. 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 $1.4 million during the first
nine months of fiscal 2007 versus the comparable prior year period. The
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 many of PCG's customers
and therefore the Group's revenue and profitability into the fourth quarter of
fiscal 2007. It is difficult to forecast when customer volumes 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 related
automotive parts manufacturers. PCG is aggressively targeting attractive new
programs that increase utilization of existing capacity.
As part of its ongoing improvement program, in the third quarter PCG
announced the closure of its Bowmanville, Ontario-based precision plastic
injection moulding operations ("MPP") and consolidation of 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.
At December 31, 2006, MPP employed approximately 82 people at its
34,000 sq. ft. leased facilities and had revenues during fiscal 2006 of
approximately $12.5 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 million over the next two quarters. This consolidation is expected to
reduce PCG's cost base, improve competitiveness and further strengthen its
operations and prospects.
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 $0.2 million of non-recurring moving expenses
associated with this relocation are expected to be incurred during the fourth
quarter. Once the relocation is completed, management expects that Omex will
be able to improve its efficiency, machine utilization and enable this
successful business to further expand its revenues.
Consolidated Results From Operations
Revenue. Consolidated revenues from continuing operations of
$171.8 million for the three months ended December 31, 2006 were 3% lower than
a year ago. A $4.0 million increase in Photowatt Technologies revenue was more
than offset by a $5.2 million decrease in ASG revenue and a $4.6 million
reduction in PCG revenue. The estimated net impact of changes in effective
foreign exchange rates was a reduction in revenue of $0.6 million for the
three months ended December 31, 2006 compared to the same period of the prior
year. Excluding the impact of foreign exchange, consolidated revenue was an
estimated 2% lower compared to the third quarter of fiscal 2006.
Consolidated Revenue by Region
($ millions)
Three months ended Nine months ended
12/31/2006 12/31/2005 12/31/2006 12/31/2005
-------------------------------------------------------------------------
U.S. & Mexico $ 69.4 $ 89.6 $ 227.8 $ 274.9
Europe 61.4 52.0 182.1 164.3
Canada 17.5 13.7 41.9 34.9
Asia-Pacific and other 23.5 21.0 75.3 42.9
-------------------------------------------------------------------------
Total $ 171.8 $ 176.3 $ 527.1 $ 517.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated loss from operations. For the three months ended
December 31, 2006, consolidated loss from operations was $2.4 million,
compared to a loss from operations of $6.6 million a year ago. This
year-over-year improvement reflected ASG's operating earnings of $2.4 million
(operating loss $0.8 million a year ago); lower operating earnings ($4.3
million compared to $5.1 million a year ago) at Photowatt International; a
reduced operating loss for Spheral Solar, solar corporate costs and solar
eliminations ($5.1 million compared to $8.0 million a year ago); operating
loss of $1.3 million ($0.5 million loss a year ago) at PCG; and, corporate
eliminations and operating costs of $2.7 million ($2.4 million of costs a year
ago). Excluding ASG restructuring costs, the costs associated with Spheral
Solar technology incurred in the third quarter and the estimated impact of
foreign currency, consolidated earnings from operations for the three months
ended December 31, 2006 would have been $4.7 million, compared to a
$5.3 million a year ago.
Selling, general and administrative ("SG&A") expenses. For the third
quarter, consolidated SG&A expenses increased $1.2 million to $22.2 million
compared to the respective prior year period reflecting higher costs incurred
by Photowatt Technologies. Third quarter SG&A expenses included $0.4 million
of Spheral Solar costs and $1.1 million of Photowatt Technologies' corporate
costs compared to $0.9 million and $0.2 million respectively in the same
quarter of the prior year. Fiscal 2007 third quarter SG&A expenses also
included $1.5 million of severance and California lease costs as well as
increased costs compared to the third quarter of fiscal 2006 associated with
incentive compensation at divisions with improved results, and consulting and
compensation costs associated with internal controls certification. Third
quarter fiscal 2006 SG&A expenses included $1.9 million of ASG restructuring
costs.
Stock-based compensation cost. For the third quarter of fiscal 2007,
stock-based compensation expense decreased $0.1 million from the third 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 December 31, 2006, interest
expense increased $0.3 million compared to a year ago to $1.1 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 and expects
to sell the land and building. 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 third quarter of fiscal
2007, net loss from continuing operations was $2.4 million (4 cents per share)
compared to net loss from continuing operations of $5.3 million
(9 cents per share) a year ago. Net loss from continuing operations for the
first nine months of fiscal 2007 was $2.0 million (3 cents per share) compared
to net loss from continuing operations of $2.5 million (4 cents per share) for
the same period last year.
Net loss. For third quarter of fiscal 2007, net loss was $2.4 million
(4 cents per share) compared to net loss of $5.8 million (10 cents per share)
for the same period last year. The net loss for the first nine months of
fiscal 2007 was $4.2 million (7 cents per share) compared to net loss of
$3.7 million (6 cents per share) for the same period last year. Excluding the
impact of Spheral Solar, consolidated net earnings for the quarter ended
December 31, 2006 would have been breakeven (0 cents per share basic and
diluted).
Impact of Foreign Exchange
The strength of the Canadian dollar against the US dollar continued to
have a negative impact on the Company's earnings in the third quarter of
fiscal 2007, partially offset by a stronger Euro against the Canadian dollar.
In the third quarter, the effective rate of exchange on the US dollar and euro
declined 4% and increased 6% respectively, while average market rates declined
3% and increased 6%, respectively compared to the same quarter of last year.
-------------------------------------------------------------------------
Estimated Foreign Exchange Impact
For the three months ended December 31, 2006
($ millions)
-------------------------------------------------------------------------
Estimated
negative
(positive) % Change
impact vs. last
of foreign year
exchange excluding
% Change included in foreign
vs. last reported exchange
Reported year results impact
-------------------------------------------------------------------------
Revenue
Automation Systems $ 113.1 (4)% $ 2.1 (3)%
Photowatt Technologies 39.2 (11)% (2.1) 5 %
Precision Components 19.9 (19)% 0.6 (16)%
Elimination of inter-
segment revenue (0.4)
-------------------------------------------------------------------------
Consolidated $ 171.8 (3)% $ 0.6 (2)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) from Operations
Automation Systems $ 2.4 N/M $ 1.7 N/M
Photowatt International 4.3 (16)% (0.3) (22)%
Precision Components (1.3) (160)% 0.2 (120)%
Spheral Solar and other
Solar costs (5.1) 36% - -
Inter-Segment elimination
and corporate expenses (2.7) (8)% - -
-------------------------------------------------------------------------
Consolidated $ (2.4) 63% $ 1.6 87%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December 31, 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 $106 million at an
average exchange rate of Cdn $1.1270. The unrecognized loss on these forward
contracts totalled approximately $1.7 million at December 31, 2006.
Period Average Market Exchange Rates in CDN$
Three months ended Nine months ended
12/31/ 12/31/ 12/31/ 12/31/
2006 2005 % change 2006 2005 % change
-------------------------------------------------------------------------
US $ 1.1399 1.1728 (3)% 1.1270 1.2058 (7)%
Euro 1.4736 1.3929 6% 1.4374 1.4728 (2)%
Singapore $ 0.7325 0.6948 5% 0.7157 0.7203 (1)%
-------------------------------------------------------------------------
Liquidity, Cash Flow and Financial Resources
Cash balances, net of bank indebtedness at December 31, 2006 increased
$2.4 million during the third quarter compared to the second quarter of fiscal
2007 and decreased $25.0 million during the first nine months of fiscal 2007.
The increase of $2.4 million in the net cash balance from the second quarter
was largely as a result of reduced investment in non-cash working capital of
$23.5 million and which offset $21.8 million of investments in property, plant
and equipment primarily to support the Photowatt Technologies expansion plan.
The change in the net cash balance in the first nine 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 third quarter of fiscal 2007, the Company invested a total of
$21.8 million in property, plant and equipment including deposits on
equipment. This total included property, plant and equipment investments at
Photowatt International of $19.6 million related to its previously announced
capacity expansion and $0.8 million and $1.2 million for property, plant and
equipment within ASG and PCG, respectively. In the third quarter of fiscal
2007, the Company's "other" long-term assets increased by $4.6 million related
to deposits made by Photowatt Technologies on silicon contracts.
The Company's debt to equity ratio at December 31, 2006 was 0.2:1. At
December 31, 2006 the Company had $70 million of unutilized credit available
under existing operating and term credit facilities. At December 31, 2006, the
Company was in compliance with its loan covenants.
During the third quarter, approximately 13 thousand stock options were
exercised for total proceeds of $136 thousand. At December 31, 2006 the total
number of shares outstanding was 59,258,094.
During the third quarter, Canadian Solar Inc. ("CSI"), a portfolio
investment of ATS, completed an initial public offering of common shares on
the NASDAQ exchange and trades under the symbol "CSIQ". 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 December 31, 2006, the Company did not enter into any material leases
which would be considered outside the normal course of operations.
In October 2006, Photowatt Technologies entered into a 10-year
irrevocable commitment (see "Long-term Silicon Supply Agreement") 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.
Contractual Obligations
(in millions of dollars)
-------------------------------------------------------------------------
Less than Beyond
Total 1 year 1-3 years 4-5 years 5 years
-------------------------------------------------------------------------
Long-term debt $ 59.8 $ 0.4 $ 4.0 $ 23.8 $ 31.6
-------------------------------------------------------------------------
Operating leases 13.2 3.4 7.2 2.5 0.1
-------------------------------------------------------------------------
Purchase Obligations 298.5 43.8 35.2 48.8 170.7
-------------------------------------------------------------------------
Total $371.5 $ 47.6 $ 46.4 $ 75.1 $202.4
-------------------------------------------------------------------------
Consolidated Quarterly Results
($ in thousands,
except per share
amounts) Q3 2007 Q2 2007 Q1 2007 Q4 2006 Q3 2006
-------------------------------------------------------------------------
Revenue $ 171,792 $ 164,433 $ 190,889 $ 208,675 $ 176,254
Net earnings
(loss) from
continuing
operations $ (2,356) $ (2,104) $ 2,434 $ (64,295) $ (5,309)
Net earnings
(loss) $ (2,389) $ (2,110) $ 338 $ (65,589) $ (5,801)
Basic earnings
(loss) per
share from
continuing
operations $ (0.04) $ (0.04) $ 0.04 $ (1.09) $ (0.09)
Basic earnings
(loss) per
share $ (0.04) $ (0.04) $ 0.01 $ (1.11) $ (0.10)
Diluted
earnings
(loss) per
share from
continuing
operations $ (0.04) $ (0.04) $ 0.04 $ (1.09) $ (0.09)
Diluted
earnings
(loss) per
share $ (0.04) $ (0.04) $ 0.01 $ (1.11) $ (0.10)
($ in thousands,
except per share
amounts) Q2 2006 Q1 2006 Q4 2005 Q3 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 is not an offer of securities for sale in the United States.
Photowatt Technologies Inc. intends to register the initial public offering of
its common shares in the United States or Canada. Common shares of Photowatt
Technologies Inc. may not be offered or sold in the United States absent
registration or an exemption from registration. The public offering of common
shares of Photowatt Technologies Inc. to be made in the United States will be
made by means of a prospectus that may be obtained from the issuer and that
will contain detailed information about Photowatt Technologies Inc. and
management, as well as financial statements.
This press release and the third 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; expansion in China and Asia;
growth plans with respect to ATS's REM business; the impact associated with
the closure of the Livermore, California facility; ASG's healthcare order
prospects and market growth potential; challenges associated with changes in
foreign exchange rates; factors tempering ASG's outlook; ASG market
diversification and cost reduction initiatives and expected benefits related
thereto; expected costs and benefits resulting from reduction of ASG North
American workforce; risk of a temporary setback in ASG's performance; expected
increases in silicon costs; demand for solar products and impact of government
solar subsidies thereon; increased manufacturing capacity of Photowatt
International, and the estimated capital cost and timing for commencement of
production, and related operating costs thereof; management's beliefs with
respect to silicon procurement and expectations in regards to inventory,
purchase orders and contracts for silicon supply; development of long term
supply agreements; efforts with respect to securing a source of silicon powder
and fines; management's expectations with respect to expansion of the
proportion of revenue and volume of production associated with modules using
refined metallurgical grade silicon, development efforts towards improving the
power efficiency of those modules and reducing the grams per watt of silicon
used in their production; estimated output related to Deutsche Solar wafer
supply; objectives of the Photosil project; goal of proposed CV21/Fujipream
relationship and intentions with respect to a definitive agreement; expected
severance costs with respect to Spheral Solar workforce reduction; Photowatt
Technologies' continued advancement towards an initial public offering and
expected timing in relation thereto; 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; timing, expenses, and outcomes associated with
Omex expansion; 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 and
expansion initiatives and/or the failure of such initiatives to achieve stated
goals; that ATS's 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; weakening of the healthcare sector or inability of ATS to further
penetrate that sector; 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 (including poly silicon,
metallurgical silicon, and silicon powder and fines), 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 Spheral
Solar technology being used in conversion of silicon powder and fines 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 desired cell efficiencies and silicon
usage levels relating to refined metallurgical grade silicon technology cannot
be achieved 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; inability of the Photosil project to realize on its objectives;
Photowatt, Clean Venture 21 Corporation and Fujipream Corporation not reaching
a definitive agreement on commercially reasonable terms, the failure to obtain
any approvals required as a precondition to entering into such a definitive
agreement, risks involved in successfully developing and commercializing
sphere based solar technology on a cost-effective basis, including whether or
not technical solutions exist, are available, can be discovered, and are
economically feasible, and potential delays in finding technical solutions;
ability of Spheral Solar to achieve lower silicon usage relative to
conventional 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,
including silicon powder and fines, and other raw materials and certain
specialized manufacturing tools and fixtures used in the production of
Photowatt Technologies' products; delays in or abandonment of pursuit of an
initial public offering for Photowatt Technologies Inc. due to a change in
market conditions, the availability of an alternative transaction, or due to
any other reason, including any of the risk factors set out herein;
performance of ATS's solar business; possibility that progress of PCG in
strengthening its operations may be delayed or reversed for unforeseen
reasons; delays and cost overruns with respect to the consolidation of MPP and
failure of this consolidation to strengthen prospects for the business; delays
and cost overruns with respect to the new leased facilities for PCG's Omex
operations; 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's filings with
Canadian provincial securities regulators, including ATS's 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.
February 14, 2007
Consolidated Statements of Earnings (Loss)
(in thousands, except per share amounts - unaudited)
Three months ended Nine months ended
-------------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
-------------------------------------------------------------------------
(as restated) (as restated)
Revenue $ 171,792 $ 176,254 $ 527,114 $ 517,020
Operating costs and
expenses:
Cost of revenue 145,140 153,053 438,831 430,022
Amortization 6,787 8,630 21,272 22,803
Selling, general and
administrative 22,213 21,031 65,513 64,128
Stock-based compensation
(note 4) 95 171 834 1,308
-------------------------------------------------------------------------
174,235 182,885 526,450 518,261
-------------------------------------------------------------------------
Earnings (loss) from
operations (2,443) (6,631) 664 (1,241)
Other (income) expenses:
Interest on long-term debt 807 610 2,329 1,449
Other net interest 248 128 191 462
Loss (gain) on sale of
assets - 2 - (99)
-------------------------------------------------------------------------
1,055 740 2,520 1,812
-------------------------------------------------------------------------
Loss from continuing
operations before income
taxes and non-controlling
interest (3,498) (7,371) (1,856) (3,053)
Provision for (recovery of)
income taxes (1,180) (2,188) 25 (967)
Non-controlling interest
in earnings of subsidiaries 38 126 145 374
-------------------------------------------------------------------------
Net loss from continuing
operations (2,356) (5,309) (2,026) (2,460)
Loss from discontinued
operations, net of tax
(note 2) (33) (492) (2,135) (1,420)
Extraordinary gain, net of
tax (note 3 (iv)) - - - 176
-------------------------------------------------------------------------
Net loss $ (2,389) $ (5,801) $ (4,161) $ (3,704)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
(note 6)
Basic and diluted from
continuing operations $ (0.04) $ (0.09) $ (0.03) $ (0.04)
Basic and diluted from
discontinued operations (0.00) (0.01) (0.04) (0.02)
-------------------------------------------------------------------------
$ (0.04) $ (0.10) $ (0.07) $ (0.06)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
Consolidated Statements of Retained Earnings
(in thousands of dollars - unaudited)
Three months ended Nine months ended
-------------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 123,291 $ 196,453 $ 125,063 $ 208,120
Net loss (2,389) (5,801) (4,161) (3,704)
Reduction from share
repurchase (note 5) - - - (13,764)
-------------------------------------------------------------------------
Retained earnings, end
of period $ 120,902 $ 190,652 $ 120,902 $ 190,652
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
Consolidated Balance Sheets
(in thousands of dollars - unaudited)
-------------------------------------------------------------------------
December 31 March 31
2006 2006
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $ 22,543 $ 27,921
Accounts receivable 152,203 133,949
Investment tax credits 6,800 19,937
Costs and earnings in excess of billings on
contracts in progress 76,418 102,759
Inventories 75,112 69,833
Other 10,715 4,887
-------------------------------------------------------------------------
343,791 359,286
Property, plant and equipment 218,883 198,863
Goodwill (note 3) 35,839 33,686
Intangible assets 446 1,354
Future income tax assets 45,651 42,493
Investment tax credits 12,633 -
Deferred development costs 2,885 3,960
Assets held for sale (note 2) 1,485 1,485
Other assets 19,425 8,697
-------------------------------------------------------------------------
$ 681,038 $ 649,824
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 8) $ 21,479 $ 1,812
Accounts payable and accrued liabilities 108,436 100,601
Billings in excess of costs and earnings on
contracts in progress 24,148 39,497
Current portion of long-term debt 445 -
Future income taxes 25,614 33,367
-------------------------------------------------------------------------
180,122 175,277
Long-term debt (note 8) 59,391 39,860
Future income taxes 289 3,121
Non-controlling interest 1,911 645
Shareholders' equity:
Share capital 327,485 326,840
Retained earnings 120,902 125,063
Contributed surplus 2,949 2,035
Cumulative translation adjustment (12,011) (23,017)
-------------------------------------------------------------------------
439,325 430,921
-------------------------------------------------------------------------
$ 681,038 $ 649,824
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and Contingencies (note 9)
See accompanying notes to interim consolidated financial statements
Consolidated Statements of Cash Flows
(in thousands of dollars - unaudited)
Three months ended Nine months ended
-------------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flows provided by
(used in) operating
activities:
Net loss $ (2,389) $ (5,801) $ (4,161) $ (3,704)
Items not involving cash 6,011 3,176 12,738 21,813
Stock-based compensation 95 171 834 1,308
Write down of assets to
net realizable value
(note 2 (i)) - - 1,978 -
-------------------------------------------------------------------------
Cash flow provided by
(used in) operations 3,717 (2,454) 11,389 19,417
Change in non-cash
operating working
capital 23,474 37,508 (8,813) 3,570
-------------------------------------------------------------------------
27,191 35,054 2,576 22,987
Cash flows provided by
(used in) investing
activities:
Acquisition of property,
plant and equipment (21,803) (10,729) (38,171) (34,381)
Cash (paid for) received
upon acquisition of
subsidiary
(note 3 (i) and (iv)) (1,475) - (1,475) 461
Investments and other (4,430) (1,685) (10,793) (15,313)
Proceeds from disposal
of assets 253 21 679 2,913
-------------------------------------------------------------------------
(27,455) (12,393) (49,760) (46,320)
Cash flows provided by
(used in) financing
activities:
Bank indebtedness 1,783 5,804 19,667 35,308
Purchase of common shares
for cancellation (note 5) - - - (25,000)
Proceeds from revolving
term debt (note 8) - - 20,000 15,000
Issuance of common shares
of subsidiary
(note 3 (ii)) 804 - 804 -
Issuance of common shares 134 164 645 2,398
-------------------------------------------------------------------------
2,721 5,968 41,116 27,706
Effect of exchange rate
changes on cash and short-
term investments 1,687 (164) 690 (1,810)
Increase (decrease) in cash
and short-term investments 4,144 28,465 (5,378) 2,563
Cash and short-term
investments, beginning of
period 18,399 23,627 27,921 49,529
-------------------------------------------------------------------------
Cash and short-term
investments, end of
period $ 22,543 $ 52,092 $ 22,543 $ 52,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information:
Cash income taxes paid $ 1,929 $ 395 $ 9,713 $ 1,250
Cash interest paid $ 1,414 $ 768 $ 3,786 $ 1,955
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
These interim consolidated financial statements have not been reviewed or
audited by the Company's auditor.
ATS AUTOMATION TOOLING SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
(tabular amounts in thousands, except per share amounts - unaudited)
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,
investment tax credits, 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 nine months ended December 31, 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 Nine months ended
---------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------
Revenue $ - $ 2,466 $ 1,737 $ 6,710
Loss from operations $ - $ (1) $ (180) $ (94)
Write-down to reduce
assets sold to net
realizable value - - (1,978) -
---------------------------------------------------------------------
Loss from discontinued
operations, net of
tax $ - $ (1) $ (2,158) $ (94)
---------------------------------------------------------------------
The loss from discontinued operations includes a non-cash charge of
$1,978,000 ($2,173,000 before taxes) during the nine months ended
December 31, 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 Nine months ended
---------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------
Revenue $ - $ 7,177 $ 475 $ 23,953
Income (loss) from
operations $ (51) $ (746) $ 33 $ (2,498)
Income tax provision
(recovery) 18 255 (10) 850
---------------------------------------------------------------------
Income (loss) from
discontinued
operations $ (33) $ (491) $ 23 $ (1,648)
---------------------------------------------------------------------
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 expects to sell this land and building. 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 Nine months ended
---------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------
Revenue $ - $ - $ - $ -
Income from operations $ - $ - $ - $ 489
Income tax expense - - - (167)
---------------------------------------------------------------------
Income from
discontinued
operations $ - $ - $ - $ 322
---------------------------------------------------------------------
3. Acquisitions and Divestitures:
(i) During the three months ended December 31, 2006, ATS acquired
an additional 2% ownership in one of its subsidiaries in the
Photowatt Technologies segment for cash consideration of $1,475,000.
This resulted in an increase in the Company's goodwill in this
subsidiary by $1,010,000 and a decrease in its non-controlling
interest in this subsidiary by $465,000.
(ii) During the three months ended December 31, 2006, options to
purchase common shares of a subsidiary in the Photowatt Technologies
segment were exercised for cash consideration of $804,000. This
resulted in a decrease in the Company's goodwill in this subsidiary
by $29,000 and an increase in its non-controlling interest in this
subsidiary of $740,000. ATS recorded a dilution gain on the issuance
of shares in this subsidiary of $35,000.
(iii) During the three and nine months ended December 31, 2006, ATS
reorganized certain assets relating to the Photowatt Technologies
segment, which diluted non-controlling interest resulting in an
increase in the Company's goodwill in this segment by $339,000 during
the three months ended December 31, 2006 and $787,000 during the nine
months ended December 31, 2006, and an increase in non-controlling
interest by the same amounts.
(iv) 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 stock option grants were estimated using the Black-
Scholes option pricing model or a binomial option pricing model, with
the following weighted average assumptions and data:
Three months ended Nine months ended
---------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------
Weighted average of
risk-free interest
rate 3.92 % - 4.04 % 3.4 %
Dividend yield 0.0 % - 0.0 % 0.0 %
Weighted average of
expected life (years) 5.0 yrs - 5.0 yrs 5.0 yrs
Expected volatility 31.0 % - 31.0 % 31.0 %
Number of stock options
granted (thousands):
Time vested 112 - 191 440
Performance based 200 - 375 173
Weighted average of
exercise price per
option (dollars) $ 11.80 - $ 11.59 $ 14.40
Weighted average value
per option (dollars):
Time vested $ 3.30 - $ 3.66 $ 5.04
Performance based $ 3.30 - $ 3.48 $ 4.42
---------------------------------------------------------------------
---------------------------------------------------------------------
During the nine months ended December 31, 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 nine months ended December 31, 2006, 25% of the
performance based options issued during the nine months ended
December 31, 2006 vested. During the nine months ended December 31,
2005, 25% of the performance based options issued during the
nine months ended December 31, 2005 vested.
During the three months ended December 31, 2006, performance based
options were issued that vest based upon achievement of internal
performance metrics and expire between fiscal 2008 and fiscal 2011.
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, 103,248 of the subsidiary's
common shares at an exercise price of $14.67 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 or at the time of
Photowatt Technologies Inc.'s initial public offering ("IPO")
(note 10). The option to purchase 54,546 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 48,702 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 103,248
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.
Photowatt Technologies Inc. has also 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 193,290 common shares
exercisable at the public offering price at the closing of the IPO,
of which 1,462 were forfeited during the nine months ended
December 31, 2006. These options vest as to 20% on each anniversary
date of the completion of the IPO. Photowatt Technologies Inc. has
also approved the grant to certain directors, officers, employees and
other key personnel of Photowatt Technologies Inc., including one of
the executive referred to above, of options to purchase an aggregate
of 99,538 common shares exercisiable at the public offering price at
the closing of the IPO, of which 3,800 were forfeited during the nine
months ended December 31, 2006. These options vest on the achievement
of specific defined performance objectives related to the development
of Spheral Solar(TM). As these options vest only upon the completion
of the IPO, no stock compensation expense will be recognized until
completion of the IPO. At the time of the IPO, the fair value of
these stock options will be measured as the exercise price will be
known.
Subsequent to December 31, 2006, Photowatt Technologies Inc. approved
an additional option grant to purchase 58,631 common shares. The
terms of this option grant are consistent with those outlined above
for the options to purchase an aggregate of 193,290 common shares. Of
these options 3,115 were forfeited subsequent to December 31, 2006.
The remaining options outstanding at December 31, 2006 regarding the
grant of options to purchase an aggregate of 99,538 common shares
were forfeited subsequent to December 31, 2006.
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 share 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 earnings
per share is as follows:
Three months ended Nine months ended
---------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------
Basic 59,252 59,077 59,239 59,143
Diluted 59,252 59,077 59,239 59,143
---------------------------------------------------------------------
---------------------------------------------------------------------
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 S.A.S. 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 Nine months ended
---------------------------------------------------------------------
December 31 December 31 December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------
(as restated) (as restated)
Revenue
Automation Systems $ 113,052 $ 118,309 $ 352,138 $ 350,674
Photowatt
Technologies 39,201 35,199 112,090 105,320
Precision Components 19,906 24,543 64,493 69,458
Elimination of
inter-segment
revenue (367) (1,797) (1,607) (8,432)
---------------------------------------------------------------------
Consolidated $ 171,792 $ 176,254 $ 527,114 $ 517,020
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (loss) from
operations
Automation Systems $ 2,395 $ (767) $ 10,847 $ 3,172
Photowatt
Technologies (806) (2,872) 645 6,822
Precision Components (1,332) (497) (2,178) (2,835)
Inter-segment
elimination and
corporate expenses (2,700) (2,495) (8,650) (8,400)
---------------------------------------------------------------------
Consolidated $ (2,443) $ (6,631) $ 664 $ (1,241)
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Bank indebtedness and Long-term debt:
(a) Bank indebtedness: As at December 31, 2006, a subsidiary of ATS,
Photowatt International S.A.S. (the "subsidiary"), has two credit
facilities available. The first facility is in the amount of
1,000,000 euro, under which the subsidiary had drawn 75,000 euro as
at December 31, 2006, and it bears interest at the French four-month
prime rate plus 1.05%. The second facility is in the amount of net
8,000,000 euro, offset by cash deposit on hand at the financial
institution, under which the subsidiary had drawn 5,456,000 euro as
at December 31, 2006, with 777,000 euro of cash on deposit offsetting
the gross amount. This facility bears interest at the euro LIBOR rate
plus 0.50% and is available until April 1, 2007 at which time the
facility amount will decrease to net 800,000 euro. Both credit
facilities are unsecured and repayable on demand.
In February 2007, an additional credit facility was made available to
the subsidiary from one of its existing lenders. The additional
credit facility increases the current facility of 1,000,000 euro to
15,000,000 euro. The facility is unsecured, repayable on demand, and
bears interest at the EURIBOR one-month rate plus 0.50%. The term for
this financing extends to the earlier of three months or the date of
issue for the initial public offering (note 10). After the expiration
of this term, the facility converts to a 8,000,000 euro credit
facility, with a similar interest rate, for a one-year period.
(b) Long-term debt: During the nine months ended December 31, 2006,
the Company drew upon an additional $20,000,000 (nil - three months
ended December 31, 2006) of the unsecured revolving bank credit
facility. During the nine months ended December 31, 2005, the Company
drew upon an additional $15,000,000 (nil - three months ended
December 31, 2005) of the unsecured revolving bank credit facility.
9. Commitments and Contingencies:
During the three months ended December 31, 2006, Photowatt
Technologies entered into an agreement with three other 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, 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.
During the three months ended December 31, 2006, Photowatt
Technologies entered into a 10 year irrevocable commitment to
purchase approximately 4,000,000 polysilicon wafers per annum
commencing in calendar 2009. Advance payments are required which will
be applied against the price of polysilicon 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
polysilicon wafers will be adjusted at the beginning of each calendar
year based on the agreed upon formula.
In January 2007, a legal claim in the amount of US$19,000,000
($22,143,000) was served on ATS by one of its customers. The claim
alleges that ATS did not meet the requirements of its contract. ATS
intends to vigorously defend itself against the claim.
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.
12. Comparative figures
Certain comparative figures have been reclassified to conform with
the current period's presentation.
%SEDAR: 00002017E
For further information: Carl Galloway, Vice President and Treasurer; Gerry Beard, Vice President and Chief Financial Officer, (519) 653-6500