ATS Automation Tooling Systems Inc.: First quarter fiscal 2009 results
- Consolidated revenue increased 36% to $212.1 million from $155.4 million a year ago;
- Consolidated earnings from operations increased to $16.3 million compared to a loss of $6.8 million a year ago;
- Earnings were $0.17 per share (basic and diluted) compared to a loss of $0.15 per share a year ago.
"Our focus in fiscal 2009 is to stabilize the Company and improve operating performance," said Anthony Caputo, ATS Chief Executive Officer. "We have made good progress in both the Automation Systems Group and Photowatt France, but much work remains to be done."
Automation Systems Group Results
- Revenue increased 32% to $142.7 million from $107.8 million a year ago due to stronger Order Backlog entering the first quarter of fiscal 2009 compared to the prior year;
- EBITDA was $12.3 million compared to $2.7 million a year ago;
- Earnings from operations were $10.3 million, up from $0.6 million a year ago;
- Period end Order Backlog increased 19% to $258 million from $217 million a year ago;
- Order Bookings grew 16% to $169 million compared to $146 million a year ago, and included two bookings with new customers in the solar industry totalling $41 million;
- Order Bookings were $62 million during the first six weeks of the second quarter.
The improvement in operating results in all geographic regions reflected higher revenue and better program execution. Revenue increased 42% in healthcare, 41% in computer-electronics, 80% in energy and 19% in other markets to more than offset a 12% decline in automotive revenue compared to the first quarter of 2008.
Photowatt Technologies Results
- Revenue increased 45% to $69.3 million from $47.7 million a year ago;
- Photowatt France EBITDA was $9.3 million compared to $2.7 million a year ago;
- Photowatt Technologies operating earnings were $10.5 million compared to a loss of $2.4 million a year ago;
- Total megawatts (MWs) sold at Photowatt France increased 29% to 13.8 MWs from 10.7 MWs in the first quarter of fiscal 2008 - with UMGSi products accounting for 54% of revenue;
- Average cell efficiency for UMGSi cells improved to approximately 13.8% from 12.9% a year ago, while average cell efficiency for polysilicon products was 15.6% compared to 14.8% a year ago.
Photowatt Technologies operating earnings in the first quarter included a gain of $2.0 million on the finalization of the sale of silicon not usable by ATS and a gain of $3.2 million on the sale of the redundant Spheral Solar building. Photowatt France's earnings included $0.2 million of costs related to the ongoing investment in the PV Alliance, a joint venture involving Photowatt France, EDF EnR Reparties, (a partially owned subsidiary of Electricité de France), and CEA Valorisation, which is intended to increase solar cell efficiency.
In the first quarter of fiscal 2009, Photowatt France supplemented its internal ingot and wafer production with increased externally purchased polysilicon wafers and cells to balance production. This added incremental earnings to operations, but at lower operating margins than for products manufactured using internally produced wafers and cells. Management intends to make improvements to increase margins on products produced with externally sourced materials. Average selling prices per watt were consistent year over year.
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 3416.
Annual and Special Meeting of Shareholders
ATS will hold its Annual and Special Meeting of Shareholders on September 11th, 2008 at 10:00 a.m. (Toronto time) at the Holiday Inn Hotel and Conference Centre, 30 Fairway Road South, Kitchener, Ontario, Canada. Materials will be mailed to shareholders prior to the meeting.
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 industries such as healthcare, computer/electronics, energy, automotive and consumer products. It also leverages its many years of experience and skills to fulfill the specialized repetitive equipment manufacturing requirements of customers. Through Photowatt Technologies, ATS participates in the growing solar energy industry as an integrated manufacturer of ingots, wafers, cells and modules. Photowatt-branded products and systems serve businesses, institutions and homeowners in established and emerging markets. ATS employs approximately 3,500 people at 21 manufacturing facilities in Canada, the United States, Europe, Southeast Asia and China. The Company's shares are traded on the Toronto Stock Exchange under the symbol ATA. Visit the Company's website at www.atsautomation.com.
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") for the three months ended June 30, 2008 (first quarter of fiscal 2009) provides detailed information on the operating activities, performance and financial position of ATS Automation Tooling Systems Inc. ("ATS" or the "Company") and should be read in conjunction with the unaudited interim consolidated financial statements of the Company for the first quarter of fiscal 2009. 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 2008 and, accordingly, the purpose of this document is to provide a first quarter update to the information contained in the fiscal 2008 MD&A. These documents and other information relating to the Company, including the Company's fiscal 2008 audited consolidated financial statements, MD&A and annual information form may be found on SEDAR at www.sedar.com.
Notice to Reader
The Company has two reportable segments: Automation Systems Group ("ASG") and Photowatt Technologies ("Photowatt") which includes Photowatt France (the ongoing Photowatt Technologies operations), Photowatt USA, a small module assembly facility and sales operation closed during fiscal 2008 and Spheral Solar, a halted development project that has been wound down. Any reference to solar production capacity assumes the use of polysilicon at 15% cell efficiency. Actual solar capacity may vary materially for a number of reasons including the use of Upgraded Metallurgical Silicon ("UMGSi"), changes in cell efficiency and/or changes in production processes. References to Photowatt's cell "efficiency" means the percentage of incident energy that is converted into electrical energy in a solar cell. Solar cells and modules are sold based on wattage output. "Silicon" refers to a variety of silicon feedstock, including polysilicon, UMGSi and polysilicon powders and fines. As described in Note 5 to the interim consolidated financial statements, the results of Precision Components Group ("PCG"), which was classified as held for sale as of March 31, 2008, are reported in discontinued operations.
Throughout this document the term "operating earnings" is used to denote earnings (loss) from operations. EBITDA is also used and is defined as earnings (loss) from operations excluding depreciation and amortization (which includes amortization of intangible assets and impairment of goodwill). The term "margin" refers to an amount as a percentage of revenue. The terms "earnings from operations", "operating earnings", "margin", "operating loss", "operating results", "operating margin", "EBITDA", "Order Bookings" and "Order Backlog" do not have any standardized meaning prescribed within Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies. Operating earnings and EBITDA are some of the measures the Company uses to evaluate the performance of its segments. Management believes that ATS shareholders and potential investors in ATS use non-GAAP financial measures such as operating earnings and EBITDA in making investment decisions about the Company and measuring its operational results. A reconciliation of EBITDA to total Company revenue and earnings from operations for the first quarter of fiscal 2009 and 2008 is contained in the MD&A. EBITDA should not be construed as a substitute for net income determined in accordance with GAAP. Order Bookings represent new orders for the supply of automation systems and products that management believes are firm. Order Backlog is the estimated unearned portion of ASG revenue on customer contracts that are in process and have not been completed at the specified date.
ASG first quarter revenue was 32% higher than a year ago, reflecting higher Order Bookings generated in fiscal 2008 over fiscal 2007 and the resulting higher Order Backlog entering the first quarter of fiscal 2009, compared to the Order Backlog levels entering the same period of fiscal 2008.
By industrial market, healthcare revenue increased 42% year over year, reflecting higher Order Backlog levels entering the quarter compared to a year earlier. Healthcare continues to be a strong market for ASG, particularly within North America. The 41% increase in computer-electronics revenues reflects increased Order Backlog entering the first quarter compared to a year ago, driven primarily by customer programs based in the United States. Revenue generated in the energy market increased by 80% based on growth in solar industry Order Bookings during the fourth quarter of fiscal 2008 and strong revenue from the nuclear industry. The 12% decline in automotive revenue compared to a year ago reflects the ongoing challenges in the North American automotive parts market. "Other" revenues increased 19% year over year from customers in the industrial products industry.
During the first quarter, the Company changed the name of its Repetitive Equipment Manufacturing division to Automation Products Group or "APG". Management believes the new name better reflects APG's business model to deliver customer value through global supply chain management, continuous cost reductions and product performance improvement. APG revenue was $25.9 million in the first quarter of fiscal 2009, compared to $10.9 million in the first quarter last year.
Foreign exchange negatively impacted ASG revenues by an estimated $7.5 million compared to the first quarter of fiscal 2008, primarily reflecting a stronger Canadian dollar relative to the US dollar.
Fiscal 2009 first quarter earnings from operations were $10.3 million (operating margin of 7%) compared to earnings from operations of $0.6 million (operating margin of 1%) in the first quarter of fiscal 2008. Earnings from operations improved in all geographic regions and reflected the 32% increase in revenues, cost reductions implemented during the fourth quarter of fiscal 2008 and improved program management. During the first quarter, the Company completed the previously-announced closures of its Michigan and Thailand facilities. Incremental costs of $0.1 million associated with these closures were incurred in the first quarter. Fiscal 2008 first quarter earnings from operations included severance costs of $2.1 million.
Foreign exchange negatively impacted ASG first quarter earnings from operations by an estimated $2.6 million compared to the first quarter of fiscal 2008, primarily reflecting a stronger Canadian dollar relative to the US dollar.
ASG Order Bookings
ASG Order Bookings were $169 million, 16% higher than in the first quarter of fiscal 2008 and included Order Bookings of $24 million and $17 million respectively with two new solar industry customers. Order Bookings in the first six weeks of the second quarter of fiscal 2009 were $62 million.
At June 30, 2008, ASG Order Backlog was $258 million, 19% higher than at June 30, 2007. Year over year, Order Backlog increased 293% in energy and 18% in "other" markets. The increase in energy Order Backlog reflects the Company's strategy to pursue opportunities in the nuclear and solar industries and reflects the aforementioned solar industry Order Bookings. This growth was partially offset by decreases of 39% in healthcare, 12% in computer-electronics and 13% in automotive. Declines in healthcare and computer-electronics Order Backlog reflect the lower Order Bookings in North America and Asia during the quarter compared to the prior year. Included in healthcare Order Backlog a year ago was a U.S. $14 million Order Booking secured at the end of the first quarter and a U.S. $12 million Order Booking which was subsequently cancelled during the second quarter of fiscal 2008. Automotive Order Backlog reflects continued lower Order Bookings in the North American automotive market during the quarter compared to the prior year.
Automation Systems Group Outlook
The outlook for ASG expressed in the fiscal 2008 annual MD&A remains largely unchanged. Continued strong Order Bookings during the first quarter, particularly in the energy sector, have lead to record levels of Order Backlog. Initiatives taken during the fourth quarter to improve program management and reduce costs have started to positively impact operating performance, however, other initiatives to improve core operations and change the ASG approach to market are not anticipated to significantly further improve operating performance until the second half of fiscal 2009 and into fiscal 2010. Management expects to complete a strategic review of ASG divisions during the second quarter of fiscal 2009. This review is expected to result in changes to the number, scope and "character" (core competencies and markets served) of divisions globally. Management expects the improved core operating profitability from the aforementioned actions will be partially offset by implementation costs, as previously disclosed in the third quarter of fiscal 2008 (see Consolidated Results from Operations). However, these measures are expected to improve ASG operating performance compared to fiscal 2008.
Management continues to believe that the long-term fundamental market demand for automation remains strong. However, the strength of the Canadian dollar, ongoing restructuring within the North American manufacturing sector and the broader deterioration in the North American economy is expected to present the Company's Canadian and U.S. operations with challenges during fiscal 2009.
Photowatt Technologies fiscal 2009 first quarter revenue was $69.3 million, 45% higher than in the first quarter of fiscal 2008. Higher revenues primarily reflected an increase in total megawatts ("MWs") sold at Photowatt France to 13.8 MWs from 10.7 MWs in the same period a year ago. Growth in MWs sold resulted from increased cell efficiency and increased ingot, wafer and cell production throughput compared to the same period a year ago, particularly with UMGSi products. Revenue from the sale of module systems ("Systems") increased to $13.3 million from $3.9 million in the first quarter of fiscal 2008. Systems include modules, combined with installation kits, solar power system design and/or other value added services. Average selling prices per watt in the first quarter of fiscal 2009 were consistent with the prior year.
Foreign exchange positively impacted Photowatt France first quarter revenues by an estimated $4.2 million on the translation of Photowatt France revenues from Euros to Canadian dollars, reflecting the strengthening of the Euro against the Canadian dollar.
Fiscal 2009 first quarter earnings from operations for Photowatt France were $5.6 million (operating margin of 8%), compared to a loss from operations of $0.4 million (negative operating margin of 1%) in the first quarter of fiscal 2008. Photowatt France's earnings from operations includes approximately $0.2 million of costs related to the investment in the PV Alliance ("PVA"), a joint venture involving Photowatt France, EDF ENR Reparties ("EDF"), a partially owned subsidiary of Electricité de France, and CEA Valorisation ("CEA"). PVA includes Lab-Fab, a research initiative to improve cell efficiencies, and may eventually include manufacturing operations in France - see "Photowatt France Outlook". Photowatt France amortization expense was $3.7 million compared to $3.1 million in the first quarter of fiscal 2008 reflecting additional depreciation and amortization from Photowatt France's expansion and improvement initiatives.
Operating profitability increased during the first quarter of fiscal 2009 compared to a year ago on revenue growth and operational improvements to increase cell efficiency and manufacturing yields. Average cell efficiency for UMGSi products increased to 13.8% compared to 12.9% in the first quarter of fiscal 2008. Average cell efficiency for polysilicon products also improved to 15.6% compared to 14.8% in the first quarter of fiscal 2008. Photowatt France supplemented its internal ingot and wafer production with increased externally purchased wafers and cells to balance production. This added incremental earnings to operations, but at lower operating margins than for products manufactured using internally produced wafers and cells. Management intends to make improvements to increase margins on products produced with externally sourced materials. In the first quarter of last year, Photowatt France used recycled polysilicon in the manufacturing process, which contributed to lower cell efficiency in that quarter.
Foreign exchange positively impacted Photowatt France first quarter earnings from operations by an estimated $0.3 million compared to the first quarter of fiscal 2008, primarily reflecting a stronger Euro relative to the Canadian dollar.
"Other solar" includes Spheral Solar, Photowatt USA and inter-solar eliminations. First quarter fiscal 2009 earnings from operations included a gain of $2.0 million on the sale of silicon (not usable by Photowatt France or Spheral Solar) that had a nominal carrying value. This completed the sales transaction initiated in the fourth quarter of fiscal 2008. Also included in the first quarter fiscal 2009 earnings from operations was a gain of $3.2 million on the sale of the redundant Spheral Solar building in Cambridge, Ontario. The remaining $0.3 million of expenses primarily related to the wind-down and closure of the Spheral Solar facility and other clean-up and equipment decommissioning costs. Included in first quarter fiscal 2008 loss from operations was a $0.3 million loss from operations from the now closed Photowatt USA division, a $1.3 million loss from operations from the now halted Spheral Solar research initiative and $0.8 million of solar corporate costs and inter-solar eliminations.
Photowatt France Outlook
The outlook for Photowatt France expressed in the fiscal 2008 annual MD&A remains largely unchanged. With respect to fundamental demand, global electricity usage is expected to increase, which management believes provides a positive long-term outlook for solar energy businesses. Countries in which Photowatt France sells products such as Germany, Spain, France and Italy have significant government subsidy programs for solar power. Certain jurisdictions, such as Spain and Germany, have subsidy programs that are designed to decline over time. Management believes the solar industry will continue to be impacted by these trends over the long-term.
In the short term, Photowatt France is expected to continue to face the industry-wide issues associated with supply of polysilicon and lower average selling prices per watt than in fiscal 2008, particularly in the latter half of the fiscal year. UMGSi products were developed by Photowatt France as an alternative to polysilicon with the objective of creating a competitive advantage, and now account for the majority of products being manufactured by Photowatt France. The operational focus is to increase the cell efficiency and reduce the cost per watt of manufacturing UMGSi modules.
In the first quarter of fiscal 2009, management initiated the previously announced euro 20 million investment to expand capacity in the existing facility and reduce manufacturing costs. The Company has committed to approximately euro 17 million of equipment, of which approximately euro 3 million has been installed and the remaining euro 14 million is expected to be received and installed during the second and third quarters of fiscal 2009. In addition, Photowatt France intends to invest a further euro 4 million in automation systems, which are being designed and built by the Company's ASG segment, to improve the production process and increase manufacturing yields. The benefits of these investments are expected to begin positively impacting operating performance during the fourth quarter of fiscal 2009.
Photowatt France continues to advance the PVA with its partners. Facilities are now being prepared and equipment has been ordered in preparation for a 25 MW cell line to research cell efficiency improvements. The cell line is expected to be completed during the second half of fiscal 2010. Initial research activities are expected to begin during the latter half of fiscal 2009, and are anticipated to be largely funded by French subsidies. Photowatt France's direct investment in the PVA is expected to be less than euro 10 million, and have a payback period of approximately 2 years.
Subsequent to the end of the first quarter, the Company formalized a purchase agreement for the supply of a further 1,900 tonnes of UMGSi over the next three and a half years (see "Contractual Obligations"). Under the terms of the purchase agreement, deliveries will begin immediately and extend through December 2011. This purchase agreement formalizes an existing successful relationship Photowatt France has had with this supplier for the past year.
Management expects the recent improvements in cell efficiency and throughput, along with action plans for the remainder of fiscal 2009, will positively impact Photowatt France's operating earnings compared to fiscal 2008. Second quarter fiscal 2009 operating performance is expected to be negatively impacted by the usual four week Photowatt France factory shutdown, which is expected to decrease output and slow-down the rate of cell efficiency improvements in the second quarter.
As Photowatt France continues to make progress on improving profitability, increasing utilization of the current facility and securing appropriate silicon supply, management intends to begin the process of evaluating strategic alternatives to separate Photowatt France from the Company.
Consolidated Results from Operations
In fiscal 2008, the Company determined that PCG was not strategic to the growth of the Company. In the fourth quarter of fiscal 2008, the Company committed to a plan to sell the operating assets and liabilities of PCG. Accordingly, the results of operations and financial position of this business have been segregated and presented separately as discontinued operations in the interim consolidated financial statements. The remaining discussion and analysis has been prepared on a continuing operations basis.
During the third quarter of fiscal 2008, management estimated that the initiatives to improve operating performance may cost approximately $30 million. The Company has now incurred $15.9 million of such costs. In the first quarter, costs incurred in this respect included PCG operating losses of $2.1 million, costs of $0.1 million related to the closure of ASG's Michigan and Thailand facilities and costs of $0.3 million related primarily to the wind-down of Spheral Solar. Management more than offset these costs through the sale of the Spheral Solar building (net cash proceeds of $16.0 million, gain on sale of $3.2 million), and the sale of silicon not usable by Spheral Solar or Photowatt France ($18.8 million during the fourth quarter of fiscal 2008 and first quarter of fiscal 2009). To offset a portion of the remaining costs anticipated to be incurred over the next several quarters, management intends to dispose of other redundant and non-core assets. The payback period on the costs of these operational improvements is expected to be less than one year.
Revenue. At $212.1 million, consolidated revenue from continuing operations was 36% higher than a year ago. The increase in revenues was driven through a 32% increase in ASG revenues and a 45% increase in Photowatt Technologies revenues. The estimated effect on revenue of changes in effective foreign exchange rates was a decrease in revenue of $3.3 million for the three months ended June 30, 2008 compared to the same period of the prior year, primarily reflecting the translation of revenues earned by the Company's U.S.-based divisions and offset by the translation of revenues earned by the Company's European-based divisions.
Consolidated earnings from operations. For the three months ended June 30, 2008, consolidated earnings from operations was $16.3 million, compared to a loss from operations of $6.8 million a year ago. Fiscal 2009 first quarter performance reflected: operating earnings of $10.3 million at ASG (operating earnings of $0.6 million a year ago); Photowatt Technologies operating earnings of $10.5 million (operating loss of $2.4 million a year ago); and inter-segment eliminations and corporate expenses of $4.5 million ($4.9 million of costs a year ago).
Selling, general and administrative ("SG&A") expenses. For the first quarter of fiscal 2009, SG&A expenses decreased 2% or $0.4 million to $21.4 million compared to the respective prior year period. The Company incurred higher professional fee costs of $0.4 million in the first quarter related to the Credit Agreement signed in the first quarter of fiscal 2009 (see "Liquidity, Cash Flow and Financial Resources"). In addition, higher profit sharing and employee performance incentives on increased earnings in the first quarter of fiscal 2009 were offset by lower severance costs, which were $2.9 million in the first quarter of fiscal 2008.
Gain on sale of silicon. During the first quarter of fiscal 2009, the Company completed delivery to a third party of silicon that was not usable by Photowatt France or Spheral Solar. The silicon had a nominal carrying value and the Company recognized a gain of $2.0 million on the sale.
Gain on sale of building. During the first quarter of fiscal 2009, the Company completed the sale of the redundant Spheral Solar building in Cambridge, Ontario for net proceeds of $16.0 million. A net gain of $3.2 million was recognized on the sale.
Stock-based compensation cost. For the first quarter, stock-based compensation expense increased to $0.7 million from $0.6 million a year earlier primarily reflecting the issuance of employee stock options offset by cancellations.
The expense associated with the Company's performance-based stock options is recognized in income over the estimated assumed vesting period at the time the stock options are granted. Upon the Company's stock price trading at or above a stock price performance threshold for a specified minimum number of trading days within a fiscal quarter, the options vest. When the performance-based options vest, the Company is required to recognize all previously unrecognized expenses associated with the vested stock options in the period in which they vest.
Interest expense and interest income. The Company earned net interest income of $0.5 million in the first quarter of fiscal 2009 compared to interest expense of $0.5 million in the first quarter of fiscal 2008. The increase in net interest income is primarily due to lower usage of the Company's credit facilities and higher cash balances maintained through the first quarter of fiscal 2009 compared to the same period a year ago. Interest expense allocated to PCG and included in discontinued operations was $0.7 million in the first quarter of fiscal 2009 (first quarter of fiscal 2008 - $0.7 million) reflecting debt attributable to this segment.
Provision for income taxes. The Company's effective income tax rate differs from the combined Canadian basic federal and provincial income tax rate of 33.5% (first quarter fiscal 2008 - 36.1%) primarily because of the utilization of unrecognized loss carryforwards in Canada and parts of Europe. The Company does not currently recognize the benefit of tax losses in Canada or parts of Europe on its balance sheet, however, these losses are available to reduce current and future taxable income in these jurisdictions.
Net income (loss) from continuing operations. For the first quarter of fiscal 2009, net income from continuing operations was $15.0 million (19 cents earnings per share basic and diluted) compared to net loss from continuing operations of $7.1 million (12 cents loss per share basic and diluted) a year ago.
Loss from discontinued operations, net of tax. The loss from discontinued operations in the first quarter of fiscal 2009 was $2.1 million compared to $1.9 million in the first quarter of fiscal 2008. See Note 5 to the interim consolidated financial statements for further details on the net loss from discontinued operations.
Net income (loss). For first quarter of fiscal 2009, net income was $12.9 million (17 cents earnings per share basic and diluted) compared to a net loss of $8.9 million (15 cents loss per share basic and diluted) for the same period last year.
Year-over-year changes in foreign exchange rates decreased first quarter consolidated revenues by an estimated $3.3 million compared to the first quarter of fiscal 2008. The decrease was primarily related to a weaker U.S. dollar relative to the Canadian dollar, which was partially offset by a stronger Euro relative to the Canadian dollar. Changes in foreign exchange rates decreased consolidated earnings from operations by an estimated $2.3 million compared to the first quarter of fiscal 2008 due to the aforementioned foreign currency changes from last year.
Liquidity, Cash Flow and Financial Resources
Cash balances, net of bank indebtedness and long-term debt, at June 30, 2008 increased $3.5 million compared to March 31, 2008. The change in the net cash balance was largely a result of cash inflows from the sale of the redundant Spheral Solar building and cash flow from operations before the change in non-cash working capital, which more than offset increased working capital and investments in property, plant and equipment. The Company invested $7.0 million in property, plant and equipment in the first quarter of fiscal 2009, $5.3 million of which was invested in Photowatt France.
The Company's investment in non-cash working capital increased by $21.9 million from March 31, 2008 to June 30, 2008. Consolidated accounts receivable increased 9%, driven primarily by increased revenues in the first quarter. Consolidated net construction-in-process was consistent with the balance at March 31, 2008 despite the increase in ASG revenues. The Company actively manages its accounts receivable and net construction-in-process balances through billing terms on long-term contracts and by focusing on improving collection efforts. Inventories were 8% higher than at March 31, 2008, driven by APG's investment in inventories to meet the requirements for new contracts won in the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009. Deposits and prepaid expenses increased 31% on higher deposits on long lead-time materials for automation systems programs and silicon deposits that were re-classified from long-term to current as they are expected to be consumed over the next year. Accounts payable increased 3% on higher purchases during the quarter.
No stock options were exercised during the first quarter of fiscal 2009. At August 8, 2008 the total number of shares outstanding was 77,277,155.
During the first quarter of fiscal 2009, the Company established a new long-term primary credit facility (the "Credit Agreement") with total credit facilities of up to $85 million, comprised of an operating credit facility of $40 million which, after the Company has met certain conditions, shall increase by $5 million monthly increments up to $65 million and a letter of credit facility of up to $20 million for certain purposes. The operating credit facility is subject to restrictions regarding the extent to which the outstanding funds advanced under the facility can be used to fund certain subsidiaries of the Company. The Credit Agreement, which is secured by security on the assets, including real estate, of the Company's North American legal entities and a pledge of shares and guarantees from certain of the Company's legal entities, is repayable in full on October 31, 2009.
The operating credit facility is available in Canadian dollars by way of prime rate advances, letter of credit for certain purposes and/or bankers' acceptances and in U.S. dollars by way of base rate advances and/or LIBOR advances. The interest rates applicable to the operating credit facility are determined based on certain financial ratios. For prime rate advances and base rate advances, the interest rate is equal to the bank's prime rate or the bank's U.S. dollar base rate in Canada, respectively, plus 1.25% to 2.25%. For bankers' acceptances and LIBOR advances, the interest rate is equal to the bankers' acceptance fee or the LIBOR, respectively, plus 2.25% to 3.25%.
Under the Credit Agreement, the Company shall pay a standby fee on the unadvanced portions of the amounts available for advance or draw-down under the credit facilities at a rate of 0.5% per annum.
The Credit Agreement is subject to a debt leverage test, a current ratio test, and a cumulative EBITDA test. Under the terms of the Credit Agreement, the Company is restricted from encumbering any assets with certain permitted exceptions. The Credit Agreement also restricts the payment of dividends and the disposition of certain assets. The Company is in compliance with these covenants and restrictions.
The Company also has a secondary credit facility comprised of outstanding amounts under short term unsecured credit facilities available in Euro totaling 16 million Euro.
The Company's total debt to total equity ratio at June 30, 2008 was 0.04:1. At June 30, 2008 the Company had $42.8 million of unutilized credit available under existing operating and long-term credit facilities.
ATS revenue and operating results are generally lower in the second quarter of each fiscal year (three months ended September 30th) due to the summer plant shutdown at Photowatt France.
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, 2008 found at www.sedar.com. The Company's off balance sheet arrangements consist of operating lease financing related primarily to facilities and equipment.
In August 2008, the Company entered into a commitment to purchase 1,900 tonnes of UMGSi commencing immediately through to December 31, 2011. Advance payments of U.S. $1.6 million are required, with U.S. $0.9 million being transferred from an earlier deposit with this silicon supplier, and will be applied against future shipments.
Changes in Accounting Policies
Effective April 1, 2008, the Company adopted new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3031 "Inventories". The standard provides guidance on the types of costs that can be capitalized and requires reversal of previous inventory write-downs if economic circumstances have changed to support the higher inventory values. There was no impact on the valuation of inventory as at April 1, 2008. Additional disclosure has been provided in Note 4 to the interim consolidated financial statements.
Future Accounting Changes
CICA Handbook Section 3064, "Goodwill and Intangible assets" establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to initial recognition and provides guidance on the recognition and measurement of internally developed intangible assets. This standard is effective for interim and annual financial statements for the Company's reporting period beginning on April 1, 2009. The Company is currently evaluating the impact of adoption of this new section.
The CICA's Accounting Standards Board has announced that Canadian publicly accountable enterprises will adopt International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board effective January 1, 2011. IFRS will require increased financial statement disclosures. Although IFRS uses a conceptual framework similar to Canadian GAAP, differences in accounting policies will need to be addressed. The Company is currently assessing the impact of this announcement.
Controls and Procedures
In its annual MD&A dated June 18, 2008 and for the fiscal year ended March 31, 2008, the Company reported that it had identified certain weaknesses in the design of internal controls over financial reporting. The Company, with the assistance of external specialists, is developing remediation plans for the identified controls deficiencies, and has commenced with certain elements of the remediation plans. During the first quarter of fiscal 2009, the Company again performed a number of additional financial review procedures in an effort to mitigate the risk of undetected material errors in the Company's interim consolidated financial statements and disclosures. During the three months ended June 30, 2008, there have been no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
Note to Readers: Forward-Looking Statements
This management's discussion and analysis of financial conditions, and results of operations of ATS for the three months ended June 30, 2008 contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of ATS, or developments in ATS's business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Forward-looking statements include all disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. Forward-looking statements may also include, without limitation, any statement relating to future events, conditions or circumstances. ATS cautions you not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made. Forward-looking statements relate to, among other things: management's focus for fiscal 2009 being to stabilize ATS and improve operating performance; management's intention to make improvements in order to increase margins on solar products produced with externally sourced materials; outlook for ASG and Photowatt France as expressed in 2008 annual MD&A; anticipated timing of impact of improvement initiatives; timing and anticipated changes associated with ASG strategic review; management's belief with respect to long term market demand for automation; potential external economic challenges during fiscal 2009; management's expectations with respect to global electricity usage; impact of government solar subsidy programs; continuing industry issues with supply of polysilicon and lower average selling prices per watt for solar products; Photowatt France operational focus being to improve cell efficiency and cost per watt; timing, dollar amount, and impact of equipment purchases at Photowatt France; timing, cost, and payback associated with PVA-related facility and research activities and availability of government subsidies therefor; impact of recent cell efficiency and throughput improvements; impact of annual Photowatt France shutdown; management's intention to begin the process of evaluation of strategic alternatives to separate Photowatt France from ATS; management's intention to dispose of certain redundant and non-core assets; expected pay-back period related to operational improvements. The risks and uncertainties that may affect forward-looking statements include, among others; general market performance including capital market conditions; economic market conditions; impact of factors such as health of automotive suppliers, financial failure of customers, increased pricing pressure and possible margin compression; foreign currency and exchange risk; the effect of the strength of the Canadian dollar; performance of the market sectors that ATS serves; extent of market demand for solar products; successful implementation of improvement initiatives at ASG and Photowatt France and achievement of intended outcomes within the expected timeframe; that some or all of the trends towards automation that ATS believes are attractive dissipate or do not result in increased demand for automation; that multinational companies withdraw from global manufacturing for business, political, economic or other reasons; the availability of government subsidies for solar products; political, labour or supplier disruptions in manufacturing and supply of silicon; inability to finalize strategic partnerships or alliances to provide for silicon supply; reversal of current silicon supply arrangements and negotiation of new supply arrangements; inability of Photowatt France or PVA to obtain grants to fund research and development; potential inability of Lab-Fab to achieve improvements in cell efficiency, including problems with the technology or commercialization thereof; slow-down in progress being made with the efficiency of UMGSI cells; that planned factory improvements at Photowatt France are unsuccessful or delayed; ability to finalize beneficial agreements needed to effectively implement Lab-Fab and ability to properly manage the Lab-Fab relationship; the development of superior or alternative technologies to those developed by ATS; the success of competitors with greater capital and resources in exploiting their technology; market risk for developing technologies; risks relating to legal proceedings to which ATS is party; exposure to product liability claims of Photowatt Technologies; risks associated with compliance with existing and new legislation; risks associated with greater than anticipated tax liabilities or expenses; management's ability to identify purchasers for redundant assets; and other risks detailed from time to time in ATS's filings with Canadian provincial securities regulators. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and ATS does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change.
For further information
Maria Perrella, Chief Financial Officer
Carl Galloway, Vice-President and Treasurer
Source: ATS Automation Tooling Systems Inc.