We have been quite pleased with the progress at ATS Automation’s ASG (Automation Systems Group) division.  Although revenue and new order bookings have been declining, the improvement in operation margin, both year-over-year and sequentially, has been dramatic.  Specifically, the EBITDA (earnings before interest, taxes, depreciation and amortization) margin in the most recent quarter was 15.8% compared to 10.9% a year ago.  For the first six months of fiscal 2010, the EBITDA margin improved to 15.1% from 9.8% in the first half of fiscal 2009.  On a dollar basis, EBITDA increased to $32.0 million in the first six months of fiscal 2010 compared to $28.3 million in the comparable period a year ago.  We are watching new order bookings closely and hope to see them pick up sometime in calendar 2010.

We are also becoming more optimistic regarding the Company’s Photowatt division.  Management has been diligently preparing Photowatt to operate as a standalone entity and a catalyst has emerged that could accelerate this eventuality.  On September 24, 2009, the Ontario Government announced the Ontario Green Energy Act, which introduced feed-in-tariffs and domestic content rules for alternative energy producers.  In response, ATS Automation established Photowatt Ontario Inc. as part of the Company’s plan to capture share in the Ontario solar energy market.  As the Company’s press release described, “ATS is uniquely positioned, with over one million square feet of Ontario-based manufacturing, more than 900 local employees, substantial automation and project expertise and extensive global solar capabilities and experience to be a natural solar market leader”.  These developments can only be positive for Photowatt’s valuation within ATS Automation Tooling Systems Incorporated.

ATS Automation has just reported results for the third quarter of fiscal 2010, ended December 27, 2009.  Although revenue and earnings continued to decline, we believe that the bottom has been put into place.  Sequential increases will eventually be followed by year over year growth.  Given the dramatic improvement in the Company’s underlying profitability, we believe that even a relatively small up tick in revenue will result in substantial earnings torque.

The Company’s ASG division reported revenue of $78.6 million compared to $97.0 million in the second quarter, down from $144.1 million a year ago.  EBITDA was $10.0 million compared to $15.3 million in the second quarter and $16.8 million a year ago.  However, when we adjust the results for severance and restructuring charges, we see that the EBITDA margin in the current quarter of 15.3% compares favourably to the 15.8% EBITDA margin in the second quarter and 13.8% in the third quarter a year ago.  Importantly, new order bookings were $92 million compared to $71 million in the second quarter.  This implies a book to bill ratio of 1.2 in the current quarter, which supports our view that the top line is poised to grow sequentially.  Anthony Caputo summed it up nicely by saying, “based on the activity we are seeing now in ASG, I believe that the order bookings deterioration we have experienced has moderated and growth should slowly follow”.

The Company’s PhotoWatt division reported revenue of $59.7 million compared to $51.5 million in the second quarter, down from $79.7 million a year ago.  EBITDA was $5.7 million compared to EBITDA of $4.7 million in the second quarter and $11.7 million in the third quarter of last year.  Looking past the quarterly numbers, management has entered into numerous discussions with customers, manufacturing and development partners, financial institutions, investors and governments in order to create and exploit additional opportunities for solar products and projects.  Perhaps most importantly, management indicated that they “intend to continue to position PhotoWatt Technologies for separation”.  On the conference call, management said that they have formally begun this process, however the form and timing of any potential separation remains uncertain.

In terms of financial strength, ATS Automation is in fine shape.  The Company generated just over $17 million of free cash flow in the quarter and net cash now totals $148.5 million.  We believe that management is actively examining potential acquisitions that will either strengthen the Company’s market position in one or more key segments or add some form of innovative technology.  As the economic recovery plays out, we believe that all of these developments will ensure that ATS Automation can generate substantially improved normalized net earnings.

June 4, 2010

ATS Automation has just reported results for its fourth quarter and 2010 fiscal year.  In all candour, the operating performance of the Company’s two divisions, especially in the fourth quarter, raised mixed feelings.  However, fiscal reporting is always backwards-looking and we believe that management’s value creation strategy is continuing to progress nicely.

On a positive note, the Company’s ASG division reported very solid results despite declining sales.  Revenue in the fourth quarter totaled $91.6 million compared to $78.6 million in the third quarter and $154.3 million a year ago.  Although revenue fell 40% on a year over year basis, management was able to boost the operating margin to 15% from 13%, which was an impressive accomplishment.  They pointed to various cost reductions, supply chain savings and improved program management as driving factors.

We were also impressed with the fact that the ASG division’s book to bill ratio remained above 1.0.  Essentially, when order intake is greater than reported revenue in a given period, it bodes well for future revenue growth.  Specifically, order bookings were $105 million in the fourth quarter and total backlog increased to $209 million at year end.  Further, over the first eight weeks of fiscal 2011, the Company booked $50 million in new orders.  These are encouraging signs but management did suggest that orders would lag the pace of the nascent economic recovery, due to the nature of the automation systems business.

Conversely, it was more difficult to find a silver lining in Photowatt’s fourth quarter results.  Revenue was $48.6 million, down 19% from the third quarter of fiscal 2010 but slightly higher than $48.2 million of sales a year ago.  Total megawatts sold decreased 1% to 12.7 MWs from 12.8 MWs sold in the third quarter of fiscal 2010, but were 37% higher than the 9.3 MWs sold in the fourth quarter of fiscal 2009.  Unfortunately, this implies that the division is still struggling with a lack of pricing power.  Further, the Company booked a $40.3 million charge to write-down inventory to net realizable value.  Excluding this charge Photowatt was close to breakeven at the operating level in the fourth quarter of fiscal 2010.

We would have been more disappointed with the division’s results if the press release did not contain the following statement: “Subsequent to year-end, the Company initiated a formal process to separate Photowatt and engaged advisors to assist the Company in identifying and evaluating strategic alternatives”. Accordingly, we believe that preparation for the eventual sale or spin-out of the Photowatt division necessitated this write-down.  Additional optimism is warranted due to Photowatt’s exposure to business opportunities related to Ontario’s Green Energy Act and the associated renewable energy feed-in-tariffs.  In fact, the Company holds a 50% interest in a joint venture that has secured approvals for orders totaling 65 MWs related to large scale, renewable energy applications in Ontario.

Finally, management had some positive comments on the acquisition of Sortimat Group, which closed June 1, 2010.  Total consideration is expected to be $56.7 million, including potential future payments of up to $8.6 million subject to certain performance hurdles and milestones being reached.  We like that the Company has strengthened its presence in the healthcare sector, with Sortimat’s particular focus on specialized assembly systems for medical products and pharmaceutical dosing devices.  The importance of the healthcare segment should not be underestimated, since it was the only sector to show positive revenue growth in fiscal 2010.

Management’s efforts to separate the Photowatt division as a standalone entity compels us to look at the ATS Automation story using a sum of the parts analysis.  At five times trailing (and likely trough) EBITDA, the ASG segment could be worth $3.50 per share.  At 1.0 times trailing twelve month sales, the low end of the range for other solar companies, the Photowatt division could be worth $2.30 per share.  Adding the cash per share, net of the funds to be spent for Sortimat, of $1.05 implies an intrinsic value today of $6.85 per share.  Looking at historic sales levels and cost structure improvements, we believe that the value of the ASG division could increase to somewhere between $4.60 and $6.40 per share, which implies that ATS Automation could trade at between $8.00 and $9.75 per share in twelve to eighteen months.  Investors should therefore be well rewarded for their patience over the next year or two.

November 19, 2010

After bottoming last June at $5.46, following the release of fourth quarter and fiscal 2010 results, shares of ATS Automation had recovered to approximately $7.25 by late-October. Unfortunately, the Company’s second quarter results seem to have disappointed “the Street” and the stock has pulled back.  Despite the share price decline, the short-term financial results do not change our investment thesis or our optimism regarding the longer-term outlook for the Company.

The slide started on November 3, when ATS reported its financial results for the three and six months ended September 26, 2010.  Consolidated revenue was $162.0 million compared to $151.1 million in the first quarter and $148.2 million in the same period a year ago.  However, consolidated earnings from operations were $5.5 million compared to $9.7 million in the first quarter and $9.3 million last year.  At the bottom line, earnings per share were $0.04 compared to $0.07 in the first quarter of fiscal 2011 and $0.07 in the second quarter of fiscal 2010.  Examining the Company’s financial statements revealed two key reasons for the disappointing results.

First, although the ASG segment’s revenue increased to $117.8 million in the second quarter of 2010 from $106.6 million in the first quarter and $97.0 million a year ago, margins were weaker.  Specifically, the operating margin declined to 12% in the most recent quarter from 15% in the first quarter of the current fiscal year and 14% in the same period a year ago.  The weaker margin reflects lower levels of profitability at Sortimat, a recent acquisition.  Investors should remember that management indicated that Sortimat would have lower margins initially but would improve over time.  Despite weighing on the financial results in the quarter, we believe that the acquisition is strategically important, as it increased exposure to the growing healthcare sector.

The second source of consternation in the quarter was the performance of the Photowatt segment.  Revenue was $45.1 million compared to revenue in the first quarter of $48.8 million and $51.5 million a year ago.  The one-time sale of $12.2 million of excess raw material inventory actually mitigated an even more dramatic decline.  Management blamed lower average selling prices, lower MWs sold and a decline in system sales for the revenue shortfall.  We believe that investors should look beyond the quarter and focus on the ramp of the Company’s joint venture, PV Alliance, which received Feed-In-Tariff contracts from the Ontario Power Authority.  Importantly, the JV partner, Q-Cells Group, is one of the largest, publicly-traded photovoltaic players in the world.  Given management’s efforts to position Photowatt as a standalone entity, we believe that Q-Cells would be a natural fit for the asset at some point in the future.

June 10, 2011

In May 2011, ABC Funds liquidated the remainder of its position in ATS Automation Systems (ATA) – an investment we held for nearly two years. Although we believe the company possesses an excellent management team, demonstrated by the strong operating performance of the Automation Systems Group, repeated disappointments at PhotoWatt suggest that any strategy to maximize the value of the division could be delayed. Since ABC Funds’ initial purchase of ATA shares in August 2009, the investment generated a total return of approximately 66%, and while we believe ATA will probably generate even greater returns in the longer-term, we felt it was prudent to take profits.