ATS REPORTS THIRD QUARTER FISCAL 2011 RESULTS

TSX: ATA

CAMBRIDGE, ON, Feb. 2 /CNW/ - ATS Automation Tooling Systems Inc. ("ATS" or the "Company") today reported its financial results for the three and nine months ended December 26, 2010.

Third Quarter Summary

  • Consolidated revenues were $192.5 million compared to $162.0 million in the second quarter of the fiscal year and $138.1 million in the same period a year ago;
  • Consolidated loss from operations was $8.5 million compared to earnings from operations of $5.5 million in the second quarter of the fiscal year and earnings from operations of $4.7 million in the same period a year ago;
  • The Company recorded a $9.0 million provision related to a restructuring project at Photowatt France ("PWF") (subject to the ongoing notification and consultation process with employee works council in accordance with French law) and related legal and advisory services. The restructuring project is intended to: grow systems sales in France; reduce factory costs; and improve the supply chain;
  • Third quarter loss per share was $0.14 compared to per share earnings of $0.04 (basic and diluted) in the second quarter of the fiscal year and per share earnings of $0.04 (basic and diluted) in the same period a year ago;
  • The Company's balance sheet was strong with cash net of debt of $95.3 million at December 26, 2010;
  • On January 5, 2011, the Company completed the acquisition of the majority of Assembly & Test Worldwide Inc.'s U.S. and German-based automation and test systems businesses (collectively "ATW"); and
  • The Company made progress on the contemplated separation of Photowatt through advancing a dual track process; a potential spinoff of the Company's solar business to shareholders or a potential sale of PWF.

"Our Automation Systems Group ("ASG") performance was strong and we saw improvements in our markets, however losses at PWF negatively impacted consolidated results," said Anthony Caputo, Chief Executive Officer. "We are beginning to see the return of larger opportunities in ASG, and with recent acquisitions, continue to expand our core business. Photowatt has initiated a restructuring project designed to recover competitiveness. The Company is pursuing a clear path to prepare for the contemplated separation of Photowatt."

Financial Results

In millions of dollars,
except per share data
  3 months
ended
Dec 26, 2010
3 months
ended
Dec 27, 2009
9 months
ended
Dec 26, 2010
9 months
ended
Dec 27, 2009
Revenues Automation Systems Group $          124.7 $             78.6 $        349.1 $        290.8
Photowatt Technologies 73.0 59.7 166.9 151.3
Inter-segment (5.2) (0.2) (10.3) (3.1)
Consolidated $          192.5 $           138.1 $        505.7 $        439.0
EBITDA Automation Systems Group $            16.8 $             10.0 $          51.4 $          41.9
Photowatt Technologies               (12.8)                5.7            (8.7)            7.0
Corporate and Inter-segment elimination              (6.3)              (5.0)   (18.4)    (15.9)
Consolidated $            (2.3) $             10.7 $         24.3 $          33.0
Net income
(loss)
Consolidated $          (11.9) $               3.7 $         (2.3) $          10.1
Earnings (loss)
per share
From continuing operations
(basic & diluted)
         (0.14) $             0.04       (0.03) $          0.11

ASG Third Quarter Results

  • Revenues increased to $124.7 million in the third quarter of fiscal 2011 compared to second quarter revenues of $117.8 million and $78.6 million a year ago reflecting the addition of Sortimat and improved Order Bookings compared to the prior periods;
  • EBITDA was $16.8 million compared to $17.0 million in the second quarter of this fiscal year and $10.0 million in the same period a year ago;
  • Earnings from operations were $14.4 million (operating margin of 12%) compared to $14.5 million (operating margin of 12%) in the second quarter of this fiscal year and $8.4 million (operating margin of 11%) in the same period a year ago;
  • Period end Order Backlog was $215 million, an increase of 3% from $208 million in the second quarter of this fiscal year and up 6% from $203 million a year ago;
  • Order Bookings were 27% higher at $133 million compared to $105 million in the second quarter of fiscal 2011 and 45% higher compared to $92 million in the third quarter of fiscal 2010;
  • Order Bookings were $73 million during the first five weeks of the fourth quarter.

On the 59% year-over-year increase in revenues in the third quarter, ASG's operating margin increased to 12% from 11%, despite the inclusion of Sortimat, which had lower operating margins than other ASG operations, and incremental amortization related to identifiable intangible assets recorded on the acquisition of Sortimat. Revenues increased year over year by 19% in life sciences, 1% in computer-electronics, 146% in energy, 45% in transportation, and 263% in "other" markets (primarily consumer products). Increased volumes were partially offset by year-over-year foreign exchange rate changes which negatively impacted the translation of revenues due to the strong Canadian dollar relative to the U.S. dollar and Euro.

The addition of ATW's capability in specialized automation and test systems, customer relationships, and critical mass has enabled the launch of a transportation group within ASG.  Integration of ATW is underway with a focus on applying best practices. Until the integrations of ATW and Sortimat are complete, ASG operating margins will be negatively impacted. Sortimat's integration is progressing well with cost reductions made in the third quarter.

Photowatt Third Quarter Results

  • Revenues were $73.0 million, a 62% increase over fiscal 2011 second quarter revenues of $45.1 million and a 22% increase from $59.7 million a year ago;
  • EBITDA was negative $12.8 million compared to EBITDA of $0.9 million in the second quarter of fiscal 2011 and EBITDA of $5.7 million a year ago;
  • Loss from operations was $16.3 million compared to a loss from operations of $2.6 million in the second quarter of fiscal 2011 and operating earnings of $1.6 million a year ago;
  • Total megawatts (MWs) sold increased 64% to 16.4 MWs from 10.0 MWs in the second quarter of fiscal 2011, and were 28% higher than the 12.8 MWs sold a year ago.

Third quarter fiscal 2011 revenues included $17.4 million of revenues generated primarily from the sale of excess raw material inventory, which was sold for approximately its net book value. Excluding the revenues from raw material sales, the year-over-year decrease in revenues reflected lower average selling prices and the strong Canadian dollar relative to the Euro, which negatively impacted the translation of revenues earned at PWF. These decreases were partially offset by higher MWs sold and initial revenues generated at PWO in the third quarter of fiscal 2011. Revenues from the sale of systems decreased 17% to $31.8 million from $38.5 million a year ago. Photowatt's third quarter operating loss included a $9.0 million restructuring provision related to the restructuring project (subject to the ongoing notification and consultation process with employee works council in accordance with French law) and related legal and advisory services at PWF.  The decline in Photowatt's operating margin also reflected incremental costs incurred at PWO as well as higher operating costs incurred at Photowatt's joint venture, PV Alliance, as activity ramped-up in advance of the fourth quarter launch of its 25 MW cell line.

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 3418.

About ATS

ATS Automation provides innovative, custom designed, built and installed manufacturing solutions to many of the world's most successful companies. Founded in 1978, ATS uses its industry-leading knowledge and global capabilities to serve the sophisticated automation systems' needs of multinational customers in industries such as life sciences, computer/electronics, energy, automotive and consumer products. It also leverages its many years of experience and skills to fulfill the specialized automation product manufacturing requirements of customers. Through Photowatt, ATS participates in the growing solar energy industry. ATS employs approximately 3,000 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 and nine months ended December 26, 2010 (third quarter of fiscal 2011) is as of February 2, 2011 and 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 third quarter of fiscal 2011. The Company assumes that the reader of this MD&A has access to and has read the audited annual consolidated financial statements and MD&A of the Company for the year ended March 31, 2010 (fiscal 2010) and the unaudited interim consolidated financial statements and MD&A for the first and second quarters of fiscal 2011 and, accordingly, the purpose of this document is to provide a third quarter update to the information contained in the fiscal 2010 MD&A. These documents and other information relating to the Company, including the Company's fiscal 2010 audited annual consolidated financial statements, MD&A and annual information form may be found on SEDAR at www.sedar.com.

Notice to Reader

The Company has two reportable segments: Automation Systems Group ("ASG") and Photowatt Technologies ("Photowatt") which includes Photowatt France ("PWF") and Photowatt Ontario ("PWO").  References to Photowatt's cell ''efficiency'' means the percentage of incident energy that is converted into electrical energy in a solar cell. Solar cells and modules are sold based on wattage output.

Non-GAAP Measures

Throughout this document the term "operating earnings" is used to denote earnings (loss) from operations. EBITDA is also used and is defined as earnings (loss) from operations excluding depreciation and amortization (which includes amortization of intangible assets). The term "margin" refers to an amount as a percentage of revenues. The terms "earnings (loss) from operations", "operating earnings", "margin", "operating loss", "operating results", "operating margin", "EBITDA", "Order Bookings" and "Order Backlog" do not have any standardized meaning prescribed within Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies. Operating earnings and EBITDA are some of the measures the Company uses to evaluate the performance of its segments. Management believes that ATS shareholders and potential investors in ATS use non-GAAP financial measures such as operating earnings and EBITDA in making investment decisions about the Company and measuring its operational results. A reconciliation of operating earnings and EBITDA to total Company net income for the three and nine months ended December 26, 2010 and the three and nine months ended December 27, 2009 is contained in this MD&A (See "Reconciliation of EBITDA to GAAP Measures"). EBITDA should not be construed as a substitute for net income determined in accordance with GAAP. Order Bookings represent new orders for the supply of automation systems and products that management believes are firm.  Order Backlog is the estimated unearned portion of ASG revenues on customer contracts that are in process and have not been completed at the specified date.  A reconciliation of Order Bookings and Order Backlog to total Company revenues for the three and nine months ended December 26, 2010 and the three and nine months ended December 27, 2009 is contained in the MD&A (See "ASG Order Backlog Continuity").

AUTOMATION SYSTEMS GROUP SEGMENT

Acquisitions

Sortimat

On June 1, 2010, ATS completed its acquisition of 100% of Sortimat Group ("Sortimat").  Sortimat is a manufacturer of assembly systems for the life sciences market.  Headquartered in Germany, and established in 1959, Sortimat also has locations in Chicago and a small, 60% owned subsidiary in India. Sortimat is being integrated into the Company's ASG segment.

The Sortimat acquisition aligns with ATS's strategy of expanding its position in the global automation market and enhancing growth opportunities, particularly in strategic segments such as life sciences. The Company benefits from Sortimat's significant experience and products in advanced system development, manufacturing, handling, and feeder technologies.  This acquisition has provided ATS with the scale required to further organize its marketing and divisions into a group focused on life sciences with the objective to grow its exposure to this market segment and help customers differentiate themselves from their competitors. To integrate Sortimat and effect margin improvements, the Company has deployed people to apply best practices, command and control, and program management and to advance approach to market.

The total cash consideration paid for Sortimat was $52.2 million, which included $2.7 million of acquisition-related costs, primarily for advisory services. Potential future payments of up to $8.5 million (6.6 million Euro), which are payable subject to the achievement of milestones related to operating performance and specific management services to be provided over the next two  years, are not included in the cost of acquisition. During the three and nine months ended December 26, 2010 the Company recognized in selling, general and administrative expense $0.5 million and $1.0 million respectively related to specific management services.

ATW

On January 5, 2011, the Company completed its acquisition of the majority of Assembly & Test Worldwide, Inc.'s U.S.-based and German automation and test systems businesses (collectively "ATW").  ATW is a manufacturer of assembly and test systems, with capability in the transportation, life sciences and energy segments.

The total cash consideration paid for ATW pending post-closing adjustments was $18.0 million, which included acquisition-related costs, primarily for advisory services, of $0.6 million.

The cash consideration of the purchase price along with transaction costs were funded with existing cash on hand.  This acquisition will be accounted for as a business combination with ATS as the acquirer of ATW.  The purchase method of accounting will be used and the earnings will be consolidated from the acquisition date.  The Company is in the process of estimating the fair values of assets acquired and liabilities assumed at the date of acquisition, including goodwill and identifiable intangible assets.

ASG Revenues

(In millions of dollars. Figures include intersegment revenues)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
Revenues by industry        
 Life sciences $           49.1    $         41.2 $          140.0 $         119.6
 Computer-electronics 9.3 9.2                32.1                25.4
 Energy 34.2    13.9         107.5               89.1
 Transportation 13.2    9.1               34.7               34.3
 Other 18.9    5.2               34.8               22.4
Total ASG revenues $         124.7 $         78.6 $         349.1 $         290.8

Third Quarter

ASG third quarter revenues were 59% higher than for the same period a year ago; primarily as a result of an incremental $20.9 million of revenues earned by Sortimat and a 45% increase in Order Bookings compared to the third quarter a year ago. Quarter-over-quarter foreign exchange rate changes negatively impacted the translation of revenues derived at foreign operations, due to the strong Canadian dollar relative to the U.S. dollar and Euro.

By industrial market, revenues from life sciences increased 19% year over year as a result of the incremental revenues earned by Sortimat. Revenues from computer-electronics remained consistent while energy market revenues increased 146% reflecting higher Order Backlog entering the third quarter compared to a year ago. The 45% improvement in transportation revenues compared to a year ago reflected higher Order Bookings in the first three quarters of the year. "Other" revenues increased 263% year over year due primarily to higher consumer products revenues.

Year-to-date

ASG revenues for the nine months ended December 26, 2010 increased 20% compared to the corresponding period of fiscal 2010. The increase reflected Sortimat's year-to-date contribution to revenues of $44.5 million, as well as higher Order Bookings throughout the first three quarters of fiscal 2011 compared to the same period in fiscal 2010. Year-over-year foreign exchange rate changes negatively impacted the translation of revenues derived at foreign operations, due to the strong Canadian dollar relative to the U.S. dollar and Euro.

By industrial market, year-to-date revenues from life sciences, computer-electronics and energy increased 17%, 26% and 21% respectively compared to the corresponding period a year ago. Revenues in transportation and "other" markets also increased 1%, and 55% respectively compared to the same period a year ago.

ASG Operating Results

(In millions of dollars. Figures include intersegment earnings)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
         
Earnings from operations $             14.4 $             8.4  $ 44.8       $ 36.7
Depreciation and amortization 2.4 1.6 6.6 5.2
EBITDA $             16.8 $           10.0       $ 51.4       $ 41.9

Third Quarter

Fiscal 2011 third quarter ASG earnings from operations were $14.4 million (operating margin of 12%) compared to earnings from operations of $8.4 million (operating margin of 11%) in the third quarter of fiscal 2010.  Higher earnings from operations reflected the increase in revenues in the third quarter of fiscal 2011 compared to the corresponding period a year ago. Higher earnings from operations were partially offset by the inclusion of Sortimat, which had lower operating margins than ASG's other operations. Third quarter fiscal 2011 earnings from operations included severance and restructuring expenses of $0.5 million compared to $2.0 million in the same period a year ago.

ASG depreciation and amortization expenses increased to $2.4 million in the third quarter of fiscal 2011 compared to $1.6 million in the same period a year ago. The increase in fiscal 2011 third quarter depreciation and amortization primarily related to a $0.9 million increase in amortization on the identifiable intangible assets recorded on the acquisition of Sortimat.

Year-to-date

For the nine months ended December 26, 2010, ASG earnings from operations were $44.8 million (operating margin of 13%) compared to earnings from operations of $36.7 million (operating margin of 13%) in the corresponding period a year ago. The improvement in fiscal 2011 earnings from operations resulted from higher revenues, partially offset by lower profitability in Sortimat. Included in fiscal 2010 earnings from operations were $5.7 million of severance and restructuring expenses and the benefit of a $2.5 million incremental investment tax credit. Excluding these prior year items, ASG operating earnings for the first three quarters of fiscal 2010 were $39.9 million (operating margin of 14%).

ASG depreciation and amortization expenses were $6.6 million in the first nine months of fiscal 2011 compared to $5.2 million in the same period a year ago. The increase in fiscal 2011 depreciation and amortization primarily related to a $2.0 million increase in amortization on the identifiable intangible assets recorded on the acquisition of Sortimat.

ASG Order Bookings

Fiscal 2011 third quarter Order Bookings were $133 million, 45% higher than the third quarter of fiscal 2010, reflecting improved Order Bookings in transportation, life sciences and energy and the addition of Sortimat's businesses. Order Bookings in the first five weeks of the fourth quarter of fiscal 2011 were $73 million.

ASG Order Backlog Continuity

(In millions of dollars)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
Opening Order Backlog $          208 $          197       $   209       $   255
Revenues              (125)              (79) (349) (291)
Order Bookings        133        92 323 260
Order Backlog adjustments1                  (1) (7) 32 (21)
Ending Order Backlog $          215 $          203 $   215 $   203

1 Order Backlog adjustments include foreign exchange and cancellations and incremental Order Backlog of $26 million acquired in the first quarter with Sortimat.

Order Backlog by Industry

(In millions of dollars)

  Dec 26, 2010 Dec 27, 2009
Life sciences $             68 $             90
Computer-electronics 17 16
Energy 45 51
Transportation 53   24
Other 32   22
Total Order Backlog $           215 $           203

At December 26, 2010, ASG Order Backlog was $215 million, 6% higher than at December 27, 2009 reflecting incremental Order Backlog from Sortimat and higher Order Bookings throughout the first nine months of fiscal 2011 compared to the corresponding period in the prior year.

ASG Outlook

In the short term, management believes business investment and capital spending by customers will remain low. The general economic environment, which negatively impacted the Company throughout fiscal 2010, is recovering. Despite signs of improvement in some of ASG's customers' markets, many customers remain cautious in their approach to capital investment. Management expects that this will continue to cause volatility in Order Bookings and put pressure on revenues in the short-term. As the global economy and some of the Company's markets have shown some signs of strengthening, activity in ASG's front-end of the business has increased. Management continues to believe that increased capital spending will lag the general economic recovery as customers are hesitant to invest until their markets stabilize and/or show signs of growth.

ASG continues to maintain profitable operating margins, despite difficult market conditions and competitive pressures. Low volumes and revenues are expected to continue to present challenges to maintaining margins at current levels. Management expects that the implementation of its strategic initiatives to improve leadership, business processes and supply chain management will continue to have a positive impact on ASG operations. However, the impact of these initiatives will also be affected by current market conditions and its impact on Order Bookings and Order Backlog.

The integration of Sortimat is progressing. The new management team to lead ASG's businesses in the life sciences market is in place, with management drawn from both Sortimat and ATS. Efforts to integrate Sortimat into ASG's sales and marketing, program management, administration and command and control processes are moving ahead. Additional initiatives to reduce operating costs are being implemented. Management expects that until Sortimat is fully integrated, ASG operating margins will be negatively impacted.

The integration of ATW has been initiated with the formation of a transportation group. This acquisition will increase ASG revenues; however, similar to Sortimat, until ATW is fully integrated, ASG operating margins will be negatively impacted. ATS will target margin improvements through the application of best practices in command and control, program management, performance management and approach to market.

Management believes the Company's strong balance sheet, approach to market and operational improvements will provide a solid foundation for ASG to improve performance when the general business environment, including capital investment, stabilizes and returns to growth.

The Company's strong financial position also provides ASG with the flexibility to pursue its growth strategy. The Company is actively seeking to expand its position in the global automation market organically and through acquisition. To further this objective, management will continue to review and pursue attractive opportunities.

PHOTOWATT TECHNOLOGIES SEGMENT

Photowatt Revenues

(In millions of dollars)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
Total Photowatt revenues $           73.0 $           59.7       $ 166.9       $ 151.3

Third Quarter

Photowatt fiscal 2011 third quarter revenues were $73.0 million, 22% higher than in the third quarter of fiscal 2010. Included in the revenues earned in the three months ended December 26, 2010 was $17.4 million of revenues generated from the sale of excess raw material inventory, which was sold for approximately its net book value.

Excluding the revenues from raw material sales, Photowatt fiscal 2011 third quarter revenues were 7% lower than the corresponding period a year ago, reflecting lower average selling prices, and the strong Canadian dollar relative to the Euro, which negatively impacted the translation of revenues earned at PWF. These decreases were partially offset by a 28% increase in total megawatts ("MWs") sold to 16.4 MWs from 12.8 MWs in the same period a year ago and initial revenues generated at PWO in the third quarter of fiscal 2011. Revenues from the sale of systems decreased to $31.8 million in the third quarter of fiscal 2011 compared to $38.5 million in fiscal 2010 due primarily to lower average selling prices per watt. 

Year-to-date

Photowatt revenues for the first nine months of fiscal 2011 increased 10% compared to the same period a year ago. Higher year-over-year revenues reflected $36.7 million of revenues generated primarily from the sale of raw material inventory, which was sold for approximately its net book value.

Excluding the revenues from raw material sales, Photowatt revenues were lower by 14%. Lower revenues reflected lower average selling prices per watt, decreased systems sales of $78.1 million compared to $94.0 million a year ago and the strong Canadian dollar relative to the Euro, which negatively impacted the translation of revenues earned at PWF. These year-over-year decreases were partially offset by an increase in MWs sold to 37.8 MWs from 31.7 MWs a year ago and revenues generated at PWO which contributed incremental revenues in the third quarter of fiscal 2011.

Photowatt Operating Results

(In millions of dollars)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
         
Earnings (loss) from operations $          (16.3) $             1.6 $        (19.0) $          (5.3)
Depreciation and amortization 3.5 4.1                10.3                12.3
EBITDA $          (12.8) $             5.7 $          (8.7) $            7.0

Third Quarter

Photowatt fiscal 2011 third quarter loss from operations was $16.3 million (operating margin of negative 22%) compared to earnings from operations of $1.6 million (operating margin of 3%) for the corresponding period a year ago.  Included in third quarter fiscal 2011 loss from operations is a $9.0 million restructuring provision in relation to the restructuring project (subject to the ongoing notification and consultation process with employee works council in accordance with French law) and related legal and advisory services at PWF.  Excluding the impact of the restructuring provision, the year-over-year decline in operating results reflected the declines in average selling prices, which more than offset cost per watt savings, primarily due to set-backs in cost reduction initiatives during the transition of PWF's manufacturing to new products. Lower operating results also reflected incremental costs at PWO incurred in the ramp-up of production during the third quarter of fiscal 2011.

Operating costs from PWF's joint venture PV Alliance ("PVA") increased to $0.9 million compared to $0.2 million a year ago as activity ramped-up in advance of the launch of the PVA's 25 MW cell line. The launch of this line was delayed until the fourth quarter of fiscal 2011, due to delays in receiving manufacturing equipment.

Photowatt fiscal 2011 third quarter depreciation and amortization expenses were $3.5 million compared to $4.1 million in the third quarter of fiscal 2010, partially reflecting the stronger Canadian dollar relative to the Euro, which impacted the translation of PWF's depreciation and amortization expenses. 

Year-to-Date

Photowatt loss from operations for the nine months ended December 26, 2010 was $19.0 million (negative 11% operating margin) compared to a loss from operations of $5.3 million (negative margin of 4%) for the corresponding period a year ago.  The year-over-year decline in operating results reflected lower average selling prices and a reduction in system sales, partially offset by higher MWs sold and lower direct manufacturing costs-per-watt.  Included in fiscal 2011 operating results was $9.1 million of restructuring charges related to the restructuring project (subject to the ongoing notification and consultation process with employee works council in accordance with French law) and related legal and advisory services at PWF.  Included in last year's operating loss was a $4.7 million warranty charge related to a specific customer contract which contained an incremental performance clause beyond Photowatt's standard warranty terms.

Photowatt fiscal 2011 year-to-date loss from operations included incremental costs related to the start-up of PWO, which was initiated during the third quarter of fiscal 2010. Operating costs from PWF's joint venture PVA increased to $1.6 million compared to $0.3 million a year ago.

Photowatt depreciation and amortization expenses for the nine months ended December 26, 2010 was $10.3 million compared to $12.3 million for the corresponding period last year. The decrease reflected the stronger Canadian dollar relative to the Euro, which impacted the translation of PWF's depreciation and amortization expense.

Photowatt Outlook

Management believes that solar power is, and for the foreseeable future will be, affected by and largely dependent on the existence of government incentives. Reductions in feed-in tariffs for solar energy implemented in Germany and France and anticipated further reductions are expected to have a negative impact on average selling prices per watt. Increased industry capacity, particularly from low-cost manufacturers in Asia, is expected to further negatively impact average selling prices per watt.

In France, the government announced a moratorium on new solar installations larger than three kilowatts while the government contemplates a new regulatory regime for the industry in France. In the short-term, the moratorium could have a negative impact on PWF volumes. In the long-term, permanent reductions in feed-in tariffs and / or an annual limit on installation capacity in the French market may have a negative impact on PWF revenues.

In Ontario, PWO has secured conditional feed-in tariff approvals totalling approximately 64 MWs related to large scale renewable energy applications made by a project development joint venture, Ontario Solar PV Fields ("OSPV") in which ATS holds a 50% interest. OSPV will utilize a range of solar solutions including modules manufactured by ATS in Cambridge, Canada. OSPV is in the process of obtaining necessary joint venture partner approvals and other requisite approvals. OSPV's next steps include efforts to arrange financing and ultimate project ownership. PWO has also signed agreements with developers who are in the process of securing conditional feed-in tariff approvals for a number of projects.  PWO will provide modules and other related services to these projects. PWO is in advanced negotiations with a number of customers on module contracts. Production from the Company's 100 MW module line began in the third quarter of fiscal 2011, with production expected to ramp-up to full capacity to meet demand in early fiscal 2012.

As PWF has been facing significant competitive pressures which have negatively impacted average selling prices, it has initiated a restructuring project intended to: (i) focus on growing system sales in France; (ii) reduce manufacturing costs; and (iii) improve the global supply chain, including potentially subcontracting the assembly of solar modules to a third party. The restructuring project may result in the reduction of 195 full-time positions, partially offset by the creation of 100 new positions, 50 of which will be in the PV Alliance. PWF also expects to discontinue approximately 136 temporary positions. The total MW capacity available for sale by PWF is expected to remain generally the same. The ultimate success of such restructuring project depends on a number of factors including the support of the employees. While local management believes the contemplated actions are appropriate and would allow PWF to recover competitiveness, as always, there is ultimately no guarantee that the restructuring project and potential future actions will offset all competitive challenges. PWF continues to monitor market conditions and intends to take appropriate actions in relation to such conditions.

The Company is continuing to work on the contemplated separation of Photowatt through a dual track process; a spinoff of the Company's solar business to shareholders or a sale of PWF.

On the spinoff, management is considering and working towards a plan that would see PWF and PWO combined into a publicly-held entity and distributed to ATS shareholders. The possible transaction could take the form of a plan of arrangement whereby shareholder approval would be required and shareholders would have some choice in determining their relative levels of ownership in each entity and could be implemented prior to the end of calendar 2011. Management is working with financial, legal, tax and accounting advisors in this regard.

In parallel, management is working with independent advisors regarding a possible sale of PWF.  Discussions with interested parties have been initiated and are focused on PWF, however, PWO could form part of a transaction. Under the dual track process scenario, if an acceptable arrangement were to be made for the contemplated sale of PWF prior to a potential spinoff of the combined entities to ATS shareholders, the Company would retain PWO for a period of time and continue to operate and invest in PWO. At the appropriate time, management would then look to separate PWO.

The Company has determined it does not meet all of the criteria to classify Photowatt as assets held for sale and its results as discontinued operations in its interim Consolidated Financial Statements as at December 26, 2010. As a result, these assets continue to be classified as held and used. Once the form and timing of contemplated separation is determined, adjustments to carrying value may result, and a write-down, if any, will be recorded in the period determined.

Whether the contemplated separation of PWF takes the form of a sale or a spinoff, a prior employee works council notification and consultation will be required under employment law in France, with a view to obtaining an opinion of the works council, which will be non-binding.

Consolidated Results from Operations

(In millions of dollars, except per share data)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
Revenues $     192.5 $        138.1 $         505.7 $       439.0
Cost of revenues 165.8 112.8              419.3            362.6
Selling, general and administrative            34.6               19.5             77.7            59.0
Stock-based compensation              0.7                  1.1                   2.1                2.8
Earnings (loss) from operations $    (8.5) 1 $            4.7 $             6.6 $         14.6
Interest expense $         0.6    $            0.5 $             1.8 $           1.6
Provision for income taxes 2.8 0.5 7.1 2.9
Net income (loss) $     (11.9) $            3.7 $           (2.3) $         10.1
Earnings (loss) per share        
Basic and diluted $     (0.14) $          0.04 $         (0.03) $         0.11

1Rounding

Revenues. At $192.5 million, fiscal 2011 third quarter consolidated revenues were 39% higher than a year ago. The increase in revenues resulted from a 59% increase in ASG revenues and a 22% increase in Photowatt revenues. Year-to-date revenues were $505.7 million or 15% higher than for the same period a year ago.

Cost of revenues.  Fiscal 2011 third quarter cost of revenues increased on a consolidated basis by $53.0 million or 47% to $165.8 million. Consolidated gross margin as a percentage of revenues decreased to 14% in the third quarter of fiscal 2011 from 18% in the same period a year ago.  The decrease in gross margins mainly reflected a decline in profitability at Photowatt. Consolidated year-to-date gross margin remained consistent at 17% compared to the same period in the prior year.

Selling, general and administrative ("SG&A") expenses. For the third quarter of fiscal 2011, SG&A expenses increased $15.1 million or 77% to $34.6 million compared to the same period a year ago. SG&A expenses for the third quarter of fiscal 2011 included $9.4 million of company-wide severance and restructuring costs compared to $2.0 million in fiscal 2010. Increased SG&A expenses also reflected incremental expenses incurred in Sortimat and PWO, including $0.9 million of incremental amortization related to identifiable intangible assets recorded on the acquisition of Sortimat, and higher costs related to acquisition activities.

For the nine months ended December 26, 2010, SG&A expenses increased 32% or $18.7 million to $77.7 million compared to the corresponding period a year ago. The increase in SG&A expenses included $9.7 million of Company-wide restructuring charges, primarily related to the Photowatt restructuring project. Increased SG&A expenses also reflected incremental expenses incurred in Sortimat and PWO, including $2.0 million of incremental amortization related to identifiable intangible assets recorded on the acquisition of Sortimat, and higher costs related to acquisition activities.

Stock-based compensation. For the three and nine month periods ended December 26, 2010, stock-based compensation expense decreased to $0.7 million and $2.1 million respectively from $1.1 million and $2.8 million in the corresponding periods a year ago. The decrease primarily reflected the revaluation of deferred stock units.

The expense associated with the Company's performance-based stock options is recognized in income over the estimated assumed vesting period at the time the stock options are granted.  Upon the Company's stock price trading at or above stock price performance thresholds for a specified minimum number of trading days within a fiscal quarter, the options vest.  When the performance-based stock options vest, the Company is required to recognize all previously unrecognized expenses associated with the vested stock options in the period in which they vest.

As at December 26, 2010, the following performance-based stock options were un-vested:

Stock price 
performance 
threshold 
Number of
options
outstanding
  Grant date
value per
option
  Weighted
average
remaining
vesting
period
  Current
year
expense
(in '000s)
  Remaining
expense to
recognize
(in '000s)
$      8.41 266,667    $      2.11     0.3 years   $  132   $  50
8.50  889,333    1.41     2.1 years   190    477
9.49 41,667    1.66     4.1 years   9   47
10.41 266,667    2.11     2.0 years   93   208
10.50 889,333    1.41     3.0 years   163   589
11.08 218,667    2.77     1.3 years   114   173
12.41 266,666    2.11     3.0 years   77   268
13.08 218,667    2.77     2.3 years   92   254

Earnings from operations. For the third quarter of fiscal 2011, the consolidated loss from operations was $8.5 million, compared to earnings from operations of $4.7 million for the same period a year ago. Fiscal 2011 third quarter performance reflected: operating earnings of $14.4 million at ASG (operating earnings of $8.4 million for the same period a year ago); Photowatt operating loss of $16.3 million (operating earnings of $1.6 million for the same period a year ago); and inter-segment eliminations and corporate expenses of $6.6 million ($5.3 million in the same period a year ago).

Year-to-date consolidated earnings from operations were $6.6 million, compared to earnings from operations of $14.6 million a year ago. Fiscal 2011 year-to-date performance reflected: operating earnings of $44.8 million at ASG (operating earnings of $36.7 million for the same period a year ago); Photowatt operating loss of $19.0 million (operating loss of $5.3 million for the same period a year ago); and inter-segment elimination and corporate expenses of $19.2 million ($16.8 million for the same period a year ago).

Interest expense and interest income. Net interest expense has increased in the three and nine months ended December 26, 2010 to $0.6 million and $1.8 million respectively compared to $0.5 million and $1.6 million of net interest income for the corresponding periods a year ago. The increase in net interest expense was primarily due to increased usage of credit facilities at PWF. 

Provision for income taxes. During the three and nine month periods ended December 26, 2010, the Company's effective income tax rate differed from the combined Canadian basic federal and provincial income tax rate of 31% (three and nine months ended December 27, 2009 - 33%) primarily as a result of losses incurred in Europe, the benefit of which was not recognized for financial statement reporting purposes.

Net income. For the third quarter of fiscal 2011, net loss was $11.9 million (14 cents loss per share basic and diluted) compared to net income of $3.7 million (4 cents earnings per share basic and diluted) for the same period last year. Net loss in the nine months ended December 26, 2010 was $2.3 million (3 cents loss per share basic and diluted) compared to net income of $10.1 million for the corresponding period a year ago (11 cents earnings per share basic and diluted).

Reconciliation of EBITDA to GAAP measures

(In millions of dollars)

 
 
Three Months
Ended
Dec 26, 2010
Three Months
Ended
Dec 27, 2009
Nine Months
Ended
Dec 26, 2010
Nine Months
Ended
Dec 27, 2009
EBITDA        
 Automation Systems $          16.8 $          10.0 $          51.4 $            41.9
 Photowatt Technologies (12.8) 5.7             (8.7)             7.0
 Corporate and inter-segment                 (6.3)                 (5.0) (18.4)               (15.9)
Total EBITDA $          (2.3) $          10.7 $          24.3 $            33.0
Less: Depreciation and amortization expense        
 Automation Systems $             2.4 $            1.6 $            6.6 $              5.2
 Photowatt Technologies 3.5 4.1 10.3 12.3
 Corporate and inter-segment 0.3 0.3 0.8 0.9
Total depreciation and amortization expense $             6.2 $            6.0 $          17.7 $            18.4
Earnings (loss) from operations        
 Automation Systems $           14.4 $            8.4 $          44.8 $            36.7
 Photowatt Technologies (16.3) 1.6   (19.0) (5.3)
 Corporate and inter-segment (6.6) (5.3) (19.2) (16.8)
Total earnings (loss) from operations $          (8.5) $            4.7 $            6.6 $            14.6
Less: Interest expense  $            0.6 $            0.5 $            1.8 $              1.6
  Provision for income taxes 2.8 0.5 7.1 2.9
Net income (loss) $        (11.9) $             3.7 $          (2.3) $            10.1

FOREIGN EXCHANGE

Strengthening in the value of the Canadian dollar relative to the U.S. dollar and the Euro had a negative foreign exchange translation impact on the Company's fiscal 2011 year-to-date revenues compared to the corresponding period of fiscal 2010. ATS follows a transaction hedging program to help mitigate the impact of short-term foreign currency movements. This hedging activity consists primarily of forward foreign exchange contracts used to manage foreign currency exposure. Purchasing third-party goods and services in U.S. dollars by Canadian operations also acts as a partial offset to U.S. dollar exposure. The Company's forward foreign exchange contract hedging program is intended to mitigate movements in currency rates primarily over a four-to-six-month period. See Note 12 to the interim consolidated financial statements for details on the derivative financial instruments outstanding at December 26, 2010.

Period Average Market Exchange Rates in Canadian dollars

  Three months ended Nine months ended
  Dec 26, 2010 Dec 27, 2009 Dec 26, 2010 Dec 27, 2009
U.S. dollar 1.0145 1.0586 1.0275 1.1078
Euro 1.3777 1.5638 1.3410 1.5740

Liquidity, Cash Flow and Financial Resources

At December 26, 2010, the Company had cash and cash equivalents of $152.9 million compared to $211.8 million at March 31, 2010. In the three and nine months ended December 26, 2010, cash flows provided by operating activities were $17.4 million and $34.8 million, respectively, compared to cash flows provided by operating activities of $26.6 million and $32.5 million in the corresponding periods in fiscal 2010. The Company's total debt to total equity ratio at December 26, 2010 was 0.1:1. At December 26, 2010, the Company had $82.6 million of unutilized credit available under existing operating and long-term credit facilities and $23.4 million available under letter of credit facilities.

In the third quarter of fiscal 2011, the Company's investment in non-cash working capital decreased by $20.3 million.  On a year-to-date basis, investment in non-cash working capital decreased by $13.5 million or 15%. Consolidated accounts receivable increased 22% or $19.2 million, primarily at ASG due to increased revenues in the first nine months of fiscal 2011. The acquisition of Sortimat also increased the Company's accounts receivable balance at December 26, 2010. Net contracts in progress decreased by 102% or $12.9 million compared to March 31, 2010. 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 increased by 18% or $14.5 million compared to March 31, 2010. Deposits and prepaid assets decreased by 5% or $1.3 million compared to March 31, 2010 due to a reduction in the fair value of forward exchange contracts and silicon and other deposits. Accounts payable increased 29% on higher purchases, consistent with higher revenues levels in the first three quarters of fiscal 2011, as well as the assumption of Sortimat's accounts payable and accrued liabilities.

Year-to-date property, plant and equipment purchases totalled $22.4 million. Expenditures at Photowatt, totalling $14.7 million, were used for production equipment and facility improvements. Total ASG and Corporate capital expenditures were $7.7 million, primarily related to the purchase of a new building in the U.S.A.

In the three and nine months ended December 26, 2010, the Company sold a portfolio investment for proceeds of $2.3 million.

The Company's primary credit facility (the "Credit Agreement") provides total credit facilities of up to $85.0 million, comprised of an operating credit facility of $65.0 million and a letter of credit facility of up to $20.0 million for certain purposes. The operating credit facility is subject to restrictions regarding the extent to which the outstanding funds advanced under the facility can be used to fund certain subsidiaries of the Company. The Credit Agreement, which is secured by the assets, including real estate, of the Company's North American legal entities and a pledge of shares and guarantees from certain of the Company's legal entities, is repayable in full on April 30, 2011. As of December 26, 2010, there was no amount borrowed under the Company's primary credit facility (March 31, 2010 - $nil).

The operating credit facility is available in Canadian dollars by way of prime rate advances, letter of credit for certain purposes and/or bankers' acceptances and in U.S. dollars by way of base rate advances and/or LIBOR advances. The interest rates applicable to the operating credit facility are determined based on certain financial ratios. For prime rate advances and base rate advances, the interest rate is equal to the bank's prime rate or the bank's U.S. dollar base rate in Canada, respectively, plus 1.25% to 2.25%. For bankers' acceptances and LIBOR advances, the interest rate is equal to the bankers' acceptance fee or the LIBOR, respectively, plus 2.25% to 3.25%.

Under the Credit Agreement, the Company pays a standby fee on the unadvanced portions of the amounts available for advance or draw-down under the credit facilities at rates ranging from 0.675% to 0.975% per annum, as determined based on certain financial ratios.

The Credit Agreement is subject to debt leverage tests, a current ratio test, and a cumulative EBITDA test.  Under the terms of the Credit Agreement, the Company is restricted from encumbering any assets with certain permitted exceptions.  The Credit Agreement also partially restricts the Company from repurchasing its common shares, paying dividends and from acquiring and disposing of certain assets.  The Company is in compliance with these covenants and restrictions.

The Company's subsidiary, Photowatt International S.A.S. has credit facilities including capital lease obligations of $56.1 million (42.5 million Euros).  The total amount outstanding on these facilities was $42.1 million (March 31, 2010 - $55.9 million), of which $1.2 million was classified as bank indebtedness (March 31, 2010 - $26.0 million), $19.8 million was classified as long-term debt (March 31, 2010 - $7.7 million) and $21.2 million was classified as obligations under capital lease (March 31, 2010 - $22.3 million).  The interest rates applicable to the credit facilities range from Euribor plus 0.5% to Euribor plus 3.35% and 4.9% per annum.  Certain of the credit facilities are secured by certain assets of Photowatt International S.A.S. and a commitment to restrict payments to the Company, and are subject to debt leverage tests.  The credit facilities, which are classified as current bank indebtedness, are subject to either annual renewal or 60 day notification. 

During the three and nine month period ended December 26, 2010, Photowatt International S.A.S. and its lenders established a new term credit facility of $19.8 million (15.0 million Euros).  The new credit facility, which is classified as long-term debt, was used to repay pre-existing credit facilities of $6.1 million (4.4 million Euros) and to replace a credit facility classified as bank indebtedness in the amount of $11.1 million (8.0 million Euros).  The new credit facility bears interest at a rate of Euribor plus 3.35%, annual payments of $5.0 million (3.8 million Euros) and expires on October 15, 2014.

The Company has additional credit facilities of $14.8 million (9.7 million Euros, 31.7 million Indian Rupee and 2.0 million Swiss Francs).  The total amount outstanding on these facilities was $7.4 million (March 31, 2010 - $nil), of which $3.9 million was classified as bank indebtedness and $3.6 million was classified as long-term debt.  The interest rates applicable to the credit facilities range from 0.0% to 8.5% per annum.  A portion of the long-term debt is secured by certain assets of the Company and a portion of the 2.0 million Swiss Francs credit facility is secured by a letter of credit under the primary credit facility.

The Company expects that continued cash flows from operations, together with cash and short-term investments on hand and credit available under operating and long-term credit facilities will be sufficient to fund its requirements for investments in working capital and capital assets, and to fund strategic investment plans including potential acquisitions. In order to finance development activities at PWO, the Company intends to arrange for bridge financing and third-party project ownership.

No stock options were exercised during the third quarter of fiscal 2011. At January 31, 2011 the total number of shares outstanding was 87,281,055.

Contractual Obligations 

Information on the Company's lease and contractual obligations is detailed in the Consolidated Annual Financial Statements and MD&A for the year ended March 31, 2010 found at www.sedar.com. The Company' off-balance sheet arrangements consist of purchase obligations, various operating lease financing arrangements related primarily to facilities and equipment, and derivative financial instruments which have been entered into in the normal course of business. 

There are no other significant off-balance sheet arrangements that management believes will have a material effect on the results of operations or liquidity.

In accordance with industry practice, the Company is liable to the customer for obligations relating to contract completion and timely delivery. In the normal conduct of its operations, the Company may provide bank guarantees as security for advances received from customers pending delivery and contract performance.  In addition, the Company may provide bank guarantees as security on equipment under lease and on order.  As of December 26, 2010, the total value of outstanding bank guarantees available under bank guarantee facilities was approximately $39.1 million (March 31, 2010 - $11.9 million).

Consolidated Quarterly Results

($ in thousands, except per share amounts) Q3
2011
Q2
2011
Q1
2011
Q4
2010
Q3
2010
Q2
2010
Q1
2010
Q4
2009
Revenues $ 192,494 $ 162,046 $ 151,114 $ 138,774 $ 138,133 $ 148,169 $ 152,701 $ 201,774
Earnings (loss) from operations $   (8,543) $     5,481 $     9,655 $ (25,994) $     4,756 $     9,305 $        502 $    17,743
Net income (loss) from continuing operations $ (11,948) $     3,251 $     6,438 $      2,084 $    3,742 $     6,012 $        325 $    14,041
Net income (loss) $ (11,948) $     3,251 $     6,438 $      2,084 $     3,742 $     6,012 $        325 $    13,506
Basic earnings (loss) per share from continuing operations $     (0.14) $       0.04 $       0.07 $        0.03 $       0.04 $      0.07 $      0.00 $       0.17
Diluted earnings (loss) per share from continuing operations $     (0.14) $       0.04 $       0.07 $        0.03 $       0.04 $      0.07 $     0.00 $       0.16
Basic earnings (loss) per share $     (0.14) $      0.04 $       0.07 $        0.03 $       0.04 $      0.07 $      0.00 $       0.16
Diluted earnings  (loss) per share $     (0.14) $       0.04 $       0.07 $       0.03 $       0.04 $      0.07 $      0.00 $       0.15
ASG Order Bookings $ 133,000 $ 105,000 $   85,000 $  105,000 $   92,000 $   71,000 $   96,000 $ 126,000
ASG Order Backlog $ 215,000 $ 208,000 $ 215,000 $  209,000 $ 203,000 $ 197,000 $ 230,000 $ 255,000

Interim financial results are not necessarily indicative of annual or longer-term results because many of the individual markets served by the Company tend to be cyclical in nature. General economic trends, product life cycles and product changes may impact ASG order bookings, Photowatt sales volumes, and the Company's earnings in its markets. ATS typically experiences some seasonality with its revenues and earnings due to summer plant shutdown at PWF. In Photowatt, slower sales may occur in the winter months, when the weather may impair the ability to install its products in certain geographical areas.

ACCOUNTING CHANGES

Accrued Pension Obligation
In the first quarter of fiscal 2011, it was determined that a pension obligation that was assumed in 1998 should have been previously recognized. The arrangement has been recorded with an adjustment to decrease retained earnings as of April 1, 2009 by $2 million (net of tax of nil) with a corresponding increase in accounts payable and accrued liabilities. This adjustment had no material impact on reported earnings, cash flows or earnings per share in prior periods reported.

INTERNATIONAL FINANCIAL REPORTING STANDARDS
The CICA's Accounting Standards Board has announced that Canadian publicly accountable enterprises will adopt International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") effective January 1, 2011. Although IFRS uses a conceptual framework similar to Canadian GAAP, differences in accounting policies and additional required disclosures will need to be addressed. This change is effective for the Company for interim and annual financial statements beginning April 1, 2011. The first financial statements to be presented on an IFRS basis will be for the quarter ended June 26, 2011 (first quarter of fiscal 2012). At that time, comparative data will be presented on an IFRS basis, including an opening balance sheet as at April 1, 2010.

The Company commenced its IFRS conversion project in fiscal 2009.  The project consists of four phases: diagnostic; design and planning; solution development; and implementation. The diagnostic phase was completed in fiscal 2009 with the assistance of external advisors. This work involved a high-level review of the major differences between current Canadian GAAP and IFRS and a preliminary assessment of the impact of those differences on the Company's accounting and financial reporting, systems and other business processes.  

The Company's IFRS conversion project is progressing according to plan. The Company is currently in the implementation phase and has completed a detailed review of all relevant IFRS standards and the identification of information gaps and necessary changes in reporting, internal controls over financial reporting, processes and systems. 

The Company is continuing to monitor standards to be issued by the IASB. Pending completion of some of these projects by the IASB, and until the Company's accounting policy choices are finalized and approved, the Company will be unable to quantify the impact of IFRS on its Consolidated Financial Statements.

The Company has assessed the effect of adoption of IFRS and the resulting changes in accounting policies based on IFRS standards expected to be in effect at the transition date. Significant accounting policy changes have been identified below.  The list is based on significant accounting policies and work completed to date and should not be considered an exhaustive list of all IFRS accounting policies.

Property, Plant and Equipment
IFRS has more specific guidance than Canadian GAAP on the capitalization and componentization of assets, requiring that significant asset components with different useful lives than the main asset be recorded and depreciated separately. As a result of this difference, the Company has determined that certain assets should have separately capitalized components under IFRS. The Company is currently evaluating the impact of this change in accounting policies under IFRS and the transitional impact is not known at this time.

Revenue recognition
IFRS requires revenues on projects which meet the definition of a construction contract to be measured on a Percentage of Completion basis. The Company has identified certain contracts which meet the definition of construction contracts for which revenues are currently recognized upon shipment and transfer of title. The transitional impact of this change is expected to result in an increase in net equity as of April 1, 2010.

Share based payments 
Under IFRS, when share options or other equity instruments vest in installments over the vesting period, referred to as "graded vesting", each installment should be treated as a separate share option grant. Canadian GAAP permits the recognition of compensation expense on a straight line basis over the vesting period. In addition, under Canadian GAAP, forfeitures of share options are recognized as they occur, whereas, under IFRS, the Company is required to estimate the number of awards expected to vest, and revise that estimate if subsequent information indicates that actual forfeitures are likely to differ from the estimates. The transitional impact of this change is expected to result in an increase in contributed surplus and a decrease in retained earnings as of April 1, 2010.

Impairment of long-lived assets
Impairment testing of property, plant and equipment under Canadian GAAP is based on a two-step approach when circumstances indicate the carrying value may not be recoverable. IFRS requires a one-step impairment test for identifying and measuring impairment.  This test requires a comparison of the asset's carrying value to the higher of its value in use or fair value less costs to sell. In addition, IFRS requires, under certain circumstances, the reversal of previous impairments which is not allowed under current Canadian GAAP.

IFRS tests asset groups for impairment at the independent cash generating unit. ("CGU") level based on the generation of cash inflows. IFRS has guidelines surrounding the highest asset group that goodwill can be allocated to for impairment testing purposes.

On transition, the Company does not expect any changes to the results of its impairment tests previously performed under Canadian GAAP.

Income taxes
Changes in accounting policies under IFRS may impact the corresponding deferred tax asset or deferred tax liability account. Under IFRS, the income tax consequences of a transaction recorded in other comprehensive income or directly in equity in previous periods must be recorded in other comprehensive income or equity (i.e. backward tracing).  Canadian GAAP requires all subsequent changes in deferred income taxes to be recorded through earnings. The Company is currently evaluating the impact of changes in accounting policies under IFRS and the corresponding income tax consequences are not known at this time. 

Investment tax credits
Under Canadian GAAP, investment tax credits are accounted for using a cost reduction approach whereby benefits are recognized in income on the same basis as the related expenditures are charged to income. IFRS requires that qualifying investment tax credit benefits be recognized as a reduction of income tax expense, either current or deferred depending on the timing of the benefit. The Company anticipates that this change will reduce the Company's earnings from operatings and EBITDA, and reduce income tax expenses, however no impact on net income is expected. 

First time adoption of IFRS
IFRS 1 "First-time Adoption of International Financial Reporting Standards" provides guidance for an entity's initial year of IFRS adoption. IFRS requires retrospective application of all IFRS standards at the reporting date, with the exception of optional exemptions and certain mandatory exemptions.  The most significant IFRS 1 optional exemptions that the Company expects to apply in its opening IFRS Balance Sheet are summarized below.

Cumulative Translation Differences
Under IFRS 1, the Company will elect not to retrospectively calculate its cumulative translation balances, and all of these balances will be reset to zero on the transition date. The transitional impact of this adjustment will increase accumulated other comprehensive income and decrease retained earnings as of April 1, 2010.

Business Combinations
The Company expects to apply IFRS 3, "Business combinations"  prospectively from the date of transition to IFRS to business combinations which occur after the date of transition. IFRS 3 establishes standards for the measurement of a business combination and the recognition and measurement of assets acquired and liabilities assumed. Most significantly, IFRS 3 requires directly attributable transaction costs to be expensed rather than included in the acquisition purchase price; the measurement of contingent consideration at fair value on the acquisition date, with subsequent changes in the fair value recorded through the income statements; and that upon gaining control in a step acquistion, an entity re-measures its existing ownership interest to fair value through the income statement. The transitional impact of this change is expected to result in a decrease to the carrying value of current assets and a decrease in retained earnings as of April 1, 2010. Future business combinations completed after April 1, 2010, are expected to have a greater impact on net income.

Fair Value as Deemed Costs
The Company expects to elect to report certain items of Property, Plant and Equipment and/or Investment Property assets in its opening balance sheet at deemed costs instead of actual costs that would have been determined under IFRS standards.  The deemed costs of an item may be either its fair value at the date of transition to IFRS or an amount determined by a previous revaluation under Canadian GAAP.  This exemption can be applied on an asset-by-asset basis and the Company is currently evaluating individual assets for which the election may apply.  The transitional impact on the Company's balance sheet as of April 1, 2010 is not currently known as the assessment is currently in progress.

CONTROLS AND PROCEDURES

The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Company. The control framework used in the design of disclosure controls and procedures and internal control over financial reporting is the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management, including the CEO and CFO, does not expect that the Company's disclosure controls or internal controls over financial reporting will prevent or detect all errors and all fraud or will be effective under all potential future conditions. A control system is subject to inherent limitations and, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. 

During the three months ended December 26, 2010, other than as noted below, there have been no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

ATS acquired the Sortimat Group on June 1, 2010. Management has not yet assessed the design or operating effectiveness of Sortimat's disclosure controls and procedures and the procedures and internal controls over financial reporting.

Note to Readers: Forward-Looking Statements

This news release and management's discussion and analysis of financial conditions, and results of operations of ATS contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements").  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of ATS, or developments in ATS's business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.  Forward-looking statements include all disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action.  Forward-looking statements may also include, without limitation, any statement relating to future events, conditions or circumstances. ATS cautions you not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made.  Forward-looking statements relate to, among other things: potential future payments owing in relation to the Sortimat acquisition; business investment and capital spending by customers; management's belief that increased capital spending will continue to lag the general economic recovery; expectation that low volumes and revenues in ASG will continue to present challenges to maintaining margins at current levels; strategic initiatives to improve leadership, business processes and supply chain management within ASG; integration and cost reduction efforts in relation to Sortimat; expectation that ASG operating margins will be negatively impacted until Sortimat is fully integrated; impact of ATW acquisition on ASG revenues and operating margins and margin improvement plan in that regard; belief that the Company's strong balance sheet, approach to market and operational improvements will provide a solid foundation for ASG to improve performance when the general business environment stabilizes and returns to growth; the Company's strong financial position providing ASG with the flexibility to pursue its growth strategy; plans to expand the Company's position in the global automation market organically and through acquisition;  review and pursuit of attractive opportunities; dependence of solar power on the existence of government incentives; anticipated further reductions in feed-in-tariffs and expectation that this will have a negative impact on average selling prices per watt; expectation that increased industry capacity will further negatively impact average selling prices per watt; short term impact of French moratorium on new solar installations and long term impact of potential new regulatory regime; PWO securing conditional feed-in tariff approvals totaling approximately 64 MWs related to applications made by OSPV; utilization by OSPV of a range of solar solutions including modules manufactured by ATS; OSPV joint venture and other approvals; OSPV's efforts to arrange financing and ultimate project ownership; PWO agreements with developers in the process of securing conditional feed-in tariff approvals;  expectation that PWO will provide modules and other related services to these projects;  timing of ramp up of production to full production on 100 MW module line; restructuring project at PWF; potential reduction in work positions; management expectation with respect to MW capacity; the intention of PWF to take future actions in relation to market conditions; potential spin-off of solar business and possible structure and timing; possible sale of PWF (and potentially PWO) and intentions if a contemplated sale of PWF were to occur prior to a potential spin-off; accounting as discontinued operations; works council notification and consultation; foreign exchange hedging; expectation that continued cash flows from operations, together with cash and short-term investments on hand and credit available under operating and long-term credit facilities, will be sufficient to fund requirements for investments; seasonality of revenues; and the introduction, evaluation and adoption of new accounting policies and standards and impacts thereof.  The risks and uncertainties that may affect forward-looking statements include, among others: general market performance including capital market conditions and availability and cost of credit; economic market conditions; impact of factors such as increased pricing pressure and possible margin compression; foreign currency and exchange risk; the relative strength of the Canadian dollar; performance of the market sectors that ATS serves; the performance of Sortimat; that strategic initiatives within ASG and targeted initiatives at Sortimat and ATW do not have intended positive impact; that additional cost saving measures will cost more, or take longer to implement, than planned; inability to successfully expand organically or through acquisition, due to an inability to grow expertise, personnel, and/or facilities at required rates or to negotiate and conclude one or more acquisitions, notwithstanding the Company's strong financial position; that one or more customers, or other persons with which the Company has contracted, experience insolvency or bankruptcy with resulting costs or losses to the Company; the availability and possible reduction or elimination of government subsidies and incentives for solar products in various jurisdictions, including France; ability of ATS and OSPV to acquire the needed expertise and financing necessary to effectively develop Ontario solar projects; the financial attractiveness of, and demand for, those solar projects; the success of developers with whom ATS has signed agreements in obtaining FIT contracts and ultimately developing the projects; the potential for the ramp up to full production of the 100 MW module line will be hindered or delayed due to an inability to procure necessary permits, approvals, materials or equipment on a timely basis; the risk that the restructuring project or other potential future actions would not offset all competitive challenges; that potential reduction in work positions is other than as contemplated; impact of conditions in the solar and capital markets, Photowatt performance, Works Council notification and consultation process, and regulatory and tax environment, on the timing and form of contemplated separation and the dual track process; ability to obtain necessary government and other certifications and approvals for solar projects in a timely fashion; political, labour or supplier disruptions in manufacturing and supply of silicon; the development of superior or alternative technologies to those developed by ATS; the success of competitors with greater capital and resources in exploiting their technology; market risk for developing technologies; risks relating to legal proceedings to which ATS is or may become a party; exposure to product liability claims of Photowatt; risks associated with greater than anticipated tax liabilities or expenses; potential for adoption of new accounting policies to have unanticipated impacts; 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 other than as required by applicable securities laws, ATS does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change.


ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Balance Sheets
(in thousands of Canadian dollars - unaudited)
 
    December 26    March 31
    2010    2010
ASSETS        
Current assets        
Cash and cash equivalents  $  152,910 $  211,786
Accounts receivable      105,182     85,995
Costs and earnings in excess of billings on contracts in progress (note 4)       40,450     42,924
Inventories (note 4)       94,819     80,280
Future income taxes            553
Deposits and prepaid assets (note 5)       26,193     27,492
    419,554     449,030
 
Property, plant and equipment        183,839     171,451
Goodwill        67,888     34,350
Intangible assets        28,071     4,864
Investment tax credits       21,976     20,878
Future income taxes        33,791    35,243
Portfolio investments       1,958     3,602
Other assets (note 6)       32,033     33,380
  $   789,110 $  752,798
 
LIABILITIES AND SHAREHOLDERS' EQUITY        
Current liabilities        
Bank indebtedness (note 10)   $   5,073 $  26,034
Accounts payable and accrued liabilities        153,148    118,518
Billings in excess of costs and earnings on contracts in progress (note 4)       40,631     30,216
Future income taxes        15,291     12,326
Current portion of long-term debt (note 10)       9,680     10,830
Current portion of obligations under capital leases (note 10)       4,672     4,260
    228,495     202,184
 
Long-term debt (note 10)       21,661     4,420
Long-term portion of obligations under capital leases (note 10)       16,479    17,985
 
Shareholders' equity        
Share capital        479,558    479,542
Contributed surplus       13,028     11,244
Accumulated other comprehensive loss (note 13)       (42,709)    (37,434)
Retained earnings (restated - note 2)       72,598     74,857
    522,475    528,209
  $   789,110 $  752,798

Commitments and contingencies (notes 3 and 16)
See accompanying notes to interim consolidated financial statements

ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Statements of Operations
(in thousands of Canadian dollars, except per share amounts - unaudited)
 
                           Three months ended Nine months ended
    December 26   December 27   December 26    December 27
    2010   2009    2010    2009
Revenue  $  192,494  $  138,133  $     505,654  $     439,003
 
Operating costs and expenses                
  Cost of revenue     165,762    112,766     419,273    362,643
  Selling, general and administrative (note 11)     34,555    19,536     77,727     59,024
  Stock-based compensation (note 7)     720    1,075     2,061     2,773
Earnings (loss) from operations     (8,543)    4,756     6,593     14,563
 
Other expenses                
  Interest on long-term debt     569    361     1,227     1,017
  Other interest     60     162     528     598
    629    523     1,755    1,615
 
Income (loss) from operations before income taxes     (9,172)     4,233     4,838     12,948
 
Provision for income taxes (note 15)     2,776     491     7,097    2,869
 
Net income (loss)  $  (11,948)  $  3,742  $  (2,259)  $  10,079
 
Earnings (loss) per share (note 8)                
Basic $        (0.14) $  0.04 $  (0.03) $  0.11
Diluted  $  (0.14)  $  0.04 $  (0.03)   $ 0.11

See accompanying notes to interim consolidated financial statements

ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Statements of Shareholders' Equity and Other Comprehensive Loss
(in thousands of Canadian dollars - unaudited)
 
Nine months ended    December 26, 2010
    Accumulated    
    Other     
    Comprehensive     Total
  Share  Contributed  Income (Loss)  Retained  Shareholders'
  Capital  Surplus  (note 13)  Earnings  Equity
Balance, beginning of period  $  479,542  $  11,244  $  (37,434)  $  74,857 $  528,209
 
Comprehensive income (loss)                    
  Net loss                    (2,259)     (2,259)
  Currency translation adjustment                (4,369)          (4,369)
  Net unrealized gain on derivative                    
  financial instruments designated as cash flow hedges
(net of income taxes of $87)  
           785          785
  Gain transferred to net income for derivatives designated as
cash flow hedges (net of income taxes of $683) 
             (1,691)          (1,691)
 
Total comprehensive loss                           (7,534)
 
Stock-based compensation (note 7)        1,789               1,789
 
Exercise of stock options     16     (5)             11
 
Balance, end of the period  $  479,558  $  13,028  $  (42,709)  $  72,598 $  522,475
 
Nine months ended                            December 27, 2009
    Accumulated    
    Other     
    Comprehensive     Total
  Share  Contributed  Income (Loss)  Retained  Shareholders'
  Capital  Surplus  (note 13)  Earnings  Equity
Balance, beginning of period (restated - note 2)  $  479,537  $  8,722  $  15,494  $  62,694 $  566,447
 
Comprehensive income (loss)                    
  Net income         ―     ―     10,079     10,079
  Currency translation adjustment         ―    (37,628)     ―     (37,628)
  Net unrealized gain on available-for-sale financial assets
(net of income taxes of $nil)  
      ―     298     ―     298
  Net unrealized gain on derivative financial instruments designated
as cash flow hedges (net of income taxes of $470)  
      ―     1,425     ―     1,425
  Loss transferred to net income for derivatives designated
as cash flow hedges (net of income taxes of 108) 
      ―     727     ―     727
 
Total comprehensive loss                          (25,099)
 
Stock-based compensation (note 8)     ―     1,963     ―     ―     1,963
 
Balance, end of the period  $  479,537  $  10,685  $  (19,684)  $  72,773 $ 543,311

See accompanying notes to interim consolidated financial statements

ATS AUTOMATION TOOLING SYSTEMS INC.
Consolidated Statements of Cash Flows
(in thousands of dollars - unaudited)
   
                            Three months ended   Nine months ended
  December 26  December 27  December 26  December 27
  2010  2009  2010  2009
 
Operating activities:              
Net income (loss)  $  (11,948)  $  3,742   (2,259)  $  10,079
Items not involving cash                        
  Depreciation of property, plant and equipment     4,987     5,357     14,566     16,323
  Amortization of intangible assets    1,226    630    3,197    2,048
  Future income taxes     2,537     90     5,720    (3,793)
  Investment tax credit receivable     337     80     (1,098)     (448)
  Other items not involving cash     (5)     (8)     (102)    (20)
  Stock-based compensation (note 7)     720     1,075     2,061     2,773
  Loss (gain) on disposal of property, plant and equipment    (21)     (244)     (62)    110
  Gain on sale of portfolio investment    (665)          (665)    ―
    (2,832)                 10,722      21,358    27,072
Change in non-cash operating working capital     20,274     15,861    13,460    5,465
Cash flows provided by operating activities     17,442     26,583     34,818    32,537
 
Investing activities:                
Acquisition of property, plant and equipment     (8,110)     (4,319)    (22,419)    (14,262)
Acquisition of intangible assets    (621)     (145)     (2,199)    (301)
Investments, silicon deposits and other     (186)    (4,985)    (3,370)    (7,565)
Business acquisition (note 3)    (274)          (50,687)    
Proceeds from disposal of property, plant and equipment    175     580     992    1,169
Proceeds on sale of portfolio investments    2,309     ―    2,309    
Cash flows used in investing activities     (6,707)     (8,869)    (75,374)    (20,959)
Financing activities:                
Restricted cash (note 5)    (201)     (510)    (3,307)    4,226
Bank indebtedness (note 10)     (18,289)     (4,044)    (28,322)   16,309
Proceeds from long-term debt (note 10)     20,754     685    22,165    4,522
Proceeds from sale and leaseback of property, plant and equipment          2,664    1,747     9,467
Repayment of long-term debt (note 10)     (5,864)     (129)    (8,209)    (1,988)
Repayment of obligations under capital leases (note 10)     (1,174)     (811)     (2,020)    (2,418)
Issuance of common shares             11     ―
Cash flows provided by (used in) financing activities    (4,774)     (2,145)     (17,935)    30,118
 
Effect of exchange rate changes on cash and cash equivalents     (1,563)    (1,876)     (385)     (4,042)
 
Increase (decrease) in cash and cash equivalents     4,398     13,693    (58,876)     37,654
Cash and cash equivalents, beginning of period     148,512    166,322     211,786     142,361
 
Cash and cash equivalents, end of period  $  152,910   180,015  $  152,910     180,015
 
Supplemental information                
 
Cash income taxes paid  $  1,567  $  345  $  2,288  $  729
Cash interest paid  $  357  $  300  $  1,270  $  924

See accompanying notes to interim consolidated financial statements

ATS AUTOMATION TOOLING SYSTEMS INC.
Notes to Interim Consolidated Financial Statements
(in thousands, except per share amounts - unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:

(a)  The accompanying interim consolidated financial statements of ATS Automation Tooling Systems Inc. and its subsidiary companies (collectively "ATS" or the "Company") have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and the accounting policies and method of their application are consistent with those described in the annual consolidated financial statements for the year ended March 31, 2010.  These interim consolidated financial statements do not include all disclosures required by GAAP for annual financial statements and should be read in conjunction with the Company's annual consolidated financial statements for the year ended March 31, 2010.

(b)  The preparation of these interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amount of revenue and expenses during the reporting period.  Actual results could differ from these estimates.  Significant estimates and assumptions are used when determining fair values of assets and liabilities acquired in a business combination and when accounting for items such as impairment of long-lived assets, fair value of reporting units and goodwill, warranties, income taxes, future income tax assets, determination of estimated useful lives of intangible assets and property, plant and equipment, impairment of portfolio investments, contracts in progress, inventory obsolescence provisions, revenue recognition, contingent liabilities, and allowances for uncollectible accounts receivable.

(c)  Interim financial results are not necessarily indicative of annual or longer-term results because many of the individual markets served by the Company tend to be cyclical in nature.  General economic trends, product life cycles and product changes may impact Automation Systems order bookings, Photowatt Technologies volumes, and the Company's earnings in any of its markets.  ATS typically experiences some seasonality with its revenue and earnings due to summer shutdown at its subsidiary in France, Photowatt International S.A.S.  In Photowatt Technologies, slower sales may occur in the winter months, when the weather may impair the ability to install its products in certain geographical areas.

The company follows a 13 week per quarter schedule, where the first fiscal month of a new quarter contains 5 weeks and each subsequent month contains 4 weeks, with the exception of its fiscal year-end, which falls on March 31.  This results in some periods containing a different number of days than comparative periods.  The three and nine months ended December 26, 2010 contained 91 days and 270 days respectively (three and nine months ended December 27, 2009 - 91 days and 271 days respectivley).

2. ACCOUNTING CHANGES:

In the nine months ended December 26, 2010, it was determined that a pension obligation that was orginially assumed in 1998 should have been previously recognized.  This arrangement has been recorded with an adjustment to decrease retained earnings as of April 1, 2009 by $2,000 (net of tax of $nil) with a corresponding increase in accounts payable and accrued liabilities.  This adjustment had no material impact on reported earnings, cash flows or earnings per share in prior periods.

3. ACQUISITION OF SORTIMAT

On June 1, 2010, the Company completed its acquisition of 100% of Sortimat Group ("Sortimat"). Sortimat is a manufacturer of assembly systems for the life sciences market, and is headquartered in Germany with locations in Chicago and a small, 60% owned subsidiary in India.  Sortimat has been integrated with the Company's existing Automation Systems Group ("ASG"). The Sortimat acquisition aligns with ATS' strategy of expanding its position in the global automation market and enhancing growth opportunities, particularly in strategic segments, such as life sciences. The financial results of Sortimat are included in the ASG segment from the date of acquisition.

The total cash consideration for Sortimat is $52,160 (40,582 Euro), which includes acquisition-related costs, primarily for advisory services, of $2,710. Potential future payments of up to $8,495 (6,610 Euro) which are payable subject to the achievement of milestones related to operating performance and specific management services to be provided over the next two years are not included in the cost of the acquisition.  During the three and nine months ended December 26, 2010 the Company recognized  in selling, general and administrative expense $460 and $1,047 respectively related to specific management services.

Cash used in the investment is determined as follows:

Cash consideration                                              $     52,160
Less cash acquired                                                  (1,473)
                                          $        50,687

The purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon the fair value at the date of acquisition. The company determined the fair values based on discounted cash flows, market information, independent valuations and management's estimates. Final valuations of certain items are not yet complete due to the inherent complexity associated with valuations.  Therefore, the purchase price allocation is preliminary and subject to adjustment over the course of fiscal 2011 on completion of the valuation process and analysis of resulting tax effects.

The preliminary allocation of the purchase price at fair value is as follows:

Purchase price allocation          
  Cash       $  1,473
  Current assets       18,357
  Property, plant and equipment       9,159
  Other long term assets       385
  Intangible assets with a definite life        
    Technology       7,906
    Customer relationships       8,137
    Other       908
  Intangible assets with an indefinite life      
    Brand       6,812
  Current liabilities       (30,962)
  Long term debt       (3,590)
Net identifiable assets       18,585
Residual purchase price allocated to goodwill       33,575
    $  52,160

Non-cash working capital includes accounts receivable of $8,482, representing gross contractual amounts receivable of $9,279 less management's best estimate of the contractual cash flows not expected to be collected of $797.

The primary factors that contributed to a purchase price that resulted in the recognition of goodwill are: the existing Sortimat business; the acquired workforce; significant experience and products in advanced system development, manufacturing, handling and feeder technologies; time-to-market benefits of acquiring an established organization in key international markets such as Europe, Asia and the United States; and the combined strategic value to the Company's growth plan. The amount assigned to goodwill is not expected to be deductible for tax purposes.

During the three months ended December 26, 2010, changes to the purchase price allocation resulted in a increase in goodwill of $2,126.  The adjustments to the preliminary purchase price allocation are noted below:

      Three months  Nine months
Adjustments to the purchase price allocation      ended   ended
  Decrease in current assets      $  (324)  $  (328)
  Decrease (increase) in current liabilities        (1,528)    1,016
  Acquisition-related costs        (274)    (537)
Net decrease (increase) in goodwill         $ (2,126) $  151

The cash consideration of the purchase price along with transaction costs were funded with existing cash on hand. This acquisition was accounted for as a business combination with the Company as the acquirer of Sortimat. The purchase method of accounting was used and the earnings have been consolidated from the acquisition date, June 1, 2010. From the acquisition date, Sortimat has contributed approximately $44,466 in revenue and a net loss of $2,132, which includes amortization of intangible assets related to the acquisition of $1,959.

4. CONTRACTS IN PROGRESS AND INVENTORIES:

  December 26  March 31
  2010  2010
 
Contracts in progress:        
  Costs incurred on contracts in process      $  483,020  $  338,624
  Estimated earnings         127,039     80,766
  $  610,059  $  419,390
 
Progress billings         (610,240)     (406,682)
  $  (181)  $  12,708
 
Disclosed as:        
  Costs and earnings in excess of billings on contracts in progress  $  40,450  $  42,924
  Billings in excess of costs and earnings on contracts in progress      (40,631)    (30,216)
  $  (181)  $  12,708
 
    December 26  March 31
    2010  2010
 
Inventories are summarized as follows:        
  Raw materials      $  45,380  $  45,984
  Work in process         15,864    8,585
  Finished goods         33,575    25,711
  $  94,819 $  80,280

The amount of inventory recognized as an expense and included in cost of revenue accounted for other than by the percentage-of-completion method during the three and nine months ended December 26, 2010 was $75,248 and $192,355 respectively (three and nine months ended December 27, 2009: $46,779 and $143,000 respectively).  The amount charged to net income and included in cost of revenue for the write-down of inventory for valuation issues during both the three and nine months ended December 26, 2010 was $194 and $1,455 respectively (three and nine months ended December 27, 2009: $2,079 and $5,096 respectively). The amount recognized in net income and included in cost of revenue for the reversal of previous inventory write-downs due to rising prices during the three and nine months ended December 26, 2010 was $940 and $1,026 respectively (three and nine months ended December 27, 2009: $nil).  

5. DEPOSITS AND PREPAID ASSETS:

  December 26  March 31
  2010  2010
Prepaid assets   $  3,436  $  4,231
Restricted cash(i)     3,730     582
Silicon and other deposits     15,029     16,335
Forward contracts and other     3,998     6,344
  $  26,193  $  27,492

(i) Restricted cash consists of cash collateralized to secure bank guarantees.

6. OTHER ASSETS:

           December 26  March 31
            2010  2010
Silicon deposits          $  28,799  $  32,389
Other             3,234     991
          $  32,033  $  33,380

7. STOCK-BASED COMPENSATION PLANS:

In the calculation of the stock-based compensation expense in the interim consolidated statements of operations, the fair values of the Company's stock option grants were estimated using the Black-Scholes option pricing model for time vesting stock options and binomial option pricing models for performance based stock options.

During the nine months ended December 26, 2010 the Company granted 325,000 time vesting stock options (700,000 in the nine months ended December 27, 2009).  The stock options granted vest over 4 years and expire on the seventh anniversary from the date of issue.  During the nine month period ended December 26, 2010, no performance based options were granted (100,000 in the nine months ended December 27, 2009).  Performance based stock options vest based on the Company's stock trading at or above certain thresholds for a specified number of minimum trading days.  The performance based stock options expire on the seventh anniversary after the date that the options vest.  During the nine month period ended December 26, 2010, no performance based options vested.  During the nine month period ended December 27, 2009 83,333 performance options vested in the normal course of business.

Nine months ended           December 26, 2010     December 27, 2009 
    Weighted       Weighted
  Number of   average   Number of   average
  stock   exercise   stock   exercise
  options   price   options   price
Stock options outstanding, beginning of year   6,368,674  $  7.89   6,112,562  $  8.18
Granted   325,000     6.34   800,000     6.40
Exercised   (2,900)    3.83   ―     ―
Forfeited/cancelled   (129,913)    18.61   (382,209)    9.57
Stock options outstanding, end of period   6,560,861  $  7.60   6,530,353  $  7.88
Stock options exercisable, end of period, time vested options   1,138,782  $  9.28   972,947  $  11.40
Stock options exercisable, end of period, performance options   991,448  $  6.14   991,448  $  6.14

The fair value of time vesting options issued during the period were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

    Nine months ended
  December 26  December 27
    2010  2009
Weighted average risk-free interest rate      2.28%     2.17%
Dividend yield      0%     0%
Weighted average expected volatility      58%     60%
Weighted average expected life      4.75 years     4.55 years
Number of stock options granted:         
  Time vested        325,000      700,000
  Performance based           100,000
Weighted average exercise price per option     $  6.34  $  6.40
Weighted average value per option:        
  Time vested      $  3.16  3.19
  Performance based     $  ―  $  3.59

8. EARNINGS (LOSS) PER SHARE:

Weighted average number of shares used in the computation of earnings (loss) per share is as follows:

  Three months ended  Nine months ended
  December 26  December 27  December 26  December 27
  2010  2009 2010  2009
   
Basic   87,281,055   87,277,155   87,279,855   87,277,155
Diluted   87,643,524   87,602,298  87,619,515   87,397,288

For the three and nine months ended December 26, 2010, stock options to purchase 5,130,366 and 5,211,526 common shares respectively are excluded from the weighted average common shares in the calculation of diluted earnings (loss) per share as they are anti-dilutive (5,186,358 and 5,825,413 common shares respectively were excluded in the three and nine months ended December 27, 2009).

9. SEGMENTED DISCLOSURE:

The Company evaluates performance based on two reportable segments:  Automation Systems and Photowatt Technologies.  The Automation Systems segment produces custom-engineered turn-key automated manufacturing systems and test systems.  The Photowatt Technologies segment is a turn-key solar project developer and integrated manufacturer of photovoltaic products.  The business segments are strategic business units that offer different products and services and each is managed separately.

The Company accounts for inter-segment revenue at current market rates, negotiated between the segments.

                    Three months ended  Nine months ended
  December 26  December 27  December 26  December 27
  2010  2009  2010  2009
Revenue        
  Automation Systems  $ 124,733  $ 78,639  $ 349,147   290,806
  Photowatt Technologies   73,006   59,748   166,901   151,331
  Inter-segment revenue   (5,245)   (254)   (10,394)   (3,134)
Total Company Revenue  $ 192,494  $ 138,133  $ 505,654  $ 439,003
Earnings from operations        
  Automation Systems  $ 14,383  $ 8,386  $ 44,777  $ 36,743
  Photowatt Technologies   (16,277)  1,626  (19,042)   (5,278)
  Inter-segment operating loss   (955)   (62)   (1,966)   (734)
  Stock-based compensation   (720)   (1,075)   (2,061)   (2,773)
  Other expenses   (4,974)   (4,119)   (15,115)   (13,395)
Total Company earnings (loss)        
from operations  $ (8,543)  $ 4,756  $ 6,593  $ 14,563
         
      December 26  March 31
      2010  2010
Assets        
  Automation Systems          $ 505,907  $ 459,730
  Photowatt Technologies           280,117   280,305
  Corporate assets and inter-segment           3,086   12,763
Total Company assets         $ 789,110  $ 752,798

10. BANK INDEBTEDNESS, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES:

The Company's primary credit facility (the "Credit Agreement") provides total credit facilities of up to $85,000, comprised of an operating credit facility of $65,000 and a letter of credit facility of up to $20,000 for certain purposes. The operating credit facility is subject to restrictions regarding the extent to which the outstanding funds advanced under the facility can be used to fund certain subsidiaries of the Company. The Credit Agreement, which is secured by the assets, including real estate, of the Company's North American legal entities and a pledge of shares and guarantees from certain of the Company's legal entities, is repayable in full on April 30, 2011.

The operating credit facility is available in Canadian dollars by way of prime rate advances, letter of credit for certain purposes and/or bankers' acceptances and in U.S. dollars by way of base rate advances and/or LIBOR advances. The interest rates applicable to the operating credit facility are determined based on certain financial ratios. For prime rate advances and base rate advances, the interest rate is equal to the bank's prime rate or the bank's U.S. dollar base rate in Canada, respectively, plus 1.25% to 2.25%. For bankers' acceptances and LIBOR advances, the interest rate is equal to the bankers' acceptance fee or the LIBOR, respectively, plus 2.25% to 3.25%.

Under the Credit Agreement, the Company pays a standby fee on the unadvanced portions of the amounts available for advance or draw-down under the credit facilities at rates ranging from 0.675% to 0.975% per annum, as determined based on certain financial ratios.

The Credit Agreement is subject to debt leverage tests, a current ratio test, and a cumulative EBITDA test.  Under the terms of the Credit Agreement, the Company is restricted from encumbering any assets with certain permitted exceptions.  The Credit Agreement also partially restricts the Company from repurchasing its common shares, paying dividends and from acquiring and disposing of certain assets.  The Company is in compliance with these covenants and restrictions.

There is no amount borrowed under the Company's primary credit facility (March 31, 2010 - $nil).

The Company's subsidiary, Photowatt International S.A.S. has credit facilities including capital lease obligations of $56,131 (42,524 Euro).  The total amount outstanding on these facilities is $42,118 (March 31, 2010 - $55,940), of which $1,167 is classified as bank indebtedness (March 31, 2010 - $26,034), $19,800 is classified as long-term debt (March 31, 2010 - $7,661) and $21,151 is classified as obligations under capital lease (March 31, 2010 - $22,245).  The interest rates applicable to the credit facilities range from Euribor plus 0.5% to Euribor plus 3.35% and 4.9% per annum.  Certain of the credit facilities are secured by certain assets of Photowatt International S.A.S. and a commitment to restrict payments to the Company and are subject to debt leverage tests.  The credit facilities which are classified as current bank indebtedness, are subject to either annual renewal or 60 day notification. 

During the three and nine month period ended December 26, 2010, Photowatt International S.A.S. and its lenders established a new term credit facility of $19,800 (15,000 Euro).  The new credit facility, which is classified as long-term debt,  was used to repay pre-existing credit facilities of $6,111 (4,417 Euro) and to replace a credit facility classified as bank indebtedness in the amount of $11,069 (8,000 Euro).  The new credit facility bears interest at a rate of Euribor plus 3.35%, annual payments of $4,950 (3,750 Euro) and expires on October 15, 2014.

The PV Alliance joint venture has additional credit facilities as described in note 14.

The Company has additional credit facilities of $14,846 (9,662 Euro, 31,663 Indian Rupee and 2,000 Swiss Francs).  The total amount outstanding on these facilities is $7,417 (March 31, 2010 - $nil), of which $3,856 is classified as bank indebtedness and $3,561 is classified as long-term debt.  The interest rates applicable to the credit facilities range from 0.0% to 8.5% per annum.  A portion of the long-term debt is secured by certain assets of the Company and a portion of the 2,000 Swiss Francs credit facility is secured by a letter of credit under the primary credit facility.

The following amounts were outstanding:

  December 26  March 31
  2010  2010
Bank indebtedness:    
PV Alliance  $ 50  $  ―
Photowatt International S.A.S.   1,167   26,034
Other facilities   3,856   ―
  $ 5,073  $ 26,034
Long-term debt:    
PV Alliance  $ 7,980  $  7,589
Photowatt International S.A.S.   19,800   7,661
Other facilities   3,561   
  $ 31,341  $ 15,250
Less: current portion    9,680   10,830
  $ 21,661  $  4,420
Obligations under capital lease:    
Photowatt International S.A.S. future minimum lease payments  $ 22,777  $ 25,201
Less: amount representing interest   1,626   2,956
  $ 21,151  $ 22,245
Less: current portion    4,672   4,260
  $ 16,479  $ 17,985

Interest for the three and nine months ended December 26, 2010 of $110 and $338 respectively (three  and nine months ended December 27, 2009 - $121 and $476 respectively) relating to obligations under capital lease has been included in interest on long-term debt expense. The interest rates applicable to the obligations under capital lease range from Euribor plus 1.38% to Euribor plus 1.9% and 4.9% per annum. 

11. RESTRUCTURING:

In the three and nine months ended December 26, 2010, the Company's subsidiary, Photowatt International S.A.S., initiated a restructuring project at its facility in Bourgoin-Jallieu, France. In the three and nine months ended December 26, 2010, restructuring costs of $9,462 and $9,746 respectively were expensed in selling, general and administrative expenses, primarily in relation to the Photowatt International S.A.S. restructuring project.

In fiscal 2008, the Company commenced a restructuring program to improve operating performance.  The restructuring program included workforce reductions, and the closure of underperforming, non-strategic divisions.  In fiscal 2010, the Company accelerated and expanded its previous restructuring program.  In the three and nine months ended December 27, 2009, severance and restructuring expenses associated with the closure of two divisions and other workforce reductions were $1,952 and $5,878 respectively, primarily in the Automation Systems group.

The following is a summary of the changes in the provision for restructuring costs:

  Nine months ended
  December 26  December 27
  2010  2009
Balance, beginning of period      $ 2,190  $ 4,535
Severance and restructuring expense     9,746   5,878
Acquisition accrual     1,000   ―
Cash payments     (3,655)   (5,512)
Foreign exchange     (83)   (245)
Balance, end of period      $ 9,198  $ 4,656

12. FINANCIAL INSTRUMENTS:

Derivative financial instruments

The Company uses forward foreign exchange contracts to manage foreign currency exposure.  Forward foreign exchange contracts that are not designated in hedging relationships are classified as held-for-trading, with changes in fair value recognized in selling, general and administrative expenses in the interim consolidated statements of operations.  During the three and nine months ended December 26, 2010, the fair value of derivative financial assets classified as held-for-trading and included in deposits and prepaid assets increased by $1,893 and $44 respectively (increased by $1,783 and $1,182 respectively during the three and nine months ended December 27, 2009) and the fair value of derivative financial liabilities classified as held-for-trading and included in accounts payable and accrued liabilities decreased by $2,308 and increased by $37 respectively during the three and nine months ended December 26, 2010 (decreased by $1,175 and $522 respectively during the three and nine months ended December 27, 2009).

Cash flow hedges

During the three and nine months ended December 26, 2010, an unrealized gain of $nil and $5 respectively was recognized in selling, general and administrative expense for the ineffective portion of cash flow hedges (unrealized loss of $8 during the three and nine months ended December 27, 2009).  After-tax unrealized gains of $967 and $188 are included in accumulated other comprehensive income at December 26, 2010 and are expected to be reclassified to earnings over the next 12 months when the revenue and purchases are recorded respectively (unrealized gains of $796 at December 27, 2009).

13. ACCUMULATED OTHER COMPREHENSIVE LOSS:

The components of accumulated other comprehensive loss are as follows:

  December 26  March 31
  2010  2010
Accumulated currency translation adjustment      $ (43,864)  $ (39,495)
Accumulated unrealized net gain on derivative financial    
instruments designated as cash flow hedges(i)      1,155   2,061
Accumulated other comprehensive loss  $ (42,709)  $ (37,434)

(i) The accumulated unrealized net gain on derivative financial instruments designated as cash flow hedges is net of future income taxes of $340 at December 26, 2010 (March 31, 2010 - $935).

14. INVESTMENT IN JOINT VENTURE:

During the year ended March 31, 2010, Photowatt Ontario Inc. entered into an agreement to establish Ontario Solar PV Fields Inc., a joint venture.  In fiscal 2008, Photowatt International S.A.S. entered into an agreement to establish the PV Alliance, a joint venture.

These are jointly-controlled enterprises and accordingly, the Company proportionately consolidates its 50% and 40% share of assets, liabilities, revenues and expenses for Ontario Solar PV Fields Inc. and PV Alliance, respectively, in the interim consolidated financial statements.

The following is a summary of the Company's proportionate share of the joint ventures:

      December 26  March 31
      2010  2010
Balance Sheet        
Current assets       $ 4,351  $ 4,933
Property and equipment       5,019   4,960
Intangible assets       3,126   2,107
Investment tax credits          562 
Current liabilities       (3,504)   (2,960)
Current portion of long-term debt       (4,482)   (3,170)
Long-term debt       (3,498)  (4,419)
Net assets      $ 1,012  $ 2,013
         
  Three months ended   Nine months ended
  December 26  December 27  December 26  December 27
  2010  2009  2010  2009
Statement of Operations        
Net loss  $ (541)  $ (167)  $ (606)  $ (265)
         
  Three months ended   Nine months ended
  December 26  December 27  December 26  December 27
  2010  2009  2010  2009
Cash flows provided by (used in)        
Operating activities  $ 253  $ 453  $ 1,334  $ 1,343
Investing activities   (339)   (919)  (1,616)   (3,815)
Financing Activities   (23)   607   650  4,318

The PV Alliance has loans from a shareholder proportionately worth 4,921 Euro (March 31, 2010 - 4,407 Euro).  The loans are repayable over five years, guaranteed by the signing of a pledge agreement, and bear interest at the maximum fiscally deductible rate.

During the year ended March 31, 2010, the PV Alliance established a credit facility proportionately worth 8,015 Euro.  The total amount outstanding on the facility is 1,124 Euro (March 31, 2010 - 1,124 Euro).  The credit facility bears interest of 6.19% per annum and is received when the program to develop solar cell technology meets certain cell efficiency targets.

The PV Alliance maintains an operating lease for a portion of the Photowatt International S.A.S. building used by PV Alliance which results in annual lease payments proportionately worth 83 Euro.  The contract with the lessee expires in 2018 with an option to terminate the lease in 2016.  The lease contains an option to extend the lease for an additional nine years.

During the year ended March 31, 2010, the PV Alliance entered into an agreement under which the regional government of Rhộne-Alpes in France committed to providing the PV Alliance with funding of 15,000 Euro over a five-year period, conditional on certain employment levels being met in the region.  During the three and nine months ended December 26, 2010, the PV Alliance received government assistance of 120 Euro and 504 Euro respectively (three and nine months ended December 27, 2009 - 192 Euro and 576 Euro respectively) which has been included in operating earnings.

15. INCOME TAXES:

For the three and nine month periods ended December 26, 2010, the Company's effective income tax rate differs from the combined Canadian basic federal and provincial income tax rate of 31% (three and nine months ended December 27, 2009 - 33%) primarily as a result of losses incurred in Europe, the benefit of which was not recognized for financial statement reporting purposes.

16. COMMITMENTS AND CONTINGENCIES:

In accordance with industry practice, the Company is liable to the customer for obligations relating to contract completion and timely delivery. In the normal conduct of its operations, the Company may provide bank guarantees as security for advances received from customers pending delivery and contract performance.  In addition, the Company may provide bank guarantees as security on equipment under lease and on order.  At December 26, 2010, the total value of outstanding bank guarantees available under bank guarantee facilities was approximately $39,096 (March 31, 2010 - $11,932).

In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies.  Accruals are made in instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated.  Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position.

17. SUBSEQUENT EVENT:

On January 5, 2011, the Company completed its acquisition of the majority of Assembly & Test Worldwide, Inc.'s U.S.-based and German automation and test systems businesses (collectively "ATW").  ATW is a manufacturer of assembly and test systems, with capability in the transportation, life sciences and energy segments.

The total cash consideration for ATW pending post-closing adjustments is $18,040 ($18,067 US), which includes acquisition-related costs, primarily for advisory services, of $616.

The cash consideration of the purchase price along with transaction costs was funded with existing cash on hand.  This acquisition will be accounted for as a business combination with the Company as the acquirer of ATW.  The purchase method of accounting will be used and the earnings will be consolidated from the acquisition date.  The Company is in the process of estimating the fair values of assets acquired and liabilities assumed at the date of acquisition, including goodwill and identifiable intangible assets.

SOURCE ATS Automation Tooling Systems Inc.

For further information:

Maria Perrella, Chief Financial Officer
Carl Galloway, Vice-President and Treasurer
519 653 6500


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