Mr. Andrew Hider reports

ATS REPORTS THIRD QUARTER FISCAL 2024 RESULTS

ATS Corp. has released its financial results for the three and nine months ended Dec. 31, 2023.

Third quarter highlights:

• Revenues increased 16.2 per cent year-over-year to $752-million.
• Net income was $47.2-million compared with $29.2-million a year ago.
• Basic earnings per share were 48 cents, compared with 32 cents a year ago.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $119.3-million, 18.5 per cent higher compared with $100.7-million a year ago.
• Adjusted basic earnings per share were 65 cents compared with 56 cents a year ago.
• Order bookings were $668-million, 31.8 per cent lower compared with $979-million a year ago, which included order bookings of $221.3-million (U.S.) (approximately $300.2-million) from an electric vehicle (EV) customer.
• Order backlog decreased 11 per cent to $1,907-million compared with $2,143-million a year ago.

"Today, we announced our third quarter results. Building on our momentum from the first half of the year, we again demonstrated strong organic revenue growth and adjusted earnings," said Andrew Hider, chief executive officer. "We also completed the acquisition of Avidity, which complements our existing life sciences businesses, while furthering our product offerings to both new and existing customers.

"In addition, subsequent to the quarter-end, our PA Solutions business completed the acquisition of IT.ACA. Engineering Srl (ITACA), an Italian-based automation integrator with a focus on pharma processing. We are pleased to welcome both the Avidity and ITACA teams to the ATS family as we drive our strategy and evolve our portfolio."

Year-to-date highlights:

• Revenues increased 21.4 per cent year-over-year to $2,241.4-million.
• Net income increased 48.5 per cent year-over-year to $145.7-million.
• Basic earnings per share increased 39.3 per cent year-over-year to $1.49.
• Adjusted EBITDA increased 25.3 per cent year-over-year to $354.6-million.
• Adjusted basic earnings per share increased 19.5 per cent year-over-year to $1.96.
• Order bookings were $2.1-billion, compared with $2,518-million a year ago.

Mr. Hider added, "Our diversified opportunity funnel and our strategic acquisitions give us ongoing confidence in our ability to create strong shareholder value and continue to deliver solutions that positively impact lives around the world."

Recent acquisitions

On Nov. 16, 2023, the company acquired Avidity Science, a growing designer and manufacturer of automated water purification solutions for biomedical and life science applications. The total purchase price paid in the third quarter of fiscal 2024, pending postclosing adjustments, was $271.9-million ($198.6-million (U.S.)). Avidity serves a diverse global customer base of pharmaceutical, biopharma, health care, government and academic research facilities. Avidity bolsters ATS's value proposition for both new and existing customers by providing researchers confidence in their data during key stages of drug discovery, development and testing.

On Jan. 1, 2024, subsequent to the third quarter, the company acquired ITACA, an Italian automation system integrator.

Third quarter summary

Fiscal 2024 third quarter revenues were 16.2 per cent, or $105-million, higher than in the corresponding period a year ago. This performance reflected year-over-year organic revenue growth (growth excluding contributions from acquired companies and foreign exchange translation) of $59.2-million, or 9.1 per cent, and revenues earned by acquired companies of $29.7-million, most notably $13.8-million from Avidity Science, which was acquired in the third quarter of fiscal 2024. Foreign exchange translation positively impacted revenues by $16.1-million, or 2.5 per cent, primarily reflecting the strengthening of the euro relative to the Canadian dollar. Revenues generated from construction contracts increased 14.9 per cent, or $63-million, due to organic revenue growth combined with positive foreign exchange translation impact. Revenues from services increased 23.2 per cent, or $28.8-million, due to revenues earned by acquired companies of $18-million, in addition to organic revenue growth and the positive impact of foreign exchange translation. Revenues from the sale of goods increased 13.1 per cent, or $13.2-million, primarily due to revenues earned by acquired companies of $11.2-million, in addition to a positive foreign exchange translation impact.

By market, revenues generated in life sciences increased $12.7-million, or 4.2 per cent, year-over-year. This was primarily due to contributions from acquisitions totalling $18.2-million and the positive impact of foreign exchange translation, partially offset by revenues earned a year ago on a large $120-million program. Revenues in transportation increased $78.8-million, or 48.8 per cent, due to timing of program execution and on higher order backlog entering the third quarter of fiscal 2024, driven primarily by EV order bookings, including previously announced EV order bookings of $578.2-million (U.S.). Revenues generated in food and beverage increased $6.4-million, or 7.2 per cent, due to revenues earned by acquired companies and the positive impact of foreign exchange translation. Revenues generated in consumer products decreased $900,000, or 1.3 per cent. Revenues in energy increased $8-million, or 34.9 per cent, due to higher order backlog entering the period as compared with the prior year, and $3.5-million of contributions from acquisitions.

Net income for the third quarter of fiscal 2024 was $47.2-million (48 cents per share basic), compared with $29.2-million (32 cents per share basic) for the third quarter of fiscal 2023. The increase primarily reflected higher revenues, partially offset by higher cost of revenues, selling, general and administrative (SG&A) expenses, and restructuring charges. Adjusted basic earnings per share were 65 cents compared with 56 cents in the third quarter of fiscal 2023.

Depreciation and amortization expense was $35.2-million in the third quarter of fiscal 2024, compared with $27.9-million a year ago -- the increase was primarily related to incremental depreciation and amortization expense from recently acquired companies.

EBITDA was $113.7-million (15.1-per-cent EBITDA margin) in the third quarter of fiscal 2024, compared with $83.9-million (13-per-cent EBITDA margin) in the third quarter of fiscal 2023. EBITDA for the third quarter of fiscal 2024 included $16.2-million of restructuring charges, $900,000 of incremental costs related to acquisition activity, $800,000 of acquisition-related fair value adjustments to acquired inventories, a $600,000 recovery of stock-based compensation expenses due to revaluation and an $11.7-million gain on sale of facilities. EBITDA for the corresponding period in the prior year included $700,000 of incremental costs related to acquisition activity, $10.5-million of restructuring charges and $5.6-million of stock-based compensation revaluation expenses. Excluding these costs, adjusted EBITDA was $119.3-million (15.9-per-cent adjusted EBITDA margin), compared with $100.7-million (15.6-per-cent adjusted EBITDA margin) for the corresponding period in the prior year. Higher adjusted EBITDA reflected higher revenues, partially offset by increased SG&A expenses. EBITDA is a non-IFRS (international financial reporting standards) measure.

Order bookings

Third-quarter fiscal 2024 order bookings were $668-million, a 31.8-per-cent year-over-year decrease, reflecting an organic order bookings decline of 36.2 per cent, primarily related to the transportation market, partially offset by 3-per-cent growth from acquired companies, in addition to a 1.4-per-cent increase due to foreign exchange rate translation of order bookings from foreign-based ATS subsidiaries, primarily reflecting the strengthening of the euro relative to the Canadian dollar. Order bookings from acquired companies totalled $29-million. By market, order bookings in life sciences increased compared with the prior-year period, primarily due to $18.1-million of contributions from acquired companies, organic growth and a positive foreign exchange rate translation of order bookings from foreign-based ATS subsidiaries. Order bookings in transportation decreased compared with the prior-year period, as a result of variability on timing of large EV orders. Third-quarter fiscal 2023 included order bookings of $221.3-million (U.S.) (approximately $300.2-million) from a global automotive customer to move toward fully automated battery assembly systems for its North American manufacturing operations. Order bookings in food and beverage increased compared with the prior-year period, primarily due to foreign exchange rate translation of order bookings from foreign-based ATS subsidiaries. Order bookings in consumer products increased primarily due to the timing of customer projects and contributions from acquired companies. Order bookings in energy decreased primarily due to timing of customer projects.

Trailing-12-month book-to-bill ratio at Dec. 31, 2023, was 0.95:1. Book-to-bill ratio is a supplementary financial measure.

Backlog

At Dec. 31, 2023, order backlog was $1,907-million, 11 per cent lower than at Jan. 1, 2023, primarily on account of lower order backlog within the transportation market where several large, strategic order bookings were included a year ago.

Outlook

The life sciences funnel remains strong, with a focus on strategic submarkets of pharmaceuticals, radiopharmaceuticals and medical devices, such as auto-fillers and auto-injectors. Management continues to see opportunities with both new and existing customers, including those customers using auto-injectors for diabetes and obesity treatments, and producers of contact lens and prefilled syringes, as well as opportunities to provide life science solutions that leverage various integrated capabilities to serve broader customer needs. In transportation, the funnel largely includes strategic opportunities related to electric vehicles, as the global automotive industry continues to shift toward EV production. The strategic nature of EV programs can result in larger average order values, resulting in variability in order bookings. Management believes the company's automated EV battery pack and assembly capabilities position ATS well within the industry. Management is working with one of its EV customers to support its revised timing on a portion of an existing program, as the customer works to realign its production schedules. The near-term market for electric vehicles remains dynamic as automotive original equipment manufacturers look to align capacity to end-market demand and lower platform costs, however, the longer-term fundamentals remain intact and the transportation funnel is strong and reflects diversified, long-term opportunities. Funnel activity in food and beverage remains strong, particularly for energy-efficient solutions. The company continues to benefit from strong brand recognition within the global tomato processing industry, and there is continuing interest in automated solutions with the food and beverage market. Funnel activity in consumer products is stable -- inflationary pressures continue to have an effect on discretionary spending, which may impact timing of some customer investments. Funnel activity in energy remains strong and includes some longer-term opportunities in the nuclear industry. The company is focused on clean-energy applications, including solutions for the refurbishment of nuclear power plants, early participation in the small modular reactor market and grid battery storage. Across all markets, customers are exercising normal caution in their approach to investment and spending. Funnel growth in markets where environmental, social and governance (ESG) requirements are an increasing focus for customers -- including grid battery storage, EV and nuclear, as well as consumer goods packaging -- provide ATS with opportunities to use its capabilities to respond to customer sustainability standards and goals, including global and regional requirements to reduce carbon emissions. Customers seeking to derisk or enhance the resiliency of their supply chains, address a shortage of skilled workers, or combat higher labour costs also provide future opportunities for ATS to pursue. Management believes that the underlying trends driving customer demand for ATS solutions, including rising labour costs, labour shortages, production onshoring or reshoring, and the need for scalable, high-quality, energy-efficient production, remain favourable.

Order backlog of $1,907-million is expected to help mitigate some of the impact of quarterly variability in order bookings on revenues in the short term. The company's order backlog includes several large enterprise programs that have longer periods of performance and therefore longer revenue recognition cycles. These programs have extended the average period over which the company expects to convert its order backlog to revenues, providing ATS with longer visibility. In the fourth quarter of fiscal 2024, management expects the conversion of order backlog to revenues to be in the 36 per cent to 39 per cent range. This estimate is calculated each quarter based on management's assessment of project schedules across all customer contracts, expectations for faster-turn product and services revenues, expected delivery timing of third party equipment, and operational capacity. The fourth-quarter conversion range accounts for the impact of approximately $200-million of order backlog with one of the company's EV customers that has been delayed, as noted above. Management expects that the program will restart in the first quarter of fiscal 2025.

The timing of customer decisions on larger opportunities is expected to cause variability in order bookings from quarter to quarter. Revenues in a given period are dependent on a combination of the volume of outstanding projects the company is contracted to, the size and duration of those projects, and the timing of project activities, including design, assembly, testing and installation. Given the specialized nature of the company's offerings, the size and scope of projects vary based on customer needs. The company seeks to achieve revenue growth organically and by identifying strategic acquisition opportunities that provide access to attractive end-markets, and new products and technologies, and deliver hurdle-rate returns.

In the short term, ATS will continue to mitigate supply chain volatility, which has been contributing to longer lead times and cost increases in the supply base over the past several quarters. However, prolonged cost increases and price volatility have distrupted, and may continue to disrupt, the timing and progress of the company's margin expansion efforts and affect revenue recognition. In addition, with a portion of order backlog related to one of the company's EV programs currently delayed, management expects to see near-term margin pressure in its transportation business. Over time, sustaining management's margin target assumes that the company will successfully implement the initiatives noted herein, and that such initiatives will result in improvements to its adjusted earnings from operations margin that offset these shorter-term pressures.

The company regularly monitors customers for changes in credit risk and does not believe that any single industry or geographic region represents significant credit risk.

In the short term, the company expects non-cash working capital to remain elevated, as large enterprise programs progress through milestones. Over the long term, the company expects to continue investing in non-cash working capital to support growth, with fluctuations expected on a quarter-over-quarter basis. The company's long-term goal is to maintain its investment in non-cash working capital as a percentage of annualized revenues below 15 per cent. However, given the size and timing of milestone payments for certain large EV programs in order backlog, the company could see its working capital exceed 15 per cent of annualized revenues in certain periods as it did in the first three quarters of fiscal 2024. The company expects that continued cash flows from operations, together with cash and cash equivalents on hand, and credit available under operating and long-term credit facilities, will be sufficient to finance its requirements for investments in non-cash working capital and capital assets, and to finance strategic investment plans, including some potential acquisitions. Acquisitions could result in additional debt or equity financing requirements for the company. Non-cash working capital as a percentage of revenues is a non-IFRS ratio.

Management is pursuing several initiatives to grow revenues and improve profitability, with the goal of expanding its adjusted earnings from operations margin to 15 per cent over time, through a combination of operational initiatives and portfolio development. Operational initiatives include a focus on pursuing continuous improvement in all business activities through the ATS business model, including in acquired businesses, improving global supply chain management, increasing the use of standardized platforms and technologies, and growing revenues while leveraging the company's cost structure. Portfolio development initiatives include efforts to grow the company's products and after-sales service revenues as a percentage of overall revenues. After-sales revenues and reoccurring revenues, which ATS defines as revenues from ancillary products and services associated with equipment sales, and revenues from customers who purchase non-customized ATS product at regular intervals, are expected to provide some balance to customers' capital expenditure cycles. Management estimates that reoccurring revenues are currently in the range of 25 per cent to 35 per cent of total revenues on a trailing-12-month basis. Moreover, the company's financial profile, which has included strong growth, margin expansion and disciplined working capital investment, has allowed it to generate free cash flows that are reinvested back into the business. Management also sees the development of the company's digitalization capabilities as another key area of growth for the portfolio, including the collection and interpretation of data to drive meaningful change that optimizes performance for customers. In addition, management is focused on investing in innovation and employing a consistent, strategic approach to acquisitions. The company continues to make progress in line with its plans to integrate acquired companies, and expects to realize cost and revenue synergies consistent with announced integration plans.

Reorganization activity

The company periodically undertakes reviews of its operations to ensure alignment with strategic market opportunities. As a part of this review, the company has identified, and previously announced, an opportunity to improve the cost structure of the organization and reallocate investment to growth areas. In the third quarter of fiscal 2024, restructuring expenses of $16.2-million were recorded in relation to the reorganization. The majority of the remaining actions are expected to be completed during the fourth quarter of fiscal 2024. The total estimated cost of these activities is expected to be at the higher end of the previously disclosed range of $15-million to $20-million.

Quarterly conference call

ATS will host a conference call and webcast at 8:30 a.m. ET on Wednesday, Feb. 7, 2024, to discuss its quarterly results. The listen-only webcast can be accessed live at the company's website. The conference call can be accessed live by dialling 888-660-6652 or 646-960-0554 five minutes prior to the start time. A replay of the conference will be available on the ATS website following the call. Alternatively, a telephone recording of the call will be available for one week (until midnight Feb. 14, 2024) by dialling 800-770-2030 and using the access code 8782510.

About ATS Corp.

ATS is an industry-leading automation solutions provider to many of the world's most successful companies. ATS uses its extensive knowledge base and global capabilities in custom automation, repeat automation, automation products and value-added services, including preautomation and after-sales services, to address the sophisticated manufacturing automation systems and service needs of multinational customers in markets such as life sciences, food and beverage, transportation, consumer products, and energy. Founded in 1978, ATS employs over 7,000 people at more than 65 manufacturing facilities and over 85 offices in North America, Europe, Southeast Asia and Oceania.

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