ATS Automation Tooling Systems Reports Second Quarter Results | Automation.com

ATS Automation Tooling Systems Reports Second Quarter Results

November 102005
CAMBRIDGE, ON, Nov. 10 /CNW/ - ATS Automation Tooling Systems Inc. today
reported its financial results for the three months ended September 30, 2005 -
and announced measures designed to improve its future performance.

Second Quarter Highlights
  • Revenue was $154.5 million, compared to $180.3 million in the second
    quarter a year ago.
  • Net loss from continuing operations for the second quarter was
    $3.0 million, which includes provisions of $5.8 million recorded for
    customers in the automotive industry. These results compare to
    earnings from continuing operations of $4.7 million in the second
    quarter a year ago, and also reflect lower revenue and earnings at
    Automation Systems Group ("ASG").
  • Solar Group operating earnings increased 544% to $3.1 million
    compared to the same period last year.
  • New ASG order bookings of $167 million in the second quarter were up
    50% from $111 million in the first quarter of fiscal 2006.
  • Period end ASG order backlog was $211 million, up 36% from
    $155 million at June 30, 2005.

    Management Commentary
    "ATS was not able to achieve our number one goal of improved results for
    shareholders in the second quarter," said Ron Jutras, President and Chief
    Executive Officer. "The chapter 11 filing of Delphi Corporation put us into a
    loss position and our underlying operating performance was disappointing due
    to significant underutilized capacity. In spite of recent improvements in
    order flow and order backlog we continue to have an unacceptable level of
    capacity utilization and as a result we are reducing our global Automation
    Systems Group workforce by 6%. This will result in estimated annualized pre-
    tax savings from workforce reductions of $9 million. The workforce reduction
    has already been implemented in a number of locations and, today, the balance
    of this rationalization was announced internally, including the planned
    consolidation of ATS Niagara, a small automation facility in Burlington,
    Ontario, into our Cambridge, Ontario facility. These reductions in workforce,
    combined with ongoing cost savings initiatives are necessary to improve ASG
    margins. In context, they are also part of a broader, ongoing management
    priority to improve global performance, maximize our industry leading-
    capabilities and deploy resources where we can achieve the best returns for
    shareholders and customers."

    Outlook
    "ASG's potential has improved since the end of the first quarter on the
    strength of higher backlog," said Mr. Jutras. "This gives us a good volume of
    work on hand to begin the second half of fiscal 2006. Looking forward, our
    pipeline of potential new orders is strong. This, however, is tempered by the
    poor health of many companies in the automotive sector. In this environment,
    the increasing diversification of the markets for our manufacturing solutions
    provides us with a clear benefit and gives us confidence about our future. We
    believe that with a leaner operating structure and higher backlogs we should
    see better results from ASG during the second half of the year."

    "For Solar Group, we expect Photowatt to continue to perform well, driven
    by strong demand and the benefits of ongoing operating improvements. Spheral
    Solar Power (SSP) completed its preproduction period at September 30, 2005,
    and its initial financial results will begin to be reflected in operating
    results in the third quarter. As a start-up, we expect SSP to generate losses
    while it ramps up its production - however, these losses are necessary
    investments that will allow us to validate the SSP technology and unlock its
    value for shareholders."

    "Subsequent to quarter end, SSP achieved a major milestone by running
    production continuously for the first time, using all of its advanced
    automated manufacturing processes and production equipment. This is a major
    step forward on our SSP commercialization path and we are optimistic that we
    will be able to achieve our primary goal of validating SSP's technology during
    calendar 2006. This is an ideal time for us to be launching SSP given the
    continuing strength of solar markets and the benefits that SSP brings to the
    marketplace."

    Quarterly Conference Call
    ATS's quarterly webcast begins at 10 am eastern today at
    www.atsautomation.com.

    Note to Readers
    The second quarter MD&A and consolidated interim financial statements
    accompanying this news release contain detailed information of quarterly
    performance, financial condition and the Company's outlook. Readers should
    review the Company's MD&A, audited financial statements and annual report for
    the full fiscal year ended March 31, 2005 which are available on SEDAR at
    www.sedar.com. Certain forward-looking statements are made in this news
    release and accompanying MD&A, including statements regarding possible future
    results and business. Investors are cautioned that such forward-looking
    statements involve risks and uncertainties. The Company's results could differ
    materially from those currently anticipated due to a number of factors
    including, but not limited to, the risks and uncertainties contained in the
    Company's fiscal 2005 MD&A and annual report and other risks detailed from
    time to time in ATS's periodic reports filed with Canadian regulatory
    authorities.

    About ATS
    ATS Automation Tooling Systems Inc. (www.atsautomation.com) is the
    industry's leading designer and producer of turn-key automated manufacturing
    and test systems, which are used primarily by multinational corporations
    operating in a variety of industries including: automotive, computer-
    electronics, healthcare, and consumer products. ATS is also an emerging leader
    in the rapidly growing market for solar energy cells and modules. The Company
    also makes precision components and subassemblies using its own custom-built
    manufacturing systems, process knowledge and automation technology. ATS
    employs approximately 4,000 people at 25 manufacturing facilities in Canada,
    the United States, Europe and Asia-Pacific. The Company's shares are traded on
    The Toronto Stock Exchange under the symbol ATA.

    Management's Discussion and Analysis
    This MD&A for the three and six months ended September 30, 2005 provides
    detailed information on the Company's operating activities of the second
    quarter of fiscal 2006 and should be read in conjunction with the unaudited
    interim consolidated financial statements for the three and six months ended
    September 30, 2005 and the Company's fiscal 2005 Annual Report. The Company
    assumes that the reader of this MD&A has access to, and has read the MD&A in
    the Company's 2005 Annual Report and the first quarter of fiscal 2006 MD&A
    and, accordingly, the purpose of this document is to provide a second quarter
    update to the information contained in the MD&A section of the 2005 Annual
    Report. For a discussion of the three months ended June 30, 2005 refer to
    ATS's first quarter MD&A. These documents and other information relating to
    the Company, including the Annual Information Form, may be found on SEDAR at
    www.sedar.com.

    Notice to Readers
    The Company has three reportable segments: Automation Systems Group
    ("ASG"), Solar Group ("Solar"), and Precision Components Group ("PCG"). The
    terms operating income, operating earnings, earnings from operations,
    operating loss, operating results, operating margin, Order Backlog and Order
    Bookings used in this MD&A have no standardized meanings prescribed within
    Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may
    not be comparable to similar measures presented by other companies.

    Certain forward-looking statements are made in this MD&A, including
    statements regarding possible future results and business. Investors are
    cautioned that such forward-looking statements involve risks and
    uncertainties. The Company's results could differ materially from those
    currently anticipated due to a number of factors including, but not limited
    to, the risks and uncertainties contained in the Company's fiscal 2005 Annual
    Report and other risks detailed from time to time in ATS's periodic reports
    filed with Canadian regulatory authorities.

    Consolidated Results of Operations
    Consolidated revenue from continuing operations for the three months
    ended September 30, 2005 was $154.5 million, $25.8 million or 14% lower than a
    year earlier. This primarily reflected an 18% decline in ASG revenue and an
    11% decline in PCG revenue. For the six months ended September 30, 2005,
    revenue from continuing operations was $345.0 million, $16.8 million or 5%
    lower than a year earlier. This reflected 8% and 10% declines in ASG and PCG
    revenues respectively, which more than offset a 7% increase in Solar revenue.
    Changes in effective foreign exchange rates reduced consolidated revenue for
    the three and six months ended September 30, 2005 compared to the same periods
    of fiscal 2005 by an estimated $11.3 million and $23.2 million respectively.

    Consolidated loss from operations for the three months ended
    September 30, 2005 was $3.9 million, compared to earnings from operations of
    $7.7 million a year ago. Solar earnings from operations increased 544% to
    $3.1 million during the quarter, up from $0.5 million in the same period of
    fiscal 2005. ASG earnings from operations declined by $13.3 million compared
    to the second quarter of fiscal 2005. The loss from operations of PCG
    increased $1.0 million compared to the second quarter of a year ago.
    Consolidated earnings from operations for the first six months of fiscal 2006
    were $5.3 million, an $8.7 million decline from the comparable prior year
    period. Changes in effective foreign exchange rates reduced consolidated
    operating earnings for the three and six months ended September 30, 2005
    compared to the same periods of fiscal 2005 by an estimated $2.6 million and
    $4.8 million respectively.

    Selling, general and administrative expenses increased $4.1 million in
    the second quarter or 22% compared to a year ago largely due to the
    $4.7 million provision taken in the second quarter for financial exposure to
    Delphi Corporation (see below). The Company continues to maintain its sales
    and marketing spending despite lower revenues in order to continue to further
    diversify its markets and fuel sales growth.

    Stock-based compensation cost increased $0.2 million during the quarter,
    and $0.8 million for the first six months of the year compared to the
    respective prior year comparable periods. This reflected the issuance of
    employee stock options, the increased use of deferred stock units under the
    directors' compensation plan, and the revaluation of the outstanding deferred
    stock units.

    Interest expense for the three and six months ended September 30, 2005
    reflected higher interest rates and higher levels of usage of the Company's
    credit facilities compared to a year ago.

    Net loss for the second quarter of fiscal 2006 was $3.3 million (6 cents
    per share) compared to net earnings of $0.4 million (1 cent per share basic
    and diluted) a year ago. Net earnings for the first six months of fiscal 2006
    were $2.1 million (4 cents per share basic and diluted) compared to
    $3.2 million (5 cents per share basic and diluted) for the same period last
    year.

    Delphi Chapter 11 Filing
    On October 8th, 2005, Delphi Corporation and certain of its subsidiaries
    ("Delphi"), announced a Chapter 11 business reorganization filing under the US
    Bankruptcy Code. Delphi is one of ASG's largest automotive customers.

    On October 8th, 2005, ASG had accounts receivable outstanding of
    US$4.1 million with the Delphi divisions that are subject to the filing. Given
    the uncertainty surrounding the eventual amount realizable related to the pre-
    bankruptcy accounts receivable, management has, for the purposes of financial
    reporting, recorded a provision in the amount of US$4.1 million ($4.7 million
    Canadian) during the second quarter of fiscal 2006.

    ASG also had approximately US$1.5 million of contracts in progress and
    US$8 million of backlog on unshipped orders with Delphi. ASG continues to
    fulfill the terms of these contracts as they have not been cancelled and
    management believes that ATS will receive payment upon completion for this
    work as part of Delphi's court approved Debtor In Possession financing. As
    such, management has not provided a reserve for these ongoing projects.
    Management continues to engage in active discussions and negotiations with
    Delphi in order to further secure payment and to assess ongoing credit risks.

    Continuing PCG operations have no direct exposure to Delphi. The
    precision metals division, a discontinued operation of the PCG segment (see
    discussion below), had accounts receivable from Delphi at the time of the
    Chapter 11 filing of $0.2 million, which have also been fully provided for in
    the quarter and included in the loss from discontinued operations.

    ATS derives a significant portion of its revenue from the automotive
    sector which is currently undergoing significant restructuring. Management
    continues to actively manage and monitor its current and future exposure to
    its automotive customers and has put in place additional controls in this
    period of industry uncertainty.

    Impact of Foreign Exchange
    The sustained strength of the Canadian dollar against the US dollar and
    the Euro continued to have a significant and negative impact on the Company's
    revenue and earnings in the second quarter and on a year-to-date basis. In the
    second quarter, the effective rate of exchange on the US dollar and Euro
    currencies declined 6% and 8% respectively, while average market rates were
    each 8% lower compared to the same quarter of last year.

    At September 30, 2005 the Company had on hand unrealized forward exchange
    contracts for the future sale of US dollars totaling US$148.8 million at an
    average exchange rate of Cdn $1.2093. The unrecognized gain on these forward
    contracts totaled approximately $4.1 million at September 30, 2005.

    Discontinued Operations
    During fiscal 2005, the Company committed to a plan to sell PCG's
    precision metals division ("Precision Metals"). The Company is in discussions
    with potential acquirers of these assets with the intention to conclude a sale
    during fiscal 2006. Accordingly, the results and financial position of
    Precision Metals have been segregated and presented separately as
    "discontinued operations" and "assets held for sale" in the accompanying
    interim financial statements. As the assets have not yet been sold, the actual
    net realizable value of the Precision Metals assets could differ materially
    from management's current estimate. The loss from discontinued operations
    incurred during the second quarter was $0.8 million compared to $1.3 million
    in the second quarter of fiscal 2005. Included in this loss is a $0.2 million
    provision for doubtful accounts in respect of Delphi's Chapter 11 filing.

    During the second quarter of fiscal 2006, the Company received a
    $0.3 million settlement related to its discontinued thermal management
    products business. See note 2 to the Consolidated Interim Financial Statements
    for further details on the net loss from discontinued operations.

    Automation Systems Group
    ASG revenue declined 18% in the second quarter compared to the second
    quarter of last year. An increase in automotive revenue of 15% was more than
    offset by declines in computer-electronics, healthcare, and "other" revenues.
    The overall decline in ASG revenue resulted from lower backlog entering the
    second quarter, reflecting order delays and push-outs, as well as continued
    weakness in the US dollar. Management believes that the complexity and size of
    projects it bids on in the healthcare sector tend to lengthen the sales cycle.
    A significant amount of the second quarter Order Bookings occurred late in the
    quarter, including a $27 million healthcare order (announced September 12,
    2005), and did not have a meaningful impact on second quarter results.

    On a regional basis, compared to the second quarter last year, the
    decline in revenue occurred primarily at ASG's Cambridge facilities,
    reflecting lower backlog levels entering the quarter at this facility. The
    acquisition of a small UK-based automation company in July (see note 3 to the
    Consolidated Interim Financial Statements) contributed approximately
    $1 million in revenue in the second quarter. For the three and six months
    ended September 30, 2005, the estimated negative foreign exchange impact on
    revenue was $7.5 million and $15.9 million, respectively.

    ASG second quarter operating loss was $3.1 million. Excluding the impact
    of provisions of $5.8 million related to automotive customers, operating
    earnings were $2.7 million (2.5% margin) compared to $10.3 million (7.7%
    margin) a year ago. The provisions include the aforementioned $4.7 million
    Delphi provision as well as a $1.1 million provision related to an unresolved
    dispute on an automotive customer's project. The year-over-year decline in
    operating earnings also reflected lower revenue during the quarter, and
    $0.6 million of costs expensed to reduce the ASG workforce in France, Germany
    and West Coast operations. On a regional basis, compared to the second quarter
    last year, increased profitability was experienced in Western North American,
    Asian, and the Contract Equipment Manufacturing operations. Excluding
    workforce reduction costs, ASG European earnings from operations also improved
    from the second quarter last year. Lower operating earnings were experienced
    at ASG's Eastern North American operations primarily due to lower revenue
    levels and costs associated with underutilized capacity.

    ASG operating earnings for the first six months of fiscal 2006 were
    $3.9 million (operating margin of 1.6%) compared to $16.7 million (6.5%
    operating margin) in the same period of fiscal 2005. The estimated negative
    impact of foreign currency on ASG operating earnings for the three and six
    months ended September 30, 2005 was $1.7 million and $3.3 million,
    respectively.

    During the quarter, the Company took advantage of a financially
    compelling opportunity to fulfill an identified strategic need by acquiring
    the net assets and operations of a small automation business in the United
    Kingdom. The Company received $0.5 million of cash net of expenses paid from
    the acquisition of this business which is expected to add modestly to revenues
    in the second half of the year. More importantly, the acquisition increases
    ASG's installation support and sales and service capabilities in this region
    and enables ATS to better serve its growing list of customers and installed
    base in the U.K.

    Automation Systems Backlog
    At September 30, 2005, ASG Order Backlog was $211 million, $56 million
    higher than at June 30, 2005 and $42 million higher than at March 31, 2005,
    but $41 million lower than the near record high levels achieved at
    September 30, 2004. New ASG Order Bookings were $167 million in the second
    quarter of fiscal 2006 and $278 million for the first six months of fiscal
    2006, compared to $154 million and $271 million in the respective prior year
    periods. ATS successfully converted approximately $70 million of the
    $86 million of anticipated automation orders discussed in the first quarter
    MD&A into new Order Bookings in the second quarter (the remaining projects are
    expected to convert to firm orders in the third quarter). Order Bookings to
    date in the third quarter are $45 million.

    Automation Systems Outlook
    Current backlog, combined with expected bookings in the third quarter are
    expected to translate into higher levels of revenue in ASG during the
    remainder of the fiscal year as compared to the first six months of this
    fiscal year. The increase in backlog from the first quarter of fiscal 2006
    primarily reflected increased healthcare booking activity in the second
    quarter. This has provided for a better level of diversification in backlog
    across industry groups compared to the end of the first quarter. Compared to
    the first quarter of fiscal 2006, ASG's healthcare backlog increased
    $40 million, automotive increased $12 million, and computer-electronics
    increased $11 million, which was partially offset by a decrease in other
    backlog of $7 million.

    Importantly, strong bookings during the second quarter have improved
    factory loading across ASG divisions, with Order Backlog levels more than
    doubling in the Company's Cambridge, Ontario facility. Management believes
    that with improved Order Backlog, the Company's activity levels in its North
    American operations are improving, which, combined with ongoing cost
    reductions initiatives, should translate into improved ASG earnings in the
    second half of the fiscal year compared to the first half.

    To further improve capacity utilization, the Company is reducing its ASG
    workforce. During the second quarter and continuing into October, the Company
    reduced employment in ASG West Coast and European operations by 34 positions.
    The Company is currently further reducing staff by an additional 135 positions
    in its Eastern North American operations. The people affected by this
    reduction have been notified.

    In total, this will represent a 6% reduction in ASG staff since the end
    of the first quarter. A portion of these reductions is the result of
    management's decision to consolidate ATS Niagara, a small leased satellite
    facility, into its Cambridge, Ontario facilities. The aggregate estimated
    annualized savings from ASG workforce reductions total approximately
    $9 million and the estimated costs expected in the second half of the year to
    complete these reductions total $2 million. The decision to reduce the
    workforce has been done in a careful and deliberate manner to allow ASG to
    maintain its industry leading technical expertise and knowledge.

    Solar Group
    Solar Group revenue, which is derived from Photowatt, was $27.2 million
    in the second quarter, slightly lower than in the same period last year,
    primarily as the result of the 8% decline in the average Euro exchange rate to
    the Canadian dollar. Excluding the translation effect of foreign exchange,
    revenue would have been 5% higher than the second quarter a year ago.

    Over the first six months of fiscal 2006, Photowatt's revenue was
    $70.1 million, or 7% higher than in fiscal 2005. Revenue growth reflects
    strong market demand for solar products primarily as a result of attractive
    government incentive programs in Europe, increasing consumer interest in
    clean, sustainable energy sources and increased selling prices for its
    products. As expected, revenues in the second quarter of fiscal 2006 were
    lower than the first quarter of fiscal 2006 as the Photowatt facility in
    France was closed for the month-long summer shutdown customary in Europe.

    Solar Group second quarter operating earnings were $3.1 million (11.3%
    operating margin), compared to $0.5 million (1.7% operating margin) a year
    ago. Solar Group operating earnings for the six month period were $9.7 million
    (13.8% operating margin), compared to $3.8 million (5.8% operating margin) a
    year ago. The increasingly strong performance of Photowatt reflects the
    benefits of significant improvements in production yields, throughput gains,
    cost reduction initiatives and the continued optimization of capital
    investments that were made in fiscal 2005. Also contributing to increased
    earnings from operations were the benefits of Photowatt's active silicon
    supply management activities, and higher selling prices to its customers.

    Solar Outlook
    The outlook for Solar continues to be very positive, however, silicon
    supply remains an industry-wide concern and silicon prices have continued to
    increase with year-over-year silicon pricing more than doubling. Management
    believes that it has secured sources of silicon at Photowatt for a significant
    amount of its capacity into the first quarter of fiscal 2007 and is continuing
    to devote resources to secure additional supply to enable its operations to
    grow without major disruption. To date, Photowatt has mitigated a significant
    amount of the impact of silicon supply shortages and increases in the market
    prices for silicon by achieving higher internal operating efficiencies.
    However, Photowatt's silicon costs are expected to continue to increase during
    the remainder of fiscal 2006 as its inventory of lower-priced silicon is
    consumed and new silicon purchases are made at higher prices. Photowatt
    continues to secure price increases with some of its customers to help offset
    the increased cost of silicon. However, there remains a risk that selling
    price increases and improvements in production efficiencies may not be able to
    fully offset higher silicon costs. Management is currently exploring longer
    term alternatives to secure additional silicon supply and continues to
    reinvest the strong cash flow generation of Photowatt to fund Photowatt's
    near-term capacity expansion and silicon supply initiatives. Management
    believes that sufficient silicon feedstock has been secured for Solar Group's
    emerging Spheral Solar Power ("SSP") operations through the end of the 2006
    calendar year.

    Solar product demand is expected to remain strong well into fiscal 2007
    based upon ongoing European subsidy programs, newly introduced US subsidy
    programs and growing demand for clean renewable energy products. Photowatt has
    initiated plans to invest approximately $9 million to increase capacity from
    32 megawatts (MW) at the start of this fiscal year to 40 MW by the end of this
    fiscal year.

    Strong demand for solar energy continues to create substantial interest
    in SSP's products among wholesalers, distributors and retailers. Management
    believes the flexible nature and durability of the SSP product gives SSP
    significant competitive advantages and growth opportunities. Early feedback in
    recent weeks from customers on the test and demonstration products that are in
    the field has been positive, with the SSP product significantly outperforming
    competitive flexible products.

    For the first time, the new SSP manufacturing factory ran continuous
    production during October 2005, successfully achieving a major technical
    milestone in its commercialization program. During this period, which began
    three weeks ago, all equipment has been operational for each of the SSP
    production processes. Management is currently gathering substantial additional
    data, insight and knowledge to help achieve the primary goal of validating the
    commercial manufacturability of the SSP technology. While there are numerous
    risks and significant work remains to be done, management is optimistic that
    this primary goal will be achieved during calendar 2006. Management believes
    that the validation of the commercial manufacturability of the SSP technology
    is the most critical hurdle to overcome in the commercialization of the SSP
    technology and in the execution of the Solar Group's longer term strategic
    plans.

    Beginning in the third quarter of fiscal 2006, ATS will recognize the
    results of SSP in its consolidated statement of earnings. Revenues for the
    balance of the year from SSP are not expected to be material to ATS. As
    discussed in the fiscal 2005 MD&A, the SSP initiative involves significant
    risks.

    In the second quarter, a special sub-committee of the ATS Board of
    Directors was formed as part of the Company's continuing plans to establish
    ATS Solar Group as a separate business within ATS to unlock the growth
    potential and value of this promising business for ATS shareholders.

    Precision Components Group
    Second quarter PCG revenue was $21.1 million, 11% lower than the
    $23.7 million in the comparable prior year period. For the six month period
    ended September 30, 2005, PCG revenue was $44.9 million, 10% lower than the
    comparable prior year period. Sales declined for the three and six month
    periods primarily as a result of lower US-Canadian dollar exchange rates, the
    previously announced discontinuation of an unprofitable customer program (see
    below) as well as volatility in North American automotive markets for PCG. The
    estimated negative foreign exchange impact on revenue in the quarter and for
    the first six months was $1.3 million and $2.6 million, respectively. PCG
    revenue in the second quarter was $2.6 million lower than in the first quarter
    of fiscal 2006 mainly reflecting traditional summer plant shutdowns.

    During the fourth quarter of fiscal 2005, as a result of requesting price
    increases on a program that had become unprofitable due to changes in foreign
    currency exchange rates, PCG received notice that a customer program would be
    terminated in the first quarter of fiscal 2006. This discontinuation reduced
    revenue by approximately $1.1 million and $2.1 million in the three and six
    months ended September 30, 2005, respectively, compared to the same period of
    last year.

    PCG incurred an operating loss of $1.4 million compared to an operating
    loss of $0.4 million in the second quarter a year ago, due to the impact of a
    weaker US dollar, lower revenue caused by volatility in the automotive market
    and a price reduction unilaterally imposed upon PCG by an automotive customer
    that reduced earnings $0.4 million in the quarter. While PCG is vigorously
    opposing this arbitrary price decrease, the Company has recorded the revenue
    related to this program at the lower level because there is uncertainty as to
    the ultimate resolution. Also affecting PCG operating earnings was
    $0.2 million of start-up costs related to PCG's manufacturing facilities in
    China, which are expected to begin ramping up production in the third quarter.
    In both the second quarter of fiscal 2006 and 2005, PCG's operating results
    were affected by traditional summer plant shutdowns in the automotive sector
    and corresponding shutdowns in PCG operations. The estimated negative impact
    of foreign currency on PCG operating earnings in the three and six months
    ended September 30, 2005 was $0.6 million and $0.9 million, respectively,
    compared to the comparative period in the prior year.

    PCG's operating loss for the first six months of fiscal 2006 was
    $2.3 million compared to an operating loss of $0.3 million in the same period
    of fiscal 2005, due partly to $1.0 million of incremental cash expenditures
    incurred in the first quarter fiscal 2006 to close PCG's McAllen, Texas
    facility and consolidate these assets into existing PCG operations. The
    consolidation of McAllen's production is complete and all customer programs
    have been transferred. All of the significant expenditures associated with the
    transfer of this business have now been incurred. The remaining equipment and
    building that were not transferred were sold during the quarter for a gain of
    $0.1 million.

    Precision Components Outlook
    PCG continues to streamline its operations in pursuit of an earnings
    recovery and continues to work toward improving its performance. In
    particular, it expects to begin to achieve the benefits of closing and
    consolidating its McAllen operations in the second half of fiscal 2006. These
    benefits are expected to be delivered in the form of reduced operating costs
    and improved PCG asset utilization. Additional gains are also expected to
    accrue incrementally over the next several quarters from PCG's ongoing
    enhancement initiatives including Six Sigma, improved equipment utilization
    and other continuous improvement programs.

    The North American automotive market remains challenging. While the
    Chapter 11 filing of Delphi did not directly affect the continuing operations
    of PCG during the second quarter, the impact of this filing on PCG's customers
    and suppliers in the automotive sector is anticipated to put additional
    pressure on the industry. PCG continues to pursue new business to more fully
    utilize existing capacity and offset the discontinuation of unprofitable
    business.

    Liquidity, Cash Flow and Financial Resources
    Cash balances, net of bank indebtedness, at September 30, 2005 increased
    $0.4 million during the quarter compared to the first quarter of fiscal 2006,
    but decreased $55.4 million during the first six months of fiscal 2006. The
    increase in cash during the second quarter was largely as a result of the
    increased usage of the Company's long term credit facilities of $15.0 million,
    offset by investments in property, plant and equipment and the Company's
    investment in the SSP development. Cash generated from operating activities
    during the quarter of $1.5 million - a decline of $45.3 million compared to
    the second quarter of fiscal 2005 - was mainly due to reduced operating
    earnings in the second quarter and the temporary reduction in non-cash working
    capital that occurred in the second quarter of fiscal 2005.

    The Company invested $18.0 million in property, plant and equipment and
    other investments (which includes deferred development), in the second quarter
    of fiscal 2006, which was offset by the proceeds from the sale of a PCG
    building in Texas of $2.5 million. Investments made in SSP in the second
    quarter of fiscal 2006, net of government funding, were $2.5 million and
    $4.7 million for capital assets and deferred development, respectively. Total
    investment in the SSP initiative, net of government funding, was $120 million
    at September 30, 2005, including the acquisition costs for the initial
    technology, the commercialization project and a $3.6 million investment in
    inventory. To date, all these costs have been capitalized on the Company's
    balance sheet. The deferred development period for the SSP initiative ended on
    September 30, 2005 and SSP's future revenue, expenses and operating results
    will be included in the consolidated statements of earnings commencing in the
    third quarter of fiscal 2006.

    During the second quarter, eight thousand stock options were exercised
    for total proceeds of $80,000. At September 30, 2005 the total number of
    shares outstanding was 59,070,042.

    Management believes the Company's cash flow from operations, sound
    balance sheet and access to unutilized credit provide ATS with the financial
    resources to execute its business plans and pursue strategic opportunities.
    The Company's debt to equity ratio at September 30, 2005 was 0.2:1. At
    September 30, 2005 the Company had $52 million of unutilized credit available
    under existing operating and term credit facilities. The Company is in
    compliance with its loan covenants.

    Share Repurchase
    In April, 2005 the Company exercised its option to purchase for
    cancellation 1,974,723 ATS common shares at a price of $12.66 per share as
    further described in note 5 to the Consolidated Interim Financial Statements.
    The total purchase price of $25 million was funded by life insurance proceeds
    of $25 million received by the Corporation in fiscal 2005 under a life
    insurance policy that had been maintained in respect of the Company's founder,
    Mr. Klaus Woerner, and which was established in conjunction with the execution
    of the option agreement.

    Lease and Contractual Obligations
    Information on the Company's lease and contractual obligations is
    detailed in the annual financial statements and MD&A for the year ended
    March 31, 2005. For the period ended September 30, 2005, the Company did not
    enter into any material leases or any material contractual obligations which
    would be considered outside the normal course of operations.
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