ATSC Q3 2009 Earnings Call Script

OPENING OF CALL/OPERATOR:

OPERATOR: Welcome to the ATS Corporation Third Quarter 2009 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session.

Now I would like to turn the program over to Joann O’Connell, Vice President of Investor Relations.

MODERATOR (J. O'Connell): Thank you. Good afternoon and thank you for joining us to review our third quarter 2009 results. With us this afternoon from ATS Corporation are Dr. Edward Bersoff, Chairman, President and Chief Executive Officer, Ms. Pamela Little, Executive Vice President and Chief Financial Officer, and George Troendle, Executive Vice President and Chief Operating Officer.

Before I review the structure of this call, I would like to read the safe harbor statement.

This conference call could contain forward looking statements about ATS Corporation within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are statements that are not historical fact. Such forward looking statements are based upon the current belief and expectations of ATS’ management and are subject to risks and uncertainties, which could cause actual results to differ from the forward looking statements. Such risks are more fully discussed in ATS’ filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks. ATS Corporation does not assume any obligation to update the information contained in this conference call.

At this time, I would like to outline the agenda for today’s call:

First, Ed will offer opening remarks.
Next, Pamela will briefly review ATS Corporation’s third quarter financial results.
Next, George will review operating results for the quarter.
Finally, Ed will further comment on the Company’s performance and outlook for our business as well as offer concluding remarks.
At the completion of Ed’s remarks, the Company will open the call to take your questions.

At this time, I would like to turn the call over to Dr. Edward Bersoff, Chairman, President and Chief Executive Officer of ATS Corporation.

Ed?

OPENING REMARKS:

E. BERSOFF: Good afternoon and thank you all for joining us today to review ATS Corporation’s third quarter 2009 financial and operational performance.

We are very pleased to report strong financial performance this quarter, with revenue growth from the second quarter of this year and ahead of third quarter 2008 revenue. We achieved EBITDA margins of 14.7% for the quarter, well exceeding our target margins and previous periods. We experienced expansion across all of our business units, and as a result of our strong cash flow, we were able to pay down $6.5 million in debt during the quarter. Total debt as of September 30, 2009 totaled $21.7 million, down $15.5 million since December 31, 2008.

George will further discuss our operational accomplishments and challenges for the quarter and I’ll later outline our continued initiatives and outlook for the rest of the year, after Pamela provides the financial details of the third quarter.

Pamela?

FINANCIAL RESULTS:

P. LITTLE: We will begin with our GAAP results, followed by our Earnings Before Interest, Taxes, Depreciation, Amortization and then explain the difference.

For the quarter ended September 30, 2009, we recorded $32.1 million in revenue. Revenue for the quarter increased slightly over the third quarter of 2009 revenue of $32 million. Revenue from commercial contracts increased by 6.4% and revenue from government contracts decreased by $300,000 over the third quarter of 2008.

Operating income and net income for the quarter was $3.9 million and $2.0 million or $0.09 per diluted share, respectively, a significant increase from the operating and net losses from the third quarter of 2008, when the company incurred a $56.8 million, non-cash goodwill and intangible asset impairment charge. The operating loss and net loss in the third quarter of 2008 was $55.8 million and $51.0 million, respectively.

Let me now turn to our internal metrics of performance and highlight how we look at our results. As I said a moment ago, our reported net income was $2.0 million for the quarter.

We incurred depreciation and amortization expenses of approximately $772,000, net interest of $598,000, and taxes of $1.3 million. Adding these expenses to our net income results in an EBITDA of $4.7 million and an associated EBITDA margin of 14.7%.

The year over year margin increase in the third quarter was driven by the realization of cost reduction initiatives implemented in 2008, the completion of several fixed priced contracts with favorable performance compared to prior estimates, and a reduction in legal expenses as a result of the resolution of the indemnification claim with the previous owners of Advanced Technology Systems, Inc. occurring at the end of the second quarter.

When combined with first and second quarter results, revenue and EBITDA for the first nine months was $89.5 million and $10.7 million, respectively, resulting in an EBITDA margin of 11.9%. In comparison, revenue and adjusted EBITDA for the first nine months of 2008 were $100.7 million and $9.6 million, respectively, resulting in an EBITDA margin of 9.6%. Operating income for the first nine months of 2009 was $8.3 million and net income was $3.6 million or $0.16 per diluted share, compared to an operating loss of $53.7 million and net loss of $50.6 million. The 2008 losses were due to the impairment charge previously discussed.

Other measures of performance that we monitor regularly include backlog and days sales outstanding, or DSO. Our contract backlog at September 30, 2009 was $153.1 million, of which $51.8 million was funded.

Our DSO at the end of the September quarter was at 61 days, down significantly from 86 days at the end of last year.

As of September 30, 2009, the balance on the revolving credit facility was $18.5 million and we had approximately $3.2 million in promissory notes related to the acquisitions we made in 2007.

As Ed mentioned earlier, our results today show strong financial performance this quarter with exceptional profit margins. We’re also pleased that we’ve been able to continue to improve our DSO again this quarter, further contributing to cash flow and our ability to reduce our debt balance. This concludes my review of the financials and I would now like to turn the call over to George.

George?

OPERATING RESULTS

G. TROENDLE: Thank you, Pamela. I would like to take the opportunity to comment on our operating results for the quarter. We were very pleased to see our second consecutive quarter of revenue growth and an increase over the revenue from the third quarter of 2008, particularly in light of some of the revenue challenges we have outlined in earlier calls. As Ed stated earlier, the increase in revenue also represents expansion across all of our business areas.

As we reported in our earnings release this afternoon, while our quarter over quarter revenue grew, our overall revenue for the first nine months is down 11.1% from the first nine months of 2008. Much of the year over year decline has come from our commercial business areas. As we discussed in earlier calls, we experienced a significant, but temporary downturn in our Fannie Mae business earlier in the year, as it reorganized to operate under government conservatorship. We’ve seen that business recover in the second and third quarters and we are now back at levels comparable to last year’s revenue for this customer. While Fannie Mae represents the largest increase in our commercial business expansion, we also began new engagements with Neustar and Perceptive Software. Overall, revenue from our commercial contracts totaled $6.7 million for the third quarter, compared to $6 million in the second quarter.

Within our government business areas, we also experienced year over year declines in revenue for 2009’s third quarter and first nine months. As we have reported earlier, this drop was within our expectations due to the conversion of one of our Coast Guard contracts to a small business set-aside, where we shifted from a prime to subcontractor role. Our government business as a whole grew in revenue from the second quarter to the third quarter, primarily through expanded work at the Department of Housing and Urban Development, Pension Benefit Guaranty Corporation or PGBC, Defense Logistics Agency, and the Defense Technology Security Administration. Overall, revenue from our civilian and defense contracts totaled $25 million for the third quarter, compared to $24 million in the second quarter.

We remain committed to increasing our bookings and backlog, in order to continue the positive momentum we have experienced this year. Our bookings of $30 million for the third quarter were considerably higher than earlier quarters and the majority of the bookings represent a number of imminent recompetes that have been recently extended. In some cases, the extensions have not only represented an extension of the term, but also additional work. While these extensions are to our immediate benefit and we are very pleased that our customers continue to value our work, it has not allowed us to achieve the growth in backlog that we expected at the end of the third quarter.

After the close of the quarter, we were pleased to win a full and open competition for new work with one of our largest customers, PBGC. We were awarded a $12.2 million, five-year software development contract, representing new work for a customer where we’ve been very successful steadily increasing our presence in the last few years. We remain confident that we can continue our strong track record of winning our recompetes and expanding our footprint with existing customers, which will significantly increase our backlog in the future. This concludes my review of the operating results and I would now like to turn the call back over to Ed.

Ed?

CONCLUDING REMARKS:

E. BERSOFF: Thank you, George. I would like to take the opportunity to summarize our financial and operational accomplishments achieved this quarter and our priorities for the rest of the year. Our accomplishments achieved in the third quarter include:

Increasing revenue for two consecutive quarters and realizing year over year revenue growth in the third quarter.
Exceeding our targeted EBITDA margin of 9% even with increasing investment in business development including several strategic hires. In fact, we have increased our investment in business development by approximately 16% in the first nine months of this year, compared to the same period last year.
Booking $30 million in new business in the third quarter from our largest and longest standing customers, and more recently, expanding our presence at PBGC with the award of a new $12 million contract.
Stabilizing many of the issues we faced in the commercial division, including the recovery of our business at Fannie Mae.
Paying down another $6.5 million of debt.

And
Commencing our stock repurchase program.

Additionally, shortly following the end of our third quarter, we retired the remainder of our warrants that expired in October.

As I stated in earlier calls, we have outlined the following additional priority initiatives for 2009:

Supporting the efforts of our business development organization and continuing to increase our bid pipeline and backlog.
Continuing to maintain at least 9% EBITDA margins.
Taking steps toward a listing on a national exchange.

And
Restarting our acquisition strategy, as the significant reduction in our debt this year and increasing stability in the credit markets have decreased our financing risks.

GUIDANCE AND CONCLUDING REMARKS:

E. BERSOFF: Before we open the call to questions, I’d like to go over our revised guidance for 2009 that we reported in our earning release this afternoon. As a result of our success in exceeding our target EBITDA and EBITDA margins each quarter in 2009, we have increased our EBITDA guidance for the year to be in the range of $12 million to $13.5 million. We are not revising our revenue guidance for the year and reiterate our guidance range for the year of $121 million to $125 million.

We are very encouraged with the strong performance this quarter and enthusiastic to build on that momentum as we end the year and begin 2010.

This concludes my remarks. At this point, we would like to open the call to questions.

AFTER Q&A:

E. BERSOFF: Thank you for your time and attention. We look forward to speaking with each of you over the coming months and thank you again for your support.