ATS Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

ATS Corporation is a global automation solutions provider, designing and building customized systems for manufacturers across diverse industries, focusing on providing efficiency-increasing solutions for its customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: ATS Corporation operates in the industrial automation sector, providing bespoke solutions for manufacturers across various industries such as life sciences, consumer products, electronics, transportation, energy, and packaged goods. The company specializes in designing, building, and installing automation systems, including automated manufacturing systems, process controls, tooling, and specialized equipment. They don’t just sell hardware; they offer a comprehensive range of services, including engineering design, project management, software development, and integration. The company’s focus is on delivering solutions that drive efficiency, increase production speed and quality, and reduce costs for its customers.

Revenue Distribution:

  • ATS segments its business into two primary divisions: Industrial Automation (IA) and Life Sciences Automation (LSA).
  • The IA segment provides standard and custom automation solutions for manufacturing companies in diverse industries, focusing on process automation, industrial tooling and equipment, and factory automation services.
  • The LSA segment provides specialized and regulated automation for life sciences companies, including equipment and services for product development, drug manufacturing, packaging, and delivery.
  • Geographically, the company generates revenue across North America, Europe, and Asia, with a relatively balanced distribution across those regions but with most revenue from North America and Europe.

Industry Trends and Competitive Landscape:

  • The industrial automation sector is growing rapidly, driven by factors such as labor shortages, the need for increased efficiency and productivity, and technological advancements in automation, artificial intelligence and machine learning. This is resulting in more complexity in systems and more software.
  • There are many competitors in automation, ranging from large multinational corporations like Siemens and ABB to specialized niche providers. However, as automation solutions become more customized, firms with expertise in specific applications are poised to gain from the general trend toward automation.
  • Key trends in the industry include the increasing use of advanced technologies such as AI and machine learning to enhance automation systems, as well as the increasing need for flexible and scalable solutions that can adapt to changing market demands.

What Makes ATS Different:

  • Customized Solutions: ATS specializes in providing customized solutions tailored to the specific needs of each client, rather than mass-producing standardized products. This allows the company to compete even against much larger competitors that are focused on scale.
  • End-to-End Capabilities: The company provides a full range of services, from initial design and engineering to manufacturing, installation, and ongoing support, creating a lock-in.
  • Diverse Industry Focus: The company’s broad industry diversification helps to protect its revenues and profits in the face of downturns in any one particular sector, as all parts of the economy are rarely down all together.
  • Global Presence: Operating on three continents allows the company to support customers globally, giving them a wide range of customer options to continue to grow in the future.

Margins:

  • ATS’ operating margins were relatively stable around 7.5% to 9.5% over the last five years. This shows that the core operations of the company are quite profitable.
  • In fiscal 2024, their adjusted EBITDA margin increased to 11.5%, a significant improvement.
  • Although many companies in the industry enjoy lower margins, ATS can leverage its bespoke nature, and end-to-end nature to maintain higher margins.
  • Given the large number of employees in manufacturing, we may continue to see a small uptick in margins, and it is unlikely to exceed double-digits without a significant change in its business model.
  • These margins are also important for a business that is capital-intensive.

Financials (In-depth):

  • Revenues: ATS reported revenue of $2.3 billion in 2024, up 10.9% year-over-year. The company has demonstrated consistent growth in its top line, which can likely continue as automation increases in demand.
  • Gross Profit: In 2024, gross profit grew 10.7% year-over-year to $653 million. Gross profit is likely to grow in line with revenue.
  • EBITDA: EBITDA was $243.5 million in 2024, compared with $162.5 million in 2023. A notable improvement over last year, signaling strong profitability.
  • Net Income: In fiscal 2024, net income was $106 million, an improvement from $24.5 million in 2023.
  • Free Cash Flow (FCF): FCF came out at $179 million for 2024.
  • ROIC: The return on invested capital (ROIC) is approximately 9%, while that may sound low, the company operates in a capital-intensive industry, and with margins at ~10% they have some upside on ROIC growth as well.
  • Balance Sheet: As of year-end 2024, ATS had cash equivalents at ~$138 million. Its long term debt stands at ~$410 million.

Moat Analysis:

  • Moat Rating: 3/5.
    • Intangible Assets: A significant portion of their business comes from recurring business with past clients who understand their processes and technology. This translates to consistent business. However, they do not have a brand strong enough to translate to pricing power. The company’s main value proposition is reliability, not name or luxury brand, meaning it can lose business to newer companies.
    • Switching Costs: Significant switching costs also apply, especially for those that use their integrated software and require the company’s technicians for support and operation. This provides a form of stickiness and increases margins.
    • Cost Advantages: While cost advantages from size, manufacturing, and scale are limited, their regional expertise in various sectors give them an edge. There is a need to have plants close to customers, and they have an established supply chain which gives them an edge over new competitors.
  • Network Effects: Limited network effects. They do have a network with a large customer base, as they are an older player, but it is not a core element of their business that leads to network effects.
  • While they have some moat characteristics, the company is not invulnerable. They operate in a highly competitive space, and may lose out to both lower cost providers and more innovative competitors. The lack of clear, strong patents is also a problem for their business and their moat.

Legitimate Risks:

  • Technological Obsolescence: The rapid pace of technological change in automation poses a risk that their solutions may become outdated if they do not continue to innovate.
  • Customer Concentration: A portion of their revenue is derived from several key customers, making the company vulnerable to changes in their spending.
  • Economic Cycles: As a supplier to manufacturing, a large part of their business is determined by industrial capex, which can swing widely depending on economic conditions. Recessions often force manufacturing companies to cut spending, which would cut their revenues in a downturn.
  • Competition: While not directly competing with smaller players, they do face competition from many different firms, some with lower costs, others with more innovative technology. This will lead to margin pressure in the future.
  • M&A Integration: Their large number of acquisitions in recent years could lead to poor integration or problems digesting acquired companies. This risk increases because of cultural issues in acquisitions, and different parts of the world.

Business Resilience:

  • Diversified Customer Base: Their broad reach across multiple industries somewhat reduces risk, but if capex spending drops, the whole economy will be affected.
  • Recurring Revenue: From service contracts and integrated solutions, a substantial part of their business is recurring in nature.
  • Flexibility: Because they are specialized in the type of systems they create, they can easily shift the focus of their production based on demand.

Understandability Rating: 3/5 While the concept of industrial automation is easy to grasp, ATS’s business is complex, involving a wide range of services and operating in multiple industries. Understanding the intricacies of their custom solutions, as well as its multiple geographical locations, requires in-depth analysis. They also deal with a variety of different industries with different nuances and demand cycles, making a full understanding of their business quite difficult. Finally, there are issues of GAAP and how to classify certain line-items into operating/nonoperating, making understanding the overall health of the business quite complex.

Balance Sheet Health Rating: 4/5 ATS maintains a fairly solid balance sheet with a manageable amount of debt. Current cash position and cash flow generation can easily meet their current short-term obligations. They also have no long term obligations, and they maintain the ability to generate profits even during downturns. While they have significant debt, they also have a significant value in their long-term investments and assets. The only major risk is any debt-related issues, or negative surprises regarding their acquisitions.

Recent Concerns / Controversies and Management’s Response:

  • Supply Chain Issues: Like many companies, ATS has had problems due to global supply chain issues during the past few years. Specifically, the company cited an inability to obtain some electronic components. This has delayed production, increased costs, and led to lower earnings. The company has been focusing on diversifying suppliers and ensuring that there are adequate alternatives when disruptions in the supply chain occurs.
  • Workforce issues: The company has reported difficulties in hiring and retaining labor. This, like most manufacturing companies, has affected their overall costs and profitability. To counter this, the company is trying new training programs, and attempting to retain their labor.
  • Integration Issues: While the company is focused on value-creation via acquisitions, there are concerns that acquiring so many firms in so many industries and geographies may result in poor integration or lack of synergies. Management has continued to state that every acquisition needs to have a defined value creation strategy to be considered and completed.

Overall, ATS is a well-established automation solutions provider with a solid client base and long track record of delivering consistent results. However, they are still operating in a rapidly evolving, and competitive market.