Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Mary T. Ryan - Vice President, Communications and Investor Relations

Todd R. Peters - President and Chief Executive Officer

Ashoka Achuthan - Vice President and Chief Financial Officer

Todd Peters

Analysts

Tom Osborne - CJS Securities

Gary Prestopino - Barrington Research

Bill Dezellem - Titan Capital Management

Mark Olswanger - Robert W. Baird & Co., Inc.

ATC Technology Corporation (ATAC) Q4 2008 Earnings Call February 11, 2009 10:00 AM ET

Operator

Good day, everyone and welcome to the ATC Fourth Quarter Year-End 2008 Results and 2009 Guidance Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Miss Mary Ryan. Please go ahead, ma'am.

Mary T. Ryan

Good morning. Thank you for joining us. With me today are Todd Peters, our President and CEO, Ashoka Achuthan, our CFO and John Pinkerton, our Chief Accounting Officer.

Please turn to slide two. Our agenda for today includes a brief overview of the company's fourth quarter and full year 2008 results, as well as the report on each segment's performance and new business opportunities presented by Todd. The financial review will be presented by Ashoka, Todd will then present our 2009 guidance. At the end of Todd's comment, we will open the floor for questions to our pre-approved list of analyst, money managers and institutional holders.

Please turn to slide three. Before we go to the substance of our call today, I would like to point out that many of our comments are considered to be forward-looking statements under the Federal Securities laws. These forward-looking statements generally include all statements other than statements of historical facts, including statements that are predictive that depend upon or refer to future events or conditions, or they concern future financial performance or position, including future revenues, expenses, earnings, growth rates or margins. You are reminded that forward-looking statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those stated or implied by our comments today. Those risks and uncertainties are fully described in our 2007 annual report on Form 10-K and other SEC filings. Please turn to slide four.

For those of you who are unfamiliar with the ATC story, this slide presents a brief description of each of our businesses.

Please turn to slide five. At this time, I would like to turn the call over to our President and CEO, Todd Peters.

Todd R. Peters

Thank you, Mary. Good morning. I'd like to thank all of you who have joined us today. My comments will cover the following topics. First, I will provide a brief overview of the company's fourth quarter and year-end results. Second, I will highlight the factors that impacted each of our business segments. Third, I will provide a summary of our new business opportunities in each segment and after a shorter present additional detail for 2008, I will then present our guidance for 2009.

Please turn to slide six for a summary of the company's overall fourth quarter and year- end performance. No doubt about it, 2008 was a mix from our business and operational perspective. On the positive side, we delivered remarkable growth and successfully executed on efficiency improvements in our Logistics business.

On the downside, our Drivetrain business suffered severely from the unprecedented economic and financial conditions impacting the automotive sector.

Fourth quarter results were not surprising, revenues decreased 5.8% to 126.5 million versus the fourth quarter of 2007 due to primarily by the weakness experienced in our Drivetrain segment.

For the full year, revenues of 530.6 million increased a nominal 0.3% from 2007. And on an adjusted basis for the fourth quarter, we reported earnings per diluted share of $0.50 versus $0.49 in the fourth quarter of last year. For the full year, on the adjusted basis, earnings per share were $1.91 versus 2.13 of 2007.

Our Logistics segment once again led a success achieving record revenues that were up 20% year-over-year. We continue to grow with our customers, acknowledgement our ability to execute and deliver value.

Throughout the year, the business consistently delivered solid margins that exceeded our expectations with fourth quarter segment margins up 17.5% and full year of 15.9% driven by cost improvements and the efficient launch of new programs.

We renewed our contracts with AT&T, TomTom and T-Mobile and expanded our operational reach into Mexico and Canada.

Additionally, we won $37 million in annualized new business and reloaded our new business pipeline to 201 million highlighting the sustainability of our future growth expectations.

On the other hand, the performance of our Drivetrain business was disappointing with customer volumes down across the Board. Revenue for the year was down 24.7%, this was driven by a reduced demand by Honda transmissions and additional softness in demand before the price that remains after the transmissions due to normal life cycle decay of legacy transmission platforms, while new platforms which have been impacted by depressed new vehicle sales have been resulted a modest volumes to date. These factors coupled with the unprecedented economic distress being experienced by our customers, severely impacted the valuation of our Drivetrain business.

The goodwill impairment charge directly correlates to the recent adverse changes in the business climate in a resulting market valuation declines in the auto industry.

In response to the auto industry challenges and to drive profitability in our Drivetrain segment, we initiated a comprehensive restructuring of this business in 2008. As previously announced, we are in the process of closing our Springfield, Missouri facility and transferring production to a company owned facility in Oklahoma City.

The move is on track as planned. We have successfully completed the move of our Allison business and are now beginning to move our production lines for Chrysler.

Post consolidations, we will have the ability to remanufacture multiple product families on the same line, versus our prior practice of dedicating a specific line to a specific product family.

This results in better asset utilization and coupled with other restructuring actions positioned us to achieve our 10% segment margin goal for the Drivetrain business as we exit 2009. Although, we have recycle business, reduced our footprint and better utilizing existing capacity and assets, we still intend to grow the business.

During 2008, we won $11 million in new business and had refined our pipeline which has a $109 million of opportunities that our business development team is aggressively pursuing. To close our discussion (ph) of 2008, we completed our $50 million stock repurchase plan representing approximately 11% of diluted shares outstanding, the 4% cost initiative from both businesses and we ended the year with an enviable liquidity position with $17.2 million in cash on hand, and a solid balance sheet of no debt.

While our cash position and expected free cash flow are adequate to satisfy foreseeable obligations and fund our organic growth, we feel it is prudent to draw on our credit facility in order to enhance our liquidity position by protecting the potential for further disruptions in the capital markets.

Finally, I would be remised if I do not think Don, our Chairman for all that he's done to ensure a smooth leadership transition and I continue to enjoy this support behind us.

Now let's review performance for the Logistics business. So please turn to slide seven.

Our Logistics segment recorded another outstanding quarter with revenue of 8.5% compared to last year's fourth quarter. This marked our 19th consecutive quarter-over-quarter revenue increase in this segment. Revenue was primarily driven by strength in our base business and the efficient rollout of new programs launched in 2007 and 2008.

These were personally offset by the run out of the one-time automotive, electronic upgrade program. For the year, our Logistics revenue grew an extraordinary 20.2% to a record $353.4 million. Clearly, this business has continued to deliver strong performance. In each quarter of 2008, we achieved solid margin performance attributable in large measures of cost improvement as well as the near perfect execution and timing of our new business launches.

We renewed contracts and expanded our operational reach, $137 million in annualizing business with existing with new customers and reloaded our opportunities pipelines of $201 million. Our business development and operations teams are energized to drive continued growth and diversification of 2009.

Let's take a closer look at the Drivetrain segment, so please turn to slide eight. Simply stated, the fourth quarter was tough, bottom-line, the unprecedented mix experienced by our customers in a supported supply based severely impacted our volumes and evaluation of our Drivetrain business. Throughout the year, we have shared with you the softness in our base business volumes and the corresponding challenges that presented for us.

The four quarter was no exception with sales down 27.7% quarter-over-quarter and what declines in segment profit magnifies due to negative operating levels. For the full year 2008, Drivetrain revenues were down 24.7% based on the practice I just discussed, including a reduced demand for Honda warranty transmissions. However, we did achieve the $50 million in revenue with Honda for the year that we had expected.

Additionally, we won $11 million in annualized new business with programs in North America and Europe. Since, the beginning of 2008, we were aggressive in reducing cost and preparation for the restructuring analysis in the fourth quarter.

Our goal established smaller, leaner and profitable business going forward. As a reminder, upon completion of the restructuring we have our reduced our Drivetrain workforce by 40% into beginning of 2008.

All elements of the restructuring are on track. Upon its completion, we expect to achieve $6 million in annual cost savings and expect the active 2009 with segment margins of 10%. Now to our new business pipelines for both segments, please turn to slide nine.

I would like to remind you that when we review our new business pipelines, these represent a snapshot of qualified opportunities with both existing and new customers. Quite obviously these pipelines fluctuated as customers are at work, modify or withdraw opportunities for any number of reasons. As you can see from the left hand side of the slide for the Logistics business, we currently at $201 million of annual revenue opportunities across 37 customers.

In 2007, we won $37 million in annual new business. Over 80% of this business has been launched and that run rate as we exited 2008. Our new business pipeline continues to reflect a diversified range of customers and markets. In January, Anthony Francis, our Logistics President, members of our business development and operations team are intended to consumer electronics tradeshow.

Just last week, we tend to reverse Logistics tradeshow. At both shows, we met with existing customers and generated dozens of leads by talking to potential customers and opening doors to new relationships. Our business development team is now bedding normally to generate and length in terms of priority purposes.

I am confident that our ability is to start new business from our current set of opportunities and leads during 2009. Looking at the right side of the slide for Drivetrain, we currently have approximately 109 million in new business opportunities across 15 unique customers.

These opportunities represent a diversified product offering includes for example the remanufactured engine as well as the penetration of the medium and heavy-duty remanufacture market.

For 2008, we won $11 million in annualized new business that will be launched and expected to be up full run rate as we exit 2009.

I expect our teams to deliver new business wins in 2009 that extend our product offering range and expand our customer roster. At this time, I'd like to turn the call over to Ashoka, and he will present additional detail for 2008. Please turn to slide 10.

Ashoka Achuthan

Thank you, Todd. Good morning everybody. My comments today will cover the following, our consolidated results of operations for the 12 months ended December 31, 2008 and our consolidated cash flow and net debt highlights. Please turn to slide 11, where we show operating results for the year-ended December 31, 2008 compared to the results for the year-ended December 2007.

Net sales increased 1.4 million or 0.3% to 530.6 million for 2008 from 529.2 million for 2007. This increase was primarily due to the launch and brand for logistics program with TomTom and the increased base volume coupled with new logistics programs for AT&T.

This was partially offset by lower volumes of Honda remanufacture transmissions used in warranty applications. A decrease in sales to GM, primarily due to the run out of an automotive electronics upgrade program that was substantially completed at the end of the first quarter of 2008.

Lower volumes of Ford and Chrysler remanufactured transmissions due to normal life cycle decay of older transmission platforms coupled with macroeconomic factors that resulted in a reduction in the number of miles driven. And the different level of repairs cost reducing the overall demand for remanufactured transmissions. A decline in multi-year revenues due to the termination of the test and the repair program in June 2007 and scheduled price concessions in our Logistics segment prior to the connection with previously -- the previous contract renewals.

We reported an operating loss of 25.1 million compared to operating income of 74.8 million in 2007. As a result of significant diverse changes in the business climate of the automotive industry, we subjected our Drivetrain business to an interim test for the impairment of goodwill.

The test indicated that the net asset value exceeded the fair value of the business, a subsequent valuation in accordance with FAS 142 indicated an impairment of 79.1 million as compared to our previously announced estimate of between 60 and 80 million.

The valuation of this business assumed the continuation of existing customer relationships and leaves the book value of remaining Drivetrain goodwill at $37 million. Results for 2008 also include pre-tax restructuring charges totaling $9.7 million again related to our Drivetrain business.

Excluding these goodwill impairment and restructuring charges, the adjusted operating income of $63.8 million decreased $11 million or 14.7% from $74.8 million in 2007.

This decrease is primarily attributable to negative operating leverage associated with the dramatic reduction in volume for all significant customers in our Drivetrain segment. Partially, offset by the efficient launch and ramp up of our Logistics programs with TomTom and AT&T and continuing cost reductions.

Loss from continuing operations was $22.7 million or $1.09 per share compared to income of $47.1 million or $2.13 per diluted share in 2007. Excluding goodwill related and restructuring charges of $62.9 million, net effects or $2.99 per diluted share.

Adjusted income from continuing operations was $40.2 million or $1.91 per diluted share, compared to $47.1 or $2.13 per diluted share in 2007. These changes were driven by the same factors that impacted our operating income.

During 2008 and 2007, we recorded after-tax losses from discontinued operations of $2.5 million and $7.5 million respectively. These relate to the results of operations and loss on disposal of the NuVinci asset group which has been reclassified to discontinued operations for all periods presented.

Let us now turn to slide 12, where we show cash flow and net debt highlights. Adjusted cash flow from operations was $53.6 million in 2008, versus $69.4 million in 2007. And reflects on investment in working capital to support the new programs in our Logistics segment. Additionally, 2008 reflects the payment of performance-based compensation accruals and 2007 reflects the utilization of remaining federal net operating loss tax benefits.

Capital spending for 2008 was $11.3 million, primarily related to new business implementation and cost reduction initiatives in our Logistics segment, compared to $19.4 million in 2007 which reflected spending related to an extensive upgrade of our Logistics IT systems.

Cash used in financing of $50.3 million reflects the completion of the $50 million stock purchase plan. We ended the year with $17.2 million of cash and zero debt. A year ago, it was impossible to foresee the magnitude of the global economic distress currently being experienced, particularly in the capital markets. We have therefore subsequently year-end borrowed $70 million under our credit facility in order to increase our cash position and preserve our financial flexibility in light of continued uncertainties in the capital markets.

The proceeds will be held in high quality, low risk investments. We do not currently have an authorization from our Board of Directors for further stock repurchases, and as a result these preemptive borrowings are not expected to be used in the near-term. Subsequent to this borrowing, we will have $79 million of borrowing capacity remaining in our credit facility.

At this point, I would like to return the presentation back to Todd to discuss 2009 guidance.

Todd R. Peters

Thank you Ashoka. Please turn to slide 13 for our 2009 outlook.

Quite frankly, I expect 2009 to be a challenging year for us giving the pervasive uncertainty in the economy. With that said, I will try to add some perspective and offer my views to what we are seeing. Wireless devices are a key component of and integral to our daily lives regarded to demographics. We are seeing the ongoing resiliency in this sector and expect this continue in 2009, I'll be at a slower pace.

We are well positioned, one of the leading names in the wireless services AT&T. They have a great service offering. They are the industry lead on integrated devices which should continue to drive interest in the products and services. We have quickly going to TomTom, so much so that we now provide a full suite of services for our second largest customer.

TomTom is number two in the GPS market in U.S. and number one in the world. They have done a great job of driving out end market space and rolling out new products and we expect them to maintain those share. We have a great reputation for quality in service, solid customer relationships and additional revenues for growth of our existing customers across the both segments.

Based on our performance, my discussions with customers, we've been actively more. This has been key to our success to date and we intend to dedicate our resources for growing our service offerings with existing customers while remaining deeply focused on building new relationships. We have $310 million in new business opportunities by intensively focused on delivering revenue growth and diversification in both segments. I have directed additional resources to our business development teams to ensure their success.

Our management teams are focused on delivering the results and managing costs, in accordance completing the Drivetrain restructuring delivering on cost savings which are expected to total $15 million to $20 million this year.

Our strong cash flow and excellent liquidity including the preemptive revolver drawdown positioned the company to face the uncertainties in the current environment. Our guidance ranges are broad initially, given the level of uncertainty in the overall market. It's takes into consideration all known factors including input form our customers.

Our full year revenue guidance is $488 million to $539 million with earnings per diluted share from continuing operations on an adjusted basis of a $1.80 to $2.20, compared to $1.91 for 2008. Our results are expected to include $0.16 to $ 0.18 per share in restructuring charges for our Drivetrain business.

Plus on a GAAP basis, our earnings per diluted share are expected to be a $1.62 to $2.4. A higher end of the range reflects the potential impact of new business wins, while the lower end of the range reflects the potential for revenue contraction from 2008 with no new business wins.

Our Logistics revenue guidance is $332 million to $374 million with segment profit of $49 million to $60 million. Performance on the high-end is depended on the extent of timing of new business wins.

Our bare case contemplates the modest level of contraction in our base business. Our team is pushing higher to maintain our record of year-over-year growth as evidence by the size of our opportunities pipeline.

Our Drivetrain revenue guidance is a $155 million to $165 million with adjusted segment profit of $10 million to $11 million or $5 million to $6 million including the impact of our previously announced restructuring.

The high-end of our range does include new business. We continue to foresee further contraction in our base volumes and our primary focus will be on completing our restructuring efforts by the end of the second quarter. Upon completion we expect to achieve pre-tax annual cost savings of $6 million and that targeted a 10% segment margins for this business as we exit 2009.

Our focus for the segment is on diversifying and expanding our products service offerings. Lastly, our guidance does not contemplate impacts of our further deterioration in the current environment, the bankruptcy of any of our customers or the impact of any regulatory drive short.

In addition to meeting our 2009 financial targets, our goals include continuing leadership in quality and service and to deliver value to our customers, continued pursuit of our target markets in both segments for growth and diversification of revenues and cash flows, maintaining our strong financial flexibility generating strong cash flow and continued efforts for operational excellence and improved ROIC.

Rest assured, I understand the challenges that we had for ATC in 2009 given the massive uncertainty that the country faces, but we are clearly focused on what we need to do and can quickly react from a cost control perspective to changing market dynamics.

I'd like to thank you for your time today, and we are now available to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we'll take our first question from Tom Osborne at CJS Securities.

Tom Osborne - CJS Securities

Hi, good morning. And congratulations on good year.

Todd Peters

Thank you, Tom.

Tom Osborne - CJS Securities

My first question relates to your demand in Logistics. Can you provide any detail on what is related to kind of new purchases versus repair or replacement?

Todd Peters

Yes. Thanks for the question. Generally, we don't give out its detail metrics to drive it's customer confidential by line of service. But what I can tell you is paralyzing that you're reading is, our number customer in that segment is AT&T,

AT&T diluted on that market while there has been some recourse of our growth is slowing, they still do expect growth in 2009 over 2008. And I think what the new business had, we've launched with... in 2008 we're well positioned in 2009. It had a big year.

Tom Osborne - CJS Securities

Could you provide any kind of estimate broadly for the entire segment?

Todd Peters

Well, for the entire segment what we said is, at the low end of our guidance range there is an embedded contraction about $20 million in revenues. And that's kind of our... as I said in my comments of bare case. And moving up the scale from that the high-end of our guidance in terms of revenue is a more modest reduction in kind of net level contraction, and the impact of new business wins that we went and launch in 2009.

Tom Osborne - CJS Securities

Okay. And then in the Drivetrain guidance $10 million to $11 million of EBIT, you're currently around breakeven. I know you had $6 million point of savings, where does the extra $4 million or $5 million potentially come from?

Todd Peters

Well, on an adjusted basis, we ended the year with a $7.5 million of segment profit and so, what you'll see is the impact to some of the actions we took earlier in '08, coming into '09 and then impact of the additional actions we'll take in '09.

Tom Osborne - CJS Securities

Okay. And then, lastly you mentioned in the press release you had renewed your AT&T mobile and TomTom contracts?

Todd Peters

Yes, we did --

Tom Osborne - CJS Securities

And that was specifically and when are they renewed until?

Todd Peters

Yes, earlier in the year and the first quarter into this of the year (ph) we announced that we had renewed our contract with AT&T and the reverse side next through the end of 2010 and in mid-year we renewed our contract with T-Mobile and extended the amount of sale, there is a three year renewal. And then, the TomTom we extended in connection during some additional services for them.

Tom Osborne - CJS Securities

Okay Thank you.

Operator

We'll take our next question from Gary Prestopino at Barrington Research.

Gary Prestopino - Barrington Research

Hey, good morning everyone.

Todd Peters

Good morning, Gary.

Gary Prestopino - Barrington Research

Couple of questions for Ashoka just initially. I heard you say that you did pay bonus accruals or did pay bonuses this year or will pay bonuses. So, the bonus money is in that SG&A expense for this year?

Ashoka Achuthan

Yes, that is correct Gary. What I said was we paid out in 2008 bonuses related to 2007 performance.

Gary Prestopino - Barrington Research

Okay, was there any -- related to '09 -- you paid out -- 2007, was there any bonus accruals this year as of '08 numbers?

Ashoka Achuthan

Yes there are. I think what Ashoka was explaining on our cash flows with bonus accrual this year is much lower than the prior year pay out and therefore, there is cash difference.

Gary Prestopino - Barrington Research

Okay. That's fine. I just want to make, get that clear and going into '09, what you've done with Drivetrain, as far as reduced the amount of the goodwill. What can we look at as a D&A run per quarter, depreciation and amortization run per quarter for the company?

Todd Peters

Yes, I think we're around $13 million to $14 million.

Ashoka Achuthan

$14 million...

Todd Peters

For the year...

Ashoka Achuthan

Attrition for the year for Drivetrain, Gary. I'm sorry for the total company.

Todd Peters

For the total company.

Gary Prestopino - Barrington Research

A $14 million is the run rate, okay and then what kind of tax rate should we use as we do our projections?

Ashoka Achuthan

38% Gary.

Gary Prestopino - Barrington Research

All right, couple other questions here, and one more what's the negative spread on what you're borrowing or versus what you're putting -- where you're putting the money. Is that 200 or 300 basis points?

Ashoka Achuthan

It's pretty nominal Gary and it's pretty nominal given the attractive rate we can borrow at, and we have factor that into our 2009 guidance.

Gary Prestopino - Barrington Research

Okay, fine. So that is some business, some actual questions related to the business. As you went through your quarter for Q4, vertical markets that you served in Logistics, where did you see the biggest slide or where was the biggest negative variance in the revenues from where you started Q3 to where you ended Q4? Was it just all across the board and all the markets? Or was it wireless, electronics where was it?

Todd Peters

Yes, that's a great question I want to remind you. Well, remember first of all our revenues were up 8.5% year-over-year quarter '08 versus quarter '07. We launched business with TomTom in '08, Gary they became our second largest customer. So we haven't been through a full seasonal with on, including the retail season is on a full suite of services. So if you remember, we came into the quarter with revenue and guidance range, and things got pretty dicey around in the middle of the quarter in terms of the news that's coming out of the retail environment around Black Friday being down et cetera. And I think we came out at beginning in the December in connection the restructuring that we thought those things are going to be a little softer.

But what we found and reason why the quarter were higher (ph), our customers actually performed pretty well during the fourth quarter across the Board. So I think all in all that's below a scale on Black Friday around well for the massive retail environment.

I think our customers performed as expected going through this season.

Gary Prestopino - Barrington Research

And then in terms of the low-end of your guidance, I mean... Todd, what actually get you below that low-end of the guidance, is it just, if we exiting on the fact that we could have a bankruptcy here something in the auto side, if we just assume that you're going to maintain your current client base in both business segment, is it just further deterioration in the economy?

Todd Peters

Yeah. I think it has to be significant for the deterioration, Gary. And we don't know what's going to happen and we're hopeful that the President, the Treasury and Congress between what they're going to do, and restoring some confidence in the market.

Gary Prestopino - Barrington Research

Right.

Todd Peters

Also to the discretionary. But we have no assurance sitting here in February that any of those programs spending initiatives will be successful. So we've taken our time gap (ph) we're closely with our customers put the adequate kind of caveat around that range. The things are... and we'll be hearing about, you'll hear about the same time I do, basically if things get worse then we'll come back to you when it's prudent to tell you what we're seeing now. But I think, our range consist of... considers everything that we know from the customers and from the macro environment that we know today.

Gary Prestopino - Barrington Research

And then last one and I'll let somebody else talk some follow-ups.

Todd Peters

Okay.

Gary Prestopino - Barrington Research

Logistics, in a recession, you mean is where you can make -- if that the revenues are decline or less than what you expected on the cost of sales services, is that where you would actually reduce your personnel expense. And I guess what I'm getting out is that what you do, is that the mechanism to mitigate the decline or potential decline in revenues.

Todd Peters

Yeah. I mean where the cost of sales will include parts of using the repair function and that would be labor that we use. So yes, there is a high variable component there.

Gary Prestopino - Barrington Research

To all the labor, for Logistics is embedded in that cost of sales number?

Todd Peters

Right.

Gary Prestopino - Barrington Research

Okay. Thank you.

Todd Peters

The variable (ph).

Operator

We'll take our next question from Bill Dezellem, Titan Capital Management.

Bill Dezellem - Titan Capital Management

Thank you. I'd like to start with the Logistics group, the leverage that you achieved in that group is something that... having trouble is that understanding the outstanding but I don't understand that because your gross margin was down versus the fourth quarter of '07 and yet you were able to grow profits at a greater rate than sales.

What am I missing here and how does you folks accomplish that?

Bill Dezellem - Titan Capital Management

And how does your folks accomplish that?

Todd Peters

Well, I think if you listen to some of the comments that I made in earlier to the year when Don was just displaying the kind of the results for the year. Our Logistics business has done a fabulous job in 2008 of continuous improvement in cost reductions and are base business and I think we're seeing, our U.S. shareholders are seeing some of the proof to that work.

Bill Dezellem - Titan Capital Management

And Todd, wouldn't that show-up though in the gross margin line?

Todd Peters

Well yeah, there is all kinds of things with space utilization but it should show-up in the gross margin line, yes.

Bill Dezellem - Titan Capital Management

And I guess the confusion that I'm having is the gross margin was lower in the fourth quarter '08 than the fourth quarter '07.

Todd Peters

That's right. I remember in fourth quarter in '07 we had the one-time electronic upgrade program what we've talked about this probably a lot that there is a higher margin on that that is now launched.

Bill Dezellem - Titan Capital Management

Exactly and I would have anticipated as a result that your profits in that segment in the fourth quarter would have grown at a slower rate than revenues. And the other was just the opposite profits grew faster than revenues in spite of the fact that you did not have that high margin program this year, that you did have last year.

Todd Peters

Yeah. And then from the launch, there is a variety of factors Bill. You've got the electronics upgrade program coming out at a higher margin rate, you've got the new business coming in at a lower margin rate, you've got the impact of cost reductions and better efficiency on launch.

Bill Dezellem - Titan Capital Management

Maybe I'll take that one offline, drag a little bit further. Let me shift relative to your new business prospects, are they taking a longer to make decisions, number one, and number two are you seeing any business just simply disappear that nobody want that as a result of the economic environment decisions to simply are not being made and dropped.

Todd Peters

Well, I think we're seeing all the above to be quite honest. I think as we reflect back on 2008, we made a mid-year adjustments for our new business wins to talk about a deal with the customers that we thought we had won. We had MSA assigned, and then at the last minute they change in leadership and they decided to keep the program well watch and out.

So to that end, yes we had our new business win that we have planned the launch, it's spending lot of time out in 2008 to win away. There have been other smaller programs where yet sometimes this is common, this is unique to 2008 where if you get an health operation, you look at doing the cost savings and you get some bids and then you decided whether that going to pull the trigger. I think looking back over the last four years, our Logistics business has won $192 million in new business, that's about $50 million a year. In 2008, we won $37 million and we got a pipeline at $201 million.

With that pipeline and the customer meetings that we've had, like I said, they're asking us to do more but each one of these opportunities has its own life. But as like I said, I'm very confident that our team will continue to lend new business into 2009.

Bill Dezellem - Titan Capital Management

And how would you characterize the acquisition landscape today versus in the last year or two?

Todd Peters

Characterizing moonscape, it's pretty baring at the moment Bill. Our focus based... what we're... we tend to be a little more conservative. But our focus this year is delivering on our organic growth opportunities, expanding our relationships with our existing customers, adding new customers to our roster and protecting our liquidity position as the country sells out the economic landscape. So, M&A activities not at the top of our chart as we enter 2009.

Bill Dezellem - Titan Capital Management

That's helpful. And then finally, who are the banks that are in your facility?

Todd Peters

Yeah. We disclosed in our public filings but I can tell you that there are lead bank and Banc of America, and then followed by JP Morgan Chase other, and then is nine banks in total.

Bill Dezellem - Titan Capital Management

Great. Thank you.

Operator

Our next question comes from Mark Olswanger at Robert W. Baird.

Mark Olswanger - Robert W. Baird & Co., Inc.

Hi, good morning. Thanks for taking the question.

Todd Peters

Hi, good morning, Mark.

Mark Olswanger - Robert W. Baird & Co., Inc.

In October you mentioned potentially benefiting from outsourcing trends. Are you seeing an increase in pitches that leads you believe that maybe happening?

Todd Peters

Well, we hope so, because if you look at our pipeline like we said if you look at our pipeline development for the Logistics business over 2008, we started the year with $79 million in our new business opportunity and we entered 2009 with $200 million. So, we're definitely seeing the deal from our organic point of view, we're working on some great opportunity. Our job now is to convert some of those in the ATC wins.

Mark Olswanger - Robert W. Baird & Co., Inc.

Okay. And then somewhat related question, how much business is AT&T still doing out its own, do you have any chance of winning that business?

Todd Peters

Well, AT&T is a big company and I'll start by saying remember we started with the wireless business and as we announced in 2008, we won an opportunity to help them with their DSL product. We think given AT&T's footprint there are obviously additional opportunities for a company like ours to help benefit them. And from the last two years we won AT&T Suppliers year award. The last year we won in at the area of creative cost management which I'm really pleased with. So I think as long as we continue to do a good job on quality and service, and deliver for AT&T the other things that they ask us to do, I think there is definitely a chance to continue to grow with them.

Mark Olswanger - Robert W. Baird & Co., Inc.

Okay. Thank you. And one last question just related to the Drivetrain segment. We're little surprised the demand we think 28% given that miles traveled, they're not just 4 to 5. If you could help us break it down into buckets, how much of the downturn is a function of your transmission failures and how much would be market share or off warranty issue?

Todd Peters

Yeah. Those are great questions, Mark and we don't even get that level of detail from our customer. But the number one driver the Ford and the Chrysler businesses the fact that our Logistics platforms have been declining and the new platforms that we've won like the six-speed have been slow to growing to the vehicle population for the reduced new car sales.

And then the Honda business obviously came down, 2007, we helped them of warranty bubble that they had. And going into 2008, we've said that there is a reduced demand on transmissions on the Honda side, primarily driven... you could pass the warranty bubble by the complexion of their vehicle population in the mix of four-speed and five-speed and there is a lower internet rate on the five-speed than on the four.

Mark Olswanger - Robert W. Baird & Co., Inc.

Okay. Great. Thanks for taking the question.

Operator

And our next question comes from John Rob (ph) Morgan Capital.

Unidentified Analyst

Hi, good morning guys. Most of my questions had been answered, only remaining question I had what are you expecting in terms of CapEx for 2009?

Todd Peters

Yeah, John, this is Todd. The CapEx will reflect a range of things like...

Ashoka Achuthan

$12 to $15 million

Todd Peters

$15 million.

Unidentified Analyst

Well. Okay. Great, thanks very much.

Operator

(Operator Instructions). We'll go next to John Clergy of Principal Global (ph).

Unidentified Analyst

Good morning. I have two questions with respect to the Drivetrain business. You mentioned I believe that your goodwill now for the business is down book value of the goodwill is down to approximately 37 million.

Todd Peters

Right.

Unidentified Analyst

What is the total carrying value of the business now, including the assets other fixed assets and plans et cetera?

Todd Peters

Just a moment. Just a moment, let me get back with that number with Ashoka.

Unidentified Analyst

Okay.

Todd Peters

Just give me a second.

Unidentified Analyst

Okay. I'll ask another question. As you consolidate your facilities down when you talk about... you put actual projections for your anticipated revenues for Drivetrain you talk about your... hoping to exit the year at a 10% margins. If you're able to achieve those targets, at what level of capacity will you be operating at as you exit the fourth quarter to achieve that margin?

Todd Peters

Yes. That has a number of different factors in it. Without any new business, we said that our restructuring, once it was completed with the one-third asset capacity in terms of four-speed. We have additional capacity in terms of the clock, because most of our operations are running one shift once we get down and maybe 1.5 shifts

So if we get incremental demand on an existing product line, we could add hours to the clock. So we got capacity that way. The other way we look at capacities of four-speed, you need to add a new program and to that end we've got about a third of capacity available after the restructuring is completed to bring in the business that's in our new product pipeline into our existing facilities.

Unidentified Analyst

And you mentioned that the ability to do more than one product on a line.

Todd Peters

Right.

Unidentified Analyst

What's the anticipated savings there in terms of...

Todd Peters

Yes, the way we get savings there because we train the same people and just to be more efficient in terms of our capital allocation of four-speed usage.

So we've got that factored in to our footprint, getting back to prior question that net investment on a book basis is about a $100 million

Unidentified Analyst

Then in terms of the ramp for the margin, for the Drivetrain business fairly low in the first quarter and building kind of throughout the year?

Todd Peters

I'd say fairly low in the first half of the year and really you'll start to see the impacts from the third quarter.

Unidentified Analyst

Okay. Thank you.

Operator

And we'll take a follow-up question from Gary Prestopino of Barrington Research.

Gary Prestopino - Barrington Research

Yes, do you have these numbers handy as far as with the both business segments what the percentage of revenues were to your major customers?

Todd Peters

Yes, I think we do have those handy. So, yes, you want it by segment or by total company, Gary?

Gary Prestopino - Barrington Research

Each segment?

Todd Peters

Yes, by segment for 2008, AT&T was 64% of the segment, TomTom was call it 21% of the segment.

Gary Prestopino - Barrington Research

Right, and --

Todd Peters

Ford was 33% of the Drivetrain segment, Honda was 29% and Chrysler was close to 12%.

Gary Prestopino - Barrington Research

Right, and then just kind of a restorable question here, because I think the biggest concern here I think people, investors may have is what happens to the Drivetrain business, if we do have a bankruptcy or something of an OEM? And maybe you could just give us your thoughts on that in terms of what exactly would happen, would there be someone to pick up the warranty issues or some entity that picks up the warranty issues on these cars or?

Todd Peters

Yes, there is a lot of speculation. Let me explain about the financial piece first. We've got $11 million to $12 million at any one-time in the receivables from what we will call the Detroit fee (ph) with about 70% of that product with Ford Motor Company, so from a risk perspective, in light of what we're hearing today, Ford isn't first inline for the situation that you're describing.

Gary Prestopino - Barrington Research

Got it.

Todd Peters

So for the balance of... you're really talking about Chrysler again that was a much smaller piece of our business. And then secondly, if you think about our Chrysler business today which is the bigger portion of that remains, that business today is primarily aftermarket. So we think that there are ways that we could continue to stay in business by helping Chrysler bring cash flows into their organization to dealers because it's not affecting the assembly line or the production lines.

Gary Prestopino - Barrington Research

And what percentage of your business is with GM?

Todd Peters

Percentage, we don't disclose that because it's less than time.

Gary Prestopino - Barrington Research

Take time. Thanks, Todd.

Todd Peters

Yes.

Operator

And we'll take a follow-up question from Bill Dezellem with Titan Capital Management.

Bill Dezellem - Titan Capital Management

Thank you, two follows-up. Number one, relative to the Drivetrain business, given the magnitude of the decline, we're presuming number one that you had not lost market share, that this is just a function of the market and if that is a correct assumption, what are you hearing about your competitors and a degree to which they are struggling and what opportunity does that or does that not create for you maybe to actually gain share over the coming quarters?

Todd Peters

That's a great question, I think we can handle that in a couple ways. first of all I don't think that there is anyone hasn't felt the pain in the auto industry, whether if they're supplying to the Tier 1 on to the production line or even the service and parts area like we do. Our competitors are feeling the same pain that we are. We have not lost any programs, so to extend that, talking about market share, remembering when we awarded transmission or engine product family, it's not split. We haven't had any programs pulled from us.

So that's not the issue, I think going forward we are going to have to come up with creative ways to help address this market as it's reshaped and there is no question that the market of the future and automotive areas, now that we have seen them in the past. And that's one of the reasons why we are trying to get through your guidance at this point in time. We are going to be really focused though this year and restructuring that business and looking for ways to make it sustain ably profitable going forward.

Bill Dezellem - Titan Capital Management

And to what degree does your, do your efforts that you have just described give you an opportunity to bring additional value that frankly, I can't even find them at this point and maybe you can't either because that ultimately will lead to the automakers wanting to place more business with you?

Todd Peters

Well, this -- we can't add them, let me give you a couple of examples. Chrysler as I just explained on the prior question, primarily uses our services today for customer pay applications. We've been working with them as we have talked about using remaining launch (ph).

Their number one goal is to reduce cost, the remanufacturing answer is a cost reducing answer. So to extent that we can get Chrysler to start using remanufacturing transmissions and engines and to supply their warranty which is we have just started the launch now. That's a definite way for them to help save money and deliver value to the customers in the repair solution.

Someone asked earlier what would happen in then bankruptcy of warranties, I think that's one of the big issues that I know. But I think most, the consensus from most industry people I talk to is that protecting the warrantees of sacred cow, in other words, if you do not protect the warranty, you are not going to get any one to buy new vehicles.

So we think that's a great place where we can help the automotive makers continue to produce their overall costs in doing business.

Bill Dezellem - Titan Capital Management

And how about the issue with competitors struggling?

Todd Peters

Well, our competitors are struggling and we keep close tails on that. And right now we don't typically comment on competitors independently. I will say that we've been very aggressive at trying to grow our business and we will look for ways to continue to do that.

Bill Dezellem - Titan Capital Management

Great. Thank you. And then the second tier broad question. You noted in your press release, your expansion in to Mexico and Canada with your operations this year, but there really hasn't been any discussion on the conference call about that, would you please provide some color around what it is you are doing and your strategy and or window into the future for us please?

Todd Peters

Yes, well I think at the first, our logistics business has been centered in the center part of the United States. We definitely have a strategy to expand a geographic reach of our logistics business and part of that we started in 2008 with customer led initiatives to help them reduce cost by opening some operational capability on the Canadian piece is very small. The piece that we are doing in Mexico is actually more meaningful, not only to the customer that we are working with, but to other growth opportunities.

As we look forward to 2009, we are going to look at expanding customers that we use to both, operations that we've established and expanding our geographic reach and presence in the United States. But again that will be a customer led program led initiators.

Bill Dezellem - Titan Capital Management

And you also have operations in Europe, if we remember correctly may be the Czech Republic?

Todd Peters

That's right.

Bill Dezellem - Titan Capital Management

Discuss how that may or may not fit in to the logistics operations?

Todd Peters

That today it does not fit in, today the European operations are centered around servicing our Drivetrain customers and we slowdown the actual launch of the Czech Republic facility based on what's being going (ph) to North America and in Europe, but just because we are slowing down and slow walking the investment in Czech Republic by no way diminishes our enthusiasm, so I am telling you and we keep meeting with customers to continue to be long-term bullish and not having a facility in Eastern Europe to service vehicles on the continent. And I can tell you the first program we won, the customer specifically identified emphasizing the long term reason to be in the Czech Republic is the reason we got in a war. And we have got two other, one existing and one potential in new customers that want to have us do business with them in the Czech Republic, so with that it is going to happen.

So we are looking forward to them.

Bill Dezellem - Titan Capital Management

Great. Thank you again for the time.

Operator

And we have no other questions standing by at this time, Mr. Peters, I would like to turn the conference back over to you for any additional or closing remarks.

Todd Peters

Again I thank you all for joining today. To wrap up, again I would like to point out that overall with all the adversity that we are faced in 2008, the fact that we turned in adjusted EPS performance of a $1.91 against the initial range of a $1.60 to $2 is really a testament one to our management teams and our ability to focus and continue to deliver even in a turbulent market.

Not withstanding the though road we have to go down under Drivetrain business. Our team has done a really nice job of putting together a thoughtful, well executed restructuring plan that re-path that business and I am really pleased with some of the other leadership changes we've had in our logistics business to really focus on growing the business organically and taking care of our customer relationships. I've talked earlier about the fact that our opportunities pipeline has grown from $79 million to $200 million in the logistics business. It's now our job to bring some of that home and get that launched in the same high quality efficient manner that we've done over the last four years. And I know 2009 is going to be difficult, but I think we've got the team in the plan in place based whatever challenges lie ahead and we at ATAC thank you for your continued support.

Operator

And again that does conclude today's conference call. We do thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ATC Technology Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts