ATS Automation Tooling Systems' (ATSAF) CEO Andrew Hider on Q4 2016 Results - Earnings Call Transcript

| About: ATS Automation (ATSAF)

ATS Automation Tooling Systems Inc. (OTCPK:ATSAF) Q4 2016 Earnings Conference Call May 18, 2017 10:00 AM ET

Executives

Stewart McCuaig - Vice President, General Counsel

Andrew Hider - Chief Executive Officer

Maria Perrella - Chief Financial Officer

Analysts

Cherilyn Radbourne - TD Securities

Mark Neville - Scotiabank

David Tyerman - Cormark Securities

Justin Keywood - GMP Securities

Lei Wang - Aviva Investors

Robert Caldwell - Richardson GMP

Operator

Good morning, ladies and gentlemen. Welcome to the ATS Automation Fourth Quarter Conference Call. I would like to remind you that this call is being recorded on Thursday, May 18, 2017 at 10 AM Eastern Time. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]

I’d now like to turn the call over to Stewart McCuaig, Vice President, General Counsel of ATS.

Stewart McCuaig

Thanks, operator, and good morning, everyone. Your main hosts today are Andrew Hider, Chief Executive Officer of ATS; and Maria Perrella, Chief Financial Officer.

Before we begin, I’m required to provide the following statement respecting forward-looking information, which is made on behalf of ATS and all of its representatives on this call. The oral statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast or projection in the forward-looking information.

Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information, are contained in HS’ filings with Canadian provincial securities regulators.

Now, it’s my pleasure to turn the call over to Anthony.

Andrew Hider

Thank you, Stewart. Good morning, ladies and gentlemen, and thank you for joining us. This is my first opportunity to address our shareholders as a group. I’m honored to be the new CEO of ATS and excited about our prospects. This is a world-class company and I have a mandate to build on what’s been accomplished today to grow the business, achieve a higher level of performance excellence, and drive the creation of long-term shareholder value.

This morning I’m going to speak to you about my first two months as CEO. My assessment of ATS thus far, what I’m seeing in our markets and our focus moving forward. We’re able to review our fourth quarter financial highlights and fiscal 2017 summary.

Since arriving in March, I’ve toured 10 of our facilities globally, met with our business leaders from around the world, and introduced myself to several large customers as well as a significant number of our employees through town hall meetings and several roundtable sessions.

During this assessment period, I’ve been impressed. Our people are engaged and proud of the work they do is builders of advanced technology and manufacturing solutions. We have a strong history of high-quality and innovation. We are able to deliver these solutions from our operations around the globe, and I believe this is unique and differentiates us in the marketplace.

Many of our customers view us as industry leaders. They value our global footprint, which has enabled – enables us to effectively and efficiently serve their global facilities. They’re pleased with the quality of work we do, the innovative manufacturing solutions we produce and our extended service programs. Our customers are leaders in their respective markets, and they depend on ATS as a strategic technology partner who enables them to execute on their strategies.

From a competitive standpoint, our business is a diversified global automation and technology company, which I believe is unique in our industry. Our core technologies, global footprint and our ability to innovate provide us with advantages in a market that is populated by competitors who are more closely aligned with a specific industrial end market for region.

All of that said, there are certainly areas that need to be improved and further developed. I will not be satisfied with the status quo. As an example, while it’s clear that some of our larger customers see the alignment between what ATS offers and their value drivers, this is not universally true. We need to do a better job of presenting our global value to all customers.

We have the ability to meet our customer’s needs, both from a technology solutions and services standpoint in many ways which our competitors cannot. Our challenge is to communicate this value to customers and then realize on it, as well we need to continue to improve the utilization of our global capacity. This includes improving our organizational structure and further developing our talent around the world. The way we communicate the value of our global network will also play a role in improving capacity utilization.

I expect, we will continue to see opportunities where we can improve our business and drive execution to achieve greater year-over-year results. Overall, our foundation is strong and we’re ready to move to the next level of performance to drive long-term shareholder value creation.

Moving to our strategy, it is not my intention to set out a strategy on today’s call. I’m working with my management team to set clear strategic priorities. We will communicate our plans once we’ve completed the necessary work reviewed and have approval from our Board. What I can tell you is that the Board, myself and our leadership team are all aligned in our goal to create long-term shareholder value through the generation of profitable growth. That growth will be both organic and inorganic.

Throughout my career, I have led several companies and successfully generated profitable growth, both organically and through acquisition. My focus as a leader has always been in five key areas; people, process, plan, performance, and customer. And here at ATS, this will be no different. Let me explain what I mean in each area.

First, people; making sure we have the right people in the right roles in developing our pipeline of talent throughout the organization.

Second, process; aligning around a common set of policy-driven business processes which we will use to drive continuous improvement in our operations.

Third, plan; delivering and driving profitable growth through a rigorous strategic planning process led by our people which targets incremental and continuous improvements.

Fourth, performance; constantly and consistently measuring our performance and course correcting to ensure we meet the high expectations we set for ourselves and the high expectations that our customers, shareholders, and other stakeholders have of us.

And finally; the underlying principle for each customer, by customer I’m referring to both the companies that buy from us and the shareholders who own our business, listening to our customers and meeting their needs today and in the future will be at the core of everything we do. And for our shareholders, we will deliver long-term shareholder value. We will develop and drive improvement in all these areas within ATS. And I’m confident that they will support the growth and performance of the business.

On our financials, as you have seen from our results released today, our revenues in adjusted margins declined slightly on a year-over-year basis. We are not pleased with these results and we are working to improve. On a positive note, our bookings for the year increased. We have a record order backlog and a strong balance sheet. As I noted earlier, we’re able to provide some more details on our financials in a few minutes.

Moving to our outlook, starting with our markets. There are positive indicator in our largest markets. Our life sciences business has been very strong and we’re seeing substantial growth in both medical devices and pharmaceuticals, driven by solid industry fundamentals and ATS technology innovations. This is a core area of ATS and I expect our growth to continue.

Transportation has improved and there are a number of interesting opportunities in new technologies, such as the EB market. Our niche position in energy continues to meaningfully contribute to our business and has several significant opportunities for which we’re uniquely qualified and positioned. The consumer market provides opportunity where ATS has the ability to deliver high value to our customers in selective submarkets.

Our services offering provides a meaningful value proposition over the life of our customers equipment. Although, revenues are flat, the foundation of our services offering is now well established. Our after sales services bookings grew sequentially in every quarter in fiscal 2017, and our services funnel has positive momentum and is growing.

Moving to inorganic growth. Acquisitions have been and will continue to be an important element of ATS’s growth. My lens to evaluate acquisitions has always been based on four criteria, and we’re applying this lens here at ATS. First, the market. Do we like the market and does it fit with ATS? Second; the strategic value of the target, technology, capability, platform, geographic services. Third, how we integrate and operate the target. And fourth, is a financial return of the acquisition attractive to us.

I have seen a good pipeline of prospects. Of course, timing will be variable and we will not acquire for the sake of acquiring. Our approach to deploying our balance sheet will be disciplined and strategic.

In summary, I’m very excited about the opportunity we had for ATS. I will reiterate, this is a world-class company with talented employees, a strong history of innovation and quality. We have industry-leading customers who evaluate ATS as a partner and rely on us to deliver critical, automated manufacturing solutions. Prospects in our markets are strong and our operating foundation is solid. We will build on that foundation in the months and years ahead.

The work I’m doing now to assess the company and set strategic priorities is being done to take this company to its next level of performance. I’m humbled and grateful for the opportunity to lead this company to its next level.

Now, I will turn the call over to Maria.

Maria Perrella

Thank you, Andrew. In the fourth quarter, ATS had higher than expected revenue generation, strong bookings, and good cash generation. However, we are now pleased with our margin performance.

For the year, although, we were faced with challenges, including the third quarter cancellation of part of the large enterprise program, ATS demonstrated resiliency by delivering profitable results and generating strong cash flows.

This morning, I will discuss operating results for the quarter and the year and our balance sheet. I’ll start with operating results. Q4 bookings of $322 million were up 13% over Q3. Compared to the record set in Q4 last year, bookings were down 17% from a record $390 million, which included the large enterprise program, part of which was cancelled in Q3 of this year.

For the year, our orders were $1.134 billion, up 6% over last year and our book to bill ratio for the year was 1.12, both good indicators of growth as we begin fiscal 2018.

Our order backlog finished the year up 4% over Q4 last year at a record $681 million, also providing a strong foundation going forward. Q4 revenues came in stronger than we expected at $266 million, or 8% higher than Q4 last year. This primarily reflected higher order backlog entering the fourth quarter and the timing of program activities at PA, where revenues were higher on the earlier than expected completion of a number of programs.

For the year, revenues were down 3% to $1.01 billion. Fiscal 2017 revenues were negatively impacted by the partial program cancellation and by adjustments and revised estimates related to certain programs, which have been completed or are in process. These items together primarily impacted our third quarter.

Our gross margin in Q4 was 24.1%, down from 24.8% in Q4 last year. Lower gross margins reflected certain larger firm fixed price programs in PA, where costs exceeded budgets and higher revenue contributions from our PA businesses in Q4 this year, which as a reminder operate with a lower gross margin. Fiscal 2017 gross margin was 24.8% compared to 24.9% last year.

Moving to SG&A, Q4 included a one-time share purchase allowance of $2.9 million and amortization of acquisition-related intangibles of $4.8 million. Excluding these two items, Q4 SG&A was $37.6 million, down from $38.4 million a year ago, which excluded $5.7 million of acquisition-related amortization, $7.1 million of executive transition expenses, and $2.3 million of restructuring charges.

Q4 adjusted earnings from operations of $24.5 million were 9.2% of revenue, down slightly from 9.4% a year ago. Lower gross margins and higher stock-based compensation costs in Q4 this year more than offset lower SG&A expenses.

For the year, adjusted earnings from operations were $97 million, or $9.6 million or 9.6% of revenues. This is down from adjusted earnings of $114 million last year. Lower revenues in fiscal 2017 an increase in employee costs and a $4.2 million increase in stock-based compensation were the primary drivers of our lower earnings in fiscal 2017.

Based on the composition of our backlog at the end of Q4 and our estimates of in quarter orders, which are booked and converted to revenue in the same quarter, Q1 fiscal 2018 revenues are estimated to be in the 35% to 40% range of backlog.

Moving to the balance sheet. I’ll review cash generation and non-cash working capital as a percentage of revenue. In Q4, we generated significant cash from operations of $80.7 million due to the timing of milestone billings and payments. This is up from Q4 last year when we generated cash from operations of $33.6 million.

For the year, we generated cash from operations of $128 million, up from $36 million last year. The change reflects our decreased investment in working capital due to the timing of program activities and milestone billings and payments. Our Q4 non-cash working capital as a percentage of revenue was 8% compared to 13.6% at the end of Q4 last year.

We target to be below 15%, however, expect the percentage will fluctuate depending on opportunities, the timing of milestone billings and payments. Fluctuations can be seen in our last two quarters, where Q3 non-cash working capital as a percentage of revenue was 15.1%. We expect to see an increase in working capital in fiscal 2018, as we work through customer programs.

At the end of the fourth quarter, our total net debt position was $42 million, down from prior year’s net debt of $154 million. We continue to have strong liquidity with cash on hand of $287 million and $750 million credit facility of which approximately $640 million is available. Our capital structure also includes a fixed interest $250 million U.S. dollar bond that matures in 2023.

In Q4, we generated earnings per share of $0.08 compared to $0.02 last year and $0.07 from Q3. The increase is primarily due to higher volumes. On an adjusted earnings per share basis, we generated $0.15 compared to $0.14 last year and $0.12 in Q3. The year-over-year increase is primarily due to higher volumes and lower finance costs, which were partially offset by a higher effective tax rate.

For the year, we generated earnings per share of $0.38 compared to $0.43 last year. On an adjusted earnings per share basis, we generated $0.57 this year compared to $0.72 in fiscal 2016. Lower volumes, higher SG&A and stock compensation caused the $0.15 year-over-year EPS decrease.

Our effective tax rate was 26% in Q4 and 24% for the year. Going forward, our effective tax rate is expected to continue to be in the range of 25% of pre-tax earnings.

In summary, our business is strong. We have record order backlog of $681 million, which will provide for a good revenue base in the upcoming quarters. Our funnel remains well diversified with a mix of programs and enterprise solutions. We are not pleased with our margin performance and we believe there are opportunities for improvement. We will continue to focus on program management, supply chain and utilization of our global footprint to improve margins going forward.

In addition, we have a strong balance sheet, which will support our objective of profitable growth.

Now, we’d like to open the call to your questions. Operator, could you please provide instructions to our listeners. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from the line of Cherilyn Radbourne from TD Securities. Your line is open.

Cherilyn Radbourne

Andrew, first of all, congratulations on your appointment, and I do appreciate that. It’s not fair to ask you too much about strategy at this stage. But I do want to ask if you could elaborate a little bit on your comment that you think ATS needs to improve the alignment with its customers?

Andrew Hider

First, thank you very much for the comment, and I’m very excited to be here at ATS. I’ve visited several customers. And what we’re seeing in the market space and what we’re seeing with these specific customers is that, we can continue to provide our current value and higher level value to them, both as they’re in their position today and as they look at their operations moving forward.

For instance, a customer that might expand their operation into a new region, we have capability that others do not that we can provide value, both at the current core location as also at the expansion location.

Cherilyn Radbourne

Okay. And then, for my second question, just wanted to ask for a little bit more detail on the strong bookings in the quarter. Can you just comment on the mix between programs and enterprise systems in there?

Maria Perrella

Sure. So, we had a good mix of both, in our bookings number. We had a few large programs which helped us to get to the $322 million and those large programs or the top three averaged around $25 million, included in here is a follow-on order of the enterprise program that we announced in Q2, and in Q2 we made that announcement and we mentioned this life sciences program being approximately $40 million. And in Q4, as I said, we won the follow-on on that and the value of that was between $30 million and $35 million.

Cherilyn Radbourne

Perfect. Thank you, that’s my two questions.

Operator

Your next question comes from Mark Neville from Scotiabank, your line is open.

Mark Neville

Hi, good morning. My first question for Andrew, in our prepared remarks you talked about some areas of the business to improve and develop, you touched on but never shared one. But I was just curious if you could maybe a little more specific on certain parts of the business? And I guess while you’re out to maybe talk about service businesses, it’s been I guess a push for the company for a few years, just your views on where that is and what needs to be done to sort of take it to the next level or push a little further?

Andrew Hider

Hey Mark good morning, thank you for the question. First, just to touch a little bit further on, when I talk about the opportunity, when we look at customers and it’s – and again, I’ve visited several customers and this will be part of my process moving forward to continue that process to visit customers on an ongoing basis. They really see a strategic value on what ATS can provide and where are they going. And it’s really by getting that alignment correct and then also continuing to provide that value to those customers.

On the second piece regarding services, the foundation of our services offering was – it’s certainly built in 2017 and we’ve been continuing to drive this, but there is more we can do. 2017 we launched a standard services package; we built out our services organization. I have personally talked to customers about this and they in their words state it’s a meaningful value proposition over the life of their equipment and our customers certainly value this.

As we look at growth, sequentially we grew quarter-over-quarter in 2017 and we expect it to grow in 2018 and beyond and both the bookings and funnel are showing healthy signs that that’s going to continue.

Mark Neville

And then when you think about improving or developing parts of the business including service, I mean you think you can do the majority of this sort of internally and then when you think about M&A, it’s sort of add a technology or something strategic or do you think M&A needs to be part of the fix?

Andrew Hider

So Mark, just to slightly correct the statement, when we say fix, we believe certainly the leading indicators are showing our services business is moving in the right direction, first. Second, M&A, when we look at M&A, we’re going to be looking at M&A both from a strategic perspective, but also as we want to build out in our capability, but that said, we always look at the ROI. So when you think about M&A and we think about M&A is augmenting our organic and inorganic discussion, we’re going to look at it as an ROI based on internal investment versus external investment and that’s how we’re going to assess M&A. I stated this in the opening remarks, we will be disciplined in how we approach this, but it will be part of our strategy moving forward.

Mark Neville

Sure, I mean, I guess when you list those four criteria, it sounded like return was fourth, but I don’t know if, again, if that was on any particular order. So don’t know if again the primary sort of objective is technologies ahead of returns or they sort of all work together.

Andrew Hider

So to answer that directly, they all work together. When you think about M&A and we look at it from the lens of our organization and just to go through these four one more time, if the market – if there is strategic value, it’s how we’re going to integrate and operator and as the return of the investment and we’re going to look at each of those equally and then determine if the asset is worth adding to ATS.

Mark Neville

All right, okay, maybe just one more for Maria before I get back in the queue. Just on the gross margin, it sounds like a combination of just some lower bid programs and some overruns, but I’m just curious as to where all those programs sit? You mentioned and the process being complete or completed, I wasn’t sure if that was with respect to the, again the lower bid or maybe the some of the more challenging projects, just again a little more color on any of that?

Maria Perrella

Sure. So Mark, as you say two parts, the first part is, are our RED programs that we had in our PA business. And when I refer to those or the substantially complete part that is – those PA RED programs are substantially complete, unfortunately they negatively impacted our Q4 gross margins.

And then the second part was, we had higher than expected revenues in the quarter and those revenues primarily came from PA. And as we’ve talked about before, PA gross margins are slightly lower or well, more than slightly lower than our systems gross margins and that impacted. But having said that, PA margins at the EBIT level are similar to the systems business, therefore they wouldn’t or that incremental revenue wouldn’t have impacted on an EBIT level.

Mark Neville

Okay, so with those lingering RED – or the RED programs, where there any lingering impacts in the Q1?

Maria Perrella

No, these programs are substantially complete; therefore there wouldn’t be any lingering impacts in Q1.

Mark Neville

So maybe just one last one. Just on bookings, I’m just curious, sort of it’s been probably five quarters now roughly of pretty solid bookings. I’m just curious if you have an internal view of sort of a normalized run rate? Again, I appreciate there is some lumpiness and so I’m just trying to gauge this on a go forward basis or again from quarter-to-quarter were you think the range should be or is, however you want to answer it if at all possible?

Maria Perrella

Sure. I’ll give it a try. Of course as we’ve said, we’d like to target to be at a rate that provides for a revenue growth, but we’ve also said that there is variability and to expect variability and that has to do with the size of some of our programs and the fact that we go after enterprise programs as well.

When we look at fiscal 2017, in the first quarter our bookings were a little bit lower than we would’ve liked and I think they were around $240 million and in that quarter we had no – we didn’t win any one program that was greater than $15 million. And then in Q2, Q3, Q4, we had a number of greater than $15 million and $20 million programs which allowed us to get to the greater than $270 million $280 million bookings number per quarter.

So, then just to summarize, variability, we know where we’d like to be, but we will see quarter-over-quarter swings because of the types of programs we pursue and the timing of when they’re won.

Mark Neville

Sure. I guess, another way to ask it is, you’ve mentioned in the last few quarters a number of these bigger wins, so I guess the expectation now or should we have expectations that generally speaking, gets macro aside, on a quarter-to-quarter basis you should expect to win a few of these each quarter or maybe one or two. I guess what I’m asking is, is sort of $270 million, $280 million, I guess is where you’ve been averaging, is that sort of a decent run rate to assume sort of at this point?

Maria Perrella

You can assume what you like, but…

Andrew Hider

I will go back to, our focus is on profitable growth and our business is going to drive that through big and small programs, as well as how we augment with services?

Mark Neville

Fair enough. All right, thanks a lot.

Andrew Hider

Thank you, Mark.

Operator

Your next question comes from David Tyerman from Cormark Securities, your line is open

David Tyerman

Well, good morning and Andrew, congratulations on your new position and look forward to following how you’ll take ATS to the next level? First question I have, just following on the margin questions, so Maria, any thoughts on margins in the backlog now that will affect the next few quarters on the gross margin side?

Maria Perrella

Based on what we know today, there is nothing unusual in our backlog in Q4. I’ve just talked about some negative impacts and if we set those aside and as I’ve said, we don’t expect these RED programs to impact Q1. Then we would expect to be at around 25%.

David Tyerman

I’m sorry, you were at 25% in Q4, were you not?

Maria Perrella

No, we were at 24.1%.

David Tyerman

Okay. Okay, I’m using different counting method, but I got. Okay, so a percent higher, roughly?

Maria Perrella

Yes.

David Tyerman

The second question, this is maybe more for you, Andrew. I’m just wondering if you have any operating metrics that you feel the company should be achieving whether return on invested capital, or margin, or revenue growth rates that sort of thing?

Andrew Hider

David, first, thank you very much for the warm welcome. I appreciate it, and I certainly look forward to future conversations over future quarters and years. When we look at our business, we’re looking at eight value drivers at the organization. Those first four, we’re going to align around revenue, bookings, working capital as a percent of revenue and margin expansion, and we will align those across our total corporation.

David Tyerman

Okay. And do you have any kind of metric that you’re thinking are would be best practices for the company?

Andrew Hider

So we – and you’re leading me down a path of talking a little bit about KPI. So I mentioned in my opening remarks bringing in the global management team. And during that session we’ve rolled out our KIP’s, which are called Key Process Indicators. Our organization is going to align around eight of those what we call value drivers within the business, the first four I just mentioned…

David Tyerman

Yes.

Andrew Hider

…as well as looking at other areas of the business that we will track on a monthly basis, and when we’re off, why are we off and what we’re going to do about it. And when I talked about my 4 Ps and a C, I talked about process and driving process through the organization. So as we look at ATS today and we look at where we’re going in the future, this will be core. And also we did measure things in the past, so I don’t want to state that’s a stark difference, but the team is very excited about where we’re going.

David Tyerman

Okay. Okay, that’s my too. Thank you.

Andrew Hider

Thank you, David.

Operator

[Operator Instructions] Your next question comes from Justin Keywood from GMP Securities. Your line is open.

Justin Keywood

Hi, thanks for taking my call and congratulations on the appointment. There has been some consolidation in the healthcare space lately, including Becton Dickinson acquiring Bard. I’m just wondering, how do you see this affecting ATS’s business going forward? And if there are any other macro trends that you see, which could be positive or challenge?

Andrew Hider

So good morning, Justin. We see these trends, obviously, and BD is certainly is as look at this is a strategic area that they’re focused on. That said our business in life sciences and medical is looking at this space in this market as a continued trend of growth. And we offer a value to our customers if others cannot, and that’s going to be a continued focus for our organization. Regardless of where people and where business is consolidated or not, we offer that same level of value to large and small companies in this space.

Justin Keywood

Okay. Thank you. And then the cash from ops in the quarter was quite strong from the working capital changes. I was wondering if there is anything unusual here and how should we look at working capital requirements for Q1 and going into 2017?

Maria Perrella

Yes. As I’ve mentioned, our working capital as a percentage of revenue at 8% was unusually low, and which then means that we reduced our working capital and drove a lot of cash out. Going forward, we expect and we continue to target our working capital as a percentage of revenue to be below 15%.

As I’ve said, we know that the 8% working capital is unusually low, and we know that will increase as we had the benefit of large customer milestone payments coming in Q4. And also we had the benefit of a number of large customer deposits come in at the end of Q4. And we know that we’ll have to make supplier payments in the next few quarters, therefore, benefiting Q4 and we’re paying out in Q1 and Q2, which will increase our use of cash and our working capital as a percentage of revenue. So then just to summarize, we expect our working capital as a percentage of revenue to go up. And that will require use of cash, but we target to be below 15%.

Justin Keywood

Okay, that’s helpful. And then just on the conversion of backlog in the past, there’s been some indication if you expected it to be at the lower or higher end of the 35% to 40% range, are you able to give any indication here?

Maria Perrella

This time I didn’t give that indication. I’ve provided some type of indication in the past. But based on what I’ve seen and what we’ve seen in the last few quarters, what we are thinking doesn’t necessarily happen and that has to do with bookings coming into the quarter and also the timing of some large materials coming through in the quarter.

Based on what we know today and the way we’ve talked about it, we believe that will be somewhere in the middle of the 35% to 40% range. But as I’ve said, there’s a number of things that happen each quarter, which can cause some variability to that range.

Justin Keywood

Okay, that’s helpful. Thanks for taking my questions.

Andrew Hider

Thank you, Justin.

Operator

You next question comes from Lei Wang from Aviva Investors. Your line is open.

Lei Wang

Yes, I have a question about use of cash and also merger acquisition. If you do any significant acquisition, how would you like to finance this, cash, debt, equity, can you give me some idea?

Maria Perrella

I’ll start. As you say, we do have a substantial amount of cash. And as we’ve said, we have about $640 million available. We’ve talked about leveraging what we’re comfortable with and we’re comfortable with being in the 2 to 2.5 times range, and we are willing to peak 4 or 4.5 times when we acquire and to do that for two quarters. If – depending on the acquisition, we would, first of all, start with debt. And if it makes sense, we would also use equity.

And we have, as we said, we have substantial room. We believe that we could do based on our capital structure today. We could purchase something in the range of $500 million.

Lei Wang

Thank you.

Maria Perrella

You’re welcome.

Operator

Your next question comes from Robert Caldwell from Richardson GMP. Your line is open.

Robert Caldwell

Hi, everyone. Good morning. Andrew, I’ll join the others on the call and wishing you all my very, very best in this new endeavor, hearty congratulations.

Andrew Hider

Thank you.

Robert Caldwell

And look forward to hearing your progress and growth in probability in the months and years ahead. First of all, I’ll ask a broad-based question, if I may. In your review of TAS prior to agreeing to join the company, and of course, obviously more importantly, in your reviews after joining the company over the last 2.5 months, what would have been your biggest surprise?

Andrew Hider

First, Robert, thank you very much for the warm welcome. Second, just to talk a little bit about my assessment, when I was presented the opportunity to join ATS, I couldn’t have been more excited about taking the helm as CEO and helping this organization and working with this organization to taking it to its next level.

Now to get to your question. A surprise and/or an opportunity I saw when joining and a good surprise and opportunity was how strategic we are as we work with our customers and the innovation we provide on a day in and day out basis. Our organization does things that nobody else can do and our people are proud of this aspect. And we provide that value to customers and they look to us to provide that value. So when we think about ATS in the long run, we certainly are in an area that – from a technology and innovation development, an area that we want to continue to drive and continue to be on the forefront with our customers.

Robert Caldwell

Thank you. That’s helpful. And one particular question, Andrew, if I may, we registered in the EV industry these days. I know ATS have had some exploratory exposure there, that’s an area you know a little bit about it. I believe what thoughts do you think of the future there?

Andrew Hider

Robert, I will present what’s been shown as far as market trends, EV market in transportation service is very positive growth over the foreseeable future. We see that as a potential for organization and we believe we are well aligned to provide profitable growth through that cycle. And we can provide value to our customers as they continue to drive and challenge on how they’re going to operate. So we view it as a positive for the business, and we believe it’s going to be an area that we are uniquely positioned to be successful in.

Robert Caldwell

Good. That’s helpful. Thank you.

Andrew Hider

You bet. Thank you, Robert.

Operator

[Operator Instructions] Your next question comes from David Tyerman from Cormark Securities. Your line is open.

David Tyerman

Just a couple of follow-ups. The SG&A, Maria, do you still see it in a $35 million to $37 million range, excluding amortization of intangibles?

Maria Perrella

I didn’t make reference to that this quarter. I think what I would say there is that, our starting point is Q4, which is around $37 million.

David Tyerman

Yes.

Maria Perrella

And that $37 million includes some incremental or higher costs in a few areas. One of them is headcount and that’s in our services and selling areas, and so that will continue going forward. We have a little bit in IT spend and some in incentive comp. So if foreign exchange stays the same $37 million-ish, as I say, it’s a good starting point. And then if there’s any M&A activity, as you say, that would impact.

David Tyerman

Great. Okay, that’s helpful. And then the second question was on stock-based comp. So we’re having a hard time trying to get a line on this. Is there two components of this, do you sort to have a run rate where you’re issuing options or whatever, and so that’s generating sort of some kind of run rate every quarter, and then you have the mark-to-market over and above that, is that the way we should be thinking about it?

Maria Perrella

Yes, that’s exactly the way to think about it. Our run rate is, I believe $4 million to $5 million a year based on the programs that we have in place. And then as you say when or if the stock price changes, then I believe for every $0.50, it’s about $0.5 million impact either way.

David Tyerman

Okay, perfect. And that $4 million to $5 million per year, is it slanted into any one particular quarter, or is it pretty, should we just assume roughly even through the year?

Maria Perrella

Even through the year and that’s assuming stock price doesn’t change.

David Tyerman

Sure, now I understand. Okay, that’s helpful. And the last question, I had the large energy project that was cancelled, any update on that, because I think you’re coming up to the time when you expected perhaps to find something, maybe getting some new work from that?

Maria Perrella

So just to clarify on that, we did announce that the customer was suspending and then we announced that the customer was – or had canceled.

David Tyerman

Yes.

Maria Perrella

And we announced that in Q3 and it was partially cancelled. And as of now, we have received some follow-on work. And as I talked about in the prior quarter, I believe I said that, we expected additional work approximately in the range of the amount that was canceled, but I didn’t disclose how much was canceled.

And I also said that the amount wouldn’t be close to the original amount that we disclosed. And when we disclose, we said approximately US$100 million program. And that $100 million program included a whole bunch of materials and a lot of those materials are being repurposed and used in the follow-on work. Therefore, the value of the follow-on work is lower than the original contract.

David Tyerman

Okay. So the amount canceled, I think was $69 million in Q3?

Maria Perrella

We didn’t – yes. So we didn’t disclose, and I think the $69 million that you’re referring to might be in our backlog reconciliation.

David Tyerman

Yes.

Maria Perrella

And that amount and that does include the amount that was canceled plus foreign exchange adjustments.

David Tyerman

Okay. So some amount of that presumably the most amount would be that program, how much of that have you booked then since then, is it most of it, or like is it most of the Q4?

Maria Perrella

We – so we don’t disclose that.

David Tyerman

Okay. And just wondering is there a large chunk to come that will affect Q1 or Q2?

Maria Perrella

I’d say whatever comes doesn’t materially impact the results of the quarter.

David Tyerman

Okay, perfect. That’s very helpful. Thank you very much.

Maria Perrella

You’re welcome.

Operator

Your next question comes from Mark Neville from Scotiabank. Your line is open.

Mark Neville

Okay, some of Andrew’s comments. You talked about the importance of the global footprint, but you also talked about improving utilization. So I’m just curious, I mean, is there any room or need in your – I guess your view to just to shrink the footprints, or do some restructuring?

Andrew Hider

So, hey, Mark, at this time one – let me start, we assess that on an annual basis, on a quarterly basis often our global footprint. Second, at this time, we do not have any plans to shrink nor do we see the value of shrink on our corporation. But to clear what I stated in the beginning, we do look at this on an annual basis to confirm we’re in the right places at the right time to grab the right level of value to our customers and return to our shareholders.

Maria Perrella

And just to slightly modify the response, we look at it on a continuous.

Andrew Hider

Yes, continuous.

Maria Perrella

And then also when we acquire, we revisit our global footprint, because that also provides a good opportunity to see if there’s any overlap and if any adjustments need to be made.

Mark Neville

Okay. And then, Maria, you said $500 million potential, or you could purchase, sorry, up to $500 million an acquisition. Was that without equity? I just wasn’t sure of the sort of the context?

Maria Perrella

Without equity, just based on our capital structure that we have today that that we have available to us in our covenants.

Mark Neville

Okay. Okay, and then I guess, I was just curious, Andrew, on your view on sort of optimal leverage or yes?

Maria Perrella

We – I think we’re – we said, we’re conservative and we’re comfortable with the 2, 2.5 times. But when we acquire, we would be comfortable in the 4 times range even a little bit higher. And we’re comfortable with that, because we know that we are good cash generators and we can delever pretty quickly.

Mark Neville

Okay. And just on the – you said that this is just a follow-on order to your life science contract you won last year. At this point, is there still room for follow-on orders to that? I just – I sort of – I thought that that was sort of like a U.S.-specific order, maybe, I’m wrong, but I’m just curious, yes, I guess, if there’s any room for that to grow further, because it seems like it’s been fairly successful at this point?

Maria Perrella

Yes, we believe that there is room to grow further. But as we’ve said in the past, it depends on the customer’s need and their customers demand and requirements, therefore, room to grow how much and by when remains to be seen.

Mark Neville

All right.

Andrew Hider

And Mark just to add a slightly additional color that I talked about in the beginning. This space is attractive and continues to be attractive to the organization. And our value we provided into this space, we view as certainly strategic for our organization.

Mark Neville

All right. Thanks a lot, and thanks again for taking my questions.

Andrew Hider

You bet.

Maria Perrella

You’re welcome.

Operator

Mr. Hider, there are no further questions at this time.

Andrew Hider

Great. Thank you very much for your time this morning. And I look forward to work – to reporting our first quarter results. Have a great day. Take care.

Operator

This concludes today’s conference call. You may now disconnect.

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