Zacks_Analysts' Blog : Restructuring Actions and New Contracts Relieve ATC Technology - Analyst Blog

Recently, Illinois-based drivetrain products remanufacturer ATC Technology Corporation (ATAC) announced additional restructuring actions. The company aims to reduce operating costs of its Drivetrain business resulting from the pending loss of the Honda transmission remanufacturing program. The restructuring actions include additional workforce reductions and consolidation of warehousing activities.

In May, Honda Motor (HMC) indicated that it will source the remanufacturing of automatic transmissions from within, by winding down the transmission business with ATC by the year end. The transmission business accounted for 10% of company revenues and 29% of Drivetrain segment revenues. Following this, the company revealed in June that it will record a pre-tax goodwill impairment charge of $37 million or $1.32 per share after tax in the second quarter of 2009.

The additional restructuring actions will result in pre-tax charges of approximately $1.5 million or $0.05 per diluted share after tax in the second half of the year for severance and related costs.

Apart from restructuring actions, ATC has been awarded two new contracts, which will help the company to partially mitigate the impending loss of Honda remanufactured transmissions. The company’s two existing customers, Chrysler and Subaru, awarded contracts to ATC to supply remanufactured engines and related components in North America in support of both warranty and customer-pay programs.

The remanufacturing for the new contracts – scheduled to launch during the third quarter – will take place at the Oklahoma City facility. These are anticipated to contribute approximately $15–$17 million in annualized revenue. However, for 2009, they are expected to contribute $7–$8 million in revenue with no impact on segment profit due to projected inefficiencies related to their launch and start-up.

Overall, the new programs are expected to help the Drivetrain segment to generate revenues of $147–$150 million in 2009, higher than the June forecast of $140–$144 million. Considering the loss of the transmission business with Honda, restructuring actions, and contribution from the new engine programs, ATC expects the Drivetrain business to achieve adjusted segment profit margin in the low single-digit range for the rest of 2009 and in 2010.

We continue to recommend ATAC as Buy with a six-month target price of $35.00