Applied Technical Services (ATS) is a premier provider of high-quality engineering, testing, and inspection services with key expertise in metallurgy, materials testing, chemical analysis, non-destructive testing, and calibrations. Harris Williams recently advised ATS on its sale to Odyssey Investment Partners.
Here, Luke Semple, Drew Spitzer, and Ian Thomas of our Energy, Power & Infrastructure Group share their thoughts on what made ATS an excellent investment opportunity, as well as their advice for other investors interested in test, inspection, certification, and compliance (TICC).
What makes TICC an appealing space for buyers and investors?
Semple: TICC encompasses a wide range of essential services, from auditing and inspection to testing, verification, quality assurance, and certification. A large part of the space's appeal to strategic buyers and private equity investors is its high cycle resilience. TICC services are generally nondiscretionary—i.e., they are required by regulations and are important for avoiding risk—and the sector is broad and diverse, spanning virtually every industry. Leading TICC providers have worked hard to remain highly relevant during the COVID-19 crisis. Some have begun offering remote audits and virtual technology, while others are bundling services and adjusting certification cycles to boost the value they deliver to customers. Such relevance contributes to their already strong long-term resilience.
Thomas: The market for TICC services is very large and growing. Demand is driven by several important factors, including the age of the country's infrastructure. The majority of U.S. transportation, water, and utility networks are over 50 years old. Aging infrastructure drives the need for predictive monitoring and inspection to verify asset integrity and maintain safety. Ongoing infrastructure improvement programs also require testing and inspection throughout the build and into operational life. In the commercial sector, increasing complexity and scrutiny of regulatory requirements are creating the need for new or more frequent testing, inspection, and associated TICC activities. Commercial-sector demand for TICC services is also being driven by end customers who are increasingly focused on quality and transparency. They demand that providers both produce and sell high-quality products in an ethical manner.
Semple: For their part, operators appreciate the independence, impartiality, expertise, and integrity inherent to third-party TICC providers, as well as the value proposition of outsourcing from both a cost and risk management perspective. Human resource scarcity in this space is a significant challenge for both private and public sectors Today, approximately 40% of testing and inspection services are outsourced, and that market is expected to grow at a CAGR of 8% to 10% in the medium term.1
Spitzer: Another highly attractive element about the space is that the platform opportunity is tremendous. There's fragmentation across service lines and a great consolidation opportunity once you have a platform. Universal geographic service coverage is increasingly desired, given the scaled operations of customers and the realization of the TICC company value proposition across the continuum of assets. M&A has been a consistent growth driver historically, yet there is significant remaining market fragmentation across sub-verticals.
What made ATS particularly appealing to its investors?
Spitzer: ATS was a closely held, family-owned business, providing buyers with the opportunity to be the first institutional capital involved. It has scale, which made it a scarce resource in this market. It also has exceptional financial performance, with a multi-decade track record of stable growth, exceptional margins, and high free cash flow. ATS is just a good example of a way to play the sector: attractive organic growth supplemented with value creation through acquisitions. The company has acquired 12 companies since 2015, and M&A represents a substantial go-forward opportunity.
Thomas: Another differentiator for ATS is its deep customer relationships. It has more than 11,000 active customers, including market leaders across a diverse range of attractive, growing end markets. That loyal customer base drives highly recurring revenue, with more than 90% of the company's revenue being generated by repeat customers.
Semple: ATS' service offering breadth demonstrates just how massive and diverse this market can be. They use non-destructive analysis techniques to quantitatively inspect, measure and evaluate the safety and integrity of mission-critical infrastructure, components, and systems without interfering with the overall operation or future usefulness of those assets. They provide engineering support in all areas of mechanical, structural, and material engineering. They also provide lab services, such as analytical chemical and materials testing services that can be used to understand a product's composition, identify a potential contaminant, or discover the source of product failure. This diversification provides multiple avenues for growth, along with economic resiliency.
Thomas: ATS also has deep technical expertise in each of its services areas, which is both a competitive advantage and a critical barrier to entry. They have a deep bench of highly technical and experienced professionals, many of whom have advanced degrees, PhDs, or high-level industry certifications.
What advice do you have for other investors interested in this space?
Thomas: There are significant opportunities for buyers to operate in the TICC sector through services that are typically non-discretionary, regulation-driven, far less cyclical than other end markets, and with very favorable long-term and predictable spending outlooks. The value proposition that TICC companies offer their customers is rooted in three areas: cost efficiency, liability management, and access to a specialized workforce. Now is a good time for buyers to look for targets that can help them create platforms, build scale, and capitalize on this sector's potential.
Semple: Attractive candidates in the market have a unique, scalable platform with a proven M&A playbook; offer a broad range of critical-path services that can't be deferred or denied; and have a visible, repeating revenue base and exceptional cash conversion. Despite the high level of market fragmentation, many companies in the sector fit those criteria.