10-K 1 d294742d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 001-32999

 

 

FUEL SYSTEMS SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-3960974

(State or Other Jurisdiction Of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

780 Third Avenue, 25th Floor, New York, New York 10017

(Address of Principal Executive Offices, Including Zip Code)

(646) 502-7170

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2011, was approximately $455.5 million based upon the closing sale price of the registrant’s common stock of $24.95 on June 30, 2011, as reported on the Nasdaq Stock Market.

As of February 15, 2012, the registrant had 20,014,065 shares of common stock, $0.001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement which will be filed with the SEC in connection with the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

TABLE OF CONTENTS

 

          Page  
     PART I       

Item 1.

   Business      2   

Item 1A.

   Risk Factors      10   

Item 1B.

   Unresolved Staff Comments      18   

Item 2.

   Properties      19   

Item 3.

   Legal Proceedings      19   

Item 4.

   Mine Safety Disclosures      19   
   PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     20   

Item 6.

   Selected Financial Data      20   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      22   

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      42   

Item 8.

   Consolidated Financial Statements and Supplementary Data      43   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      43   

Item 9A.

   Controls and Procedures      43   

Item 9B.

   Other Information      44   
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      45   

Item 11.

   Executive Compensation      45   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     45   

Item 13.

   Certain Relationships and Related Transactions and Director Independence      46   

Item 14.

   Principal Accounting Fees and Services      46   
   PART IV   

Item 15.

   Exhibits, Financial Statement Schedules      47   
   Signatures      51   
   Index to Consolidated Financial Statements      F-1   


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FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this Form 10-K. These statements are not historical facts, but instead involve known and unknown risks, uncertainties and other factors that may cause our or our company’s actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward looking statements. Statements in this Form 10-K that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Words such as: “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “seeks,” “on-going” or the negative of these terms or other comparable terminology often identify forward-looking statements, although not all forward-looking statements contain these words. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and beliefs concerning future business conditions, our results of operations, financial position and our business outlook, or state other “forward-looking” information based on currently available information. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. A list of the known material factors that may cause our results to vary, or may cause management to deviate from its current plans and expectations, is included in Item 1A “Risk Factors.” These forward-looking statements are not guarantees of future performance. We cannot assure you that the forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not place undue reliance on these forward looking statements. The forward-looking statements made in this Form 10-K relate to events and state our beliefs, intent and our view of future events only as of the date of this form 10-K. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

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PART I

 

Item 1. Business.

Overview

Founded over 50 years ago, Fuel Systems Solutions is a leader in providing alternative fuel systems for transportation, industrial, and refueling applications worldwide. We have a global presence and operate in geographies and markets that are underpenetrated and growing rapidly, driven by compelling economics, government support, and local demand. Our dedicated and bi-fuel technologies offer our customers a broad range of cost-effective products and applications that we tailor to local specifications. Our technologies enable our customers to:

 

   

benefit from significantly lower retail fuel prices, capturing the differential between traditional fuels and compressed natural gas (CNG) and liquid propane gas (LPG);

 

   

contribute to cleaner air and environment as carbon emissions of natural gas are in general lower than gasoline and diesel; and

 

   

help displace oil and exploit natural gas reserves so as to increase energy independence.

Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. We supply our products and systems to the marketplace through a global distribution network of approximately 700 distributors and dealers in more than 70 countries and 175 original equipment manufacturers, or OEMs.

We offer an array of components, systems and fully integrated solutions for our customers, including:

 

   

fuel delivery—pressure regulators, fuel injectors, flow control valves and other components designed to control the pressure, flow and/or metering of gaseous fuels;

 

   

electronic controls—solid-state components and proprietary software that monitor and optimize fuel pressure and flow to meet manufacturers’ engine requirements;

 

   

gaseous fueled internal combustion engines—engines manufactured by OEMs that are integrated with our fuel delivery and electronic controls;

 

   

systems integration—systems integration support to integrate the gaseous fuel storage, fuel delivery and /or electronic control components and sub-systems to meet OEM and aftermarket requirements;

 

   

auxiliary power systems—fully integrated auxiliary power systems for truck and diesel locomotives; and

 

   

natural gas compressors—natural gas compressors and refueling systems for light and heavy duty refueling applications.

Automobile manufacturers, taxi companies, transit and shuttle bus companies and delivery fleets are among the most active customers for our transportation products. Our largest markets for transportation products are currently, and have historically been, outside the United States. To capture demand in the now emerging United States market for alternative gaseous fuel-powered vehicles and equipment, we recently made acquisitions in the United States, and now have a full suite of automotive capabilities, including a California Air Resources Board (“CARB”) certified product line and in-house OEM systems engineering platform, enhancing our ability to leverage our existing relationship with fleet customers and other manufacturers as they roll out CNG and LPG versions of key fleet vehicles in North America.

 

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Manufacturers of industrial mobile and power generation equipment, stationary engines, and truck and rail locomotives are among the most active customers for our industrial products. Our broad product range allows us to provide turnkey EPA (“Environment Protection Agency”) and CARB-certified and non certified engine systems, customer specified fuel systems modules and/or components, as well as auxiliary power units (APUs). The wide availability of gaseous fuels in world markets combined with their lower emissions and cost compared to gasoline and diesel fuels is driving rapid growth in the global alternative fuel industry.

Unless the context otherwise requires, the terms “we,” “us,” “our”, “Fuel Systems” and “the Company” refer to Fuel Systems Solutions, Inc., or Fuel Systems and its subsidiaries. We were incorporated in Delaware in 1985 after having provided automotive and alternative fuel solutions in a variety of organizational structures since 1958. In 2006, we reorganized our business and corporate structure creating Fuel Systems Solutions, Inc. as a holding company with our two operating segments, IMPCO operations, and BRC operations. Our IMPCO operations consist mainly of our industrial business but include certain activities in the transportation market undertaken at our facilities. All other business in the transportation market is conducted by our BRC operations.

The predecessor to Fuel Systems was IMPCO Technologies, Inc., which we refer to as IMPCO U.S., and all of our filings with the SEC prior to our reorganization are filed under the name of IMPCO Technologies, Inc. Our periodic and current reports, and any amendments to those reports, are available, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC on our website: www.fuelsystemssolutions.com. The information on our website is not incorporated by reference into this report. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street N E, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding us at http://www.sec.gov.

Our Industry

Our business is focused on the alternative fuel industry. We believe three independent market factors—economics, energy independence and environmental concerns—are driving the growth of the market for alternative fuel technology. We believe the historic price differential between propane or natural gas and gasoline and diesel results in an economic benefit to end users of alternative fuel technology. In transportation markets, the price of alternative fuels such as natural gas or propane is typically substantially less than the price of gasoline. By converting a liquid fueled internal combustion engine to run on propane or natural gas, customers can capitalize on this fuel price differential. End-users may recoup the cost of the conversion within six to eighteen months, depending on the fuel cost disparity prevailing at the time and fuel usage. In addition to economic benefits of alternative fuels to end-users, some governments have sought to create a demand for alternative fuels in order to reduce their dependence on imported oil and reduce their unfavorable balance of payments by relying on their natural gas reserves. Alternative fuel vehicles that operate on natural gas or propane can lessen the demand for imported crude oil.

The World Energy Outlook 2011 projects the global primary energy demand to grow by 33% between 2010 and 2035 at an average annual rate of 3.5% per year. Even though the earth’s energy resources are adequate to meet this demand, the amount of investment that will be needed to exploit these resources will be higher than in the past. World Energy Outlook 2011 estimated that an investment of $38.0 trillion is needed through 2035. According to the World Energy Outlook 2011, world oil resources are judged to be sufficient to meet the projected growth in demand to 2035; however, a supply-side crunch involving an abrupt escalation in oil prices cannot be ruled out.

Consequently, natural gas remains a key fuel in the electric power and industrial sectors. Consumption of natural gas worldwide is expected to rise from 3.3 trillion cubic meters in 2010 to 5.1 trillion cubic meters in 2035. Gaseous fuels such as natural gas, have significant reserves available worldwide that are less costly to refine compared to crude oil and have historically been less expensive than liquid fuels. According to the U.S.

 

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Geological Survey’s World Petroleum Assessment 2000, a significant volume of natural gas remains to be discovered. China and India, the world’s most heavily populated nations, are actively developing their infrastructure to facilitate natural gas consumption and imports.

Environmental concerns have also driven the growth of the alternative fuel industry. According to the Natural Gas Vehicles for America, per unit of energy, natural gas contains less carbon than any other fossil fuel, and thus produces lower carbon dioxide (CO2) emissions per vehicle mile traveled. Tests have shown that vehicles operating on natural gas produce up to 20 to 30 percent less greenhouse gas emissions than comparable diesel and gasoline fueled vehicles. Tests conducted by the U.S. Environmental Protection Agency show that propane-fueled vehicles produce 30 percent to 90 percent less carbon monoxide and about 50 percent fewer toxins and other smog-producing emissions than gasoline engines, as reported by the Propane Education Resource Council.

We are directly involved in two markets: transportation and industrial, including mobile and power generation equipment. These markets have seen growth in the use of clean-burning gaseous fuels due to the less harmful emissions effects of gaseous fuels and the cost advantage available in many markets of gaseous fuels over gasoline and diesel fuels.

Transportation

According to the most recent statistics from the World LP Gas Association and International Association for Natural Gas Vehicles, there are over seventeen million propane, or LPG, vehicles and nearly thirteen million Natural Gas (“NG”) vehicles in use worldwide, either for personal mobility, fleet conveyance, or public transportation. As the world’s vehicle population increases, it is expected that the passenger vehicle fleet doubles by 2035 and most growth will occur in developing countries within Asia, North Africa and areas of the Middle East. These regions currently have the lowest ratio of vehicles per one thousand people and are slated to grow rapidly over the next ten years as economic improvements stimulate personal vehicle ownership. In Europe, Asia and Latin America, alternative fuel vehicles operating on propane and natural gas are widely available through OEM and aftermarket distribution channels and have gained important penetration of total vehicles in circulation in many countries.

In the United States the transportation market for LPG, NG and other gaseous fuel vehicles has been limited, but recently a market for dedicated and bi-fuel natural gas vehicles has emerged and we have recently invested in that market. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview”.

Industrial

Engines in equipment such as forklifts, aerial platforms, sweepers, turf equipment, power generators and other mobile industrial equipment have long been workhorses of developed countries and comprise a significant portion of our global business. With developed countries such as the United States, and the countries in Asia and Europe seeking a broader consensus on regulation of emission sources in an attempt to further reduce air pollution, many countries have legislated, and we believe will continue to legislate, emission standards for this type of equipment.

Our industrial brands focus on serving the market with fuel systems, services and emission certified engine packages. With the imposition of new emissions regulations, OEMs will require advanced technologies that permit the use of gaseous fuels in order to satisfy not only new regulations but also their customers’ requirements for durability, performance and reliability. We have developed and are currently supplying a series of advanced technology alternative fuel systems to the industrial OEM market under the brand name Spectrum®.

 

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Competitive Advantages

We believe we have developed a technological leadership position in the alternative fuel industry based on our experience in designing, manufacturing and commercializing alternative fuel delivery products and components; our relationships with leading companies in transportation; our knowledge of the power generation and industrial markets; our financial commitment to research and product development; and our proven ability to develop and commercialize new products. We believe our competitive strengths include:

 

   

strong technological base;

 

   

strong global distribution and OEM customer relationships;

 

   

extensive manufacturing experience;

 

   

established systems integration expertise; and

 

   

positioning for global growth.

Customers and Strategic Relationships

Our customers include some of the world’s largest engine, vehicle and industrial equipment OEMs.

We are working with a number of our customers to address their future product and application requirements as they integrate more advanced, certified gaseous fuel systems into their business strategies. Additionally, we continually survey and evaluate the benefits of joint ventures, acquisitions and strategic alliances with our customers and other participants in the alternative fuel industry to strengthen our global business position.

In 2011, no customers represented more than 10.0% of our consolidated sales. In 2010, one customer represented 14.6% of our consolidated sales. In 2009, two customers represented 13.0% and 11.6% of our consolidated sales, respectively. During 2011, 2010, and 2009 sales to our top ten customers accounted for 32.8%, 53.0%, and 62.0% of our consolidated sales, respectively. If our largest customer or several of these key customers were to reduce their orders substantially, we would suffer a decline in sales and profits, and those declines could be substantial.

Products and Services

Our products include gaseous fuel regulators, fuel shut-off valves, fuel metering and delivery systems, complete engine systems, auxiliary power systems and electronic controls for use in internal combustion engines for the transportation, industrial and power generation markets. In addition to these core products, which we manufacture, we also design, assemble and market ancillary components required for complete systems operation on alternative fuels.

 

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All of our products are designed, tested and validated in accordance with our own internal requirements, as well as tested and certified with major regulatory and safety agencies throughout the world, including Underwriters Laboratories in North America and TÜV in Europe. The following table describes the features of our products:

 

Products

  

Features

Fuel Metering

  

•    Full range of injectors designed to operate on propane, natural gas or biogas fuels

 

•    Electronic control overlays allow integration with modern emissions monitoring systems for full emissions compliance capability

 

•    Designed for high resistance to poor fuel quality

Fuel Regulation

  

•    Reduces pressure of gaseous and liquid fuels

 

•    Vaporizes liquid fuels

 

•    Handles a wide range of inlet pressures

Fuel Shut-Off

  

•    Mechanically or electronically shuts off fuel supply to the regulator and engine

 

•    Available for high-pressure vapor natural gas and low-pressure liquid propane

 

•    Designs also incorporate standard fuel filtration to ensure system reliability

Electronics & Controls

  

•    Provides closed loop fuel control allowing integration with existing sensors to ensure low emissions

 

•    Integrates gaseous fuel systems with existing engine management functions

Engine-Fuel Delivery Systems

  

•    Turnkey kits for a variety of engine sizes and applications

 

•    Customized applications interface based on customer requirements

Fuel Systems

  

•    Complete vehicle and equipment systems for aftermarket and post-production OEM conversion

 

•    Complete engine and vehicle management systems for heavy on-highway vehicles

 

•    Complete engine and vehicle management systems for off-highway and industrial engines used for material handling, power generation and industrial applications

Compressors

  

•    Complete range of compressors for natural gas refueling applications and turnkey refueling stations

Auxiliary Power Systems

  

•    Range of auxiliary power systems products for truck and rail applications

 

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We have developed capabilities that we use to develop a broad range of products to satisfy our customers’ needs and applications. These capabilities/applications fall into the following categories:

 

Capabilities

  

Applications

Design and Systems Integration

  

•    Strong team of applications engineers for component, system and engine level exercises providing support to customers in the application of our gaseous fuel products

  

•    Applications engineering services for whole vehicle/machine integration outside of our products

  

•    Full three dimensional design modeling and component rapid prototyping services

Certification

  

•    Certification of component products and systems in line with the requirements of California Air Resources Board and Environmental Protection Agency for off- highway engines as well as European ECE-ONU certifications

  

•    Provide customers with the required tools to manage in-field traceability and other requirements beyond initial emission compliance

Testing and Validation

  

•    Component endurance testing

  

•    Component thermal and flow performance cycling

  

•    Engine and vehicle testing and evaluation for performance and emissions

Sub-System Assembly

  

•    Pre-assembled modules for direct delivery to customers’ production lines

  

•    Sourcing and integrating second and third tier supplier components

Final Assembly & Test

  

•    Full vehicle final up-fit assembly and test operating as an extension of the OEM production line/process

Training and Technical Service

  

•    Complete technical service support, including technical literature, web-based information, direct telephone interface (in all major countries) and on-site support

  

•    Training services through sponsored programs at approved colleges, at our facilities worldwide and on-site at customer facilities

Service Parts and Warranty Support

  

•    Access to service parts network, along with direct support in development of customers’ own internal service parts programs and procedures

Sales and Distribution

We sell products through a worldwide network encompassing over 700 distributors and dealers in more than 70 countries and through a sales force that develops sales with distributors, OEMs and large end-users. Our operations focus on OEM and aftermarket distributors in the transportation, industrial and power generation markets. Of these markets, we believe that the greatest potential for growth is in the, Asia, North and South America and Middle East regions in sales to transportation OEMs and aftermarket distributors and installers and in North America in sales to industrial OEMs and the related aftermarket.

During the years 2011, 2010 and 2009, sales to distributors accounted for 63.5%, 49.4%, and 35.5%, respectively, of our revenue, and sales to OEM customers accounted for 36.5%, 50.6%, and 64.5%, respectively, of our revenue.

Distributors generally service the aftermarket business for the conversion of liquid fueled engines to gaseous fuels. Many domestic distributors have been our customers for more than 30 years, and many of our export distributors have been our customers for more than 20 years.

 

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Information regarding revenue, income and assets of each of our two business segments, IMPCO operations and BRC operations, and our revenue and assets by geographic area is included in Note 15 to the consolidated financial statements included elsewhere in this Annual Report on Form 10K as well as in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Manufacturing

We manufacture and assemble a majority of our products at our facilities in Santa Ana, California, Union City, Indiana, Kitchener, Canada, Beccar, Argentina and Cherasco, Italy and to a lesser extent at some of our other international facilities. Current manufacturing operations consist primarily of mechanical component assembly and test, forging and light machining, electronic PCB assembly and testing and system up-fitting. We rely on outside suppliers for parts and components and obtain components for products from a variety of domestic and foreign automotive and electronics suppliers, die casters, stamping operations, specialized diaphragm manufacturers and machine shops. During 2011, no suppliers represented more than 10.0% of consolidated purchases of raw materials and services. During 2010 and 2009, one supplier represented 10.3% and 12.4%, respectively, of the consolidated purchases of raw materials and services.

Machined die cast aluminum parts and supplier engineered parts represent the major components of our cost of sales. Coordination with suppliers for quality control and timely shipments is a high priority to maximize inventory management. We use a computerized material requirement planning system to schedule material flow and balance the competing demands of timely shipments, productivity and inventory management. Our manufacturing facilities in California, Canada, and Argentina are ISO-9001 certified, while the facilities in Italy are ISO/TS-16949 and ISO-9001 certified.

Research and Development

Our research and development programs provide the technical capabilities that are required for the development of systems and products that support the use of gaseous fuels in internal combustion engines. Our research and development is focused on fuel delivery and electronic control systems and products for motor vehicles, engines, forklifts, stationary engines and small industrial engines. In 2010, we expanded our research and development facility in Italy to continue to serve our customers with new products and capabilities. In 2011, we expanded our research and development facilities in the U.S. to address the increasing U.S. automotive market. Our research and development expenditures were approximately $28.1 million, $20.8 million, $15.2 million, in 2011, 2010, and 2009, respectively.

Competition

Our key competitors in gaseous fuel delivery products, accessory components and engine conversions markets include Westport Innovations Inc. in Canada and its subsidiaries OMVL, S.r.L. and EMER, S.p.A. in Italy, Landi Group and O.M.T. Tartarini, S.r.L. located in Italy; Aisan Industry Co. Ltd. and Nikki Company Ltd. in Japan. These companies, together with us, account for a majority of the world market for alternative fuel products and services. In the future, we may face competition from traditional automotive component suppliers, such as the Bosch Group, Delphi Corporation, Siemens VDO Automotive AG and Visteon Corporation, and from motor vehicle OEMs that develop fuel systems internally. Industry participants compete on price, product performance and customer support.

Product Certification

We must obtain emission compliance certification from the Environmental Protection Agency to sell certain of our products in the United States, receive certification from CARB to sell certain products in California and meet European standards for emission regulations in Europe. Each car, truck or van sold in each of these markets must be certified before it can be introduced into commerce, and its products must meet component, subsystem and system level durability, emission, refueling and various idle tests. We have also obtained international

 

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emissions compliance certification in Argentina, Australia, Brazil, Canada, Chile, Europe, Russia, Mexico and Thailand. We strive to meet stringent industry standards set by various regulatory bodies. Approvals enhance the acceptability of our products in the worldwide marketplace. Many foreign countries also accept these agency approvals as satisfying the “approval for sale” requirements in their markets.

Employees

As of December 31, 2011, we employed approximately 1,700 persons, excluding those employed by our unconsolidated affiliates in India. Of these employees, approximately 405 were employed in IMPCO operations, of which 170 are foreign employees, and approximately 1,285 were employed in BRC operations, all of which are foreign employees. Employees in Italy, the Netherlands and Argentina are represented by a collective bargaining agreement. Personnel employed by our foreign subsidiaries are often subject to national labor contracts. We consider our relations with our current employees and unions to be good.

Intellectual Property

We currently rely primarily on patent and trade secret laws to protect our intellectual property. We currently have approximately one hundred patents registered in countries located in North America, Europe, and Asia. We do not expect the expiration of our patents to have a material effect on our revenue.

We also rely on a combination of trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights. However, we cannot be sure that these intellectual property rights provide sufficient protection from competition. We believe that our intellectual property protected by copyright and trademark protection is less significant than our intellectual property protected by patents. Third parties may claim that our products and systems infringe their patents or other intellectual property rights. Identifying third party patent rights can be particularly difficult, especially since patent applications are not published until 18 months after their filing dates. If a competitor were to challenge our patents, or assert that our products or processes infringe its patent or other intellectual property rights, we could incur substantial litigation costs, be forced to design around their patents, pay substantial damages or even be forced to cease our operations, any of which could be expensive and/or have an adverse effect on our operating results. Third party infringement claims, regardless of their outcome, would not only consume our financial resources, but also would divert the time and effort of our management and could result in our customers or potential customers deferring or limiting their purchase or use of the affected products or services until resolution of the litigation.

 

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Item 1A. Risk Factors.

The success of our recent investments in the automotive alternative fuel transportation business in the United States is contingent on the growth of the gaseous alternative fuel industry in the United States.

We recently expanded our automotive alternative fuel transportation activities in the United States by acquiring several businesses. The return on our investments is dependent among other factors on the expansion of the United States market for vehicles that operate on gaseous alternative fuels. If this market does not expand, the revenues and profits generated by these investments may not justify the purchase prices that we paid for them.

Reduced consumer or corporate spending due to weakness in the financial markets and uncertainties in the economy, domestically and internationally, may materially and adversely affect our revenue, operating results and cash flows.

We depend on demand from the consumer, OEM, contract manufacturing, industrial, automotive and other markets we serve for the end market applications that use our products and services. All of these markets have been, and may continue to be, affected by the recent instability in global financial markets that have caused extreme economic disruption. Reductions in consumer or corporate demand for our products and services as a result of uncertain conditions in the macroeconomic environment, such as volatile energy prices, inflation, fluctuations in interest rates, difficulty securing credit, extreme volatility in security prices, diminished liquidity, mortgage failures, or other economic factors, may materially and adversely affect our revenue, operating results and cash flows.

Negative economic conditions may also materially impact our customers, suppliers and other parties with which we do business. Economic and financial market conditions that adversely affect our customers may cause them to terminate existing purchase orders, reduce the volume of products they purchase from us in the future or seek price concessions. In connection with the sale of products, we normally do not require collateral as security for customer receivables and do not purchase credit insurance. We may have significant balances owing from customers who operate in cyclical industries or who may not be able to secure sufficient credit in order to honor their obligations to us. Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations, liquidity and financial condition.

Adverse economic and financial market conditions may also cause our suppliers to be unable to provide materials and components to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for our amounts owing them or reducing the maximum amount of trade credit available to us. While we have not yet experienced changes of this type, they could have a material adverse effect on our results of operations, liquidity and financial condition. If we are unable to successfully anticipate changing economic and financial markets conditions, we may be unable to effectively plan for, and respond to, those changes, and we could be materially and adversely affected.

The European Union debt crisis could have a material adverse effect on our business, financial condition and liquidity.

The possibility that certain European Union (“EU”) member states will default on their debt obligations and are being required to pay significantly increased borrowing costs has negatively impacted economic conditions and contributed to instability in global markets. The continued uncertainty over the outcome of the EU’s financial support programs and the possibility that EU member states may experience serious financing obstacles could further disrupt global markets.

The current debt crisis in the EU has also caused the value of the Euro to further fluctuate. A deterioration in the value of the Euro may adversely affect our customers in those countries.

 

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The world has recently experienced a global macroeconomic downturn. The EU debt crisis may adversely affect global market conditions and has adversely affected economic growth in the EU and other parts of Europe. If economic conditions in our key markets remain uncertain or deteriorate further, customer demand for our products could decline, and we may experience material adverse impacts on our business and operating results.

We maintain a majority of our investments and liquidity in Italy and other EU countries, much of it in banks in Italy. While we have adopted investment and treasury policies which are intended to mitigate any adverse effect from the EU debt crisis, we are unable to provide assurances that the financing tension caused by the EU debt crisis will not affect our liquidity and financial resources.

Currency exchange rate fluctuations may adversely affect our operating results and cash flows and may have a material adverse effect on our revenue and overall financial results.

Because of our significant operations outside of the United States, we engage in business relationships and transactions that involve many different currencies. Exchange rates between the U.S. dollar and the local currencies in these foreign locations where we do business can vary unpredictably. These variations may have an effect on the prices we pay for key materials and services from overseas vendors in our functional currencies under agreements that are priced in local currencies. If the rate of the U.S. dollar depreciates against local currencies, our effective costs for such materials and services would increase, adversely affecting our operating results and cash flows.

For the year ended December 31, 2011, non-U.S. operations accounted for approximately 78.0% of our revenue. Most revenues and expenses of our non-U.S. operations are in local currency. Our financial statements are presented in U.S. dollars, therefore, gains and losses on the conversion of foreign currency denominated expenses into U.S. dollars could cause fluctuations in our operating results, and fluctuating exchange rates could cause significantly reduced revenue and gross margins from non-U.S. dollar-denominated revenue, which could materially and adversely affect our overall financial results.

Also, for the year ended December 31, 2011, Euro denominated revenue accounted for approximately 53.5% of our total revenue; therefore a substantial appreciation in the rate of exchange of the U.S. dollar against the Euro could have a significant adverse affect on our financial results.

We currently do not engage in financial hedging against these risks and may not be able to hedge against these risks in the future.

We are subject to governmental certification requirements and other regulations, and more stringent regulations in the future may impair our ability to market our products.

We must obtain product certification from governmental agencies, such as the Environmental Protection Agency and the California Air Resources Board, to sell certain of our products in the United States and must obtain other product certification requirements in Europe and other regions. A significant portion of our future revenue will depend upon sales of fuel management products that are certified to meet existing and future air quality and energy standards. We cannot assure you that our products will meet these standards in the future. We incur significant research and developments costs to ensure that our products comply with emissions standards and meet certification requirements in the countries where our products are sold. Our failure to comply with certification requirements could result in the recall of our products as well as civil and/or criminal penalties.

Any new government regulation that affects our alternative fuel technologies, whether at the foreign, federal, state, or local level, including any regulations relating to installation and service of these systems, may increase our costs and the price of our systems and adversely affect the effectiveness of the related technologies. As a result, these regulations could materially and adversely affect us.

 

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We maintain a significant investment in inventory and have made significant investments in the expansion of our operations to meet demand for our product without long-term contracts with customers. A decline in our customers’ purchases would lead to a decline in our revenue and could result in a decrease in our operating results and cash flows.

We do not have long-term contracts with our customers. Generally, our product sales are made on a purchase order basis, which allows our customers to reduce or discontinue their purchases from us. Accordingly, we cannot predict the timing, frequency or size of our future customer orders. Our ability to accurately forecast our sales is further complicated by the current global economic and financial uncertainty. We maintain significant inventories (approximately 63% of total inventory) at BRC Group, the principal operating company in our transportation division, in an effort to ensure that our European transportation customers have a reliable source of supply. Our total inventory at December 31, 2011 was $103.4 million, an increase of $17.5 million compared to our total inventory at December 31, 2010. If we fail to anticipate the changing needs of our customers and accurately forecast our customer demands, our existing and potential customers may not place orders with us, which would decrease our revenue, and we may accumulate significant inventories of products that we will be unable to sell which may result in a significant decline in the value of our inventory. As a result, our revenue, gross profit and other operating results and cash flows may be materially and adversely affected.

In addition, we expanded our operational capacity, including opening new facilities in Italy, to address increased demand for our fuel systems components and systems, and we increased substantially our investment in research and development. We may continue to make significant investments in our business without any guarantees or long-term commitments from our customers that they will continue to purchase our components and systems with the same timing, frequency and size as we expect. As a result, if there is insufficient demand for our components and systems, we may not recover the costs of any increased investment in our operations, which could have a material, adverse effect on our financial position, liquidity and results of operations.

An expansion of OEM offering of gaseous fuel vehicles employing internally developed OEM technology would likely result in a decrease in our revenue and profit margins.

We derive a substantial portion of our revenue from the sale of gaseous fuel systems and components to automobile OEMs. An expansion in the offering of OEM gaseous fuel vehicles employing internally developed OEM technology could reduce demand for our systems and components and would likely have a negative impact on our revenue and profits.

We currently face, and will continue to face, significant competition, which could materially and adversely affect us.

We currently compete with companies that manufacture products to convert liquid-fueled internal combustion engines to gaseous fuels. Our competitors in the future may have greater name recognition, larger customer bases, broader global reach and a wider array of product lines, as well as greater financial resources and access to capital than we have. We are also subject to competition from other alternative fuels and alternative fuel technologies, including ethanol, electric and hybrid electric and fuel cells, and we cannot assure you that such technologies will not be favored over gaseous fuel technologies in the future. We also cannot assure you that our competitors will not create new and improved innovative gaseous fuel technologies. Increases in the market for alternative fuel vehicles may cause automobile or engine manufacturers to develop and produce their own fuel conversion or fuel management equipment rather than purchasing the equipment from suppliers such as us or to employ competing technologies. Further, greater acceptance of alternative fuel engines may result in new competitors. Should any of these events occur, either alone or in combination, the total potential demand for, and pricing of, our products could be negatively affected and cause us to lose business, which could materially and adversely affect us.

 

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New technologies may render our existing products obsolete, which could materially and adversely affect us.

New developments in technology may negatively affect the development or sale of some or all of our products or make our products obsolete. Our inability to enhance existing products in a timely manner or to develop and introduce new products that incorporate new technologies, conform to increasingly stringent emission standards and performance requirements, and achieve market acceptance in a timely manner could negatively impact our competitive position and may materially and adversely affect us. New product development or modification is costly, involves significant research, development, time and expense and may not necessarily result in the successful commercialization of any new products.

Fluctuation in oil or natural gas prices may result in a decline in the demand for our products and services, which would materially and adversely affect our revenue, operating results and cash flows.

We believe that our sales in recent years have been favorably impacted by changes in consumer demand prompted by rising oil prices and concern over potential increases in oil prices. Conversely, when oil prices decrease and remain low or continue to decrease, it may result in a decline of the demand for our products and services. In addition, volatility in the price of natural gas may have an equal though opposite impact on the demand for our products and services. The potential decline in the demand for our products and services caused by these price fluctuations could materially and adversely affect our revenue, operating results and cash flows.

Our business is directly and significantly affected by regulations relating to reducing vehicle emissions. If current regulations are repealed or if the implementation of current regulations is suspended or delayed, our revenue, operating results and cash flows may decrease significantly.

If regulations relating to vehicle emissions are amended in a manner that may allow for more lenient standards, or if the implementation of such currently existing standards is delayed or suspended, the demand for our products and services could diminish, and our revenue, operating results and cash flows could decrease significantly. In addition, demand for our products and services may be adversely affected by the perception that emission regulations will be suspended or delayed. Accordingly, we rely on stricter emissions regulations, the adoption of which are out of our control and cannot be assured, to stimulate our growth.

Changes in tax policies and governmental incentives may reduce or eliminate the economic benefits that make our products attractive to consumers, which could materially and adversely affect us.

In some jurisdictions and from time to time, government authorities may provide tax benefits and incentives for clean-air vehicles, including tax credits, rebates and reductions in applicable tax rates. In certain of our markets, these benefits extend to vehicles powered by our systems and create economic benefits for our customers. Changes in these tax benefits or incentives, such as the expiration at the end of 2009 of the Italian government’s economic incentives for the purchase of new dual fuel consumer automobiles, may reduce or eliminate the economic benefits that make our products attractive to customers, which could materially and adversely affect us. Government authorities in some countries may from time to time use fuel prices as an instrument of fiscal policy and taxation may vary for different types of fuels, including gaseous fuels. Changes in taxation can affect the retail prices for alternative fuels which can negatively impact the attractiveness of our products.

Some of our foreign subsidiaries have done, and may continue to do, business in countries subject to U.S. sanctions and embargoes, including Iran.

Some of our foreign subsidiaries sell fuel delivery systems, related parts and accessories to customers in Iran, a country currently subject to sanctions and embargoes imposed by the U.S. government, the European Union (“EU”), the United Nations, and other countries. In addition to Iran, there are other countries that are also subject to sanctions. These sanctions are complex. We believe we have procedures in place to conduct U.S. and foreign operations without violating U.S., EU, or other sanctions. However, if we fail to comply with U.S.

 

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sanctions, EU sanctions or other sanctions in our foreign operations, we could be subject to material fines and penalties and incur damage to our reputation, which may lead to a reduction in the market price of our common stock.

In addition, our foreign subsidiaries’ sales to Iran could reduce demand for our common stock among certain of our investors for political reasons.

Recent Iranian sanction laws and regulations have adversely affected our revenues and may cause us other adverse consequences.

In June 2010, the United Nations Security Council by Resolution voted to impose a new and expanded round of sanctions against Iran. In July 2010, the European Union implemented the UN Resolution. On July 1, 2010, President Obama signed into law the new Comprehensive Iran Sanctions and Accountability and Divestment Act of 2010 (the “CISADA”). In November 2011, President Obama signed Executive Order 13590 imposing broad sanctions similar to those included within the CISADA and which expressly apply to any individual or entity (whether or not a U.S. person). In January 2012, the EU expanded its sanctions against Iran. The expanded round of laws and regulations imposing sanctions on Iran has not significantly impacted our revenues derived from this country. We can offer no assurance that any further expansion of Iranian sanctions will not further adversely affect our revenues and cause us other adverse consequences.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws.

The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in other jurisdictions prohibit companies and their intermediaries and agents from making improper payments to foreign officials, including employees of government owned businesses, for the purpose of obtaining or retaining business. During the last few years, the United States Department of Justice and the SEC have brought an increasing number of FCPA enforcement cases, many resulting in very large fines and deferred criminal prosecutions. Our internal control policies and procedures mandate compliance with the FCPA and other similar anti-bribery laws. We recently instituted training programs for our employees around the world. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from improper acts committed by our employees or agents.

In any acquisition or joint venture we engage in, we expose ourselves to the possibility that the employees and agents of such businesses may not have conducted themselves in compliance with the anti-corruption laws of the FCPA. Although when we make such acquisitions or enter into joint ventures, we impose contractual provisions and attempt to undertake cost appropriate due diligence, we cannot provide assurance that we will always be protected from the consequences of acts which may have violated the FCPA.

Violations of the FCPA may result in significant civil and criminal fines, as well as criminal convictions. Violations of the FCPA and other foreign anti-bribery laws, or allegations of such violations, could disrupt our business and cause us to suffer civil and criminal financial penalties and other sanctions, which are likely to have a material adverse impact on our business, financial condition, and results of operations.

The development of our business is dependent on the availability of gaseous fueling infrastructure

Many countries, including the United States, currently have limited or no infrastructure to deliver natural gas and propane to consumers. Currently in the United States, alternative fuels such as natural gas cannot be readily obtained by consumers for motor vehicle use and only a small percentage of motor vehicles manufactured for the United States are equipped to use alternative fuels. Users of gaseous fuel vehicles may not be able to obtain fuel conveniently and affordably, which may adversely affect the demand for our products and services. We cannot assure you that the United States or global market for gaseous fuel engines will expand broadly or, if it does, that it will result in increased sales of our fuel system products.

 

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We engage in related party transactions, which result in a conflict of interest involving our management.

We have engaged in the past, and continue to engage, in a significant number of related party transactions, specifically between the Company’s foreign subsidiaries and members of the family of our Chief Executive Officer, Director and largest stockholder, his brother Pier Antonio Costamagna (one of our executive officers who is General Manager of MTM, S.r.L., a wholly owned subsidiary of the Company), companies in which our Chief Executive Officer’s family has controlling or other ownership interests, companies that our employees and service providers own in whole or in part and former owners of the companies we have purchased in foreign countries. Many of these relationships stem from the fact that when we acquired these foreign subsidiaries they were privately owned and such transactions are not uncommon in privately owned companies. Our Board, its Audit Committee and its Nominating and Corporate Governance Committee seek to review on an ongoing basis related party transactions as well as new transactions which may be proposed for various issues related to the effect on our business. We cannot assure you that the terms of the transactions with these various related parties are on terms as favorable to us as those that could have been obtained in arm’s-length transactions with third parties, or that the existing policies and procedures are sufficient to identify and completely address conflicts of interest that may arise. Related party transactions could result in related parties receiving more favorable treatment than an unaffiliated third party would receive, although these parties may provide goods or services that are not readily available elsewhere in some situations. In addition, related party transactions present difficult conflicts of interest, could result in significant and minor disadvantages to our company and may impair investor confidence, which could materially and adversely affect us. Related party transactions could also cause us to become materially dependent on related parties in the ongoing conduct of our business, and related parties may be motivated by personal interests to pursue courses of action that are not necessarily in the best interests of our company and our stockholders.

We have a significant amount of goodwill and intangible assets that may become impaired, which could impact our results of operations.

Approximately $29.4 million, or 6.5%, of our total assets at December 31, 2011 were net intangible assets, including technology, customer relationships and trade name, and approximately $59.0 million, or 13.1%, of our total assets at December 31, 2011 were goodwill that relates to our acquisitions. We amortize the intangible assets, with the exception of goodwill, based on our estimate of their remaining useful lives and their values at the time of acquisition. We are required to test goodwill for impairment at least on an annual basis, or earlier if we determine it may be impaired due to change in circumstances. We are required to test the other intangible assets with definite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amounts of the intangible assets may not be recoverable. If impairment exists in any of these assets, we are required to write-down the related asset to its estimated recoverable value as of the measurement date. Such impairment write-downs may significantly impact our results of operations.

We are dependent on certain key customers, and the loss of one or more customers could have a material adverse effect on us.

A substantial portion of our business results from revenues from key customers. In the year ended December 31, 2011 no customers represented more than 10.0% of our consolidated revenues. In the year ended December 31, 2010, one customer represented 14.6% of our consolidated revenues. In the year ended December 31, 2009, two customers represented 13.0% and 11.6% of our consolidated revenues, respectively. Revenues from our top ten customers during the years ended December 31, 2011, 2010, and 2009 accounted for approximately 32.8%, 53.0%, and 62.0% of our consolidated revenues, respectively. If one or more of these key customers were to reduce their orders from us substantially, we would suffer a decline in revenue, which may materially and adversely affect us.

 

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We may not be able to successfully integrate our recently acquired business or any future acquired businesses into our existing worldwide business without substantial expenses, delays or other operational or financial problems.

During 2011, we acquired NaturalDrive Partners LLC and Alternative Fuel Systems (2004) Inc. During 2010, we acquired Productive Concepts International, LLC’s alternative fuel business and Evotek LLC, and as a part of our business strategy we may seek to acquire additional businesses, technologies or products in the future. We cannot assure you that any acquisition or any future transaction we complete will result in long-term benefits to us or our stockholders or that our management will be able to integrate or manage the acquired business effectively, efficiently and in a timely manner. We could also incur unanticipated expenses or losses in connection with any acquisition or future transaction.

Acquisitions entail numerous risks, including difficulties associated with the integration of operations, technologies, products and personnel that, if realized, could harm our operating results. Risks related to potential acquisitions include, but are not limited to:

 

   

difficulties in combining previously separate businesses into a single unit;

 

   

inability to overcome differences in foreign business practices, accounting practices, customs and importation regulations, language and other barriers in connection with the acquisition of foreign companies;

 

   

substantial diversion of management’s time and attention from day-to-day business when evaluating and negotiating such transactions and then integrating an acquired business;

 

   

discovery, after completion of the acquisition, of liabilities assumed from the acquired business or of assets acquired that are not realizable;

 

   

costs and delays in implementing, and the potential difficulty in maintaining, uniform standards, controls, procedures and policies, including the integration of different information systems;

 

   

the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies; and

 

   

failure to achieve anticipated benefits, such as cost savings and revenue enhancements.

We face risks associated with marketing, distributing, and servicing our products internationally.

In addition to our operations in the United States, we currently operate in Canada, Italy, Australia, India, Pakistan, the Netherlands, Japan, Brazil, Argentina and Venezuela, and market our products and technologies in other international markets, including both industrialized and developing countries. During the year ended December 31, 2011, approximately 28% of our revenue was derived from sales to customers located within the United States and Canada, and the remaining 72% was derived from sales in Asia, Europe, Latin America and the Middle East. During 2010 and 2009, approximately 14% and 8% of our revenue, respectively, was derived from sales to customers located within the United States and Canada, and the remaining 86% and 92%, respectively, was derived from sales in Asia, Europe, Latin America and the Middle East. Additionally, approximately 86% of our employees and 83% of our approximately 700 distributors and dealers worldwide are located outside the United States. Our combined international operations are subject to various risks common to international activities, such as the following:

 

   

our ability to maintain good relations with our overseas employees, suppliers, distributors and customers to collect amounts owed from our overseas customers;

 

   

expenses and administrative difficulties associated with maintaining a significant labor force outside the United States, including, without limitation, the need to comply with employment and tax laws and to adhere to the terms of real property leases and other financing arrangements in foreign nations;

 

   

exposure to currency fluctuations;

 

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potential difficulties in enforcing contractual obligations and intellectual property rights;

 

   

complying with a wide variety of laws and regulations, including product certification, environmental, and import and export laws;

 

   

the challenges of operating in disparate geographies and cultures;

 

   

political and economic instability; and

 

   

adverse tax consequences, including, without limitation, restrictions on our ability to repatriate dividends from our subsidiaries.

We depend on a limited number of third party suppliers for key materials and components for our products.

We have established relationships with third party suppliers that provide materials and components for our products. A supplier’s failure to supply materials or components in a timely manner or to supply materials and components that meet our quality, quantity or cost requirements, combined with a delay in our ability to obtain substitute sources for these materials and components in a timely manner or on terms acceptable to us, would harm our ability to manufacture our products effectively, or would significantly increase our production costs, either of which could materially and adversely affect us. In addition, we rely on a limited number of suppliers for certain proprietary die cast parts, electronics, software, catalysts and engines for use in our end products. Approximately 23.5%, 28.9%, and 45.7%, of our purchases of raw materials and services during the years ended December 31, 2011, 2010, and 2009, respectively, were supplied by ten entities. During 2011, no suppliers represented more than 10.0% of our purchases of raw materials and services. During 2010 and 2009, one supplier represented 10.3% and 12.4%, respectively, of our purchases of raw materials and services.

Mariano Costamagna’s employment agreement may limit our Board of Directors’ ability to change our senior management.

Mariano Costamagna, our Chief Executive Officer and a member of our Board of Directors, has entered into an employment agreement with us that is effective from January 1, 2009 until December 31, 2012. This new employment agreement provides for an annual base salary of $145,000 paid in U.S. dollars and €335,000 paid in Euros, as well as bonuses, benefits and reasonable business expenses. If, during the term of his employment, we terminate Mr. Costamagna’s employment other than for “cause” or disability or if Mr. Costamagna resigns for “good reason,” we must pay Mr. Costamagna a severance payment equal to $5.0 million divided into five equal installments (the first of which is due on the 60th day following termination with subsequent installments due on each anniversary of termination), provided that Mr. Costamagna abides by certain covenants limiting his ability to compete with us, solicit our employees or interfere with our business during those four years following his termination. The required severance payment may limit our Board of Directors’ ability to decide whether to retain or to replace Mr. Costamagna or to reallocate management responsibilities among our senior executives, a fact that could, in certain circumstances, materially and adversely affect us.

Our business is subject to seasonal influences.

Operating results for any quarter are not indicative of the results that may be achieved for any subsequent quarter or for a full year. Many of the factors that impact our operating results are beyond our control and difficult to predict. They include seasonal work patterns due to vacations and holidays, particularly in our European manufacturing facilities, and fluctuations in demand for the end-user products in which our products are placed.

Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management’s time and attention.

From January 1, 2011 through December 31, 2011, our stock price fluctuated from a low of $15.55 to a high of $30.51. For 2010, our stock price fluctuated from a low of $24.50 to a high of $51.94. For 2009, our stock price fluctuated from a low of $9.83 to a high of $52.53. In the past, securities class action litigation often has

 

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been brought against a company following periods of volatility in the market price of its securities. Companies in the technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and could divert the time and attention of our management.

Our actual operating results may differ materially from our guidance.

From time to time, we release guidance in our quarterly earnings releases, quarterly earnings conference calls or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.

Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions and estimates inherent in the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon, or otherwise consider, our guidance in making an investment decision in respect of our common stock.

 

Item 1B. Unresolved Staff Comments.

None.

 

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Item 2. Properties.

Facilities

Our executive offices are located in New York, New York. We currently lease additional manufacturing, research and development and general office facilities, under leases expiring through 2019, in the following locations set forth below:

 

Location

  

Principal Uses

   Square Footage  

IMPCO Operations:

     

Ontario, Canada

  

Sales, marketing application, development and assembly, manufacturing

     110,000   

Santa Ana, California

  

Sales manufacturing, design, development and testing

     108,000   

Sterling Heights, Michigan

  

Sales, marketing application, development and assembly

     83,000   

Union City, Indiana

  

Sales, marketing application and assembly

     75,000   

Delfgauw, Holland

  

Sales, marketing application, development and assembly

     20,000   

Fukuoka, Japan

  

Sales, marketing application and assembly

     8,000   

BRC Operations:

     

Cherasco, Italy

  

Sales, marketing application, development and assembly, manufacturing

     600,000   

Beccar, Argentina

  

Sales, marketing and assembly, manufacturing

     129,000   

Melbourne, Australia

  

Sales, marketing application, development and assembly

     72,000   

Livorno (Collesalvetti), Italy

  

Assembly

     55,000   

Cesena, Italy

  

Sales, marketing application, development and assembly

     19,000   

Sao Paulo, Brazil

  

Sales and assembly

     16,000   

Badia, Italy

  

Sales and assembly

     15,000   

Valencia, Venezuela

  

Sales and assembly

     12,000   

Karachi, Pakistan

  

Sales and marketing

     9,000   
     

 

 

 

Total (1)

        1,331,000   
     

 

 

 

 

(1) Properties leased by our unconsolidated affiliates are excluded from the above table.

We also lease nominal amounts of office space in various countries. We believe our facilities are presently adequate for our current core product manufacturing operations and OEM development programs and production.

 

Item 3. Legal Proceedings.

From time to time, we may be involved in litigation relating to claims arising out of the ordinary course of our business. We are not a party to, and to our knowledge there are not threatened, any claims or actions against us, the ultimate disposition of which would have a material adverse effect on us.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ Stock Market under the symbol “FSYS.” As of February 15, 2012, there were approximately 277 holders of record of our common stock. The high and low per share prices of our common stock as reported on the Nasdaq Stock Market were as follows:

 

     High      Low  
Year Ended December 31, 2011      

First Quarter

   $ 30.51       $ 23.55   

Second Quarter

   $ 29.85       $ 22.99   

Third Quarter

   $ 25.27       $ 17.22   

Fourth Quarter

   $ 23.87       $ 15.55   

Year Ended December 31, 2010

     

First Quarter

   $ 51.94       $ 26.09   

Second Quarter

   $ 34.89       $ 24.68   

Third Quarter

   $ 40.00       $ 24.50   

Fourth Quarter

   $ 42.65       $ 29.32   

Dividend Policy

We have not recently declared or paid dividends on our common stock, including during the past two fiscal years, and we currently expect to retain any earnings for reinvestment in our business. Accordingly, we do not expect to pay dividends in the foreseeable future. The timing and amount of any future dividends is determined by our Board of Directors and will depend on our earnings, cash requirements and the financial condition and other factors deemed relevant by our Board of Directors.

Sales of Unregistered Securities

Except as previously reported in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, we have not sold any equity securities during the three years ended December 31, 2011 which were not registered under the Securities Act of 1933, as amended.

Issuer Repurchases of Equity Securities

There were no repurchases of our common stock during the fourth quarter of 2011.

 

Item 6. Selected Financial Data.

The following selected financial data with respect to our Consolidated Statements of Income data for each of the five years in the period ended December 31, 2011 and the Consolidated Balance Sheet data as of the end of each such fiscal year are derived from our audited consolidated financial statements. The following information should be read in conjunction with our consolidated financial statements and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

 

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    Years Ended December 31,  

(in thousands, except per share data)

  2011     2010     2009     2008     2007  

Statements of Operations:

         

Revenue

  $ 418,134      $ 430,632      $ 452,325      $ 382,697      $ 265,331   

Cost of revenue

    321,350        298,259        303,789        274,060        201,200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    96,784        132,373        148,536        108,637        64,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

         

Research and development expense

    28,149        20,775        15,151        11,069        7,946   

Selling, general and administrative expense

    56,810        53,297        53,079        47,562        36,906   

Goodwill impairment loss

    —          —          —          3,907        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    84,959        74,072        68,230        62,538        44,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    11,825        58,301        80,306        46,099        19,279   

Other income (expense)

    495        1,539        2,706        (2,379     (2,811
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity share in earnings of unconsolidated affiliates, income taxes, and extraordinary gain

    12,320        59,840        83,012        43,720        16,468   

Equity share in earnings of unconsolidated affiliates

    —          —          852        454        416   

Income tax expense

    (7,058     (19,556     (34,023     (20,161     (9,159
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income, net of tax, before extraordinary gain

    5,262        40,284        49,841        24,013        7,725   

Extraordinary gain, net of tax

    —          —          —          243        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    5,262        40,284        49,841        24,256        7,725   

Less: Net income attributed to non-controlling interests

    (94     (582     (2     (914     (1,842
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Fuel Systems

  $ 5,168      $ 39,702      $ 49,839      $ 23,342      $ 5,883   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to Fuel Systems (1):

         

Basic:

         

Income from continuing operations before extraordinary gain attributable to Fuel Systems

  $ 0.26      $ 2.24      $ 2.96      $ 1.47      $ 0.38   

Per share effect of the extraordinary gain

  $ —        $ —        $ —        $ 0.02      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Fuel Systems

  $ 0.26      $ 2.24      $ 2.96      $ 1.49      $ 0.38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

         

Income from continuing operations before extraordinary gain attributable to Fuel Systems

  $ 0.26      $ 2.23      $ 2.95      $ 1.46      $ 0.38   

Per share effect of the extraordinary gain

  $ —        $ —        $ —        $ 0.02      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Fuel Systems

  $ 0.26      $ 2.23      $ 2.95      $ 1.48      $ 0.38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at end of period):

         

Total current assets

  $ 299,285      $ 306,928      $ 290,268      $ 200,648      $ 155,110   

Total assets

    450,002        454,563        417,112        287,327        247,370   

Total current liabilities

    104,692        96,079        148,459        117,886        84,544   

Long-term obligations

    15,488        19,917        25,425        15,484        21,172   

Total equity

    329,822        338,567        243,228        153,957        141,654   

 

(1) See Note 12 of the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the method used to determine the number of shares used to compute net income per share.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion includes forward-looking statements about our business, financial condition, and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performances or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A list of the known material factors that may cause our results to vary, or may cause management to deviate from its current plans and expectations, is included in Item 1A “Risk Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and notes included herein.

Overview

We design, manufacture and supply alternative fuel components and systems for use in the transportation and industrial markets on a global basis. Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. For over 50 years, we have developed alternative fuel products. We supply our products and systems to the market place through a global distribution network of over 700 distributors and dealers in more than 70 countries and 175 original equipment manufacturers, or OEMs.

We offer an array of components, systems and fully integrated solutions for our customers, including:

 

   

fuel delivery—pressure regulators, fuel injectors, flow control valves and other components designed to control the pressure, flow and/or metering of gaseous fuels;

 

   

electronic controls—solid-state components and proprietary software that monitor and optimize fuel pressure and flow to meet manufacturers’ engine requirements;

 

   

gaseous fueled internal combustion engines—engines manufactured by OEMs that are integrated with our fuel delivery and electronic controls;

 

   

systems integration—systems integration support to integrate the gaseous fuel storage, fuel delivery and/or electronic control components and sub-systems to meet OEM and aftermarket requirements;

 

   

auxiliary power systems—fully integrated auxiliary power systems for truck and diesel locomotives; and

 

   

natural gas compressors—natural gas compressors and refueling systems for light and heavy duty refueling applications.

Manufacturers of industrial mobile equipment and stationary engines are among the most active customers for our industrial products. Users of small and large industrial engines capitalize on the lower cost and pollutant benefits of using alternative fuels. For example, forklift and other industrial equipment users often use our products to operate equipment indoors resulting in lower toxic emissions. The wide availability of gaseous fuels in world markets combined with their lower emissions and cost compared to gasoline and diesel fuels is driving rapid growth in the global alternative fuel industry. Automobile manufacturers, taxi companies, transit and shuttle bus companies, and delivery fleets are among the most active customers for our transportation products where our largest markets are currently outside the United States.

We recently completed the acquisitions of NaturalDrive Partners, LLC (“NaturalDrive”), Productive Concepts International, LLC (“PCI”) and Evotek LLC (“Evotek”) (collectively referred to as “IMPCO Automotive Acquisitions”) to expand our activities in the automotive market within the United States.

 

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The IMPCO Automotive Acquisitions equip our U.S. automotive business with the capabilities necessary to be a leader in this market. Evotek and NaturalDrive are strategic transactions that we believe position Fuel Systems to compete in the dedicated natural gas vehicle (NGV) OEM market emerging in the United States. PCI adds key technology and industry relationships to further our North American OEM and fleet market strategy, and also expands our vehicle modification and systems integration capabilities for a variety of alternative fuel applications, including hybrid, CNG, propane and dual-fuel diesel. We continue to believe fleet vehicles offer attractive opportunities for our gaseous fuel solutions in the U.S. We now have a full suite of automotive capabilities in this market, including a CARB certified, dedicated systems product line and in-house OEM systems engineering platform, enhancing our ability to leverage our existing relationships with fleet customers and other manufacturers as they roll out CNG and LPG versions of key fleet vehicles.

In addition to the IMPCO Automotive Acquisitions, we added Alternative Fuel Systems (2004) Inc. (“AFS”) and purchased the remaining 50% interest in MTE S.r.l. in an effort to continue to expand our core businesses and geographic footprint.

For the year ended December 31, 2011 revenue decreased approximately 2.9%, operating profit decreased approximately 79.7% and diluted EPS decreased by 88.3%. These results were driven primarily by the expiration of the Italian government incentives which drove strong results in our BRC operations related to our post-production OEM (“DOEM”) sales for the prior year. Beginning in the second quarter of 2010 and continuing through subsequent quarters, our volumes for DOEM conversions decreased significantly. The expiration of the Italian government incentives were partially offset by increased activity in our IMPCO operations as well as our aftermarket business. These changes in the mix of our revenues also resulted in lower gross margin, as factory utilization and gross profit were closely tied to DOEM volumes. In addition, we incurred higher research and development costs as we continue to focus our efforts to support the US automotive market as well as other next generation products.

Net cash provided by operations was $10.4 million for the year ended December 31, 2011. We believe that our net cash position of $86.7 million provides us with adequate capital for working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets.

Recent Developments

Purchase of remaining 50% interest in MTE S.r.l.

On June 1, 2011, we purchased the remaining 50% ownership interest in MTE S.r.l. (“MTE”), for €7.5 million (approximately $10.4 million), of which €5.3 million (approximately $7.5 million), was paid on the closing date, with the remaining balance of €2.2 million (approximately $2.9 million) classified as restricted cash in Other Current Assets at December 31, 2011 as a guarantee towards possible indemnification obligations of the seller until its payment, which was subsequently paid on January 15, 2012 in accordance with the terms of the agreement. Further performance payments of up to €1.0 million (approximately $1.3 million) in cash may be made no later than 5 days after May 31, 2014 based on the achievement of 2012 and 2013 gross profit targets. As of the closing date of the transaction, the MTE contingent consideration was assigned a preliminary fair value of approximately $0.4 million. Future changes to the fair value of the contingent consideration will be determined each period and charged to expense in the Consolidated Statements of Operations under operating expenses. Management believes that the model used in the determination of the fair value of the MTE contingent consideration agreement is sensitive to changes in the unobservable inputs on which it is based and their interrelationships, changes that may be driven by mutated market conditions, different demand level, alternative strategies that management may pursue, and other factors.

Since we previously had control of MTE prior to this transaction and the results of MTE were consolidated within the BRC operation segment, the excess purchase price of the remaining 50% over the non-controlling interest is recorded to additional paid in capital.

 

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Acquisition of Alternative Fuel Systems (2004) Inc.

On May 31, 2011, through our wholly owned subsidiary IMPCO Technologies, Inc. (“IMPCO US”), we acquired Alternative Fuel Systems (2004) Inc. (“AFS”), a developer and marketer of fuel management systems that enable internal combustion engines to operate on compressed natural gas. The aggregate purchase price for 100% of the equity of AFS was approximately $8.9 million in cash, net of cash acquired of approximately $0.7 million.

The results of operations of AFS have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.

The purchase price has been allocated as follows (in thousands):

 

Inventory

   $ 1,300   

Other tangible assets

     1,291   

Intangible assets subject to amortization

     2,110   

Goodwill

     5,225   
  

 

 

 

Total assets acquired

     9,926   

Less: total liabilities

     (985
  

 

 

 

Total net assets recorded

   $ 8,941   
  

 

 

 

Of the $2.1 million of acquired intangible assets, $1.4 million relates to customer relationships with a useful life of approximately 7 years, $0.4 million to developed technology with a useful life of 6 years and $0.3 million to trademarks with a useful life of 6 years. The international presence of AFS, specifically in the Asia automotive market, as well as the ability to incorporate their products into our existing supply chain were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $5.2 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed. Management has determined that the acquisition of AFS was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Acquisition of NaturalDrive Partners LLC

On April 18, 2011, through our wholly owned subsidiary IMPCO US, we completed the purchase of NaturalDrive, a premier alternative fuel automotive systems developer in North America that offers dedicated CNG and LPG conversion systems across multiple U.S. fleet vehicle platforms. The transaction was valued at $6.0 million, comprised of $4.5 million in cash and $1.5 million of Fuel Systems’ stock paid at closing. More specifically, we issued 52,317 shares of common stock in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the issuance did not involve a public offering. The transaction also includes provisions for earn-out payments totaling up to $6.75 million in the form of Fuel Systems stock, which would be payable during the three years following closing based upon achievement of business volume and general milestones. The earn-out will be paid in three equal installments of $1.5 million no later than 90 days after the end of each yearly period ending in March 2012, March 2013, and March 2014 if specified target customer volumes for the year are achieved, and reasonable progress is made on the general milestones. In the case the earn-out for a specific period is determined to be payable in accordance with the aforementioned target customer volumes and additional GM volume thresholds are met for the same period, the earn-out shares for the applicable period will be multiplied by a factor of 1.5 for purposes of determining the number of earn-out shares payable. As of the closing date of the acquisition, the NaturalDrive contingent consideration was assigned a fair value of approximately $1.4 million. Future changes to the fair value of the contingent consideration will be determined each period and charged to expense in the Consolidated Statements of Operations under operating expenses. Management believes that the model used in the determination of the

 

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fair value of the NaturalDrive contingent consideration agreement is sensitive to changes in the unobservable inputs on which it is based and their interrelationships, changes that may be driven by mutated market conditions, different demand level, alternative strategies that management may pursue, and other factors.

The results of operations of NaturalDrive have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.

The purchase price has been allocated as follows (in thousands):

 

Total tangible assets

   $ 68   

Intangible assets subject to amortization

     5,650   

Goodwill

     1,694   
  

 

 

 

Total assets acquired

     7,412   

Less: total liabilities

     (1,448
  

 

 

 

Total net assets recorded

   $ 5,964   
  

 

 

 

Of the $5.7 million of acquired intangible assets, $4.8 million refers to existing technology with an estimated useful life of 8 years, $0.6 million to customer relationships with a useful life of approximately 6 years and $0.3 million to non-compete agreements with an estimated useful life of 4 years. The continued development of the U.S. alternative fuel market as well as potential legislative changes impacting this market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $1.7 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed.

Management has determined that the acquisition of NaturalDrive was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, goodwill, taxes, inventories, warranty obligations, long-term service contracts, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates.

Revenue Recognition

We recognize revenue upon transfer of title and risk of loss, generally when products are shipped provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and management believes collectability is reasonably assured. We consider arrangements with extended payment terms not to be fixed or determinable unless they are secured under an irrevocable letter of credit arrangement guaranteed by a reputable financial institution, and accordingly, we defer such revenue until amounts become due and payable. We classify shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred. We provide for returns and allowances as circumstances and facts require.

 

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Sales to our unconsolidated subsidiaries are made on terms similar to those prevailing with unrelated customers as noted above.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate the allowance for doubtful accounts based on historical experience and any specific customer collection issues that have been identified through management’s review of outstanding accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Warranty

We provide for the estimated cost of product warranties at the time revenue is recognized based, in part, on historical experience. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability may be required. We believe that our warranty experience is within the industry norms. Our standard warranty period is 18 to 24 months from the date of delivery to the customer depending on the product. The warranty obligation on our certified engine products can vary from three to five years depending on the specific part and the actual hours of usage.

Inventory Reserves

We write down our inventory for estimated slow moving and obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Goodwill and Intangible Assets

We recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. In those acquisitions that include contingent consideration—i.e. earnout payments to be paid upon the satisfaction of certain milestones—as part of the total consideration paid, we determine the fair value of this liability at the acquisition date using a probability weighted income approach. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed (including any contingent consideration) at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, support obligations assumed, estimated restructuring liabilities and pre-acquisition contingencies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and they are inherently uncertain.

 

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Examples of critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to:

 

   

future expected cash flows from acquired developed technologies and patents and other customer contracts and;

 

   

the life of the acquired developed technologies and patents;

 

   

the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio;

 

   

risk associated with uncertainty, achievement and payment of any milestones; the life of the acquired developed technologies and patents;

 

   

the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and

 

   

discount rates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly, with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period, our final determination of the uncertain tax positions estimated value, or tax related valuation allowances, changes to these uncertain tax positions’ and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.

Goodwill and Intangible Assets—Impairment Assessments

We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The FASB issued authoritative guidance requiring that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit (i.e. an operating segment, or one level below an operating segment) to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. All our reporting units examined for goodwill impairment purposes had fair values in excess of their carrying values by at least 40 percent, except for one reporting unit, which we estimated had a fair value 8 percent higher than its carrying value. This reporting unit comprises approximately one-half of our total goodwill. If the terminal growth rate of 5% for this reporting unit decreased by 50 basis points, fair value would be reduced by approximately $5 million, assuming all other components of

 

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the fair value estimate remain unchanged. If the applicable discount rate of 15.75% on this reporting unit increased by 50 basis points, fair value would be reduced by approximately $8 million, assuming all other components of the fair value estimate remain unchanged. In both cases, step I of the goodwill impairment test would still be passed.

Our most recent annual goodwill impairment analysis, which was performed during the fourth quarter of fiscal 2011, did not result in an impairment charge, nor did we record any goodwill impairment in fiscal 2010 or 2009 in relation with our annual impairment analysis.

We make judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.

Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. We recognized intangible asset impairment charges of $0.4 million in fiscal 2011 associated with the relocation of our automotive operations in the Netherlands and did not recognize any such impairment charge in 2010 and 2009.

Deferred Taxes

Based upon the substantial net operating loss carryforwards and recent history of losses incurred in certain jurisdictions, we cannot conclude that it is more likely than not that the deferred tax assets in the United States and certain foreign jurisdictions as of December 31, 2011 will be realized within the foreseeable future. The balance of the total United States valuation allowance was $33.5 million as of December 31, 2011. In addition, we have a foreign valuation allowance of $6.9 million as of December 31, 2011. We expect to provide a full valuation allowance on future tax benefits generated in the United States and in certain foreign jurisdictions until we can sustain a level of profitability that demonstrates our ability to utilize the deferred tax assets.

As of December 31, 2011, undistributed earnings, except with respect to a portion of undistributed earnings from BRC, are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes is provided thereon. Residual U.S. taxes have been accrued (applied as a reduction of net operating loss carryforwards) on approximately $30.0 million of earnings of BRC that is not considered indefinitely reinvested. Such amounts could be drawn as a dividend or from BRC in the future without U.S. income tax consequences. Upon distributions of earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. We have accrued such residual income taxes for all undistributed foreign earnings not considered indefinitely reinvested. It is not practical to determine the income tax impact in the event we repatriate undistributed foreign earnings that are considered indefinitely reinvested. As of December 31, 2011, approximately $1.5 million in foreign withholding taxes was accrued related to undistributed earnings not considered to be indefinitely reinvested.

We believe that we have considered relevant circumstances that we may be currently subject to, and the financial statements accurately reflect our best estimate of the results of our operations, financial condition and cash flows for the years presented. We have discussed the decision process and selection of these critical accounting policies with the Audit Committee of the Board of Directors.

 

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Results of Operations

Years Ended December 31, 2011 and 2010

In an effort to more appropriately align the structure and business activities within Fuel Systems into two operating segments, in 2011 we relocated a portion of the automotive business (GFI BV) from the Netherlands to Italy. Our historical consolidated results were not impacted, but we began reporting GFI BV within our BRC operations segment in the fourth quarter of 2011. For comparison purposes, the previously reported financial information by business segment includes the reclassification of GFI BV’s operations for the years ended December 31, 2011 and 2010, respectively, within BRC operations.

REVENUES

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2011     2010      

IMPCO Operations

   $ 159,760      $ 116,945      $ 42,815        36.6

BRC Operations

     266,186        320,952        (54,766     (17.1 )% 

Intersegment

     (7,812     (7,265     (547     7.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 418,134      $ 430,632      $ (12,498     (2.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

IMPCO Operations. The increase in revenue primarily relates to an increase in demand in the industrial market of approximately $33.8 million which includes approximately $19.2 million from our auxiliary power unit business. In addition, the transportation business at IMPCO increased approximately $9.0 million compared to the prior year. This increase was attributable to an increase in sales in the US automotive market primarily from the IMPCO Automotive Acquisitions of approximately $27.8 million, partially offset by a decrease in sales in the Asian transportation market of approximately $17.3 million, due to the completion of a large program in 2010, and in the Canadian market of $1.5 million. We expect quarterly revenue from the US Automotive market to be closely tied to orders from OEMs. Included in the results discussed above is the strengthening of local currencies compared to the US dollar which positively impacted revenues by approximately $4.5 million for the year ended December 31, 2011.

BRC Operations. The decrease in revenue in 2011 was due primarily to a decrease in sales for DOEM conversions of approximately 79.3%, partially offset by an approximately 32.1% improvement in aftermarket sales including kits to OEMs due to higher petrol prices. Volumes for the DOEM conversions decreased to approximately 21,500 for the full year 2011 compared to 109,000 conversions for 2010. In the fourth quarter of 2011 total revenues were approximately $63.6 million, compared to total revenues of $45.6 million in the fourth quarter of 2010, primarily due to the increase in aftermarket sales. The strengthening of local currencies compared to the US dollar positively impacted revenues by approximately $14.3 million for the year ended December 31, 2011.

The following represents revenues by product and by geographic location for the years ended December 31, 2011 and 2010:

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2011      2010       

Transportation

   $ 314,004       $ 361,795       $ (47,791     (13.2 )% 

Industrial

     104,130         68,837         35,293        51.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 418,134       $ 430,632       $ (12,498     (2.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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     Year Ended
December 31,
     Change     Percent
Change
 
     2011      2010       

North America

   $ 115,768       $ 59,466       $ 56,302        94.7

Europe:

          

Italy

     54,269         160,446         (106,177     (66.2 )% 

All other

     82,980         68,260         14,720        21.6

Asia & Pacific Rim

     95,241         97,538         (2,297     (2.4 )% 

Latin America

     69,876         44,922         24,954        55.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 418,134       $ 430,632       $ (12,498     (2.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

COST OF REVENUE

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2011      2010       

IMPCO Operations

   $ 120,382       $ 79,217       $ 41,165        52.0

BRC Operations

     200,968         219,042         (18,074     (8.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Cost of Revenue

   $ 321,350       $ 298,259       $ 23,091        7.7
  

 

 

    

 

 

    

 

 

   

 

 

 

IMPCO Operations. The increase mostly relates to the US automotive market, primarily due to the IMPCO Automotive Acquisitions for approximately $24.2 million, as well as an increase in volume associated with the industrial market including our APU business of $15.9 million. We expect the pressure on gross margins to continue until volumes associated with the US automotive market increase, which will better absorb fixed costs. Included in the results discussed above is the strengthening of local currencies compared to the US dollar which increased cost of revenue by approximately $3.6 million for the year ended December 31, 2011.

BRC Operations. The decrease of $18.1 million relates primarily to the decrease in DOEM volumes, beginning in the second quarter 2010 and continuing into subsequent quarters, as well as lower compensation and related expenses of approximately $10.4 million. Compensation and related expenses include salaries, fringe benefits and variable compensation. Factory utilization and gross profit have been closely tied to DOEM volumes as well. The elimination of the Italian government incentives has significantly decreased volumes and factory utilization resulting in reduced gross profit levels. These decreases were partially offset by the increase in the aftermarket product costs due to higher volume. The strengthening of local currencies compared to the US dollar increased cost of revenue by approximately $10.8 million for the year ended December 31, 2011.

RESEARCH & DEVELOPMENT

 

     Year Ended
December 31,
     Change      Percent
Change
 
     2011      2010        

IMPCO Operations

   $ 14,063       $ 8,940       $ 5,123         57.3

BRC Operations

     14,086         11,835         2,251         19.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Research and Development

   $ 28,149       $ 20,775       $ 7,374         35.5
  

 

 

    

 

 

    

 

 

    

 

 

 

IMPCO Operations. The increase relates to additional compensation and related expenses of $3.1 million, as well as outside services and supplies of $1.1 million associated with the research and development for the US automotive market, including the full year impact of the IMPCO Automotive Acquisitions.

 

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BRC Operations. The increase relates to additional compensation and related expenses of $0.6 million associated with the continued investment in various automotive projects including next generation products, OEM quality system solutions and expansion of current products as well as additional overhead costs associated with our new R&D facility of approximately $1.5 million.

SELLING, GENERAL & ADMINISTRATIVE

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2011      2010       

IMPCO Operations

   $ 14,342       $ 12,934       $ 1,408        10.9

BRC Operations

     37,361         35,005         2,356        6.7

Corporate

     5,107         5,358         (251     (4.7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Selling, General & Administrative

   $ 56,810       $ 53,297       $ 3,513        6.6
  

 

 

    

 

 

    

 

 

   

 

 

 

IMPCO Operations. The increase relates primarily to additional costs of approximately $0.8 million associated with the full year impact of the IMPCO Automotive Acquisitions as well as outside consultants of $1.4 million, offset by a reduction in the contingent consideration associated with the PCI and Natural Drive acquisitions of approximately $1.7 million.

BRC Operations. The increase relates primarily to the strengthening of local currencies compared to the US dollar of approximately $1.7 million, an additional reserve for potential labor claims from former DOEM employees for approximately $0.7 million compared to 2010, and approximately $1.3 million of costs associated with the relocation of one of our Netherland subsidiaries. These increases were partially offset by lower outside consultant costs as well as lower advertising costs.

Corporate Expenses. Corporate expenses consist of general and administrative expenses at the corporate level to support our business segments in areas such as executive management, finance, human resources, management information systems, legal and accounting services and investor relations. Corporate expenses remained relatively flat versus the prior year.

OPERATING INCOME/(LOSS)

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2011     2010      

IMPCO Operations

   $ 7,792      $ 13,872      $ (6,080     (43.8 )% 

BRC Operations

     9,140        49,787        (40,647     (81.6 )% 

Corporate Expenses (1)

     (5,107     (5,358     251        4.7
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 11,825      $ 58,301      $ (46,476     (79.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents corporate expense not allocated to either of the business segments.

Operating income for the year ended December 31, 2011 decreased for the reasons stated above. Operating income for the quarter ended December 31, 2011 was $0.7 million compared to operating loss of $3.2 million for the prior year quarter. This resulted primarily from increased revenues from our BRC operations.

Other Income (Expense), Net.

Other income (expense) includes foreign exchange gains and losses between various other assets and liabilities to be settled in other currencies. For the year ended December 31, 2011 we recognized approximately $1.0 million in losses on foreign exchange compared to $1.5 million in gains on foreign exchange for the year

 

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ended December 31, 2010. We routinely conduct transactions in currencies other than our reporting currency, the U.S. dollar. We cannot estimate or forecast the direction or the magnitude of any foreign exchange movements with any currency that we transact in; therefore, we do not measure or predict the future impact of foreign currency exchange rate movements on our consolidated financial statements.

Interest Income.

For the year ended December 31, 2011, interest income increased approximately $0.9 million to $1.8 million, from $0.9 million in 2010. This increase was primarily due to higher weighted average cash and cash equivalents available in 2011 compared to 2010.

Provision for Income Taxes.

Income tax expense for the year ended December 31, 2011 and 2010 was approximately $7.1 million and $19.6 million, representing an effective tax rate of 57.3% and 32.7%, respectively, and primarily consisted of the provision for our foreign operations. A full valuation allowance is maintained against the income tax benefits generated in the United States and certain foreign jurisdictions due to cumulative losses incurred in those jurisdictions, as we cannot conclude that such tax benefits meet the more likely than not threshold for realization. For the year ended December 31, 2011, (loss) income before income taxes for the U.S. and foreign based operations was $(9.8) million and $22.1 million, respectively. Accordingly, for the year ended December 31, 2011, we have not recorded income tax benefits for losses incurred, or significant income tax expense for income generated for such jurisdictions, as such amounts will be offset by the valuation allowance. We operate in an international environment with significant operations in various locations outside of the United States, which have statutory tax rates that are different from the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. The change in the effective tax rate is primarily a result of the fluctuation of earnings in the various jurisdictions.

Years Ended December 31, 2010 and 2009

In an effort to more appropriately align the structure and business activities within Fuel Systems’ two operating segments, in 2011 we relocated automotive business from the Netherlands (GFI BV) to Italy. Our consolidated results were not impacted, but we began reporting GFI BV with its BRC operations segment in the fourth quarter of 2011. For comparison purposes, the previously reported financial information by business segment includes reclassification of GFI BV’s operations for the years ended December 31, 2010 and 2009, respectively, within BRC operations.

REVENUES

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2010     2009      

IMPCO Operations

   $ 116,945      $ 63,016      $ 53,929        85.6

BRC Operations

     320,952        392,332        (71,380     (18.2 )% 

Intersegment

     (7,265     (3,023     (4,242     140.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 430,632      $ 452,325      $ (21,693     (4.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

IMPCO Operations. The increase in revenue relates to an increase in demand in the industrial market of approximately $18.1 million as well as the transportation market of approximately $35.7 million which includes approximately $21.1 from our Asian market due to completion of a large program with one of our customers. The increases in the industrial and transportation markets include approximately $21.5 million from the acquisition of the Teleflex Incorporated’s Power Systems Business (“Power Systems Business”) in July 2009 and approximately $5.8 from the US Automotive market which includes the recent acquisitions of PCI and Evotek.

 

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BRC Operations. The decrease in revenue was primarily due to lower sales for post-productions OEM (“DOEM”) conversions, partially offset by an approximate 19.7% increase in aftermarket sales. Volumes for the DOEM conversions decreased to approximately 109,000 for the full year 2010 compared with approximately 184,000 for the prior year. The lower DOEM volumes began in the second quarter of 2010, after the expiration of the Italian government auto incentives, continued into the third quarter of 2010, and significantly impacted the fourth quarter of 2010 as well. In the fourth quarter of 2010 total revenues were approximately $45.6 million, which included DOEM conversions of approximately 5,300 units, compared to total revenues of $147.0 million in Q4 2009, which included conversions of approximately 66,600 units. BRC’s revenue for 2010 includes a decrease of approximately $19.2 million or 4.9% from the weakening of local currencies compared to the dollar from 2009.

The followings represent revenues by product and by geographic location for the years ended December 31, 2010 and 2009:

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2010      2009       

Transportation

   $ 361,795       $ 405,028       $ (43,233     10.7

Industrial

     68,837         47,297         21,540        45.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 430,632       $ 452,325       $ (21,693     (4.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2010      2009       

North America

   $ 59,466       $ 34,339       $ 25,127        73.2

Europe:

          

Italy

     160,446         270,549         (110,103     (40.7 )% 

All other

     68,260         43,819         24,441        55.8

Asia & Pacific Rim

     97,538         87,608         9,930        11.3

Latin America

     44,922         16,010         28,912        180.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 430,632       $ 452,325       $ (21,693     (4.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

COST OF REVENUE

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2010      2009       

IMPCO Operations

   $ 79,217       $ 48,736       $ 30,481        62.5

BRC Operations

     219,042         255,053         (36,011     (14.1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Cost of Revenue

   $ 298,259       $ 303,789       $ (5,530     (1.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

IMPCO Operations. The increase relates primarily to the increased volume of sales in the industrial market as well as the full year impact of the Power Systems Business acquired in July 2009.

BRC Operations. The decrease of $36.0 million relates to the decrease in DOEM volumes, beginning in the second quarter 2010 and continuing into the third and fourth quarters, as well as lower compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Factory utilization and gross profit have been closely tied to DOEM volumes as well. The elimination of incentives has significantly decreased factory utilization resulting in reduced gross profit levels. These decreases were partially offset by the increase in the aftermarket product costs due to higher volume. Cost of revenues for the quarter ended December 31, 2010 decreased to $38.7 million, from $93.6 million in the prior year quarter, primarily due to lower DOEM volumes.

 

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RESEARCH & DEVELOPMENT

 

     Year Ended
December 31,
     Change      Percent
Change
 
     2010      2009        

IMPCO Operations

   $ 8,940       $ 6,859       $ 2,081         30.3

BRC Operations

     11,835         8,292         3,543         42.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Research and Development

   $ 20,775       $ 15,151       $ 5,624         37.1
  

 

 

    

 

 

    

 

 

    

 

 

 

IMPCO Operations. The increase relates to additional compensation and related expenses associated with the research and development for the US Automotive market, as well as the additional costs associated with the Power Systems Business, acquired in July 2009, of approximately $1.2 million.

BRC Operations. The increase relates to additional compensation and related expenses associated with the continued investment in various automotive projects including next generation products, OEM quality system solutions and expansion of current products as well as the additional costs associated with the Power Systems Business, acquired in July 2009, of approximately $1.1 million.

SELLING, GENERAL & ADMINISTRATIVE

 

     Year Ended
December 31,
     Change     Percent
Change
 
     2010      2009       

IMPCO Operations

   $ 12,934       $ 11,654       $ 1,280        11.0

BRC Operations

     35,005         34,251         754        2.2

Corporate

     5,358         7,174         (1,816     (25.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Selling, General & Administrative

   $ 53,297       $ 53,079       $ 218        0.4
  

 

 

    

 

 

    

 

 

   

 

 

 

IMPCO Operations. The increase relates primarily to additional costs in 2010 associated with the Power Systems Business, acquired in July 2009, of approximately $1.6 million.

BRC Operations. The increase relates primarily to certain costs associated with lower sales volumes. Specifically, the fourth quarter of 2010 includes the write-off of certain DOEM assembly lines of approximately $0.7 million, and reserves for potential labor claims from former DOEM employees for approximately $1.2 million. These increases were partially offset by lower outside consultant costs.

Corporate Expenses. Corporate expenses consist of general and administrative expenses at the corporate level to support our business segments in areas such as executive management, finance, human resources, management information systems, legal and accounting services and investor relations. Corporate expenses in 2010 decreased compared to 2009 primarily because of a reduction in employees in our corporate office, as well as lower outside service costs.

OPERATING INCOME/(LOSS)

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2010     2009      

IMPCO Operations

   $ 13,872      $ (6,037   $ 19,909        329.8

BRC Operations

     49,787        93,517        (43,730     (46.8 )% 

Corporate Expenses (1)

     (5,358     (7,174     1,816        25.3
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 58,301      $ 80,306      $ (22,005     (27.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents corporate expense not allocated to either of the business segments.

 

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Operating income for the year ended December 31, 2010 decreased for the reasons stated above. Operating loss for the quarter ended December 31, 2010 was $3.2 million compared to operating income of $33.4 million for the prior year quarter. This resulted primarily from the timing required to reduce our overall costs of our BRC Operations in proportion to the decrease in revenues.

Other Income (Expense), Net.

Other income (expense) includes foreign exchange gains and losses between various other assets and liabilities to be settled in other currencies. For the years ended December 31, 2010 and 2009 we recognized approximately $1.5 million and $3.1 million, respectively in gains on foreign exchange. We routinely conduct transactions in currencies other than our reporting currency, the U.S. dollar. We cannot estimate or forecast the direction or the magnitude of any foreign exchange movements with any currency that we transact in; therefore, we do not measure or predict the future impact of foreign currency exchange rate movements on our consolidated financial statements.

Included in other income for the year end December 31, 2009, is a gain of approximately $1.4 million associated with the acquisition of the remaining 50% ownership interest in WMTM. This acquisition qualified as a step acquisition which occurs when a shareholder obtains control over an entity by acquiring an additional interest in that entity. Under the appropriate FASB issued authoritative guidance, the previously held equity interest was remeasured to fair value at the date of the acquisition.

Interest Expense.

For the year ended December 31, 2010, interest expense decreased approximately $1.4 million to $0.9 million, from $2.3 million in 2009. This decrease was primarily due to a lower weighted average outstanding debt in 2010 compared to 2009.

Provision for Income Taxes.

Income tax expense for the year ended December 31, 2010 and 2009 was approximately $19.6 million and $34.0 million, respectively, representing an effective tax rate of 32.7% and 41.0%, respectively, and primarily consisted of the provision for our foreign operations. A full valuation allowance is maintained against the income tax benefits generated in the United States and certain foreign jurisdictions due to cumulative losses incurred in those jurisdictions, as we cannot conclude that such tax benefits meet the “more likely than not” threshold for realization. Accordingly, for the year ended December 31, 2010, we did not record income tax benefits for losses incurred or significant income tax expense for income generated for such jurisdictions as such amounts will be offset by the valuation allowance. We operate in an international environment with significant operations in various locations outside of the United States, which have statutory tax rates that are different from the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. The change in the effective tax rate is primarily a result of the fluctuation of earnings in the various jurisdictions.

Liquidity and Capital Resources

Overview—Our primary sources of liquidity are cash provided by operating activities and debt financing. Additionally from time to time we raise funds from the equity capital markets to fund our working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets. We believe the amounts available to us under our various credit agreements together with cash on hand will continue to allow us to meet our needs for working capital and other cash needs for worldwide operations for at least the next 12 months. For periods beyond 12 months, although we do not have any plans to do so, we may seek additional financing to fund future operations through future offerings of equity or debt securities or through agreements with corporate partners with respect to the

 

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development of our technologies and products. However, we can offer no assurances that we will be able to obtain additional funds on acceptable terms, if at all. Nevertheless, our ability to satisfy our working capital requirements will substantially depend upon our future operating performance (which may be affected by prevailing economic conditions), and financial, business and other factors, some of which are beyond our control. We continue to evaluate our need to increase liquidity.

We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. As of December 31, 2011 we had approximately $61.7 million of cash held in accounts outside the U.S., primarily in Europe. Although we currently do not intend nor foresee a need to repatriate these funds, residual US taxes have been accrued on approximately $30.0 million of earnings not considered to be indefinitely reinvested from our BRC Operations. We expect existing domestic and foreign cash and cash equivalents and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.

Should we require more capital in the U.S. than is generated by our operations domestically, for example to fund significant discretionary activities, such as acquisitions of businesses, we could elect to repatriate future earnings from foreign jurisdictions. This could result in higher effective tax rates. We have the ability to borrow funds domestically at reasonable interest rates. See Item 1A “Risk Factors” for additional information that could impact our liquidity and capital resources.

 

     As of December 31,  
     2011     2010  

Cash and cash equivalents

   $ 96,740      $ 124,775   
  

 

 

   

 

 

 

Current portion of term loans and debt

     6,367        4,823   
  

 

 

   

 

 

 

Long-term term loans and other loans

     3,698        7,571   

Total debt

     10,065        12,394   

Total Fuel Systems stockholders’ equity

     329,822        334,806   
  

 

 

   

 

 

 

Total capitalization (debt plus equity)

   $ 339,887      $ 347,200   
  

 

 

   

 

 

 

Debt to total capitalization

     3.0     3.6

Net Cash (cash and cash equivalents less debt)

   $ 86,675      $ 112,381   

Current assets

   $ 299,285      $ 306,928   

Current liabilities

   $ 104,692      $ 96,079   

Our debt to total capitalization at December 31, 2011 improved by 16.7% when compared to 2010 while our net cash has decreased by approximately $25.7 million at December 31, 2011 compared to December 31, 2010. This decrease is mainly attributable to the outflows in our investing activities including acquisitions and investments in PP&E.

Our ratio of current assets to current liabilities was approximately 2.9:1 and 3.2:1 at December 31, 2011 and December 31, 2010, respectively. At December 31, 2011, our total working capital decreased by $16.3 million to $194.6 million from $210.8 million at December 31, 2010. This decrease is primarily due to the following: (1) a decrease of $28.0 million in cash; (2) an increase of $8.2 million in accounts payable; (3) an increase of $2.0 million in related party payables; (4) a decrease of $2.0 million in deferred tax assets; and (5) a net increase of $1.5 million in total current debt, which were all partially offset by: (a) an increase of $17.5 million in net inventory, (b) an increase of $4.9 million in net accounts receivable, and (c) an increase of $3.7 in related party receivables.

 

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The following table provides a summary of our operating, investing and financing activities as follows:

 

     Years ended December 31,  
     2011     2010     2009  

Net cash provided by (used in):

      

Operating activities

   $ 10,448      $ 66,706      $ 32,701   

Investing activities

     (27,986     (41,816     (41,909

Financing activities

     (9,934     59,053        29,155   

Effect on cash of changes in exchange rates

     (563     (5,687     95   
  

 

 

   

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

   $ (28,035   $ 78,256      $ 20,042   
  

 

 

   

 

 

   

 

 

 

Cash Flow from Operating Activities. We prepare our statement of cash flows using the indirect method. Under this method, we reconcile net income to cash flows from operating activities by adjusting net income for those items that impact net income but may not result in actual cash receipts or payments during the period. These reconciling items include, but are not limited to, depreciation and amortization, provisions for doubtful accounts, write down of inventory, gains and losses from various transactions, equity share in income of unconsolidated affiliates and changes in the consolidated balance sheet for working capital from the beginning to the end of the period.

2011 compared to 2010. In 2011, our net cash flow provided from operating activities was approximately $10.4 million, a decrease of 84.3% from 2010. This decrease was primarily driven by the decrease in sales for DOEM conversions, which resulted in lower net income for the year. In addition, cash in-flows associated with accounts receivable were lower in the twelve months ended December 2011 when compared to the same period in 2010, mainly due to the cash collected from increased DOEM conversions in 2010, partially offset by the increase in the IMPCO operations in 2011. Similarly, cash out-flows associated with inventory were higher in 2011: this change in inventory primarily reflects increases in the industrial market, as well as in the US automotive market. These items were all partially offset by higher cash in-flows associated with: accounts payable, due primarily to the increase in inventory; other current assets, due primarily to decreases in VAT receivables at our BRC operations; income taxes payable, and net related party receivables.

2010 compared to 2009. In 2010, our net cash flow provided from operating activities was approximately $66.7 million, an increase of 104.0% from 2009. This increase was primarily driven by lower level of accounts receivable offset by decreases in accounts payable and income taxes payable at the end of the year at our BRC operations due to overall decrease in the volume of activity, specifically in our DOEM business.

Cash Flow from Investing Activities. Our net cash used in investing activities consisted primarily of PP&E expenditures as well as acquisitions. The majority of our PP&E expenditures were within our BRC operations and related primarily to leasehold improvements and acquisitions of machinery and equipment.

In 2011, our PP&E additions were approximately $12.1 million, or 56.7% lower than in 2010 due to a lower level expenditure at our BRC Operations upon completion of the new R&D Center. In addition, we paid approximately $13.4 million for the acquisitions of Alternative Fuel Systems and NaturalDrive, net of cash acquired.

In 2010, our PP&E additions were approximately $28.0 million or 116.9 % higher than in 2009. This was due primarily to the continued expansion of our BRC operations, specifically costs associated with our new R&D center of approximately $13.4 million. In addition, we paid approximately $11.6 million for the acquisitions of Productive Concepts International and Evotek, net of cash acquired.

In 2009, our PP&E additions were approximately $12.9 million or 21.1% higher than in 2008. This was due primarily to the continued expansion of our BRC operations. In addition, we paid approximately $29.2 million for the acquisitions of Distribuidora Shopping, WMTM, the Power Systems Business and FuelMaker assets net of cash acquired.

 

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Cash Flow from Financing Activities. Our capitalization and financing strategy is intended to ensure that we are properly capitalized with the appropriate level of debt and available credit.

In 2011, our financing activities included the redemption of the non-controlling interest in MTE for approximately $7.5 million, payments on term and other loans of approximately $4.1 million, as well as new borrowings on our revolving lines of credit for approximately $1.8 million in connection with our BRC operations.

In 2010, our financing activities included net proceeds from issuance of 2,300,000 shares of common stock for approximately $64.9 million and proceeds from term and other loans of approximately $15.0 million, offset by repayments of term and other loans of approximately $20.3 million.

In 2009, our financing activities included proceeds from term loans of approximately $19.8 million related to the purchase of Distribuidora Shopping and FuelMaker; $27.7 million of net proceeds from the issuance of 1,500,000 shares of our common stock to fund the purchase of the Power Systems Business, as well as other working capital requirements for us. In addition, we repaid approximately $18.0 million of term and other loans as well as our lines of credit.

Credit Agreements

Our outstanding debt is summarized as follows (in thousands):

 

     Available as of
December 31, 2011
     December 31,
2011
     December 31,
2010
 

(a) Revolving lines of credit—Italy and Argentina

   $ 10,397       $ 2,513       $ 751   

(b) Revolving line of credit—USA.

     13,000         —           —     

(c) Term loan—Intesa SanPaolo S.p.A.

     —           1,418         2,837   

(d) Term loan—Banca IMI S.p.A and Intesa SanPaolo S.p.A.

     —           5,395         7,731   

(e) Other indebtedness

     —           739         1,075   
  

 

 

    

 

 

    

 

 

 
   $ 23,397         10,065         12,394   

Less: current portion

        6,367         4,823   
     

 

 

    

 

 

 

Non-current portion

      $ 3,698       $ 7,571   
     

 

 

    

 

 

 

At December 31, 2011, our weighted average interest rate on outstanding debt was 3.6%. We are party to numerous significant credit agreements and other borrowings. All foreign denominated revolving lines of credit have been converted using the average interbank currency rate at December 31, 2011.

(a) Revolving Lines of Credit—Italy and Argentina

We maintain various revolving lines of credit in Italy and Argentina. The revolving lines of credit in Italy include $7.1 million, which is unsecured, and $2.0 million that is collateralized by accounts receivable. The interest rates on these revolving lines of credit are fixed and variable and range from 2.4% to 5.4% as of December 31, 2011. At December 31, 2011 and 2010 there were no balances outstanding, respectively.

The revolving lines of credit in Argentina, assumed in connection with the acquisition of Distribuidora Shopping, consist of two lines for a total amount of availability of approximately $3.8 million. These lines are unsecured with approximately $2.5 million and $0.8 million outstanding at December 31, 2011 and December 31, 2010, respectively. At December 31, 2011, the interest rates for the lines of credit in Argentina ranged from 3.4% to 22.5%.

All lines are callable on demand.

 

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(b) Revolving Line of Credit—USA

As of December 31, 2011, the Company and IMPCO Technologies, Inc. (“IMPCO”) maintain an unsecured, revolving short term credit facility with Intesa SanPaolo S.p.A. (“Intesa”) amounting to $13.0 million. IMPCO intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCO’s payments. At December 31, 2011 and December 31, 2010, there were no balances outstanding, respectively. The maximum aggregate principal amount of loans permitted to be outstanding at any time is $13.0 million and the maturity date for the agreement is April 30, 2014. At our option, the loans will bear interest on either the applicable LIBOR rate plus 2.0%, the bank’s prime rate plus 1.0% or the bank’s cost of funds rate plus 2.0%. The bank’s prime rate is a floating interest rate that may change as often as once a day. If any amounts under a loan remain outstanding after the loan’s maturity date, such amounts will bear interest at the bank’s prime rate plus 2.0%. In addition, this revolving credit facility carries a commitment fee of 0.5% of the average daily unused amount. The line of credit contains quarterly covenants that began September 30, 2009, and which require us to maintain (1) a ratio of Net Debt/EBITDA for the then most recently concluded period of four consecutive fiscal quarters of the Company to be less than 2, (2) a consolidated net worth of at least $135 million, and (3) we shall not, and shall not permit any of its subsidiaries to create, incur, assume or permit to exist any debt other than (i) debt of any such subsidiary owing to any other subsidiary or to us or (ii) debt for borrowed money in a total aggregate principal amount, the U.S. Dollar equivalent of which does not exceed $75 million. At December 31, 2011, we were in compliance with these covenants.

(c) Term Loan—Intesa SanPaolo S.p.A.

On June 26, 2007, BRC S.r.L (“BRC”), a subsidiary of the Company that was merged into MTM during 2011, entered into a five and a half year unsecured term loan agreement with Intesa Sanpaolo S.p.A. of Italy in which BRC received €5.0 million (approximately $6.5 million). The payment terms are such that BRC will pay equal installments on a semi-annual basis throughout the term of the loan and interest based on six-month EURIBOR plus 0.4% per annum, which was 2.0% and 1.6% at December 31, 2011 and December 31, 2010, respectively. The loan agreement requires that BRC maintain a ratio of indebtedness to EBITDA, measured at each year end, of less than 1.25 to maintain this rate. At December 31, 2011 and December 31, 2010, BRC was in compliance with this covenant. In the event the ratio of indebtedness to EBITDA exceeds 2.5, the effective rate may adjust upward not to exceed six-month EURIBOR plus 1.2%, which was 2.8% and 2.4% at December 31, 2011 and December 31, 2010, respectively. At December 31, 2011 and December 31, 2010, the amounts outstanding were $1.4 million and $2.8 million, respectively.

(d) Term Loan—Banca IMI S.p.A. and Intesa SanPaolo S.p.A.

On December 22, 2008, MTM S.r.L. (“MTM”), a subsidiary of the Company, entered into a financing agreement with Banca IMI S.p.A. and Intesa SanPaolo S.p.A. pursuant to which MTM may borrow up to €15.0 million (approximately $19.4 million) to be used for the acquisition of Distribuidora Shopping (see Note 3) as well as for investments in MTM’s subsidiaries and certain capital expenditures for research and development. Approximately $5.4 million and $7.7 million were outstanding on this financing agreement as of December 31, 2011 and December 31, 2010, respectively. In addition, on May 28, 2009, MTM exercised its option to extend the maturity date of its borrowings under this financing agreement from June 22, 2009 to June 22, 2014. As specified in the financing agreement, MTM must make interest payments on June 30 and December 31 of each year beginning on June 30, 2009 and is obligated to repay the entire principal amount of the loan, €15.0 million, in ten equal semi-annual installments beginning on December 22, 2009 and ending on June 22, 2014.

The loan contains semi-annual covenants which began June 30, 2009 and which require MTM to maintain (1) a ratio of indebtedness less cash and cash equivalents to rolling twelve month EBITDA of less than 2.5, (2) a ratio of indebtedness less cash and cash equivalents to equity of less than 1.0 and (3) a ratio of rolling twelve month EBITDA to net interest expense ratio greater than 5.0. In addition, the loan requires Mariano Costamagna (the Company’s Chief Executive Officer) and his family to hold, directly or indirectly, 10% of the outstanding capital stock of the Company, unless the reduction in ownership is attributable to one or more issuances of the

 

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Company’s capital stock or a merger or other fundamental corporate transaction which causes a variation in the outstanding capital stock. At December 31, 2011, MTM was in compliance with these covenants. The loan is collateralized by all of MTM’s ownership interest in Distribuidora Shopping and all of Distribuidora Shopping’s receivables.

(e) Other indebtedness

Other indebtedness includes capital leases and various term loans and lines of credits at our foreign subsidiaries. These term loans and lines of credit are used primarily to fund the operations of these subsidiaries and bear interest ranging from 2.7% to 3.0%.

Off-Balance Sheet Arrangements

As of December 31, 2011, we had no off-balance sheet arrangements.

Recent Accounting Pronouncements

In September 2011, the FASB issued revised authoritative guidance that modifies goodwill impairment testing by providing entities with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position results of operations or cash flows.

In June 2011, the FASB issued a new accounting standard, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating its impact on the financial statements and disclosures.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating its impact on the financial statements and disclosures.

 

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Contractual Obligations

The following table contains supplemental information regarding total contractual obligations as of December 31, 2011:

 

     Payments Due by Period  

(In thousands)

Contractual Obligations

   Years Ending December 31,  
   Total      2012      2013      2014      2015      2016      Thereafter  

Revolving lines of credit

   $ 2,513       $ 2,513       $ —         $ —         $ —         $ —         $ —     

Revolving lines of credit—interest

     166         166         —           —           —           —           —     

Term and other loans—principal

     7,349         3,772         2,210         1,133         55         57         122   

Term and other loans—interest

     272         159         79         21         6         4         3   

Capital lease obligations (a)

     219         82         105         32         —           —           —     

Operating lease obligations (a)

     34,251         7,670         6,819         5,703         4,383         3,903         5,773   

Other long-term liabilities (b)

     155         17         18         19         19         20         62   

Other and miscellaneous (a)

     579         579         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 45,504       $ 14,958       $ 9,231       $ 6,908       $ 4,463       $ 3,984       $ 5,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The capital lease obligations are undiscounted and represent total minimum lease payments. The operating lease obligations represent total minimum lease payments. The “other and miscellaneous” category includes obligations under employment contracts.
(b) We have other long term liabilities on our balance sheet amounting to $7.9 million, of which $7.7 million are not shown on this table. Of the $7.7 million, $1.2 million relates to our obligations to employees and directors under our deferred compensation plan, and $4.6 million relates to a mandatory termination payment for Italian employees called “Trattamento di Fine Rapporto” that is required by Italian law (see Note 14). Payments under both of these contractual obligations are due upon employees’ termination of service.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Management. We operate on a global basis and are exposed to currency fluctuations related to the manufacture, assemble and sale of our products in currencies other than the U.S. Dollar. The major foreign currencies involve the markets in the European Union, Argentina, Australia and Canada. Movements in currency exchange rates may affect the translated value of our earnings and cash flow associated with our foreign operations as well as the translation of the net asset or liability positions that are denominated in foreign currencies. In countries outside of the United States, we generally generate revenues and incur operating expenses denominated in local currencies. These revenue and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates. We monitor this risk and attempt to minimize the exposure to our net results through the management of cash disbursements in local currencies.

We prepared sensitivity analyses to determine the impact of hypothetical changes in foreign currency exchange rates on our results of operations. The foreign currency rate analysis assumed a uniform movement in currencies by 10% relative to the U.S. Dollar on our results. Based upon the results of these analyses, a 10% change in currency rates would have resulted in an increase or decrease in our earnings for the year ended December 31, 2011 by approximately $1.1 million. We seek to hedge our foreign currency economic risk by minimizing our U.S. dollar investment in foreign operations using foreign currency term loans to finance our foreign subsidiaries. The term loans are denominated in local currencies and translated to U.S. dollars at period end exchange rates.

Debt Obligation. The following table summarizes our debt obligations at December 31, 2011. The interest rates represent weighted average rates, with the period end rate used for the variable rate debt obligations. The fair value of the debt obligations approximated the recorded value as of December 31, 2011 (U.S. dollar equivalent in thousands).

 

     Debt Obligations
(in thousands)
 
     2012     2013     2014     2015     2016     Thereafter     Total  

Debt Denominated in U.S. dollars

              

Other finance loans

   $ 144      $ —        $ —        $ —        $ —        $ —        $ 144   

Interest rate

     3.0               3.0

Capital leases

   $ 8      $ —        $ —        $ —        $ —        $ —        $ 8   

Interest rate

     9.4               9.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average interest rate, (U.S.)

     3.4               3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt Denominated in Foreign Currencies

              

Line of credit, variable interest rate

   $ 2,513      $ —        $ —        $ —        $ —        $ —        $ 2,513   

Interest rate

     6.6               6.6

Term loans, variable rate (INTESA-BRC)

   $ 1,418      $ —        $ —        $ —        $ —        $ —        $ 1,418   

Interest rate

     2.0               2.0

Term loans, variable rate (IMI-MTM)

   $ 2,158      $ 2,158      $ 1,079      $ —        $ —        $ —        $ 5,395   

Interest rate

     2.6     2.6     2.6           2.6

Term loans, fixed rate

   $ 52      $ 52     $ 54     $ 55     $ 57     $ 122      $ 392   

Interest rate

     2.7     2.7 %     2.7 %     2.7 %     2.7 %     2.7 %     2.7

Capital lease

   $ 74      $ 95     $ 26     $ —        $ —        $ —        $ 195   

Interest rate

     7.7     7.7     7.7 %           7.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average interest rate, (foreign)

     4.1     2.8     2.8     2.7     2.7     2.7     3.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 8. Consolidated Financial Statements and Supplementary Data.

See pages F-1 through F-41 of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

 

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of December 31, 2011.

Based on such evaluation, our chief executive officer and our chief financial officer have concluded that as of December 31, 2011, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit to the SEC is (1) recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC and (2) accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Under the rules of the SEC, “internal control over financial reporting” is defined as a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Internal control over financial reporting includes maintaining records, that in reasonable detail, accurately and fairly reflect our transactions and our dispositions of assets; provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America; provide reasonable assurance that receipts and expenditures of company assets are made only in accordance with management authorization; and provide reasonable assurance regarding the prevention or the timely detection of the unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2011.

Attestation Report of the Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP, (“PwC”) the independent registered public accounting firm that audited the financial statements included in this Form 10-K, has attested to, and reported on, the effectiveness of our internal control over financial reporting. The reports of PwC are included in the Financial Statements to this Form 10-K.

 

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Changes in Internal Control over Financial Reporting

For the three month period ended December 31, 2011, there has been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

The information relating to our executive officers, directors and nominees is set forth under the captions “Board Composition” and “Executive Officers” in the Fuel Systems 2012 Proxy Statement and is incorporated by reference herein. The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” that appears in the Fuel Systems 2012 Proxy Statement is also incorporated by reference herein.

We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to our Chief Executive Officer, principal financial officer, principal accounting officer, and to all of our other directors, officers and employees. Our Code of Ethics is available at the Corporate Governance section on our website, www.fuelsystemssolutions.com. As permitted by Item 5.05 of Form 8-K, we will disclose amendments to and waivers from our Code of Ethics required under Item 5.05 on our website.

The information regarding our Audit Committee and designated audit committee financial experts is set forth under the captions “Independent Directors” and “Audit Committee” in the Fuel Systems 2012 Proxy Statement and such information is incorporated by reference herein.

The information concerning procedures by which shareholders may recommend director nominees is set forth under “Procedure for Shareholder Recommendations for Director Nominees” in the Fuel Systems 2012 Proxy Statement and such information is incorporated by reference herein.

 

Item 11. Executive Compensation.

The information relating to executive compensation is set forth under the captions “Executive Compensation” and “Directors Compensation” in the Fuel Systems 2012 Proxy Statement and such information is incorporated by reference herein; except that the information under the caption “Compensation Committee Report” shall be deemed “furnished” with this report and shall not be deemed “filed” with this report, nor deemed incorporated by reference into any filing under the Securities Act of 1933 except only as may be expressly set forth in any such filing by specific reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information relating to security ownership of management and certain beneficial owners is set forth under the caption “Principal Stockholders” in the Fuel Systems 2012 Proxy Statement and such information is incorporated by reference herein.

Equity Compensation Plan Information

All of our equity compensation plans have been approved by our stockholders except for the December, 2011 Stock Option Plan. The following table sets forth information about our common stock that may be issued under our equity compensation plans as of December 31, 2011:

 

Plan Category

   Number of
Securities to
Be Issued
upon
Exercise  of
Outstanding
Options
     Weighted-
Average
Exercise
Price of
Outstanding
Options
     Number of
Securities
Remaining
Available for
Future
Issuance
Under  Equity
Compensation
Plans
 

Equity Compensation Plans Approved by Stockholders

     57,750       $ 11.28         383,404 (1) 

Equity Compensation Plans Not Approved by Stockholders

     —           —           300,000 (2) 

Total

     57,750       $ 11.28         683,404   

 

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(1) Represents shares of restricted stock available for issuance under our 2009 Restricted Stock Plan.
(2) Includes 300,000 shares of options available for issuance under the 2011 Stock Option Plan, which was approved by the Board of Directors on December 14, 2011, but is subject to shareholders’ approval.

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information regarding certain relationships and related party transactions and director independence is set forth under the captions “Independent Directors” and “Certain Relationships and Related Transactions” in the Fuel Systems 2012 Proxy Statement and such information is incorporated by reference herein.

 

Item 14. Principal Accounting Fees and Services.

The information regarding fees and services of the independent registered public accounting firm (“independent accountant”) and our pre-approval policies and procedures for audit and non-audit services provided by our independent accountant are set forth under the captions “Principal Accountant Fees and Services” and “Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors” in the Fuel Systems 2012 Proxy Statement and such information is incorporated by reference herein.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

(a) Documents filed as part of this report:

(1) Consolidated Financial Statements of Fuel Systems Solutions, Inc.

Reports of independent registered public accounting firm.

Consolidated balance sheets as of December 31, 2011 and 2010.

Consolidated statements of operations for the years ended December 31, 2011, 2010, and 2009.

Consolidated statements of stockholders’ equity for the years ended December 31, 2011, 2010, and 2009.

Consolidated statements of cash flows for the years ended December 31, 2011, 2010, and 2009.

Notes to consolidated financial statements.

(2) Supplemental Financial Statement Schedules:

Schedule II—Valuation Accounts.

 

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(b) Exhibits:

EXHIBIT INDEX

Certain of the following exhibits, as indicated by footnote, were previously filed as exhibits to registration statements or reports filed by the Company or its predecessor companies and are hereby incorporated by reference to such statements or reports. The Company’s Exchange Act file number is 1-32999, the Exchange Act file number of IMPCO Technologies, Inc., our predecessor company, is 1-15143, and the Exchange Act file number of AirSensors, Inc., a predecessor company, was 0-16115.

 

Exhibit No.

  

Description

  3.1*    Amended and Restated Certificate of Incorporation of Fuel Systems Solutions, Inc., as currently in effect.
  3.2*    Bylaws of Fuel Systems Solutions, Inc., as currently in effect.
  4.1    Stockholder Protection Rights Agreement dated as of June 27, 2006 between Fuel Systems Solutions, Inc. and ChaseMellon Stockholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-4 (No. 333-135378) filed on June 27, 2006).
  4.2    Amendment No. 1 to Stockholder Protection Rights Agreement, dated as of July 21, 2009, between the Company and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on July 21, 2009).
  4.3    Specimen of common stock certificate of Fuel Systems Solutions, Inc. (incorporated by reference to Exhibit 3.7 of the Company’s Registration Statement on Form S-4 (No. 333-135378) filed on June 27, 2006).
10.1+    1993 Stock Option Plan for Non-employee Directors (incorporated by reference to the IMPCO Technologies, Inc. Annual Report on Form 10-K for fiscal 1994).
10.2+    2002 Stock Option Plan for Employees (incorporated by reference to Appendix A of IMPCO Technologies, Inc.’s Proxy Statement filed October 18, 2002).
10.3+    2003 Stock Incentive Plan (incorporated by reference to Appendix B to IMPCO Technologies, Inc.’s Proxy Statement filed May 13, 2003).
10.4+    2004 Stock Incentive Plan (incorporated by reference to Appendix B to IMPCO Technologies, Inc.’s Proxy Statement filed April 9, 2004).
10.6+    Form of Restricted Stock Agreement under 2006 Incentive Bonus Plan (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006).
10.7+    2009 Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 9, 2009).
10.8+    2009 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on July 9, 2009).
10.9+    Form of Restricted Stock Agreement under 2009 Restricted Stock Plan (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on July 9, 2009).
10.10+    Fuel Systems Solutions, Inc. Deferred Compensation Plan and Plan Adoption Agreement, each as amended and restated, effective January 1, 2008 (incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).
10.11+    First Amendment, dated December 31, 2008, to the Fuel Systems Solutions, Inc. Deferred Compensation Plan effective January 1, 2008 (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

 

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Exhibit No.

  

Description

  10.12+    Amended and Restated Employment Agreement between Fuel Systems Solutions, Inc. and Mariano Costamagna dated December 9, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 15, 2008).
  10.13+    Amendment No. 1 to the Amended and Restated Employment Agreement between Fuel Systems Solutions, Inc. and Mariano Costamagna (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 28, 2010).
  10.14*    Director Compensation Policy.
  10.15    Form of Director Indemnification Agreement (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on July 9, 2009).
  10.16    Loan Agreement between MTM, S.r.L. and Unicredit Banca Medio Credito S.p.A., dated December 2, 2004 (incorporated by reference to Ex. 10.3 to IMPCO Technologies, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).
  10.17    English summary of Financing Agreement dated December 22, 2008, by and among MTM S.r.L., Banca IMI S.p.A. and Intesa SanPaolo S.p.A. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 29, 2008).
  10.18    Committed Credit Facility dated July 10, 2009 between Fuel Systems, Inc. /IMPCO Technologies, Inc. and Intesa SanPaolo S.p.A. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 17, 2009).
  10.19    Asset Purchase and Assumption Agreement, dated as of August 4, 2010, by and among IMPCO Technologies, Inc., Productive Concepts International LLC, Robert Lykins, and, only with respect to Section 2.3(c), Fuel Systems Solutions, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on August 5, 2010).
  10.20    Equity Purchase Agreement, dated as of September 3, 2010, by and among IMPCO Technologies, Inc., EvoTek LLC, Tana Wroblewski, Gerald Wroblewski, and, only with respect to Section 2.2(b), Fuel Systems Solutions, Inc. (incorporated by reference to Exhibit 2.2 of the Company’s Quarterly Report on Form 10-Q filed on November 9, 2010).
  10.21+    Fuel Systems Solutions, Inc. 2011 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 20, 2011).
  10.22+    Fuel Systems Solutions, Inc. 2011 Phantom Stock Option Plan (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 20, 2011).
  10.23+    Form of Nonqualified Stock Option Agreement under the Fuel Systems Solutions, Inc. 2011 Stock Option Plan (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on December 20, 2011).
  10.24+    Form of Incentive Stock Option Agreement under the Fuel Systems Solutions, Inc. 2011 Stock Option Plan (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on December 20, 2011).
  10.25+    Form of Phantom Stock Option Agreement under the Fuel Systems Solutions, Inc. 2011 Phantom Stock Option Plan (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on December 20, 2011).
  12.1*    Computation of Ratios to Fixed Charges
  21.1*    Subsidiaries of the Company.
  23.1*    Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm, with respect to Fuel Systems Solutions, Inc.

 

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Exhibit No.

  

Description

  24.1*    Powers of Attorney (included on the signature page hereto).
  31.1*    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
  31.2*    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
  32.1*    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
  32.2*    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

* Filed herewith.
+ Management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 8, 2012.

 

FUEL SYSTEMS SOLUTIONS, INC.
By:  

/S/    MARIANO COSTAMAGNA

Name:   Mariano Costamagna
Title:   Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mariano Costamagna and Pietro Bersani, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this annual report on Form 10-K under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/S/    MARIANO COSTAMAGNA        

Mariano Costamagna

  

Chief Executive Officer and Director (Principal Executive Officer)

  March 8, 2012

/S/    PIETRO BERSANI        

Pietro Bersani

  

Chief Financial Officer (Principal Financial Officer)

  March 8, 2012

/S/    MICHAEL HELFAND        

Michael Helfand

  

Senior Vice President Finance and Chief Accounting Officer (Principal Accounting Officer)

  March 8, 2012

/S/    NORMAN L. BRYAN        

Norman L. Bryan

   Director   March 8, 2012

/S/    MARCO DI TORO        

Marco Di Toro

   Director   March 8, 2012

/S/    JOSEPH E. POMPEO        

Joseph E. Pompeo

   Director   March 8, 2012

/S/    TROY A. CLARKE        

Troy A. Clarke

   Director   March 8, 2012

/S/    JAMES W. NALL        

James W. Nall

   Director   March 8, 2012

/S/    WILLIAM J. YOUNG        

William J. Young

   Director   March 8, 2012

/S/    ALDO ZANVERCELLI        

Aldo Zanvercelli

   Director   March 8, 2012

 

51


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

CONSOLIDATED FINANCIAL STATEMENTS—FUEL SYSTEMS SOLUTIONS, INC.

  

Reports of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Operations

     F-4   

Consolidated Statements of Stockholders’ Equity

     F-5   

Consolidated Statements of Cash Flows

     F-6   

Notes to Consolidated Financial Statements

     F-7   

SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES:

  

Schedule II—Valuation Accounts—Fuel Systems Solutions, Inc.

     F-41   

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Fuel Systems Solutions, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index located on page F-1 present fairly, in all material respects, the financial position of Fuel Systems Solutions, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index located on page F-1, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PricewaterhouseCoopers LLP

Irvine, California

March 8, 2012

 

F-2


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

 

    December 31,
2011
    December 31,
2010
 

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $ 96,740      $ 124,775   

Accounts receivable less allowance for doubtful accounts of $2,665 and $2,858 at December 31, 2011 and December 31, 2010, respectively

    62,551        57,654   

Inventories

    103,382        85,854   

Deferred tax assets, net

    6,512        8,551   

Other current assets

    19,125        22,780   

Related party receivables

    10,975        7,314   
 

 

 

   

 

 

 

Total current assets

    299,285        306,928   
 

 

 

   

 

 

 

Equipment and leasehold improvements, net

    59,051        59,653   

Goodwill

    58,968        53,815   

Deferred tax assets, net

    363        335   

Intangible assets, net

    29,422        30,285   

Other assets

    2,071        2,196   

Related party receivables

    842        1,351   
 

 

 

   

 

 

 

Total Assets

  $ 450,002      $ 454,563   
 

 

 

   

 

 

 

LIABILITIES AND EQUITY

   

Current liabilities:

   

Accounts payable

  $ 54,816      $ 46,610   

Accrued expenses

    36,230        37,928   

Income taxes payable

    2,517        3,258   

Current portion of term loans and debt

    6,367        4,823   

Deferred tax liabilities, net

    82        770   

Related party payables

    4,680        2,690   
 

 

 

   

 

 

 

Total current liabilities

    104,692        96,079   

Term and other loans

    3,698        7,571   

Other liabilities

    7,885        8,218   

Deferred tax liabilities, net

    3,905        4,128   
 

 

 

   

 

 

 

Total Liabilities

    120,180        115,996   
 

 

 

   

 

 

 

Commitments and contingencies (Note 14)

   

Equity:

   

Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued and outstanding at December 31, 2011 and 2010

    —          —     

Common stock, $0.001 par value, authorized 200,000,000 shares; 20,089,591 issued and 20,014,065 outstanding at December 31, 2011; and 20,028,968 issued and 19,921,217 outstanding at December 31, 2010

    20        20   

Additional paid-in capital

    318,632        322,948   

Shares held in treasury, 16,055 and 18,545 shares at December 31, 2011 and 2010, respectively

    (523     (588

Retained Earnings

    15,357        10,189   

Accumulated other comprehensive (loss) income

    (3,664     2,237   
 

 

 

   

 

 

 

Total Fuel Systems Equity

    329,822        334,806   

Non-controlling interests

    —          3,761   
 

 

 

   

 

 

 

Total Equity

    329,822        338,567   
 

 

 

   

 

 

 

Total Liabilities and Equity

  $ 450,002      $ 454,563   
 

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-3


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Share and Per Share Data)

 

     Years Ended December 31,  
     2011     2010     2009  

Revenue

   $ 418,134      $ 430,632      $ 452,325   

Cost of revenue

     321,350        298,259        303,789   
  

 

 

   

 

 

   

 

 

 

Gross profit

     96,784        132,373        148,536   
  

 

 

   

 

 

   

 

 

 

Operating Expenses:

      

Research and development expense

     28,149        20,775        15,151   

Selling, general and administrative expense

     56,810        53,297        53,079   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     84,959        74,072        68,230   
  

 

 

   

 

 

   

 

 

 

Operating income

     11,825        58,301        80,306   

Other (expense) income, net

     (294     1,542        4,615   

Interest income

     1,836        900        420   

Interest expense

     (1,047     (903     (2,329
  

 

 

   

 

 

   

 

 

 

Income from operations before income taxes, equity share in income of unconsolidated affiliates, and non-controlling interest

     12,320        59,840        83,012   

Equity share in income of unconsolidated affiliates, net

     —          —          852   

Income tax expense

     (7,058     (19,556     (34,023
  

 

 

   

 

 

   

 

 

 

Net income

     5,262        40,284        49,841   

Less: net income attributed to non-controlling interests

     (94     (582     (2
  

 

 

   

 

 

   

 

 

 

Net income attributable to Fuel Systems

   $ 5,168      $ 39,702      $ 49,839   
  

 

 

   

 

 

   

 

 

 

Net income per share attributable to Fuel Systems:

      

Basic

   $ 0.26      $ 2.24      $ 2.96   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.26      $ 2.23      $ 2.95   
  

 

 

   

 

 

   

 

 

 

Number of shares used in per share calculation

      

Basic

     19,972,969        17,725,049        16,847,439   
  

 

 

   

 

 

   

 

 

 

Diluted

     20,004,236        17,807,330        16,922,971   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Data)

 

    Fuel Systems Stockholders’ Equity     Non-
controlling
Interest
    Total
Equity
    Fuel Systems     Total  
    Common Stock     Additional
Paid-In
Capital
    Shares Held
in
Treasury
    Retained
Earnings/
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
        Comprehensive
Income (Loss)
    Comprehensive
Income (Loss)
 
    Shares     Amount                  

Balance, December 31, 2008

    15,749,783      $ 16      $ 220,270      $ (1,399   $ (79,354   $ 14,422      $ 2      $ 153,957      $ 16,081      $ 15,924   
                 

 

 

   

 

 

 

Net income

    —          —          —          —          49,841        —          (2     49,839      $ 49,841        49,839   

Foreign currency translation adjustment

    —          —          —          —          —          1,328        —          1,328        1,328        1,328   

Issuance of common stock upon exercise of stock options

    24,000        —          263        —          —          —          —          263        —          —     

Issuance of common stock relating to acquisition of TA

    322,800        —          9,047        827        —          —          —          9,874        —          —     

Issuance of common stock

    1,500,000        2        27,718        —          —          —          —          27,720        —          —     

Issuance and vesting of restricted common stock, net of shares withheld for employee taxes

    13,738        —          329        (62     —          —          —          267        —          —     

Shares held in trust for deferred compensation plan, at cost

    —          —          —          (20     —          —          —          (20     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2009

    17,610,321      $ 18      $ 257,627      $ (654   $ (29,513   $ 15,750      $ —        $ 243,228      $ 51,169      $ 51,167   
                 

 

 

   

 

 

 

Net income

    —          —          —          —          39,702        —          582        40,284      $ 39,702      $ 40,284   

Foreign currency translation adjustment

    —          —          —          —          —          (13,513     (156     (13,669     (13,513     (13,669

Issuance of common stock upon exercise of stock options

    3,350        —          29        —          —          —          —          29        —          —     

Issuance of common stock

    2,300,000        2        64,850        —          —          —          —          64,852        —          —     

Issuance and vesting of restricted stock, net of shares withheld for employee tax

    7,546        —          442        (91     —          —          —          351        —          —     

Dividends declared by MTE

    —          —          —          —          —          —          (723     (723     —          —     

Change of control in MTE

    —          —          —          —          —          —          4,058        4,058        —          —     

Shares held in trust for deferred compensation plan, at cost

    —          —          —          157        —          —          —          157        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

    19,921,217      $ 20      $ 322,948      $ (588   $ 10,189      $ 2,237      $ 3,761      $ 338,567      $ 26,189      $ 26,615   
                 

 

 

   

 

 

 

Net income

    —          —          —          —          5,168        —          94        5,262      $ 5,168      $ 5,262   

Purchase of remaining shares from non-controlling interest

    —          —          (6,940 )     —          —          —          (4,156     (11,096     —          —     

Foreign currency translation adjustment

    —          —          —          —          —          (5,901     301        (5,600     (5,901     (5,600

Issuance of common stock relating to acquisition of Natural Drive

    52,317        —          1,464        —          —          —          —          1,464        —          —     

Issuance and vesting of restricted common stock relating to acquisition of Evotek

    29,736        —          1,000        —          —          —          —          1,000        —          —     

Issuance of common stock upon exercise of stock options

    2,500        —          16        —          —          —          —          16        —          —     

Issuance and vesting of restricted stock, net of shares withheld for employee tax

    8,295        —          144        65        —          —          —          209        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    20,014,065      $ 20      $ 318,632      $ (523   $ 15,357      $ (3,664   $ —        $ 329,822      $ (733   $ (338
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-5


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, except Share and Per Share Data)

 

    Years Ended December 31,  
    2011     2010     2009  

Cash flows from operating activities:

     

Net income

  $ 5,262      $ 40,284      $ 49,841   

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation and other amortization

    10,688        9,035        8,087   

Amortization of intangibles arising from acquisitions

    8,225        5,288        4,108   

Provision for doubtful accounts

    641        1,317        567   

Write down of inventory

    3,148        4,020        9,596   

Provision for loan to unconsolidated affiliate

    —          —          343   

Equity share in income of unconsolidated affiliates

    —          —          (852

Gain on Acquisition

    —          —          (1,422

Realized foreign exchange loss on subsidiary liquidation

    417        —          —     

Unrealized loss (gain) on foreign exchange transactions

    46        (1,427     (1,541

Compensation expense related to stock option and restricted stock grants

    1,241        442        329   

Loss on disposal of equipment and leasehold improvement

    505        1,157        357   

Dividends from unconsolidated affiliates

    —          —          196   

Reduction of contingent consideration

    (1,661     —          —     

Changes in assets and liabilities

     

(Increase) decrease in accounts receivable

    (7,499     58,470        (51,366

(Increase) decrease in inventories

    (22,133     (453     17,319   

Decrease (increase) in other current assets

    3,272        (8,127     (977

Decrease (increase) in other assets

    333        338        (1,131

Increase (decrease) in accounts payable

    9,167        (23,437     (789

(Decrease) increase in income taxes payable

    (648     (10,423     5,522   

(Decrease) increase in accrued expenses

    (224     (5,150     451   

Decrease (increase) in deferred income taxes, net

    824        (1,519     (3,943

(Decrease) increase in long-term liabilities

    (307     (621     759   

Receivables from/payables to related party, net

    (849     (2,488     (2,753
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    10,448        66,706        32,701   
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

     

Purchase of equipment and leasehold improvements

    (12,130     (28,043     (12,928

Acquisitions, net of cash acquired

    (13,441     (11,643     (29,209

Investment in joint venture

    (33     —          —     

Amount in restricted cash for redemption of non-controlling interest

    (2,882     —          —     

Amount in escrow for contingent consideration

    —          (4,000     —     

Controlling interest in previously unconsolidated affiliates

    —          1,044        —     

Proceeds from sale of assets

    500        826        228   
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (27,986     (41,816     (41,909
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

     

Increase (decrease) in callable revolving lines of credit, net

    1,830        (2,150     (156

Proceeds from revolving lines of credit

    —          14,500        —     

Payments of revolving lines of credit

    —          (14,500     —     

Proceeds from term loans and other loans

    —          464        19,757   

Payments on term loans and other loans

    (4,083     (3,762     (18,036

Acquisition of non-controlling interest

    (7,498     —          —     

Proceeds from issuance of common stock, net of expense of $4.1 and $2.3 million in 2010 and 2009, respectively

    —          64,852        27,720   

Payments of capital lease obligations

    (199     (296     (358

Proceeds (purchase) of common shares held in trust, net

    —          157        (20

Dividends issued by consolidated affiliates

    —          (241     —     

Proceeds from exercise of stock options

    16        29        248   
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (9,934     59,053        29,155   
 

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    (27,472     83,943        19,947   

Effect of exchange rate changes on cash

    (563     (5,687     95   

Net (decrease) increase in cash and cash equivalents

    (28,035     78,256        20,042   

Cash and cash equivalents at beginning of period

    124,775        46,519        26,477   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

    96,740      $ 124,775      $ 46,519   
 

 

 

   

 

 

   

 

 

 

 

F-6


Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements

1. Description of the Business

Fuel Systems Solutions, Inc. (“Fuel Systems” and the “Company”) designs, manufactures and supplies alternative fuel components and systems for use in the transportation, industrial and power generation industries on a global basis. The Company’s components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines.

2. Summary of Significant Accounting Policies

(a) Principles of consolidation—The Consolidated Financial Statements include the accounts of the Company and our majority-owned subsidiaries. All intercompany transactions, including intercompany profits and losses and intercompany balances, have been eliminated in consolidation. Investments in unconsolidated joint ventures or affiliates (“joint ventures”) are accounted for under the equity method of accounting, whereby the investment is initially recorded at the cost of acquisition and adjusted to recognize the Company’s share in undistributed earnings or losses since acquisition. The Company’s share in the earnings or losses for its joint ventures would be reflected in equity share in income of unconsolidated affiliates. If the investment in an unconsolidated joint venture is reduced to a zero balance due to prior losses, the Company recognizes any further losses related to its share to the extent that there are any receivables, loans or advances to the joint venture. These additional losses would be reflected in selling, general, and administrative expenses.

(b) Use of estimates—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

(c) Cash and cash equivalents—The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

(d) Restricted cash—The Company classifies cash and cash equivalents that are restricted from operating use for the next twelve months as restricted cash. Amounts restricted for longer than twelve months are classified as other assets. When the restrictions are no longer in place, the amounts are reclassified to cash and cash equivalents. At December 31, 2011 restricted cash balance was $2.9 million included in other current assets (see Note 10). At December 31, 2011 and 2010 restricted cash balance was $0.5 million and $0.4 million, respectively, and included in other assets.

(e) Inventories—The Company values its inventories at the lower of cost or market value. Cost is determined by the first-in, first-out, or the FIFO method, while market value is determined by replacement cost for raw materials and parts and net realizable value for work-in-process and finished goods.

(f) Equipment and leasehold improvements—Equipment and leasehold improvements are stated on the basis of historical cost. Depreciation of equipment is provided using the straight-line method principally over the following useful lives: dies, molds, and patterns shorter of 3 to 7 years or estimated product life; machinery and equipment 5 to 10 years; office furnishings and equipment 3 to 7 years; automobiles and trucks 5 years. Amortization of leasehold improvements is provided using the straight-line method over the shorter of the assets’ estimated useful lives or the lease terms. Design and development costs incurred in conjunction with the procurement of dies, molds, and patterns are immaterial. Depreciation of equipment acquired under a capital lease is provided using the straight line method over the shorter of the useful life of the equipment or the duration of the lease.

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

(g) Intangibles—Intangible assets, including goodwill, are recorded based on the excess of the acquisition cost over the fair value of amounts assigned to tangible assets and liabilities.

Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Impairment testing is performed for each of the Company’s reporting units. The Company compares the carrying value of a reporting unit, including goodwill, to the fair value of the unit. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. If the carrying amount of a reporting unit exceeds its fair value, the Company revalues all assets and liabilities of the reporting unit, excluding goodwill, to determine if the fair value of the net assets is greater than the net assets including goodwill. If the fair value of the net assets is less than the net assets including goodwill, impairment has occurred. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment has occurred. The Company’s estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from the Company’s annual long-range planning process. The Company also makes estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors.

The Company evaluates the useful lives of other intangible assets, mainly existing technology, trade name, and customer relationships to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.

Among the intangible assets acquired, existing technology and trade name are amortized using the straight line method, the best estimate of the pattern of the economic benefits, and customer relationships are amortized using the accelerated sum-of-the-years digit method. The sum-of-the-years digit method of amortization reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

(h) Warranty costs—Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. Estimates are based, in part, on historical experience.

(i) Research and development costs—Research and development costs are charged to expense as incurred. Equipment used in research and development with alternative future uses is capitalized and amortized over the expected useful life of the equipment.

(j) Revenue recognition—The Company recognizes revenue upon transfer of title and risk of loss, generally when products are shipped provided there is (1) persuasive evidence of an arrangement, (2) there are no uncertainties regarding customer acceptance, (3) the sales price is fixed or determinable and (4) management believes collectability is reasonably assured. The Company considers arrangements with extended payment terms not to be fixed or determinable unless they are secured under an irrevocable letter of credit arrangement guaranteed by a reputable financial institution, and accordingly, the Company defers such revenue until payment is received.

The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis in its consolidated statement of operations. The Company classifies shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred.

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

(k) Allowance for doubtful accounts—The Company maintains provisions for uncollectible accounts for estimated losses resulting from the inability of its customers to remit payments. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that have been identified. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered.

(l) Net income per share attributed to Fuel Systems—Basic income per share is computed by dividing net income applicable to common stock by the weighted average shares of common stock outstanding during the period. Diluted income per share is computed based on the weighted average number of shares of common stock outstanding, and if dilutive, all common stock equivalents.

(m) Income taxes—The Company uses the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In the preparation of its consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, property, plant and equipment and losses for tax and accounting purposes. These differences result in deferred tax assets, which include tax loss carry-forwards and liabilities, and are included within the consolidated balance sheet. The Company then assesses the likelihood of recovery of the deferred tax assets from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. To the extent a valuation allowance is established or increased in a period, the Company includes an expense within the tax provision of the consolidated statement of operations.

The Company follows the interpretations of the Financial Accounting Standard Board (“FASB”), which establish a single model to address accounting for uncertain tax positions. The interpretations clarify the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements and also provide guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

(n) Stock based compensation—The Company’s stock-based compensation programs consist of restricted stock and stock options issued to employees and non-employee directors. The Company recognizes compensation expense for all stock-based payment arrangements, over the requisite service period of the award. For stock options, the Company determines the grant date fair value using the Black-Scholes option-pricing model, which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and risk-free interest rates. For restricted stock the Company determines the fair value based on the fair market values of the underlying stock on the dates of grant.

(o) Impairment of long-lived assets and long-lived assets to be disposed of—Impairment losses are recorded on long-lived assets used in operations when an indicator of impairment (significant decrease in market value of an asset, significant change in extent or manner in which the asset is used or significant physical change to the asset) is present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The Company has not experienced any significant changes in the business climate or in the use of assets that would require the Company to write down the value of the assets recorded in the consolidated balance sheet.

(p) Foreign currency translation—Assets and liabilities of the Company’s consolidated foreign subsidiaries are generally translated at period-end exchange rates, and related revenue and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as foreign currency

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

components of other comprehensive income (loss) in equity. The results and financial condition of the Company’s international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. dollar. The functional currency for each of the Company’s international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. dollar increases the costs incurred by the subsidiaries because a significant portion of the Company’s international subsidiaries’ inventory purchases are U.S. dollar denominated. The Company seeks to manage its foreign currency economic risk by minimizing its U.S. dollar investment in foreign operations using foreign currency term loans and lines of credit to finance the operations of its foreign subsidiaries. The Company generally recognizes foreign exchange gains and losses on the consolidated statement of operations for intercompany balances that are denominated in currencies other than the reporting currency. In the event that the Company determines that intercompany balances between the Company and its subsidiary will not be settled in the foreseeable future, the foreign exchange gains and losses are deferred as part of the cumulative translation adjustment on the consolidated balance sheet.

Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

(q) Financial instruments—At December 31, 2011 and 2010, the fair value of the Company’s term loans and related party receivables approximated carrying value. The estimated fair values of the Company’s financial instruments have been determined using available market information. The estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have an effect on the estimated fair value amounts. The fair value of current financial assets, current liabilities, and other assets are estimated to be equal to their carrying amounts.

(r) Comprehensive income—The Company presents comprehensive income in the consolidated statements of stockholders’ equity. Comprehensive income includes, in addition to net income, changes in equity that are excluded from the consolidated statements of operations and are recorded directly into a separate section of equity on the consolidated balance sheet. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.

(s) Treasury stock—Treasury shares are accounted for as a deduction of equity. Any consideration paid or received is recognized directly in equity so that treasury stock is accounted for using the cost method and reported as shares held in treasury on the Company’s consolidated balance sheet. When treasury stock is reissued, the value is computed and recorded using a first-in-first-out basis.

(t) Reclassifications—Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

In September 2011, the FASB issued revised authoritative guidance that modifies goodwill impairment testing by providing entities with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued a new accounting standard, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating its impact on the financial statements and disclosures.

In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating its impact on the financial statements and disclosures.

3. Acquisitions

Acquisition of Alternative Fuel Systems (2004) Inc.

On May 31, 2011, through its wholly owned subsidiary IMPCO Technologies, Inc. (“IMPCO US”), the Company acquired Alternative Fuel Systems (2004) Inc. (“AFS”), a developer and marketer of fuel management systems that enable internal combustion engines to operate on compressed natural gas. The aggregate purchase price for 100% of the equity of AFS was approximately $8.9 million in cash, net of cash acquired of approximately $0.7 million.

The results of operations of AFS have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.

The purchase price has been allocated as follows (in thousands):

 

Inventory

   $ 1,300   

Other tangible assets

     1,291   

Intangible assets subject to amortization

     2,110   

Goodwill

     5,225   
  

 

 

 

Total assets acquired

     9,926   

Less: total liabilities

     (985
  

 

 

 

Total net assets recorded

   $ 8,941   
  

 

 

 

Of the $2.1 million of acquired intangible assets, $1.4 million relates to customer relationships with a useful life of approximately 7 years, $0.4 million to developed technology with a useful life of 6 years and $0.3 million to trademarks with a useful life of 6 years. The international presence of AFS specifically in the Asia automotive market as well as the ability to incorporate their products into the Company’s existing supply chain, were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $5.2 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed.

The Company has determined that the acquisition of AFS was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Acquisition of NaturalDrive Partners LLC

On April 18, 2011, through its wholly owned subsidiary IMPCO US, the Company completed the purchase of NaturalDrive, a premier alternative fuel automotive systems developer in North America that offers dedicated CNG and LPG conversion systems across multiple U.S. fleet vehicle platforms. The transaction is valued at $6.0 million, comprised of $4.5 million in cash and $1.5 million of Fuel Systems’ stock paid at closing. More

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

specifically, the Company issued 52,317 shares of common stock in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the issuance did not involve a public offering. The transaction also includes provisions for earn-out payments totaling up to $6.75 million in the form of Fuel Systems stock, which would be payable during the three years following closing based upon achievement of business volume and general milestones. The earn-out will be paid in three equal installments of $1.5 million no later than 90 days after the end of each yearly period ending in March 2012, March 2013, and March 2014 if specified target customer volumes for the year are achieved, and reasonable progress is made on the general milestones. In the case the earn-out for a specific period is determined to be payable in accordance with the aforementioned target customer volumes and additional GM value thresholds are met for the same period, the earn-out shares for the applicable period will be multiplied by a factor of 1.5 for purposes of determining the number of earn-out shares payable. The range of the undiscounted amounts the Company could be required to pay for these earnout payments is between $0.0 and $6.75 million. In accordance with the FASB issued authoritative guidance, the Company determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis, contemplating various scenarios for the earnout levels, with probability ranging from approximately 10% to approximately 60%. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy, which reflects the Company’s own assumptions. The resultant probability-weighted cash flows were then discounted using a rate of approximately 13.0% over the earnout period that reflects the uncertainty surrounding the expected outcomes, and which we believe is appropriate and representative of a market participant assumption once considered the earnout conditions. As of the closing date of the acquisition, the NaturalDrive contingent consideration was assigned a fair value of approximately $1.4 million (see Note 14). Changes to the fair value of the contingent consideration are determined each period and charged to expense in the Consolidated Statements of Operations under operating expenses. The Company believes that the model used in the determination of the fair value of the NaturalDrive contingent consideration agreement is sensitive to changes in the unobservable inputs on which it is based and their interrelationships, changes that may be driven by mutated market conditions, different demand level, alternative strategies that management may pursue, and other factors.

The results of operations of NaturalDrive have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.

The purchase price has been allocated as follows (in thousands):

 

Total tangible assets

   $ 68   

Intangible assets subject to amortization

     5,650   

Goodwill

     1,694   
  

 

 

 

Total assets acquired

     7,412   

Less: total liabilities

     (1,448
  

 

 

 

Total net assets recorded

   $ 5,964   
  

 

 

 

Of the $5.7 million of acquired intangible assets, $4.8 million refers to existing technology with an estimated useful life of 8 years, $0.6 million to customer relationships with a useful life of approximately 6 years and $0.3 million to non-compete agreements with an estimated useful life of 4 years. The continued development of the U.S. alternative fuel market as well as potential legislative changes impacting this market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $1.7 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed.

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

The Company has determined that the acquisition of NaturalDrive was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Acquisition of Evotek LLC

On September 22, 2010, the Company acquired Evotek LLC (“Evotek”), an alternative fuel automotive systems developer in North America that offers dedicated CNG and LPG conversion systems across multiple U.S. fleet vehicle platforms. The aggregate purchase price for 100% of the equity of Evotek was approximately $4.0 million in cash. In addition, the Company issued 89,207 shares of common stock in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the issuance did not involve a public offering. The 89,207 shares of common stock are in escrow and will be released in three equal annual installments upon achievement of certain product development milestones. The Evotek contingent consideration (shares held in escrow) with a value of $3 million will be recognized as stock based compensation expense (with a debit to research and development and a credit to additional paid-in capital), over the earn-out period provided generally that such former Evotek employee is an employee of the Company at the time the acquisition-related contingent consideration is earned. The results of operations of Evotek have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.

The purchase price has been allocated as follows: $3.7 million to existing technology with an estimated useful life of 7 years and approximately $0.1 million to net tangible assets. As with the PCI acquisition, the continued development of the U.S. alternative fuel market as well as potential legislative changes impacting this market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $0.2 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed.

The Company has determined that the acquisition of Evotek was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Acquisition of Productive Concepts International LLC

On September 2, 2010, the Company acquired Productive Concepts International LLC’s alternative fuel vehicle business (“PCI”) for an estimated transaction value of approximately $13.0 million including $975,000 in assumed debt. Based in Union City, Indiana, PCI is a specialized vehicle modification and value-added systems integrator for a variety of alternative fuel applications including hybrid, CNG, propane and dual-fuel diesel. The Company paid $7.7 million at closing, with an additional cash payment of $4.0 million payable due upon the achievement of a system installation volume milestone prior to December 31, 2011. Further performance payments of up to $20 million in Fuel Systems Solutions stock may be made in the future based on the achievement of 2011 and 2012 revenue targets (see Note 14). The first performance payment of $10.0 million was expected to be paid no later than 90 days after the end of calendar year 2011 if revenue is greater than $45 million for 2011. The second performance payment of $10.0 million is expected to be paid no later than 90 days after the end of calendar year 2012 if revenue is greater than $65.0 million for 2012. The range of the undiscounted amounts the Company could be required to pay for these earnout payments is between $0.0 and $20.0 million. In accordance with the FASB issued authoritative guidance, the Company determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The resultant probability-weighted cash flows were then discounted using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption. Changes to the fair value of the contingent consideration are determined each period and charged to expense in the Consolidated

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Statements of Operations under operating expenses. As of the closing date of the acquisition, the PCI contingent consideration was assigned a preliminary fair value of approximately $5.1 million, of which $4.0 million was in escrow and classified in other current assets in the Condensed Consolidated Balance Sheet at December 31, 2010. The results of operations of PCI have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.

The purchase price has been allocated as follows (in thousands):

 

Total tangible assets

   $ 669   

Intangible assets subject to amortization

     8,900   

Goodwill

     3,451   
  

 

 

 

Total assets acquired

     13,020   

Less: total liabilities (including contingent consideration)

     (5,327
  

 

 

 

Total net assets recorded

   $ 7,693   
  

 

 

 

Of the $8.9 million of acquired intangible assets, the entire amount relates to customer relationships with a useful life of approximately 8 years. The continued development of the U.S. alternative fuel vehicle market as well as potential legislative changes impacting this market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $3.5 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed.

The Company has determined that the acquisition of PCI was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Acquisition of Teleflex Incorporated’s Power Systems Business

On July 19, 2009, the Company entered into an equity interest purchase agreement (the “Equity Interest Purchase Agreement”) through which Fuel Systems agreed to acquire Teleflex Incorporated’s Power Systems business (the “Power Systems Business”). On August 4, 2009, the Company completed the acquisition of the Power Systems Business for $14.6 million in an all cash transaction ($15.0 million less $0.4 million of cash acquired). The Power Systems Business operates in Canada, the Netherlands and Italy and manufactures alternative fuel components and systems for transportation and industrial applications as well as auxiliary power systems for the truck and rail markets. The Company acquired the equity interests of the Power Systems Business companies and partnerships, including Teleflex Ecotrans Technologies Inc. and Teleflex GFI Control Systems, Inc. The results of operations of the Power Systems Business have been included in the accompanying consolidated statement of operations from the date of the acquisition within the IMPCO operating segment. The total amount of revenues and losses of the Teleflex Power Systems Business since the acquisition date that have been included in the consolidated income statement for the year ended December 31, 2009 was $18.8 million and $2.1 million respectively.

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

The purchase price has been allocated as follows (in thousands):

 

Cash

   $ 376   

Accounts receivable

     7,932   

Inventory

     11,733   

PP&E

     4,183   

Other assets

     1,594   

Intangible assets subject to amortization

     6,464   

Goodwill

     2,837   
  

 

 

 

Total assets acquired

     35,119   

Less:

  

Accounts payable

     7,579   

Accrued liabilities

     11,553   

Other long-term liabilities

     987   
  

 

 

 

Total liabilities assumed

     20,119   
  

 

 

 

Total net assets acquired

   $ 15,000   
  

 

 

 

The estimated fair value of the receivables acquired was $7.9 million while the gross contractual amount of these receivables was approximately $9.5 million. The Company has estimated that approximately $1.6 million of the contractual cash flows will not be collected.

Of the $6.5 million of acquired intangible assets, $2.4 million related to existing technology with a useful life of approximately 8 to 12 years, $3.4 million was assigned to customer relationship with a useful life of approximately 20 years, and $0.7 million was assigned to trademarks with a useful life of approximately 10 to 15 years.

Pro forma Information Related To Acquisition of the Power Systems Business (Unaudited)

The following unaudited supplemental pro forma consolidated summary operating data for 2009 has been prepared by adjusting the historical data as set forth in the accompanying consolidated statements of operations for the years ended December 31, 2009 to give effect to the 2009 acquisition of the Power Systems Business as if it had occurred at the beginning of the period presented below.

 

     For the year ended
December 31,
 
     2009  

Revenue

   $ 495,712   

Operating income

   $ 79,848   

Net income attributable to Fuel Systems

   $ 49,333   

Net income per share attributable to Fuel Systems:

  

Basic

   $ 2.93   

Diluted

   $ 2.92   

This unaudited pro forma information is provided for informational purposes only and does not purport to be indicative of the results of operations that would have occurred if the acquisition had been completed on the dates set forth above, nor is it necessarily indicative of the future operating results.

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Acquisition of FuelMaker Corporation Assets

On May 28, 2009, the Company completed the acquisition of selected assets and technology for compressed natural gas (CNG) refueling products manufactured by FuelMaker Corporation (“FuelMaker”) and American Honda Motor Co., Inc. (“American Honda”), including the home refueling appliance marketed under the Phill™ brand, for approximately $7.0 million in cash.

As part of the purchase agreements, the Company has agreed to fulfill certain FuelMaker service obligations and has assumed certain outstanding purchase orders. In an additional agreement with American Honda, MTM has made provisions to license technology back to American Honda under certain circumstances to support its natural gas vehicle activities.

Purchase of Remaining 50% Interest in WMTM

On May 5, 2009, the Company purchased the remaining 50% ownership interest in WMTM Equipamentos de Gases, Ltda (“WMTM”), from White Martin Gases Industriais S.A. (“White Martin”), BRC Brasil’s 50% joint venture partner in WMTM, for approximately R$5.0 million (approximately $2.7 million U.S. dollars excluding $0.6 million of cash acquired) of which R$1.0 million (approximately $0.5 million U.S. dollars) was paid on the closing date with the remainder paid in monthly installments. The final installment was paid on December 5, 2009. The results of WMTM have been included in the accompanying consolidated statements of operations from the date of acquisition within the BRC operation segment.

This acquisition qualified as a step acquisition which occurs when a