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Fuel Systems Solutions 10-K 2010
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, 2009

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  ¨    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, 2009, was approximately $287.5 million based upon the closing sale price of the registrant’s common stock of $20.19 on June 30, 2009, as reported on the Nasdaq Stock Market.

As of February 15, 2010, the registrant had 17,610,320 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 2010 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    3

Item 1A.

   Risk Factors    9

Item 1B.

   Unresolved Staff Comments    15

Item 2.

   Properties    16

Item 3.

   Legal Proceedings    16

Item 4.

   [Reserved]    16
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    17

Item 6.

   Selected Financial Data    17

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk    33

Item 8.

   Consolidated Financial Statements and Supplementary Data    34

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    34

Item 9A.

   Controls and Procedures    34

Item 9B.

   Other Information    35
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance    36

Item 11.

   Executive Compensation    36

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    36

Item 13.

   Certain Relationships and Related Transactions and Director Independence    37

Item 14.

   Principal Accounting Fees and Services    37
   PART IV   

Item 15.

   Exhibits, Financial Statement Schedules    38
   Signatures    42
   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 that involve risks and uncertainties. These statements may be found throughout this Form 10-K. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’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. In most cases, you can identify forward looking statements by the following words: “may,” “will,” “would,” “should,” “could,” “may,” “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. These important factors include those that we discuss under the heading “Risk Factors.” These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. 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. 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.” You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of the filing of this Annual Report.

PART I

 

Item 1. Business.

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 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 360 distributors and dealers in more than 70 countries and more than 100 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.

 

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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 announced our intention to expand our activities in these same markets within the United States. 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.

Unless the context otherwise requires, the terms “we,” “us,” “our” 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 includes certain activities in the transportation market undertaken at our facilities in California, Canada and the Netherlands. 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.

Alternative Fuel Industry

Overview

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 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.

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 percent less greenhouse gas emissions than comparable gasoline vehicles and up to 15 percent less than comparable diesel 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.

Markets

We are directly involved in two market segments: the transportation segment and the industrial segment, including mobile and power generation equipment. These segments 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. Historically, we have derived substantially all of our transportation segment revenues from countries outside the United States. We recently announced our intention to expand our offering of alternative fuel systems solutions in the automotive alternative fuel transportation market in the United States.

 

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Transportation

According to the most recent statistics from the World LP Gas Association and International Association for Natural Gas Vehicles, there are over fourteen million propane, or LPG, vehicles and nearly ten million natural gas vehicles in use worldwide, either for personal mobility, fleet conveyance or public transportation. As the world’s vehicle population increases, most growth is expected to 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. The Energy Information Administration of the U.S. Department of Energy, the World Bank, the Office of Economic and Community Development, the fifteen countries of the European Union and the Asian Development Bank suggest that interest in expanding the use of alternative fuel vehicles is mounting in many parts of the developed and developing world. 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.

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®.

The World Energy Outlook 2009 projects the global primary energy demand to grow by 40% between 2007 and 2030 at an average annual rate of 1.5% 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 2009 estimated that an investment of $26.0 trillion is needed through 2030. According to the World Energy Outlook 2009, world oil resources are judged to be sufficient to meet the projected growth in demand to 2030; 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 106 trillion cubic feet in 2007 to 152 trillion cubic feet in 2030. Gaseous fuels such as propane and 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. 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.

Competitive Advantages

Participants in our industry compete on price, product performance and customer support.

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

IMPCO’s customers include some of the world’s largest engine manufacturer OEMs, and BRC’s customers include some of the world’s largest automotive 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.

 

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In 2009, two customers represented 13.0% and 11.6% of our consolidated sales, respectively. In 2008, one customer represented 10.7% of our consolidated sales and in 2007, no single customer represented more than 10% of our consolidated sales. During 2009, 2008 and 2007, sales to our top ten customers accounted for 62.0%, 36.3% and 39.7% 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 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.

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  

•   Designed to operate on propane, natural gas or digester gas 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

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

 

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Capabilities

 

Applications

 

•   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

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 360 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 Europe, Asia, North 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 2009, 2008 and 2007, sales to distributors accounted for 35.5%, 60.5% and 61.3%, respectively, of our net revenue, and sales to OEM customers accounted for 64.5%, 39.5% and 38.7%, respectively, of our net 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.

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 17 to the consolidated financial statements included elsewhere in this Annual Report on Form 10K.

Manufacturing

We manufacture and assemble a majority of our products at our facilities in Santa Ana, California, Kitchener, Canada, Buenos Aires, Argentina and Cherasco, Italy and to a lesser extent at some of our other international facilities. Current manufacturing operations consist primarily of mechanical assembly and light machining. 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 2009, one supplier represented 12.4% of the consolidated raw materials and services. During 2008, no suppliers represented more than 10% of the consolidated purchases of raw materials and services. In 2007, one supplier accounted for approximately 10.4% of our purchases of raw materials and services.

Material costs and machined die cast aluminum 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.

 

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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, Argentina and Italy are 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. Our research and development expenditures were approximately $15.2 million, $11.1 million and $7.9 million in 2009, 2008 and 2007, respectively.

Competition

Our key competitors in gaseous fuel delivery products, accessory components and engine conversions markets include Landi Group, OMVL, S.r.L. and O.M.T. Tartarini, S.r.L. located in Europe; 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 the California Air Resources Board 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 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, 2009, we employed approximately 1,767 persons, excluding those employed by our unconsolidated affiliates in Italy and Korea. Of these employees, 331 were employed in IMPCO operations, of which 173 are foreign employees, and 1,436 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 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, trademark and trade secret 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.

Expiration of Italian government incentives for post-production OEM conversions will adversely affect our revenue and operating results.

The Italian government in early 2009 provided significantly increased economic incentives for the purchase before December 31, 2009 of new dual fuel consumer automobiles, commercial transportation vehicles and motorbikes which use compressed natural gas (NPG) or liquid propane gas (LPG). These incentives apply to automobiles ordered by customers prior to December 31, 2009 and delivered to customers thereafter. These incentives, combined with our investment in OEM conversion facilities in Italy, stimulated significant growth during 2009 of our BRC division revenues and operating income. As of the date of this Annual Report on Form 10-K, the Italian government has not publicized any decision regarding the extension of these incentives into 2010 however we do not believe that they will be extended for 2010. While we believe the Italian government incentives for 2009 purchases increased demand for our post-production OEM conversions in Italy, we also believe that demand is stimulated by the lower price, when compared to gasoline, of CNG and LPG in Italy and elsewhere in Europe. We can offer no assurance that the incentives will be continued or will not be significantly reduced. The expiration or reduction of the Italian government incentives may significantly reduce demand for our post-production OEM conversions and, accordingly, materially reduce the revenue and operating results from our BRC operations and thereby our company as a whole.

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

We depend on demand from the consumer, original equipment manufacturer, contract manufacturing, industrial, automotive and other markets we serve for the end market applications that use our products. 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 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, negatively affect our revenue and operating results could be adversely affected. We realized a slow decline in demand for products in the industrial market during most of 2009, which impacted sales in our IMPCO operating division. The demand for our products in the automotive aftermarket and from post-production OEMs, however, continued to increase during most of 2009.

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 or to reduce the volume of products they purchase from us in the future. 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 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 significantly affect our liquidity and could have a material adverse effect on our results of operations 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 our business could be negatively affected.

We maintain a significant investment in inventory and have recently made significant investments in the expansion of our operations to meet recent increases in demand for our product without long-term contracts with customers. A decline in our customers’ purchases could lead to a decline in our sales and profitability.

We do not have long-term contracts with many of 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 uncertainty. We maintain significant inventories 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, 2009 was $90.4 million, a decrease of $2.2 million compared to our total inventory at December 31, 2008. If we fail to anticipate the changing needs of our customers and accurately forecast our customer demands, our customers may not continue to place orders with us, and we may accumulate significant inventories of products that we will be unable to sell or return to our vendors. This may result in a significant decline in the value of our inventory and a decrease to our future gross profit.

 

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In addition, due in part to fluctuations in gasoline prices that have oriented automotive manufacturers to promote gaseous fuel equipment and the perceived environmental benefits from alternative fuels, we have experienced a recent, significant increase in the demand for our fuel systems components and systems. To meet this increase in demand, we have recently expanded our operational capacity, including opening new facilities in Italy. We may continue to make significant investments in our business to increase our operational capacity 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, we may not recover the costs of any increased investment in our operations which could have a material, adverse effect on our consolidated financial position, results of operations and cash flows.

Fluctuation in oil prices may adversely affect the demand for our products.

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, which would adversely affect our revenue, operating results and cash flows.

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

A substantial portion of our business results from sales to key customers. In the year ended December 31, 2009, two customers represented 13.0% and 11.6% of our consolidated sales, respectively. In the year ended December 31, 2008, one customer represented 10.7% of our consolidated sales. In the year ended December 31, 2007, no customer represented more than 10.0% of our consolidated sales. Sales to our top ten customers during the years ended December 31, 2009, 2008, and 2007 accounted for approximately 62.0%, 36.3%, and 39.7% 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 revenue and profits, and those declines could be material and adverse.

Currency exchange rate fluctuations and devaluations may have a significant adverse effect on our revenue, sales and overall financial results.

For the year ended December 31, 2009, non-U.S. operations accounted for approximately 91.1% of our revenue and approximately 72.6% of our cash. Therefore, gains and losses on the conversion of foreign currency denominated expenses into U.S. dollars could cause fluctuations in our results of operations, and fluctuating exchange rates could cause significantly reduced revenue and/or gross margins from non-U.S. dollar-denominated international revenue.

Also, for the year ended December 31, 2009, Euro denominated revenue accounted for approximately 83% of our total revenue; therefore a substantial change in the rate of exchange between the U.S. dollar and the Euro could have a significant adverse affect on our financial results.

If the exchange rate between the U.S. dollar and the Euro shifts significantly because of a strengthening U.S. dollar, a large portion of our revenue may be reduced in the translation from Euro to U.S. dollar for financial reporting purposes. We currently do not and may not in the future be able to hedge against these risks.

Adverse currency fluctuations may hinder our ability to economically procure key materials and services from overseas vendors and suppliers, may affect the value of our debt, and may affect our profit margins.

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 exchange rates with local currencies decline, our effective costs for such materials and services would increase, adversely affecting our profitability.

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 Italy, Australia, the Netherlands, Japan, Brazil and Argentina, and market our products and technologies in other international markets, including both industrialized and developing countries. During 2009 and 2008, approximately 8% and 13% of our revenue, respectively, was derived from sales to customers located within the United States and Canada, and the remaining 92% and 87%, respectively, was derived from sales in Asia, Europe, Latin America and the Middle East where economics and fuel availability make our products more competitive. Additionally, approximately 91% of our employees and 75% of our approximately 364 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 and distributors and to collect amounts owed from our overseas customers;

 

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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;

 

   

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

 

   

restrictions on our ability to repatriate dividends from our subsidiaries.

We currently face and will continue to face significant competition, which could result in a decrease in our revenue.

We currently compete with companies that manufacture products to convert liquid-fueled internal combustion engines to gaseous fuels. We are also subject to competition from other alternative fuels and alternative fuel technologies including ethanol, electric and hybrid electric and fuel cells. 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 our products could be adversely affected and cause us to lose existing business.

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 may decrease.

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 could decrease. In addition, demand for our products and services may be adversely affected by the perception that emission regulations will be suspended or delayed. In addition, we rely on emissions regulations, the adoption of which is out of our control, to stimulate our growth.

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

We must obtain product certification from governmental agencies, such as the EPA 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 sales 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 continue to meet these standards. 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. The failure to comply with certification requirements could result in the recall of our products or civil 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. As a result, these regulations may have a negative impact on our revenue and profitability and thereby harm our business, prospects, results of operations or financial condition.

Changes in tax policies and governmental incentives may reduce or eliminate the economic benefits that make our products attractive to consumers.

In some jurisdictions, governments 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. From time to time, governments change tax policies in ways that create benefits such as those for our customers. Reductions in or elimination of these tax benefits or incentives may adversely affect our revenue and results of operations.

 

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The potential growth of non-gaseous alternative fuel products and lack of gaseous fueling infrastructure will have a significant impact on our business.

Our future success depends on the continued global expansion of the gaseous fuel industry. We recently announced the expansion of our automotive alternative fuel transportation business into the United States. Many countries, including the United States, currently have limited or no infrastructure to deliver natural gas and propane. Major growth of the United States and international markets for gaseous fuel vehicles is significantly dependent on United States and international politics, governmental policies and restrictions related to business management. In the United States, alternative fuels such as natural gas currently 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. We do not expect this trend to improve in the United States in the foreseeable future. Our ability to attract customers and sell products successfully in the alternative fuel industry also depends significantly on the current price differential between liquid fuels and gaseous fuels. 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. In addition, we have designed many of our products for gaseous fuel vehicles powered by internal combustion engines, but not for other power sources, such as electricity or alternate forms of power. If there is major growth in the market relating to those power sources, our revenue may not increase and may decline.

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 or would significantly increase our production costs, either of which would negatively impact our results of operations and business. In addition, we rely on a limited number of suppliers for certain proprietary die cast parts, electronics, software, catalysts as well as engines for use in our end products. Approximately 45.7%, 34.6%, and 36.9% of our purchases of raw materials and services during the years ended December 31, 2009, 2008, and 2007, respectively, were supplied by ten entities. During 2009, one supplier represented 12.4% of the consolidated raw materials and services. During 2008, no suppliers represented more than 10% of the consolidated purchases of raw materials and services. In 2007, one supplier accounted for approximately 10.4% of our purchases of raw materials and services. We could incur significant costs in the event that we are forced to utilize alternative suppliers.

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 2009 we acquired the Argentine companies Distribuidora Shopping S.A. and Tomasetto Achille, S.A., the Teleflex Power Business, 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. 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 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.

 

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New technologies could render our existing products obsolete.

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. 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.

Some of our foreign subsidiaries have done and may continue to do business in countries subject to U.S. sanctions and embargoes, including Iran, and we have limited managerial oversight over those activities. As a result, potential investors may choose to not invest in our common stock.

From time to time, some of our foreign subsidiaries sell fuel delivery systems, related parts and accessories to customers in Iran, a country that is currently subject to sanctions and embargoes imposed by the U.S. government and the United Nations and a country identified by the U.S. government as a terrorist-sponsoring state. Although these sanctions and embargoes do not prohibit our foreign subsidiaries from selling products and providing services in Iran, they do prohibit Fuel Systems and our domestic subsidiaries, as well as employees of our foreign subsidiaries who are U.S. citizens, from participating in, approving or otherwise facilitating any aspect of the business activities in that country.

The constraints on our ability to have U.S. persons, including our senior management, provide managerial oversight and supervision over sales in Iran may negatively affect the financial or operating performance of such business activities. We have procedures in place to conduct these operations in compliance with applicable U.S. laws. However, failure to comply with U.S. laws in our foreign operations could result in material fines and penalties, damage to our reputation and a reduction in the value of our shares of common stock.

In addition, our foreign subsidiaries’ activities in Iran could reduce demand for our stock among certain of our investors. Certain potential investors may avoid investing in our common stock for political reasons, rather than for business reasons.

We are highly dependent on certain key personnel.

Our success depends on the management and leadership skills of our senior management team. The unexpected loss of any of these individuals or an inability to attract and retain additional personnel could impede or prevent the implementation of our business strategy. Although we have incentives for management to stay with us, we cannot assure that we will be able to retain all of our existing senior management personnel or attract additional qualified personnel when needed.

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

Mariano Costamagna, BRC’s co-founder, 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. His 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 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 may, in certain circumstances, have an adverse effect on our business, operations and financial condition.

Unionized labor disputes at original equipment manufacturer facilities can negatively affect our product sales.

As we become more dependent on vehicle conversion programs with OEMs, we will become increasingly dependent on OEM production and the associated labor forces at OEM sites. For 2009 and 2008, direct OEM product sales accounted for approximately 64.5% and 39.5% of our revenue, respectively. Labor unions represent most of the labor forces at OEM facilities. In the past, labor disputes have occurred at OEM facilities, which have adversely impacted our direct OEM product sales. Such labor disputes are likely to occur in the future and, if they do occur, will negatively impact our sales and profitability.

 

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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.

Our existing debt could adversely affect our business and growth prospects.

At December 31, 2009, we had approximately $19.4 million of outstanding debt and credit lines that allow us to borrow up to an aggregate of $58.7 million. Our level of debt, the cash flow needed to satisfy our debt and the covenants contained in our credit agreements could:

 

   

limit funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

   

limit our ability to incur additional indebtedness;

 

   

limit our ability to capitalize on significant business opportunities;

 

   

place us at a competitive disadvantage to those of our competitors that are less indebted than we are;

 

   

make us more vulnerable to rising interest rates;

 

   

make us more vulnerable in the event of a downturn in our business; and

 

   

prevent us from obtaining additional financing on acceptable terms or limit amounts available under our existing or any future credit facilities.

For additional information regarding our debt, please see the “Liquidity and Capital Resources” section of Item 7 “Management’s Discussion of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

We engage in related party transactions, which could 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 CEO and largest shareholder, his brother, companies our CEO’s family owns in part or may control and companies that 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 and its Committees seek to review such related party transactions which are on going and review 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 have an adverse effect on our financial condition, liquidity and results of operations. 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 shareholders.

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

Approximately $24.1 million or 5.8% of our total assets at December 31, 2009 were net intangible assets, including technology, customer relationships, trade name, and approximately $54.2 million or 13.0% of our total assets at December 31, 2009 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 asset to its estimated recoverable value as of the measurement date. Such impairment write-downs may significantly impact our results of operations.

Future sales of our common stock could adversely affect our stock price.

Substantial sales of our common stock, including shares issued upon exercise of our outstanding options, in the public market or the perception by the market that these sales could occur, could lower our stock price or make it difficult for us to

 

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raise additional equity. As of December 31, 2009, we had 17,610,320 shares of common stock outstanding, excluding 15,492 shares issued but held by us as treasury stock. Except for the 3,347,373 shares held by Mariano Costamagna and his family members and affiliates, which are subject to the “volume,” “manner of sale” and other selling restrictions of Rule 144, all of these shares are currently freely tradable.

As of December 31, 2009, up to 66,100 shares were issuable upon the exercise of options, all of which were vested and exercisable. Subject to applicable vesting and registration requirements, upon exercise of these options the underlying shares may be resold into the public market. In the case of outstanding options that have exercise prices less than the market price of our common stock from time to time, investors would experience dilution. We cannot predict if future sales of our common stock, or the availability of our common stock for sale, will harm the market price of our common stock or our ability to raise capital by offering equity securities.

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

From January 1, 2009 through December 31, 2009, our stock price has fluctuated from a low of $9.83 to a high of $52.53. During 2008, our stock price fluctuated from a low of $9.80 to a high of $61.24. In the past, securities class action litigation often has 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 attention and resources of our management.

Our actual operating results may differ significantly 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 of 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:

     

Santa Ana, California

   Manufacturing, design, development and testing    108,000

Sterling Heights, Michigan

   Sales, marketing application, development and assembly    83,000

Gorinchem, Holland

   Sales marketing application, development and assembly    87,000

Fukuoka, Japan

   Sales, marketing and assembly    4,000

Ontario, Canada

   Sales, marketing application, development and assembly, manufacturing    110,000

BRC Operations:

     

Cherasco, Italy

   Sales, marketing application, development and assembly, manufacturing    465,000

Livorno (Collesalvetti), Italy

   Assembly    149,000

Cesena, Italy

   Sales, marketing application, development and assembly    25,000

Melbourne, Australia

   Sales, marketing application, development and assembly    72,000

Buenos Aires, Argentina

   Sales and marketing    11,000

Karachi, Pakistan

   Sales and marketing    9,000

Beccar, Argentina

   Sales, marketing and assembly    291,000
       

Total (1)

      1,414,000
       

 

(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. [Reserved]

 

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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 December 31, 2009, there were approximately 263 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, 2009

     

First Quarter

   $ 36.34    $ 9.83

Second Quarter

   $ 26.75    $ 12.77

Third Quarter

   $ 38.34    $ 18.13

Fourth Quarter

   $ 52.53    $ 30.72

Year Ended December 31, 2008

     

First Quarter

   $ 14.94    $ 9.80

Second Quarter

   $ 41.90    $ 12.96

Third Quarter

   $ 61.24    $ 25.68

Fourth Quarter

   $ 40.00    $ 21.92

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.

Issuer Repurchases of Equity Securities

There were no repurchases of our common stock in the open market during the fourth quarter of 2009.

 

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, 2009 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.

Effective January 1, 2009, the Company adopted the new guidance for non-controlling interests in consolidated financial statements. This new guidance outlines new accounting and reporting requirements for ownership interests in subsidiaries held by parties other than the parent (previously known as minority interest) which requires, among other items: (a) the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (b) the amount of consolidated net income attributable to the parent and the non-controlling interests be clearly identified and presented on the face of the consolidated statement of income; and (c) entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The presentation and disclosure requirements of the new guidance are required to be applied retrospectively for all periods presented. In accordance with the new guidance, the Company applied the presentation and disclosure requirements retrospectively to the following Five Year Summary Selected Financial Information.

 

      Years Ended December 31,

(in thousands, except per share data)

   2009    2008    2007    2006    2005
          As Adjusted
(Note 20)
   As Adjusted
(Note 20)
   As Adjusted
(Note 20)
   As Adjusted
(Note 20)

Statements of Operations:

              

Revenue

   $ 452,325    $ 382,697    $ 265,331    $ 220,816    $ 174,539

Cost of revenue

     303,789      274,060      201,200      166,663      133,717
                                  

Gross profit

     148,536      108,637      64,131      54,153      40,822
                                  

 

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      Years Ended December 31,  

(in thousands, except per share data)

   2009     2008     2007     2006     2005  
           As Adjusted
(Note 20)
    As Adjusted
(Note 20)
    As Adjusted
(Note 20)
    As Adjusted
(Note 20)
 

Operating expenses

          

Research and development expense

     15,151        11,069        7,946        8,056        8,155   

Selling, general and administrative expense

     53,079        47,562        36,906        26,062        26,611   

Goodwill impairment loss

     —          3,907        —          —          —     

Acquired in-process technology

     —          —          —          —          99   
                                        

Total operating expenses

     68,230        62,538        44,852        34,118        34,865   
                                        

Operating income

     80,306        46,099        19,279        20,035        5,957   

Other income (expense)

     2,706        (2,379     (2,811     (2,576     (230
                                        

Income (loss) before tax and cumulative effect of a change in accounting principle/extraordinary gain

     83,012        43,720        16,468        17,459        5,727   

Equity share in earnings of unconsolidated affiliates

     852        454        416        685        1,327   

Impairment loss in unconsolidated affiliates

     —          —          —          (271     (1,045

Income tax expense

     (34,023     (20,161     (9,159     (9,293     (14,438
                                        

Income (loss), net of tax, before cumulative effect of a change in accounting principle/extraordinary gain (1)

     49,841        24,013        7,725        8,580        (8,429

Cumulative effect of a change in accounting principle/extraordinary gain, net of tax (2)

     —          243        —          —          (117
                                        

Net income (loss)

     49,841        24,256        7,725        8,580        (8,546

Less: Net income attributed to non-controlling interests

     (2     (914     (1,842     (1,668     (1,103
                                        

Net income (loss) attributable to Fuel Systems

   $ 49,839      $ 23,342      $ 5,883      $ 6,912      $ (9,649
                                        

Net income (loss) per share attributable to Fuel Systems (3):

          

Basic:

          

Income (loss) from continuing operations before cumulative effect of a change in accounting principle/extraordinary gain attributable to Fuel Systems

   $ 2.96      $ 1.47      $ 0.38      $ 0.46      $ (0.71

Per share effect of the cumulative effect of a change in accounting principle/extraordinary gain

   $ —        $ 0.02      $ —        $ —        $ (0.01
                                        

Net income (loss) attributable to Fuel Systems

   $ 2.96      $ 1.49      $ 0.38      $ 0.46      $ (0.72
                                        

Diluted:

          

Income (loss) from continuing operations before cumulative effect of a change in accounting principle/extraordinary gain attributable to Fuel Systems

   $ 2.95      $ 1.46      $ 0.38      $ 0.46      $ (0.71

Per share effect of the cumulative effect of a change in accounting principle/extraordinary gain

   $ —        $ 0.02      $ —        $ —        $ (0.01
                                        

Net income (loss) attributable to Fuel Systems

   $ 2.95      $ 1.48      $ 0.38      $ 0.46      $ (0.72
                                        

Balance Sheet Data (at end of period):

          

Total current assets

   $ 290,268      $ 200,648      $ 155,110      $ 120,973      $ 106,883   

Total assets

     417,112        287,327        247,370        199,033        176,323   

Total current liabilities

     148,459        117,886        84,544        63,867        65,817   

Long-term obligations

     25,425        15,484        21,172        18,717        20,187   

Total equity

     243,228        153,957        141,654        116,449        90,319   

 

(1) Includes in the years ended December 31, 2009, 2008, 2007, 2006, and 2005, $5.0 million, $2.9 million, $1.8 million, $0.2 million, $2.6 million, respectively, additions to valuation allowance to establish a reserve for the deferred tax assets that are unlikely to be realized in the next three years (see Note 9 of the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
(2) For 2008, extraordinary gain of $0.2 million was recorded related to the repurchase of the 49% of non-controlling interest in IMPCO BV and for 2005, cumulative effect of a change in accounting principle was recorded of $0.1 million.
(3) See Note 13 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 loss 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 to 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, for use 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 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 360 distributors and dealers in more than 70 countries and more than 100 original equipment manufacturers.

Our management believes that the Company operates in two business segments, IMPCO operations and BRC operations. IMPCO operations manufactures and sells products for use primarily in the industrial market, including complete certified engines, fuel systems, parts and conversion systems for applications in the transportation, material handling, stationary and portable power generator markets. Through the acquisition of Teleflex Inc.’s Power Systems Business discussed below, IMPCO operations expanded into the auxiliary power systems market. Its sales are conducted through its U.S. and foreign facilities in Canada, the Netherlands and Japan and through distributors. BRC operations manufactures and sells products for use primarily in the transportation market in Italy and through its foreign facilities in Argentina, Brazil, Pakistan, India and Australia. Our IMPCO operations recently announced its intention to expand its activities in the U.S. automotive alternative fuel transportation market (“automotive business”). Corporate expenses consist of general and administrative expenses at Fuel Systems Solutions. Intercompany sales between IMPCO operations and BRC operations have been eliminated in the results reported.

Net income was $49.8 million on revenue of approximately $452.3 million in 2009 as compared to net income of $24.3 million on revenue of approximately $382.7 million in 2008. Operating income increased by approximately $34.2 million to $80.3 million, compared to $46.1 million for the same period in 2008. Research and Development costs increased approximately $4.1 million to $15.2 million compared to $11.1 million for the same period in 2008. This increase was due to increased projects in our BRC operations as well as acquisitions. Selling general and administrative expenses increased approximately $5.5 million to $53.1 million compared to $47.6 million primarily due to acquisitions.

Results for the year ended December 31, 2009 improved from 2008 due to the increase in revenue in the transportation market, particularly in sales for post-production OEM (“DOEM”) conversions. The unit volumes for our DOEM conversions increased to approximately 184,000 for the year ended December 31, 2009 from 58,000 for the year ended December 31, 2008. This increase was driven primarily by the Italian government incentives which we do not believe will be extended. However we cannot predict nor assure that the 2009 trends, operating performance of IMPCO or BRC or the Italian government incentives will continue into 2010 or be as favorable for future reporting periods or fiscal years. For future reporting periods or fiscal years, we cannot predict the direction of the movements in foreign exchange which were favorable in 2009 and unfavorable in 2008.

Recent Developments

Acquisition of Distribuidora Shopping S.A.

On January 15, 2009, we completed the acquisition of Distribuidora Shopping S.A. and its subsidiary Tomasetto Achille S.A. (“Distribuidora Shopping”) from Carlo Evi and Susana Iallonardi (collectively, the “Sellers”). Distribuidora Shopping is headquartered in Argentina and, operating under the brand name Tomasetto Achille, manufactures, imports, exports and markets natural gas kits for vehicles. The results of Distribuidora Shopping have been included in the BRC operation segment from the date of the acquisition.

The aggregate purchase price after post-closing adjustments for 100% of the equity of Distribuidora Shopping was $17.5 million, net of cash acquired of $0.1 million. At the time of the signing of the share purchase agreement on December 16, 2008, we paid the Sellers $2.0 million in cash as a down payment on the purchase price. This down payment was reflected in “Other Assets” at December 31, 2008.

 

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Of the aggregate purchase price of $17.5 million net of cash acquired of $0.1 million, we paid $7.6 million in cash and Fuel Systems issued 322,800 shares of common stock with a value of $9.9 million on the closing date to the Sellers 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. Of the 322,800 shares of Fuel Systems common stock issued to Sellers in the private placement, 39,868 shares were issued from treasury stock with a historical cost basis of $0.8 million. In addition, of the 322,800 shares, 129,120 shares will remain in escrow for up to six years in order to cover unknown or contingent liabilities of Distribuidora Shopping and to satisfy any claims for indemnification that we may have against the Sellers during that time. our losses will not be limited to the value of the escrow shares, but we must deplete the escrow shares before seeking any amount in cash from the Sellers. Subject to certain limitations, the Sellers’ maximum liability for indemnification obligations is $8.2 million.

MTM Loan

On January 22, 2009, IMPCO U.S., a subsidiary of the Company, repaid in full the outstanding principal and accrued interest on the amounts it owed to MTM S.r.L under the intercompany loan originally entered into on December 23, 2004. The aggregate amount IMPCO U.S. paid to retire the MTM loan was $10.8 million, comprising $10.6 million of principal and $0.2 of accrued and unpaid interest. Since IMPCO U.S. has fulfilled its financial obligation under the MTM loan, the guarantors have cancelled their guarantees and released us from our related pledge of BRC’s stock.

Acquisition of FuelMaker Corporation Assets

On May 28, 2009, we 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, we have agreed to fulfill certain FuelMaker service obligations and have assumed certain outstanding purchase orders. In an additional agreement with American Honda, we have 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 install was paid on December 5, 2009. The results of WMTM have been included in the BRC operations segment from the date of the acquisition.

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. Any difference between the carrying value and the fair value of the previously held equity interest is recognized as a gain or loss in the income statement. The Company calculated the difference to be approximately $1.4 million gain which is included in other income (expense) for year ended December 31, 2009. Under current accounting guidance adopted on January 1, 2009, this gain is no longer considered extraordinary.

Capital Transactions

On June 26, 2009, we completed the public sale to selected institutional investors of an aggregate of 1,500,000 shares of our common stock at a price of $20.00 per share. Net proceeds from the offering were $27.7 million, after deducting offering expenses and placement agency fees. The sale of the shares was made in an issuer direct public offering pursuant to subscription agreements, dated June 22, 2009, between us and each of the purchasers. We used the net proceeds of the offering for general corporate purposes, which included the repayment of indebtedness and the acquisition of Teleflex Inc.’s Power Systems Business.

Intesa Sanpaolo Unsecured Committed Credit Facility

On July 10, 2009, Fuel Systems and IMPCO U.S. converted its existing uncommitted, unsecured, revolving short-term credit facility with Intesa Sanpaolo into a committed, unsecured, revolving credit facility. IMPCO U.S. intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCO’s payments, but does not currently intend to use any of the funds for its own purposes.

 

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The maximum aggregate principal amount of loans outstanding at any time is $13.0 million and the maturity date for the agreement is April 30, 2014. At the Company’s 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 0.50% of the average daily unused amount and also includes financial covenants regarding the Company’s ratio of net debt to EBITDA, consolidated net worth and aggregate debt level.

Acquisition of Teleflex Incorporated’s Power Systems Business

On July 19, 2009, we entered into an equity interest purchase agreement (the “Equity Interest Purchase Agreement”) through which we agreed to acquire Teleflex Incorporated’s Power Systems business (the “Power Systems Business”). On August 4, 2009, we 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. We 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 the Power Systems Business have been included in the IMPCO operations from the date of the acquisition.

We are in the process of finalizing valuations of certain tangible and intangible assets; thus the allocation of the purchase price is subject to refinement.

Stockholder Protection Rights Agreement

On July 21, 2009, the Board of Directors of the Company entered into Amendment No. 1 to the our Stockholder Protection Rights Agreement, dated as of June 27, 2006, to extend the expiration date of the rights agreement from July 22, 2009 to July 22, 2019. No other material changes were made to the rights agreement.

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. 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. We provide for returns and allowances as circumstances and facts require.

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.

 

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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 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

We account for goodwill in accordance with applicable accounting standards. Those standards require that goodwill not be amortized but instead be tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the assets might be impaired. Management considers one level below operating segments to be a reporting unit for purposes of testing for impairment. This impairment test is performed annually at year end.

A two-step test is used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill.

We determine fair value using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations.

We operate wholly owned and majority owned subsidiaries. We record goodwill at the time of purchase for the amount of the purchase price over the fair values of the assets and liabilities acquired. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge in the future.

Intangible Assets

We amortize intangible assets acquired if they are determined to have definite useful lives. Certain intangible assets, such as acquired technology and trade names, are amortized on a straight-line basis, our best estimate of the pattern of economic benefits, over their estimated reasonable useful lives. Certain other intangible assets such as customer relationships are amortized using an accelerated method since the value of customer relationships is expected to decline at a faster rate.

Deferred Taxes

Based upon the substantial net operating loss carryforwards and expected future operating results, we have concluded that it is more likely than not that substantially all of the deferred tax assets in the United States and certain foreign jurisdictions at December 31, 2009 may not be realized within the foreseeable future. The balance of the total United States valuation allowance was $31.8 million as of December 31, 2009. In addition, we have a foreign valuation allowance of $5.5 million as of December 31, 2009. 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, 2009, 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 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

 

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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, 2009, 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.

Results of Operations

Years Ended December 31, 2009 and 2008

The following table sets forth our revenue and operating income (in thousands):

 

     Revenue
     Years Ended December 31,
     2009    2008

IMPCO Operations

   $ 71,023    $ 91,359

BRC Operations

     381,302      291,338
             

Total

   $ 452,325    $ 382,697
             

 

     Operating Income (loss)  
     Years Ended December 31,  
     2009     2008  

IMPCO Operations

   $ (6,210   $ 4,120   

BRC Operations

     93,690        49,767   

Corporate Expenses (1)

     (7,174     (7,788
                

Total

   $ 80,306      $ 46,099   
                

 

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

The following tables set forth our product revenue by application and by geographical areas across all reportable segments for fiscal years 2009 and 2008 (in thousands):

 

     Years Ended December 31,  
     2009     2008  

Revenue:

          

Transportation

   $ 405,028    89.5   $ 302,750    79.1

Industrial

     47,297    10.5     79,947    20.9
                          

Total

   $ 452,325    100   $ 382,697    100.0
                          

 

     Years Ended December 31,  
     2009     2008  

Revenue:

          

North America(1)

   $ 34,339    7.6   $ 50,763    13.3

Europe:

          

Italy

     270,549    59.8     127,530    33.3

All Other (2)

     81,608    18.1     135,762    35.5

Asia & Pacific Rim (2)

     49,819    11.0     57,529    15.0

Latin America (2)

     16,010    3.5     11,113    2.9
                          

Total

   $ 452,325    100.0   $ 382,697    100.0
                          

 

(1) Revenue predominately from the United States
(2) No one country represents more than 10% of total consolidated revenue.

 

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For the year ended December 31, 2009, revenue increased approximately $69.6 million, or 18.2%, to $452.3 million from $382.7 million for the year ended December 31, 2008. The increase in revenue was due primarily to an increase in revenue from BRC operations of approximately $90.0 million offset by a decrease from IMPCO operations of approximately $20.4 million. Revenues for the year ended December 31, 2009 includes approximately $41.1 million associated with companies acquired in 2009 ($22.3 million from BRC operations and $18.8 from IMPCO Operations). Revenue for 2009 includes a decrease of approximately $16.5 million from weakening of local currencies compared to the dollar from the full year 2008.

For the year ended December 31, 2009, operating income increased approximately $34.2 million or 74.2% to $80.3 million from $46.1 million for the year ended December 31, 2008. The increase in operating income for the year ended December 31, 2009 was primarily composed of an increase in operating income from BRC operations of $43.9 million, partially offset by a decrease in IMPCO operations operating income of $10.3 million and a decrease in corporate expenses of $0.6 million.

IMPCO Operations. For the year ended December 31, 2009, revenue decreased by approximately $20.4 million, or 22.2%, as compared to the prior year. The decrease in revenue was due primarily to a decrease in demand in the industrial market caused by reduced spending by original equipment manufacturers as a result of uncertainties associated with the U.S. economy combined with competitive pressures. Revenue for the year ended December 31, 2009 includes approximately $18.8 million from the Power Systems Business acquisition. The weakening of local currencies compared to the US dollar negatively impacted revenues by approximately $1.6 million for the full year 2009.

For the year ended December 31, 2009, the operating loss for IMPCO operations was $6.2 million, or (8.7)% of revenue, compared to operating income of $4.1 million or 4.5% of revenue, for the prior year. The operating loss is a result of a decrease in revenue combined with erosion in gross margins due to decreased absorption of fixed costs; start up costs of $1.9 million associated with the automotive business; approximately $2.2 million of operating losses from the Power Systems Business acquisition; increase in inventory reserves of approximately $1.6 million due to excess inventory; and approximately $1.2 million of transaction costs associated with the acquisition of the Power Systems Business.

BRC Operations. For the year ended December 31, 2009, revenue increased by approximately $90.0 million, or 30.9%, compared to the prior year. The increase in revenue in 2009 was due to an increase in sales for DOEM conversions and acquisitions, partially offset by the slowdown of sales for aftermarket conversion kits in the transportation market driven by decreasing gasoline prices and the global economic climate. Volumes for the DOEM conversion increased approximately 126,000 to 184,000 for the full year 2009 compared to 58,000 conversions for the full year 2008. Revenue for the year ended December 31, 2009 includes approximately $22.3 million of revenue associated with acquisitions. The weakening of local currencies compared to the US dollar negatively impacted revenues by approximately $14.9 million for the year ended December 31, 2009.

For the year ended December 31, 2009, operating income for BRC was $93.7 million, or 24.6% of revenue, compared to $49.8 million, or 17.1% of revenue, for the full year 2008. The increase in operating income of 88.2% was primarily due to the increase in revenues combined with an increase in our gross margin. The improvement in our gross margin is attributed to the increase in unit volume output from DOEM conversions which better absorbs costs in 2009 compared to 2008, offset by an increase in the inventory reserve of approximately $7.3 million due primarily to excess compressor inventory. Included in the operating income for the year ended December 31, 2008 was a goodwill impairment charge of $3.9 million due to the changes in the business climate for IMPCO Australia.

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 for the fiscal year ended December 31, 2009 were $7.2 million, compared to approximately $7.8 million in the prior year. The decrease relates primarily to a decrease in outside consulting services.

Other Income (Expense), Net. For the year ended December 31, 2009, the Company recognized 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. Any difference between the carrying value and the fair value of the previously held equity interest is recognized as a gain or loss in the income statement. Under current accounting guidance adopted on January 1, 2009, this gain is no longer considered extraordinary.

Other income (expense), net includes foreign exchange gains and losses between the U.S. dollar and the Euro with respect to “marking to market” of the intercompany MTM loan balance as well as other assets and liabilities to be settled in other currencies. For the year ended December 31, 2009, we recognized approximately $3.1 million in gains on foreign exchange. For the year ended December 31, 2008, we recognized approximately $1.6 million in losses on foreign exchange.

 

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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 Expense. For the year ended December 31, 2009, interest expense increased approximately $0.9 million to $2.3 million from $1.4 million in 2008. This increase is primarily due to a higher weighted average outstanding debt in 2009 compared to 2008.

Provision for Income Taxes. During 2009, we recognized a tax provision for approximately $34.0 million as compared to $20.2 million in the prior year. In 2009, income tax expense for our foreign operations was approximately $33.3 million based on an estimated effective annual tax rate of 34.9%. In 2008, income tax expense for our foreign operations was approximately $20.1 million based on an estimated effective annual tax rate of 39%. The increase in tax expense from the prior year is attributed to the increase in our pretax earnings in 2009. The decrease in the foreign effective tax rate from the prior years is attributable to the mix of income amongst the jurisdictions and less impact of non-deductible items. In 2009, IMPCO U.S. recorded income tax expense of $0.7 million primarily related to the accrual for foreign tax withholdings on undistributed earnings not considered to be indefinitely reinvested as well as amortization of goodwill for tax purposes, which is not offset against deferred tax asset in the determination of the required valuation allowance. In 2008, IMPCO U.S. recorded income tax expense of $0.1 million which relates to state taxes due as well as the amortization of goodwill for income tax purposes which is not offset against the deferred tax asset in the determination of the required valuation allowance.

Based upon the substantial net operating loss carry forwards and expected future operating results, we have concluded that it is more likely than not that substantially all of the deferred tax assets in the United States and certain foreign jurisdictions at December 31, 2009 may not be realized within the foreseeable future. We expect to reduce the valuation allowance if we are profitable or provide a full valuation allowance on future tax benefits realized in the United States if we have additional losses until we can sustain a level of profitability that demonstrates our ability to utilize the assets. We will continue to evaluate the recoverability of the deferred tax assets each quarter.

Years Ended December 31, 2008 and 2007

The following table sets forth our revenue and operating income (in thousands):

 

     Revenue
     Years Ended December 31,
     2008    2007

IMPCO Operations

   $ 91,359    $ 109,002

BRC Operations

     291,338      156,329
             

Total

   $ 382,697    $ 265,331
             

 

     Operating Income (loss)  
     Years Ended December 31,  
     2008     2007  

IMPCO Operations

   $ 4,120      $ 13,506   

BRC Operations

     49,767        17,871   

Corporate Expenses (1)

     (7,788     (12,098
                

Total

   $ 46,099      $ 19,279   
                

 

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

The following tables set forth our product revenue by application and by geographical areas across all reportable segments for fiscal years 2008 and 2007 (in thousands):

 

     Years Ended December 31,  
     2008     2007  

Revenue:

          

Transportation

   $ 302,750    79.1   $ 169,454    63.9

Industrial

     79,947    20.9     95,877    36.1
                          

Total

   $ 382,697    100.0   $ 265,331    100.0
                          

 

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     Years Ended December 31,  
     2008     2007  

Revenue:

          

North America (1)

   $ 50,763    13.3   $ 61,225    23.1

Europe:

          

Italy

     127,530    33.3     54,069    20.3

All Other (2)

     135,762    35.5     95,410    36.0

Asia & Pacific Rim (2)

     57,529    15.0     45,960    17.3

Latin America (2)

     11,113    2.9     8,667    3.3
                          

Total

   $ 382,697    100.0   $ 265,331    100.0
                          

 

(1) Revenue for countries outside the United States represent less than 1% of total consolidated revenue.
(2) No one country represents more than 10% of total consolidated revenue.

Total revenue increased approximately $117.4 million, or 44.2%, to $382.7 million in 2008 from $265.3 million in 2007. The increase in revenue for 2008 was the result of $135.0 million increase in BRC revenue from our operations during the year, offset by a decrease of $17.6 million in revenue from our IMPCO operations. Revenue from the transportation market increased in 2008 by $133.3 million, or 78.7%, primarily due to increased sales of aftermarket conversion kits and growth in the sales of DOEM conversions. Revenue from our industrial market decreased by $15.9 million, or 16.6%, primarily due to decreased demand resulting from the softening economy.

For the year ended December 31, 2008, operating income increased $26.8 million to $46.1 million from $19.3 million for the year ended December 31, 2007. This increase is primarily attributed to the increase in revenue in 2008 as well as the inclusion in our 2007 results of $5.4 million in expenses, related to our voluntary stock option investigation and related restatement of our historical consolidated financial statements. Additionally, improvement within our gross margin to 28.4% in 2008 from 24.2% in 2007 is primarily due to a change in mix of products sold and increasing utilization of existing manufacturing capacity. Operating income for BRC operations improved in 2008 as compared to 2007, but was partially offset by a decline in operating income for IMPCO operations in 2008 as compared to 2007.

IMPCO Operations. During 2008, revenue decreased by approximately $17.6 million, or 16.2%, to $91.4 million, from $109.0 million during 2007. The decrease in revenue during 2008 was due a decrease in demand in the industrial market caused by reduced spending by original equipment manufacturers as a result of uncertainties associated with the world economy.

Operating income for 2008 decreased by approximately $9.4 million to $4.1 million, or 4.5% of revenue, compared to $13.5 million in 2007, or 12.4% revenue. The decrease is due to the decrease in revenue discussed above as well as increased research and development expenses being incurred to develop the new Tier IV fuel systems to meet the Environmental Protection Agency emission standards which are effective January 1, 2010 and an increase in inventory reserve of $2.3 million.

BRC Operations. During 2008, revenue increased by approximately $135.0 million, or 86.4%, to $291.3 million, from $156.3 million during 2007. The increase in revenue in 2008 is due in large part to an increase in sales for post-production OEM conversions driven by government incentives in Europe as well as growth in sales of aftermarket conversion kits in the transportation market, driven by automotive manufacturers promoting gaseous fuel equipment. In addition, BRC’s revenue in 2008 includes a full year of results for Zavoli S.r.L., which we acquired on July 2, 2007, while BRC’s revenue in 2007 included only six months of Zavoli’s results. The incremental amount for revenues related to Zavoli in 2008 was $27.2 million.

BRC’s operating income for 2008 increased by approximately $31.9 million to $49.8 million, or 17.1% of revenue, compared to $17.9 million in 2007, or 11.4% revenue. The increase was primarily due to the increase in revenue and to an increase in gross margin due to a change in mix of products sold and increasing utilization of existing manufacturing capacity, partially offset by an increase in the reserve for the loan and for the reserves on other receivables from BRC’s 50% joint venture, WMTM, of $1.7 million in order to fully impair the loan, an increase in inventory reserve of $3.1 million, transaction costs of $0.8 million related to the acquisition of Distribuidora Shopping S.A. and Tomasetto Achille S.A. in January 2009 and a goodwill impairment loss of $3.9 million. In addition, BRC’s operating income in 2008 includes a full year of results for Zavoli S.r.L., which we acquired on July 2, 2007, while BRC’s operating income in 2007 included only six months of Zavoli’s results. The incremental amount for operating income related to Zavoli in 2008 was $4.5 million.

For 2008 and 2007, we recorded amortization expense of approximately $2.8 million and $2.2 million, respectively, for the intangible assets, and approximately $1.0 million and $0.8 million, respectively, for depreciation expense of the step-up in fair value of fixed assets related to the acquisition of BRC and Zavoli. In future years, the amount of amortization and

 

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depreciation will vary due to future changes to the remaining useful lives, movements in the exchange rate between the U.S. dollar and the Euro, and the use of an accelerated amortization schedule for the fair value allocated to customer relationships; however, we estimate that the amount of combined amortization and depreciation during 2009 will be approximately $3.4 million.

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 for the fiscal year ended December 31, 2008 were approximately $7.8 million compared to approximately $12.1 million in the prior year. Corporate expenses in 2008 decreased compared to 2007 primarily because of the high costs we incurred in connection with our voluntary stock option investigation and resulting restatement of our financial statements in 2007, partially offset by $0.3 million of severance costs recorded in the second quarter of 2008 for our former chief financial officer.

Other Income and Expense. Other income (expense), net includes foreign exchange gains and losses between the U.S. dollar and the Euro with respect to “marking to market” of the intercompany MTM loan balance as well as other assets and liabilities to be settled in other currencies. For the year ended December 31, 2008, we recognized approximately $0.3 million in gains on foreign exchange. For the year ended December 31, 2007, we recognized approximately $1.6 million in unrealized losses on foreign exchange in connection with the MTM loan, offset by a gain on foreign currency of approximately $0.1 million.

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.

Provision for Income Taxes. During 2008, we recognized a tax provision for approximately $20.2 million as compared to $9.2 million in the prior year. In 2008, income tax expense for our foreign operations was approximately $20.1 million based on an effective annual tax rate of 39%. In 2007, income tax expense for our foreign operations was approximately $8.5 million based on an effective annual tax rate of 39%. The increase in tax expense from the prior year is attributed to the increase in our pretax earnings in 2008. In 2008, IMPCO U.S. recorded income tax expense of $0.1 million which relates to state taxes due as well as the amortization of goodwill for income tax purposes which is not offset against the deferred tax asset in the determination of the required valuation allowance. In 2007, IMPCO U.S. recorded income tax expense of $0.7 million primarily from accruing for foreign tax withholdings on undistributed earnings not considered to be indefinitely reinvested as well as amortization of goodwill for tax purposes, which is not offset against the deferred tax asset in determining the required valuation allowance.

Extraordinary Gain. On August 1, 2008, IMPCO B.V., IMPCO’s subsidiary in the Netherlands, completed a redemption of the 49% non-controlling interest of IMPCO BV from Beru AG for approximately $6.1 million, based on the exchange rate of the Euro to the U.S. dollar on August 1, 2008. The purchase price was allocated to the related non-controlling interest liability and resulted in the step-down of fixed assets value of $0.3 million and extraordinary gain of $0.2 million. Prior to the purchase of the non-controlling interest, IMPCO held the 51% majority interest in IMPCO B.V.; therefore, the assets and liabilities of IMPCO B.V. were previously included in the prior period condensed consolidated balance sheet.

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 capital expenditures, research and development, strategic acquisitions as well as to invest in and operate our existing operations and prospective new lines of business.

We believe the amounts available to us under our various credit agreements together with cash provided by operating activities 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 development of the Company’s 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 liquidly. See Item 1A “Risk Factors” for additional information that could impact our liquidity and capital resources.

 

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     As of December 31,  
     2009     2008  

Cash and cash equivalents

   $ 46,519      $ 26,477   
                

Current portion of term loans and debt

     7,240        7,075   
                

Long-term term and other loans

     12,167        4,927   

Total debt

     19,407        12,002   

Total Fuel Systems stockholders’ equity

     243,228        153,955   
                

Total capitalization (debt plus equity)

   $ 262,635      $ 165,957   
                

Debt to total capitalization

     7.4     7.2

Net Cash (cash and cash equivalents less debt)

   $ 27,112      $ 14,475   

Current assets

   $ 290,268      $ 200,648   

Current liabilities

   $ 148,459      $ 117,886   

While our debt to total capitalization at December 31, 2009 remained relatively flat compared to 2008, our net cash has improved by approximately $12.6 million or 87.3% compared to December 31, 2008. This was driven by higher revenues as well as management’s continued monitoring of inventory levels.

Our ratio of current assets to current liabilities was 2:1 and 1.7:1 at December 31, 2009 and December 31, 2008, respectively. At December 31, 2009, our total working capital had increased by $59.0 million to $141.8 million from $82.8 million at December 31, 2008. This increase is primarily due to the following: (1) an increase of $62.6 million in net receivables primarily in BRC operations as a result of increased revenue; (2) an increase of $20.0 million in cash; and (3) an increase of $2.9 million in other current assets, which all were partially offset by (a) an increase of $8.6 million in accounts payable, (b) an increase of $20.0 million in accrued expenses and (c) an increase of $1.9 million in income taxes payable. The increases in accrued expenses, accounts payable, and income taxes payable are primarily in our BRC operations as a result of costs associated with increased revenue.

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

 

     Years ended December 31,  
     2009     2008     2007  

Net cash provided by (used in):

      

Operating activities

   $ 32,701      $ 26,381      $ 26,568   

Investing activities

     (41,909     (19,050     (14,094

Financing activities

     29,155        (4,516     516   

Effect on cash of changes in exchange rates

     95        (3,135     2,261   
                        

Net increase/(decrease) in cash and cash equivalents

   $ 20,042      $ (320   $ 15,251   
                        

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 inventory reserves and doubtful accounts; 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.

2009 compared to 2008. In 2009, our net cash flow provided from operating activities was $32.7 million, an increase of 24% from 2008. This increase was primarily driven by higher net income; higher depreciation and amortization from increased capital expenditures and acquired intangibles; higher provisions for inventory reserves due to certain inventory moving slowly; and lower inventory purchases. These increases are partially offset by a significant increase in accounts receivable primarily in BRC operations due to higher revenues from a shift in our product mix from aftermarket kits to DOEM conversions with a corresponding increase in terms and days sales outstanding.

2008 compared to 2007-In 2008, our net cash flow provided from operating activities was $26.4 million which was relatively flat compared to 2007. The slight decrease was primarily driven by higher net income, higher depreciation and amortization from increased capital expenditures and acquired intangibles, higher provisions for inventory reserves and goodwill impairment offset by a significant increase in accounts receivable and inventory.

 

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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 are within our BRC operations and related to the continued expansion of assembly lines.

In 2009, our PP&E additions were approximately $12.9 million or 21% higher than in 2008. This was due primarily to the continued expansion of our BRC operations. In addition, the Company paid approximately $29.2 million for the acquisitions of Distribuidora Shopping, WMTM, the Power Systems Business and FuelMaker assets net of cash acquired.

In 2008, our PP&E additions were approximately $10.7 million or 78% higher than in 2007. This was due primarily to the continued expansion of BRC operations. In addition, the Company paid approximately $8.3 million for the redemption of the 49% non-controlling interest in IMPCO BV from Beru AG and a down payment for the purchase of Distribuidora Shopping.

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 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 Business Systems as well as other working capital requirements for the Company. In addition, we repaid approximately $18.0 million of term and other loans as well as our lines of credit.

In 2008, our financing activities included payments of approximately $5.4 million on our term loans and lines of credit offset by proceeds from the exercise of stock options and warrants of approximately $2.4 million.

In 2007, our financing activities included proceeds from our Intesa San Paolo S.p.A loan in June 2007 to purchase Zavoli S.r.L and proceeds from the exercise of stock options and warrants of approximately $3.7 million offset by approximately $8.8 million repayments of our term loans and other lines of credit.

Credit Agreements

The Company’s outstanding debt is summarized as follows (in thousands):

 

      Available as of
December 31, 2009
   December 31, 2009    December 31, 2008

(a) Revolving lines of credit— Italy and Argentina

   $ 45,674    $ 2,869    $ —  

(b) Revolving line of credit – USA.

     13,000      —        1,000

(c) Term loan—Intesa SanPaolo S.p.A.

     —        4,498      5,767

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

     —        10,750      —  

(e) Other indebtedness

     —        1,290      5,235
                    
     58,674      19,407      12,002

Less: current portion

        7,240      7,075
                    

Non-current portion

   $ 58,674    $ 12,167    $ 4,927
                    

The debt is scheduled to be repaid as follows (in thousands):

 

5 year debt payout:

    

2010

   $ 7,240

2011

     4,140

2012

     4,021

2013

     2,444

2014

     1,562
      

Total

   $ 19,407
      

At December 31, 2009, the Company’s weighted average interest rate on outstanding debt was 3.6%. The Company is 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, 2009.

 

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(a) Revolving Lines of Credit – Italy and Argentina

The Company maintains various revolving lines of credit in Italy and Argentina. The revolving lines of credit in Italy include $27.2 million which is unsecured; $7.1 million, $3.2 million and $4.3 million all of which is collateralized by accounts receivable and $2.9 million which was guaranteed by BRC. The interest rates on these revolving lines of credit are fixed and variable and range from 0.02% to 4.7% as of December 31, 2009. At December 31, 2009 and 2008 there was $2.9 million and zero outstanding.

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 $2.3 million. These lines are unsecured with approximately $3,000 outstanding at December 31, 2009. At December 31, 2009, the interest rates for the lines of credit in Argentina ranged from 7.4% to 18%.

All lines are callable on demand.

(b) Revolving Line of Credit – USA

The Company and IMPCO Technologies, Inc. (“IMPCO”) entered into an uncommitted line of credit that is callable on demand with Intesa SanPaolo S.p.A. (“Intesa”) dated December 17, 2008 amounting to $13.0 million. Each loan under the credit facility may be made for a length of time up to three months and will bear interest at a floating rate of the bank’s prime rate plus 0.5%. This floating interest rate 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%. At December 31, 2008, there was $1.0 million outstanding under this credit facility. At December 31, 2009, there was no balance outstanding under this credit facility. On July 10, 2009, the Company and IMPCO converted this uncommitted line of credit into a committed, unsecured, revolving short-term credit facility with Intesa into a committed, unsecured, revolving credit facility. IMPCO intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCO’s payments, but does not currently intend to use any of the funds for its own purposes.

The maximum aggregate principal amount of loans outstanding at any time is $13.0 million and the maturity date for the agreement is April 30, 2014. At the Company’s 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 0.50% of the average daily unused amount and also includes financial covenants regarding the Company’s ratio of net debt to EBITDA, consolidated net worth and aggregate debt level. At December 31, 2009, the Company was in compliance with these covenants.

(c) Term Loan – Intesa SanPaolo S.p.A.

On June 26, 2007, BRC, a subsidiary of the Company, entered into a five and a half year unsecured term loan agreement with Intesa Sanpaolo S.p.A. of Italy in which BRC received approximately $6.7 million. The proceeds for the loan were used to purchase Zavoli S.r.L., which was completed on July 2, 2007 for approximately $8.5 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 1.4% and 3.4% at December 31, 2009 and December 31, 2008, 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, 2009 and 2008, 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 2.2% at December 31, 2009. At December 31, 2009 and December 31, 2008, the amount outstanding was $4.5 million and $5.8 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 $21.5 million converted into U.S. dollars) to be used for the acquisitions of Distribuidora Shopping and certain assets from FuelMaker (see Note 2) as well as for investments in MTM’s subsidiaries and certain capital expenditures for research and development. Approximately $10.8 million and no amount were outstanding on this financing agreement as of December 31, 2009 and 2008, 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.

 

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The loan contains semi-annual covenants beginning June 30, 2009 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 FSYS, unless the reduction in ownership is attributable to one or more issuances of FSYS capital stock or a merger or other fundamental corporate transaction which causes a variation in the outstanding capital stock. At December 31, 2009, 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 2.0% to 4.8%.

Off-Balance Sheet Arrangements

As of December 31, 2009, we had no off-balance sheet arrangements.

Recent Accounting Pronouncements

Accounting Standards Adopted in 2009

In December 2007, the FASB revised the authoritative guidance for business combinations. This guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired measured at fair value as of the acquisition date. In addition, all acquisition costs are to be expensed rather than capitalized. This guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. This guidance became effective for the Company on January 1, 2009. This guidance has an impact on the Company’s accounting for business combinations completed on or after January 1, 2009 including the Company’s acquisitions of Distribuidora Shopping S.A., FuelMaker Corporation assets and the remaining 50% of WMTM Equipamentos de Gases, Ltda as well as the Company’s acquisition of Teleflex Incorporated’s Power Systems business.

Effective January 1, 2009, the Company adopted the new authoritative guidance for non-controlling interests in consolidated financial statements. This guidance outlines new accounting and reporting requirements for ownership interests in subsidiaries held by parties other than the parent (previously known as minority interest) which requires, among other items: (a) the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (b) the amount of consolidated net income attributable to the parent and the non-controlling interests be clearly identified and presented on the face of the consolidated statement of income; and (c) entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The presentation and disclosure requirements of are required to be applied retrospectively for all periods presented. In accordance with this guidance, the Company applied the presentation and disclosure requirements retrospectively to comparative financial statements. As a result of the adoption, the Company made the following retroactive adjustments: the December 31, 2008 and 2007 non-controlling interests balances of $2,000 and $6.6 million previously presented in other long-term liabilities have been presented as part of stockholders’ equity. In addition, net income attributable to non-controlling interest of $0.9 million and $1.8 million for the years ended December 31, 2008 and 2007, respectively, has been included in net income so that net income for those years is $24.3 million and $7.7 million, respectively.

In April 2009, FASB issued the authoritative guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies, which requires certain disclosures related to assets and liabilities acquired through business combinations arising out of potential contingencies. This guidance requires assets and liabilities acquired through contingencies to be recorded at fair value on the acquisition date if the fair value can be determined during the measurement period or if it can be determined that it was probable that the asset or liability existed as of the acquisition date and the amount can be reasonably estimated. This guidance became effective for the Company on January 1, 2009. The adoption of this guidance has an impact on the Company’s accounting for business combinations completed on or after January 1, 2009 including the Company’s acquisitions of Distribuidora Shopping S.A., FuelMaker Corporation assets and the remaining 50% of WMTM Equipamentos de Gases, Ltda as well as the Company’s acquisition of Teleflex Incorporated’s Power Systems business.

Accounting Standards Not Yet Adopted

In June 2009, the FASB issued authoritative guidance for the consolidation of variable interest entities and changes the consolidation guidance applicable to a variable interest entity (“VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could

 

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potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Former guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. New guidance also requires enhanced disclosures about an enterprise’s involvement with a VIE. The Company adopted this guidance on January 1, 2010. The Company is currently assessing the impact this guidance may have on its consolidated financial statements.

Contractual Obligations

The following table contains supplemental information regarding total contractual obligations as of December 31, 2009:

 

     Payments Due by Period

(In thousands)

Contractual Obligations

   Years Ending December 31,
   Total    2010    2011    2012    2013    2014    Thereafter

Revolving lines of credit

   $ 2,869    $ 2,869    $ —      $ —      $ —      $ —      $ —  

Term and other loans — principal

     16,176      4,113      4,084      4,012      2,444      1,252      271

Term and other loans — interest

     883      336      249      166      87      25      20

Capital lease obligations (a)

     378      195      174      9      —        —        —  

Operating lease obligations (a)

     44,876      8,398      7,978      6,670      6,253      5,294      10,283

Other long-term liabilities

     237      45      39      15      15      15      108

Other and miscellaneous (a)

     1,875      625      625      625      —        —        —  
                                                
   $ 67,294    $ 16,581    $ 13,149    $ 11,497    $ 8,799    $ 6,586    $ 10,682
                                                

 

(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.

 

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

Foreign Currency Management. The results and financial condition of our international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. dollar. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. The functional currency for all of our international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. dollar increases the costs incurred by our subsidiaries, as a significant amount of our international subsidiaries’ inventory purchases are U.S. dollar denominated, and thus the cost of our products, adversely affecting our competitiveness and profitability. We monitor this risk and attempt to minimize the exposure through the management of cash disbursements in local currencies and, when deemed appropriate, the use of forward currency contracts.

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 the operations of our foreign subsidiaries. The term loans are denominated in local currencies and translated to U.S. dollars at period end exchange rates.

Debt Obligations. The following table summarizes our debt obligations at December 31, 2009. 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, 2009 (U.S. dollar equivalent in thousands).

 

     Debt Obligations
(in thousands)
 
     2010     2011     2012     2013     2014     Thereafter     Total  

Debt Denominated in U.S. dollars

              

Other finance loans

   $ 122      $ —        $ —        $ —        $ —        $ —        $ 122   

Interest rate

     4.2               4.2

Capital leases

   $ 92      $ 60      $ 9      $ —        $ —        $ —        $ 161   

Interest rate

     8.0     8.8     9.4           8.3
                                                        

Weighted average interest rate, (U.S.)

     5.9     8.8     9.4           6.6
                                                        

Debt Denominated in Foreign Currencies

              

Line of credit, variable interest rate (BPER-ZAVOLI)

   $ 2,000      $ —        $ —        $ —        $ —        $ —        $ 2,000   

Interest rate

     4.0               4.0

Line of credit, variable interest rate (TA)

   $ 11      $ —        $ —        $ —        $ —        $ —        $ 11   

Interest rate

     4.0               4.0

Term loans, variable rate (INTESA-BRC)

   $ 997      $ 1,045      $ 1,096      $ —        $ —        $ —        $ 3,138   

Interest rate

     1.4     1.4     1.4           1.4

Term loans, variable rate

(IMI-MTM)

   $ 1,667      $ 1,667      $ 1,667      $ 1,667      $ 833      $ —        $ 7,500   

Interest rate

     2.5     2.5     2.5     2.5     2.5       2.5

Term loans, variable rate

(ORMA-ZAVOLI)

   $ 35      $ 36      $ 37      $ 39      $ 40      $ 189      $ 377   

Interest rate

     2.2     2.2     2.2     2.2     2.2     2.2     2.2

Term loans, fixed rate

   $ 62      $ 125      $ —        $ —        $ —        $ —        $ 187   

Interest rate

     2.0     2.0             2.0

Capital lease (TA)

   $ 208      $ —        $ —        $ —        $ —        $ —        $ 208   

Interest rate

     15.4               15.4

Capital leases (PTY)

   $ 51      $ 128      $ —        $ —        $ —        $ —        $ 179   

Interest rate

     7.6     7.6             7.6
                                                        

Weighted average interest rate, (foreign)

     3.5     2.2     2.1     2.5     2.5     2.2     2.7
                                                        

We do not believe we are exposed to material direct risks associated with changes in interest rates other than with our cash equivalents. There were no other off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons in 2009, 2008, or 2007 that would have affected our liquidity or the availability of or requirements for capital resources.

 

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Item 8. Consolidated Financial Statements and Supplementary Data.

See pages F-1 through F-38 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.

Disclosure Controls and Procedures

We have carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, these officers have concluded that, as of December 31, 2009, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that such information is 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 Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:

 

   

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principle, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, our 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 and procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on our evaluation under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Management has excluded Teleflex Inc.’s Power Systems Business from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination during 2009. We have also excluded Teleflex Inc.’s Power Systems Business from our audit of internal control over financial reporting. Teleflex Inc.’s Power Systems Business is a wholly-owned subsidiary whose total assets and total revenues represent 8% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 2010 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 2010 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 2010 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 2010 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 2010 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 2010 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. The following table sets forth information about our common stock that may be issued under our equity compensation plans as of December 31, 2009:

 

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 (1)

Equity Compensation Plans Approved by Stockholders

   66,100    $ 11.15    550,023

Equity Compensation Plans Not Approved by Stockholders

   —        —      —  

Total

   66,100    $ 11.15    550,023

 

(1) Includes 135,786 shares of common stock available for issuance under our stock option plans, as well as 17,585 and 396,652 shares of restricted stock available for issuance under our 2006 Equity Incentive Plan and 2009 Restricted Stock Plan, respectively. We currently have no intention to issue any stock options under any of our stock option plans in the foreseeable future.

 

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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 2010 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 2010 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, 2009 and 2008.

Consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007.

Consolidated statements of stockholders’ equity for the years ended December 31, 2009, 2008 and 2007.

Consolidated statements of cash flows for the years ended December 31, 2009, 2008 and 2007.

Notes to consolidated financial statements.

(2) Supplemental Financial Statement Schedules:

Reports of Independent Registered Public Accounting Firm.

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 (incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-4 (No. 333-135378) filed on June 27, 2006).
  3.2   Bylaws of Fuel Systems Solutions, Inc., as currently in effect (incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-4 (No. 333-135378) filed on June 27, 2006).
  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 10.2 of the Company’s Form 8-K filed on July 21, 2009).
  4.3   Specimen of common stock certificate of Fuel Systems, Inc. 2006 (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+   1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.14 of IMPCO Technologies, Inc. Annual Report on Form 10-K for fiscal 1997).
10.3+   1997 Incentive Stock Option Plan (incorporated by reference to the IMPCO Technologies, Inc. Proxy Statement filed October 7, 1997).
10.4+   2000 Incentive Stock Option Plan (incorporated by reference to Appendix A to IMPCO Technologies, Inc.’s Proxy Statement filed August 28, 2000).
10.5+   The 2002 Stock Option Plan for Employees (incorporated by reference to Appendix A of IMPCO Technologies, Inc.’s Proxy Statement filed October 18, 2002).
10.6+   The 2002 Stock Option Plan for Non-Employee Directors (incorporated by reference to Appendix B of IMPCO Technologies, Inc.’s Proxy Statement filed October 18, 2002).
10.7+   2003 Stock Incentive Plan (incorporated by reference to Appendix B to IMPCO Technologies, Inc.’s Proxy Statement filed May 13, 2003).
10.8+   2004 Stock Incentive Plan (incorporated by reference to Appendix B to IMPCO Technologies, Inc.’s Proxy Statement filed March 29, 2004).
10.9+   2006 Incentive Bonus Plan (incorporated by reference to Exhibit 10.40 of the Company’s Registration Statement on Form S-4 (No. 333-135378) filed on June 27, 2006).
10.10+   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 fiscal year 2006).
10.11+   2009 Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on July 9, 2009).
10.12+   2009 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on July 9, 2009).

 

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Table of Contents

Exhibit No.

 

Description

10.13+   Form of Restricted Stock Agreement under 2009 Restricted Stock Plan (incorporated by reference to Exhibit 99.2 of the Company’s Form 8-K filed on July 9, 2009).
10.14+   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 fiscal year 2008).
10.15+   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 fiscal year 2008).
10.16+   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).
10.17+   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).
10.18*   Director Compensation Policy.
10.19   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 8, 2009).
10.21   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 the company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).
10.22   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).
10.23   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 Form 8-K filed on July 17, 2009).
10.24   Sublease Agreement dated June 16, 2005, by and between IMPCO Technologies, Inc. and Meteor Communications Corporation (incorporated by reference to Ex. 10.1 of the Company’s Current Report on Form 8-K/A filed July 14, 2005).
10.25   Sublease Agreement dated August 17, 2005 by and between IMPCO Technologies, Inc. and Monterey Carpets, Inc. (incorporated by reference to Ex. 10.1 of the Company’s Current Report on Form 8-K filed September 9, 2005).
10.26   English summary of Share Purchase Agreement, dated December 16, 2008, by and among MTM S.r.L., Alessandro Carlo Evi and Susana Iallonardi (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 22, 2008).
10.27   Purchase Agreement between MTM S.r.L. and Mcintosh & Morawetz Inc., in its capacity as Interim Receiver and Receiver and Manager of FuelMaker Corporation (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 6, 2009).
10.28   Asset purchase Agreement dated April 30, 2009 between 2045951 Ontario Inc., American Honda Motor Co., Inc. and MTM S.r.L. (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on May 6, 2009).
10.29   Equity Interest Purchase Agreement, dated as of July 19, 2009 by and among Fuel Systems Solutions, Inc. and Teleflex Incorporated (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on July 22, 2009).
10.30   Form of Subscription Agreement between Fuel Systems Solutions, Inc. and each purchaser of securities, dated June 22, 2009 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 23, 2009).

 

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Table of Contents

Exhibit No.

 

Description

12.1*   Computation of Ratios to Fixed Charges
16.1   Letter of BDO Seidman, LLP regarding change in certifying accountant, dated March 12, 2009 (incorporated by reference to Exhibit 16.1 of Form 8-K filed March 13, 2009).
21.1*   Subsidiaries of the Company.
23.1*   Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm, with respect to Fuel Systems Solutions, Inc.
23.2*   Consent of BDO Seidman, LLP, independent registered public accounting firm, with respect to Fuel Systems Solutions, Inc.
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

 

* 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, 2010.

 

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 Matthew Beale, 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

    Chief Executive Officer and Director     March 8, 2010
Mariano Costamagna     (Principal Executive Officer)    

/S/ MATTHEW BEALE

    President, Chief Financial Officer     March 8, 2010
Matthew Beale    

and Secretary

(Principal Financial Officer)

   

/S/ MICHAEL HELFAND

    Senior Vice President Finance and Chief     March 8, 2010
Michael Helfand    

Accounting Officer

(Principal Accounting Officer)

   

/S/ NORMAN L. BRYAN

    Director     March 8, 2010
Norman L. Bryan        

/S/ MARCO DI TORO

    Director     March 8, 2010
Marco Di Toro        

/S/ DOUGLAS R. KING

    Director     March 8, 2010
Douglas R. King        

/S/ JAMES W. NALL

    Director     March 8, 2010
James W. Nall        

/S/ WILLIAM J. YOUNG

    Director     March 8, 2010
William J. Young        

/S/ ALDO ZANVERCELLI

    Director     March 8, 2010
Aldo Zanvercelli        

 

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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-4

Consolidated Statements of Operations

   F-5

Consolidated Statements of Stockholders’ Equity

   F-6

Consolidated Statements of Cash Flows

   F-7

Notes to Consolidated Financial Statements

   F-8

SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES:

  

Reports of Independent Registered Public Accounting Firm

   F-36

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

   F-37

 

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 accompanying consolidated balance sheet as of December 31, 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended present fairly, in all material respects, the financial position of Fuel Systems Solutions, Inc. and its subsidiaries at December 31, 2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule as of and for the year ended December 31, 2009 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, 2009, 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 audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides 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.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Teleflex Inc.’s Power Systems Business from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination during 2009. We have also excluded Teleflex Inc.’s Power Systems Business from our audit of internal control over financial reporting. Teleflex Inc.’s Power Systems Business is a wholly-owned subsidiary whose total assets and total revenues represent 8% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.

 

PricewaterhouseCoopers LLP
Irvine, California
March 8, 2010

 

F-2


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Fuel Systems Solutions, Inc.

Santa Ana, CA

We have audited the accompanying consolidated balance sheet of Fuel Systems Solutions, Inc. (the “Company”) as of December 31, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fuel Systems Solutions, Inc. at December 31, 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 20 to the consolidated financial statements, the Company adopted the authoritative guidance for non-controlling interests in consolidated financial statements on January 1, 2009 and the accompanying consolidated financial statements have been retrospectively adjusted to reflect the presentation and disclosure requirements of this new accounting standard.

/s/ BDO SEIDMAN, LLP

Costa Mesa, CA

March 6, 2009, except as to Note 20, which is as of May 29, 2009

 

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Table of Contents

FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

 

     December 31,
2009
    December 31,
2008
 
          

As adjusted

(note 20)

 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 46,519      $ 26,477   

Accounts receivable less allowance for doubtful accounts of $3,159 and $3,293 at December 31, 2009 and December 31, 2008, respectively

     132,603        70,009   

Inventories

     90,367        92,610   

Deferred tax assets, net

     9,217        5,734   

Other current assets

     8,647        5,749   

Related party receivables

     2,915        69   
                

Total current assets

     290,268        200,648   
                

Equipment and leasehold improvements, net

     40,767        27,672   

Goodwill

     54,209        41,295   

Deferred tax assets, net

     107        174   

Intangible assets, net

     24,053        10,021   

Investment in unconsolidated affiliates

     4,058        3,334   

Other assets

     3,051        4,183   

Related party receivables

     599        —     
                

Total Assets

   $ 417,112      $ 287,327   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 73,837      $ 65,224   

Accrued expenses

     40,384        20,342   

Income taxes payable

     15,788        13,870   

Current portion of term loans and debt

     7,240        7,075   

Deferred tax liabilities, net

     917        112   

Related party payables

     10,293        11,263   
                

Total current liabilities

     148,459        117,886   

Term and other loans

     12,167        4,927   

Other liabilities

     7,551        6,256   

Deferred tax liabilities, net

     5,707        4,301   
                

Total Liabilities

     173,884        133,370   
                

Commitments & Contingencies

    

Stockholders’ Equity:

    

Fuel Systems Stockholders’ Equity:

    

Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued and outstanding at December 31, 2009 and 2008

     —          —     

Common stock, $0.001 par value, authorized 200,000,000 shares; 17,625,812 issued and 17,610,320 outstanding at December 31, 2009; and 15,801,745 issued and 15,749,783 outstanding at December 31, 2008

     18        16   

Additional paid-in capital

     257,627        220,270   

Shares held in treasury, 15,492 and 51,962 shares at December 31, 2009 and 2008, respectively

     (654     (1,399

Accumulated deficit

     (29,513     (79,354

Accumulated other comprehensive income

     15,750        14,422   
                

Total Fuel Systems Stockholders’ Equity

     243,228        153,955   

Non-controlling interests

     —          2   
                

Total Equity

     243,228        153,957   
                

Total Liabilities and Stockholders’ Equity

   $ 417,112      $ 287,327   
                

See accompanying notes to consolidated financial statements.

 

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FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Share and Per Share Data)

 

     Years Ended December 31,  
     2009     2008     2007  
          

As adjusted

(note 20)

   

As adjusted

(note 20)

 

Revenue

   $ 452,325      $ 382,697      $ 265,331   

Cost of revenue

     303,789        274,060        201,200   
                        

Gross profit

     148,536        108,637        64,131   
                        

Operating Expenses:

      

Research and development expense

     15,151        11,069        7,946   

Selling, general and administrative expense

     53,079        47,562        36,906   

Goodwill impairment loss

     —          3,907        —     
                        

Total operating expenses

     68,230        62,538        44,852   
                        

Operating income

     80,306        46,099        19,279   

Other income (expense), net

     4,615        (1,865     (1,848

Interest income

     420        845        471   

Interest expense

     (2,329     (1,359     (1,434
                        

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

     83,012        43,720        16,468   

Equity share in income of unconsolidated affiliates

     852        454        416   

Income tax expense

     (34,023     (20,161     (9,159
                        

Income net of tax, before extraordinary gain

     49,841        24,013        7,725   

Extraordinary gain

     —          243        —     
                        

Net income

     49,841        24,256        7,725   

Less: net income attributed to non-controlling interests

     (2     (914     (1,842
                        

Net income attributable to Fuel Systems

     49,839        23,342        5,883   
                        

Basic earnings per share:

      

Income before extraordinary gain attributable to Fuel Systems

   $ 2.96      $ 1.47      $ 0.38   
                        

Extraordinary gain

   $ —        $ 0.02      $ —     
                        

Net income attributable to Fuel Systems

   $ 2.96      $ 1.49      $ 0.38   
                        

Diluted earnings per share:

      

Income before extraordinary gain attributable to Fuel Systems

   $ 2.95      $ 1.46      $ 0.38   
                        

Extraordinary gain

   $ —        $ 0.02      $ —     
                        

Net income attributable to Fuel Systems

   $ 2.95      $ 1.48      $ 0.38   
                        

Number of shares used in per share calculation

      

Basic

     16,847,439        15,649,216        15,410,287   
                        

Diluted

     16,922,971        15,788,750        15,614,014   
                        

See accompanying notes to consolidated financial statements.

 

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FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Data)

 

     Fuel Systems Stockholders’ Equity                 Fuel Systems     Total  
    

 

Common Stock

   Additional
Paid-In
Capital
   Shares Held
in Treasury
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Non-
controlling
Interest
    Total
Equity
    Comprehensive
Income (Loss)
    Comprehensive
Income (Loss)
 
     Shares     Amount                  
                                      

As

adjusted

(note 20)

    As
adjusted
(note 20)
   

As

adjusted

(note 20)

   

As

adjusted

(note 20)

 

Balance, December 31, 2006

   15,180,481      $ 15    $ 212,275    $ (460   $ (108,372   $ 8,045      $ 4,946      $ 116,449      $ 16,627      $ 18,305   

Net income

   —          —        —        —          5,883        —          1,842        7,725      $ 5,883      $ 7,725   

Cumulative adjustment for adoption of FASB guidance on uncertain tax positions

   —          —        —        —          (207     —          —          (207     —          —     

Foreign currency translation adjustment

   —          —        —        —          —          13,638        (187     13,451        13,638        13,451   

Issuance of common stock upon exercise of stock options and warrants

   306,209        —        3,683      —          —          —          —          3,683        —          —     

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

   12,508        —        273      (29     —          —          —          244        —          —     

Stock–based compensation

   —          —        252      —          —          —          —          252        —          —     

Purchase of treasury shares

   (83     —        —        (1     —          —          —          (1     —          —     

Shares held in trust for deferred compensation plan, at cost

   —          —        —        58        —          —          —          58        —          —     
                                                                            

Balance, December 31, 2007

   15,499,115      $ 15    $ 216,483    $ (432   $ (102,696   $ 21,683      $ 6,601      $ 141,654      $ 19,521      $ 21,176   
                                  

Net income

   —          —        —        —          23,342        —          914        24,256      $ 23,342      $ 24,256   

Purchase of subsidiary shares from non-controlling interests

   —          —        —        —          —          —          (6,442     (6,442     —          —     

Foreign currency translation adjustment

   —          —        —        —          —          (7,261     (1,071     (8,332     (7,261     (8,332

Issuance of common stock upon exercise of stock options and warrants

   239,235        1      3,269      (867     —          —          —          2,403        —          —     

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

   11,516        —        384      (54     —          —          —          330        —          —     

Stock-based compensation

   —          —        134      —          —          —          —          134        —          —     

Purchase of treasury shares

   (83     —        —        (1     —          —          —          (1     —          —     

Shares held in trust for deferred compensation plan, at cost

   —          —        —        (45     —          —          —          (45     —          —     
                                                                            

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   
                                                                            

See accompanying notes to consolidated financial statements.

 

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FUEL SYSTEMS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, except Share and Per Share Data)

 

     Years Ended December 31,  
     2009     2008     2007  
           As
adjusted
(note 20)
    As
adjusted
(note 20)
 

Cash flows from operating activities:

      

Net income

   $ 49,841      $ 24,256      $ 7,725   

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

      

Amortization of intangibles arising from acquisitions

     4,108        2,784        2,259   

Depreciation and other amortization

     8,087        6,502        4,961   

Provision for doubtful accounts

     567        1,268        (124

Provision for inventory reserve

     9,596        5,366        625   

Goodwill impairment loss

     —          3,907        —     

Extraordinary gain

     —          (243     —     

Provision for loan to unconsolidated affiliate

     343       1,650        583   

Equity share in income of unconsolidated affiliates

     (852     (454     (416

Gain on Acquisition

     (1,422     —          —     

Compensation expense related to stock option and restricted stock grants

     329        419        436   

Unrealized (gain) loss on foreign exchange transactions

     (1,541     396        1,923   

Loss on disposal of assets

     357        341        29   

Dividends from unconsolidated affiliates

     196        228        —     

Changes in assets and liabilities

      

Increase in deferred income taxes

     (3,943     (4,475     (2,219

Increase in accounts receivable

     (51,366     (21,906     (2,906

Decrease (increase) in inventories

     17,319        (29,841     (3,747

(Increase) decrease in other current assets

     (977     (2,290     170   

(Increase) decrease in other assets

     (1,131     (441     439   

(Decrease) increase in accounts payable

     (789     17,371        16,047   

Increase (decrease) in accrued expenses

     5,973        16,300        (2,431

Increase (decrease) in long-term liabilities

     759        618        (1,166

(Receivables from)/payables to related party – net

     (2,753     4,625        4,380   
                        

Net cash provided by operating activities

     32,701        26,381        26,568   
                        

Cash flows from investing activities:

      

Purchase of equipment and leasehold improvements

     (12,928     (10,675     (5,974

Acquisitions, net of cash acquired

     (29,209     (8,504     (8,136

Proceeds from sale of assets

     228        129        16   
                        

Net cash used in investing activities

     (41,909     (19,050     (14,094
                        

Cash flows from financing activities:

      

Decrease in revolving lines of credit, net

     (156     (847     (5,944

Payments on term and other loans

     (18,036     (4,567     (2,815

Proceeds from term loans

     19,757        —          6,738   

Proceeds from issuance of common stock, net of expense of $2.3 million

     27,720        —          —     

Payments of capital lease obligations

     (358     (505     (415

(Purchase of) proceeds from the sale of common shares held in trust, net

     (20     (100     91   

Dividends paid to non-controlling interests in consolidated subsidiaries

     —          (900     (822

Proceeds from exercise of stock options and warrants

     248        2,403        3,683   
                        

Net cash provided by (used in) financing activities

     29,155        (4,516     516   
                        

Effect on cash of changes in exchange rates

     95        (3,135     2,261   

Net increase (decrease) in cash and cash equivalents

     20,042        (320     15,251   

Cash and cash equivalents at beginning of period

     26,477        26,797        11,546   
                        

Cash and cash equivalents at end of period

   $ 46,519      $ 26,477      $ 26,797   
                        

Supplemental disclosures of cash flow information:

      

Non-cash investing and financing activities:

      

Acquisition of equipment under capital lease

   $ 52      $ 80      $ 216   

Issuance of 1,382 shares, 5,321 shares and 4,980 shares of restricted stock in 2009, 2008 and 2007, respectively

   $ 15      $ 99      $ 89   

Issuance of 282,932 shares of common stock for the acquisition of Distribuidora Shopping (see Note 2)

   $ 9,047      $ —        $ —     

Issuance of 39,868 shares from treasury stock for the acquisition of Distribuidora Shopping (see Note 2)

   $ 827      $ —        $ —     

See accompanying notes to consolidated financial statements.

 

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FUEL SYSTEMS SOLUTIONS, INC.

Notes to Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies

(a) 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.

(b) 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”) over which the Company has significant influence 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 is 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.

(c) 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.

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

(e) 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, 2009 and 2008 restricted cash balance was $0.5 million and included in other assets.

(f) 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.

(g) 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 over the assets’ estimated useful lives, ranging from three to seven 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.

(h) Intangibles—Intangibles, primarily 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 amortized but is subject to annual impairment tests in accordance with authoritative guidance. Other identifiable intangible assets are amortized over their useful lives. The Company regularly reviews business conditions and other relevant factors to determine whether impairment conditions exist and performs its annual impairment test at year end each year. The Company utilizes the discounted cash flow method to determine the fair value of each of its reporting units. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of goodwill to its carrying amount. In calculating the implied fair value of the reporting unit goodwill, the present value of the reporting unit’s expected future cash flows is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the present value of the reporting unit’s expected future cash flows over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

The Company assigns fair values to the intangible assets by applying valuation models that assign future after-tax cash flows to existing technology, trade name, non-compete agreements and customer relationships. Among the intangible assets acquired, existing technology and trade name are amortized using the straight line method, the best estimate of the pattern of

 

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Table of Contents

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.

(i) 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.

(j) 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.

(k) 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.

(l) 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.

(m) 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.

(n) 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.

On January 1, 2007, the Company adopted the interpretations issued by the Financial Accounting Standards Board (“FASB”) which establishes a single model to address accounting for uncertain tax positions. The new 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.

(o) Stock based compensation—The Company has eight stock option plans that provide for the issuance of options to key employees and directors of the Company at the fair market value at the time of grant. Options previously granted under these plans generally vest in four or five years and are generally exercisable while the individual is an employee or a director, or ordinarily within one month following termination of employment. In no event may options be exercised more than ten years after date of grant. The Company does not intend to grant any additional options available for future grant under any stock option plans. Under the Company’s 2006 Incentive Bonus Plan, the Company is authorized to issue a total of up to 400,000 shares in restricted stock awards to employees and directors in addition to cash awards.

The Company recognizes the grant-date fair value of stock options and other equity-based compensation issued to employees as expense in the consolidated financial statements.

 

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(p) 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.

(q) 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 components of other comprehensive income in stockholders’ 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.

(r) Financial instruments—At December 31, 2009 and 2008, 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.

(s) 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 stockholders’ equity on the consolidated balance sheet. Accumulated other Comprehensive income consists solely of foreign currency translation adjustments.

(t) 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.

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

Recent Accounting Pronouncements

Accounting Standards Adopted in 2009

In December 2007, the FASB revised the authoritative guidance for business combinations. This guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired measured at fair value as of the acquisition date. In addition, all acquisition costs are to be expensed rather than capitalized. This guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. This guidance became effective for the Company on January 1, 2009. This guidance has an impact on the Company’s accounting for business combinations completed on or after January 1, 2009 including the Company’s acquisitions of Distribuidora Shopping S.A., FuelMaker Corporation assets and the remaining 50% of WMTM Equipamentos de Gases, Ltda as well as the Company’s acquisition of Teleflex Incorporated’s Power Systems business (see Note 2).

In December 2007, the FASB revised the authoritative guidance for non-controlling interests in consolidated financial statements. The guidance outlines new accounting and reporting requirements for ownership interests in subsidiaries held by parties other than the parent (previously known as minority interest), the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. See Note 20 for the impact of the adoption of this standard.

 

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In April 2009, FASB issued the authoritative guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies, which requires certain disclosures related to assets and liabilities acquired through business combinations arising out of potential contingencies. This guidance requires assets and liabilities acquired through contingencies to be recorded at fair value on the acquisition date if the fair value can be determined during the measurement period or if it can be determined that it was probable that the asset or liability existed as of the acquisition date and the amount can be reasonably estimated. This guidance became effective for the Company on January 1, 2009. The adoption of this guidance has an impact on the Company’s accounting for business combinations completed on or after January 1, 2009 including the Company’s acquisitions of Distribuidora Shopping S.A., FuelMaker Corporation assets and the remaining 50% of WMTM Equipamentos de Gases, Ltda as well as the Company’s acquisition of Teleflex Incorporated’s Power Systems business (see Note 2).

Accounting Standards Not Yet Adopted

In June 2009, the FASB issued authoritative guidance for the consolidation of variable interest entities and changes the consolidation guidance applicable to a variable interest entity (“VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Former guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. New guidance also requires enhanced disclosures about an enterprise’s involvement with a VIE. The Company adopted this guidance on January 1, 2010. The Company is currently assessing the impact this guidance may have on its consolidated financial statements.

 

2. Acquisitions

Acquisition of Distribuidora Shopping S.A.

On January 15, 2009, MTM completed its acquisition of Distribuidora Shopping S.A. and its subsidiary Tomasetto Achille S.A. (“Distribuidora Shopping”) from Carlo Evi and Susana Iallonardi (collectively, the “Sellers “). Distribuidora Shopping is headquartered in Argentina and, operating under the brand name Tomasetto Achille, manufactures, imports, exports and markets natural gas kits for vehicles. This acquisition reinforces the Company’s natural gas vehicle product lines and expands its global manufacturing and distribution footprint. A portion of the funds that MTM used in the acquisition were provided according to the terms of the financing agreement between MTM and Banca IMI S.p.A. and Intesa SanPaolo S.p.A. dated December 22, 2008 (see Note 10). Since this acquisition was accounted for under the FASB authoritative guidance for Business Combinations, which requires the acquisition costs to be expensed, the Company expensed in selling general and administrative in 2008 acquisition related costs of approximately $0.8 million incurred through December 31, 2008. During the year ended December 31, 2009, acquisition related costs of approximately $0.3 million were expensed in selling general and administrative expense as incurred. The results of operations of Distribuidora Shopping have been included in the accompanying consolidated statements of operations from the date of the acquisition within the BRC operation segment.

The aggregate purchase price after post-closing adjustments for 100% of the equity of Distribuidora Shopping was $17.5 million, net of cash acquired of $0.1 million. At the time of the signing of the share purchase agreement on December 16, 2008, MTM paid the Sellers $2.0 million in cash as a down payment on the purchase price. This down payment was reflected in “Other Assets” at December 31, 2008.

Of the aggregate purchase price of $17.5 million, MTM paid $7.6 million in cash and Fuel Systems issued 322,800 shares of common stock with a value of $9.9 million on the closing date to the Sellers 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. Of the 322,800 shares of Fuel Systems common stock issued to Sellers in the private placement, 39,868 shares were issued from treasury stock with a historical cost basis of $0.8 million (see Note 11). In addition, of the 322,800 shares, 129,120 shares will remain in escrow for up to six years in order to cover unknown or contingent liabilities of Distribuidora Shopping and to satisfy any claims for indemnification that MTM may have against the Sellers during that time. MTM’s losses will not be limited to the value of the escrow shares, but MTM must deplete the escrow shares before seeking any amount in cash from the Sellers. Subject to certain limitations, the Sellers’ maximum liability for indemnification obligations is $8.2 million.

 

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The purchase price has been allocated based on management’s estimates as follows (in thousands):

 

Total tangible assets, including cash of $96

   $ 12,418   

Intangible assets subject to amortization

     7,370   

Goodwill

     9,198   
        

Total assets acquired

     28,986   

Less: total liabilities

     (11,422
        

Total net assets recorded

   $ 17,564   
        

Of the $7.4 million of acquired intangible assets, $2.6 million relates to existing technology with a useful life of 7 years, $3.7 million was assigned to customer relationships with a useful life of 10 years, $0.8 million was assigned to the trademark with a useful life of 10 years and $0.3 million was assigned to covenant not to compete with a useful life of 5 years. A history of operating margins and profitability, service and manufacturing employee base and a leading presence in the market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $9.2 million. The acquired goodwill is not deductible for tax purposes.

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

In connection with the Company’s acquisition of Distribuidora Shopping, the Company entered into a new lease agreement and assumed an existing lease agreement. Both lease agreements have lease commitments in the aggregate of $4.8 million from April 2009 through December 2019. One of the lease agreements is with GNC Vicar, of which Carlo Evi, former owner of and current employee of Distribuidora Shopping, together with an individual related to two current employees of Distribuidora Shopping, owns 100% (see Note 15).

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 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. Any difference between the carrying value and the fair value of the previously held equity interest is recognized as a gain or loss in the income statement. The Company calculated the difference to be approximately $1.4 million gain which is included in other income (expense) net for the year ended December 31, 2009. Under current accounting guidance adopted on January 1, 2009, this gain is no longer considered extraordinary. The Company has determined that the acquisition of the remaining 50% of WMTM was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

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.

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 operation segment.

 

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The purchase price has been allocated based on management’s estimates as follows (in thousands):

 

Total tangible assets, including cash of $376

   $ 25,497   

Intangible assets subject to amortization

     6,464   

Goodwill

     3,784   
        

Total assets acquired

     35,745   

Less: total liabilities

     (20,745
        

Total net assets recorded

   $ 15,000