Fuel Systems Solutions 10-K 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2010
Commission File No.: 001-32999
FUEL SYSTEMS SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
780 Third Avenue, 25th Floor, New York, New York 10017
(Address of Principal Executive Offices, Including Zip Code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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 registrants 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, 2010, was approximately $457.3 million based upon the closing sale price of the registrants common stock of $25.95 on June 30, 2010, as reported on the Nasdaq Stock Market.
As of February 15, 2011, the registrant had 19,921,217 shares of common stock, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants 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
This Form 10-K contains certain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this Form 10-K. These statements are not historical facts, but instead involve known and unknown risks, uncertainties and other factors that may cause our or our companys actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward looking statements. Statements in this Form 10-K that are not historical facts are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Words such as: may, will, would, should, could, expect, anticipate, intend, plan, anticipate, believe, estimate, predict, potential, continue, seeks, on-going or the negative of these terms or other comparable terminology often identify forward-looking statements, although not all forward-looking statements contain these words. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and beliefs concerning future business conditions, our results of operations, financial position and our business outlook, or state other forward-looking information based on currently available information. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. A list of the known material factors that may cause our results to vary, or may cause management to deviate from its current plans and expectations, is included in Item 1A Risk Factors. These forward-looking statements are not guarantees of future performance. We cannot assure you that the forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not place undue reliance on these forward looking statements. The forward-looking statements made in this Form 10-K relate to events and state our beliefs, intent and our view of future events only as of the date of this form 10-K. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
We design, manufacture and supply alternative fuel components and systems for use in the transportation and industrial markets on a global basis, primarily outside the United States. Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. For over 50 years, we have developed alternative fuel products. We supply our products and systems to the marketplace through a global distribution network of approximately 850 distributors and dealers in more than 65 countries and more than 175 original equipment manufacturers, or OEMs.
We offer an array of components, systems and fully integrated solutions for our customers, including:
Automobile manufacturers, taxi companies, transit and shuttle bus companies and delivery fleets are among the most active customers for our transportation products. Our largest markets for transport products are currently, and have historically been, outside the United States. As a result of recent acquisitions in the United States, we now have a full suite of automotive capabilities, including CARB certified, dedicated systems product line and in-house OEM systems engineering platform, enhancing our ability to leverage our existing relationship with fleet customers and other manufacturers as they roll out CNG and LPG versions of key fleet vehicles. Manufacturers of industrial mobile equipment and stationary engines are among the most active customers for our industrial products. 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 include certain activities in the transportation market undertaken at our facilities. All other business in the transportation market is conducted by our BRC operations.
The predecessor to Fuel Systems was IMPCO Technologies, Inc., which we refer to as IMPCO U.S., and all of our filings with the SEC prior to our reorganization are filed under the name of IMPCO Technologies, Inc. Our periodic and current reports, and any amendments to those reports, are available, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC on our website: www.fuelsystemssolutions.com. The information on our website is not incorporated by reference into this report. You may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street N E, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding us at http://www.sec.gov.
Our business is focused on the alternative fuel industry. We believe three independent market factorseconomics, energy independence and environmental concernsare 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.
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 earths 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 Surveys World Petroleum Assessment 2000, a significant volume of natural gas remains to be discovered. China and India, the worlds most heavily populated nations, are actively developing their infrastructure to facilitate natural gas consumption and imports.
Environmental concerns have also driven the growth of the alternative fuel industry. According to the Natural Gas Vehicles for America, per unit of energy, natural gas contains less carbon than any other fossil fuel, and thus produces lower carbon dioxide (CO2) emissions per vehicle mile traveled. Tests have shown that vehicles operating on natural gas produce up to 20 to 30 percent less greenhouse gas emissions than comparable diesel and gasoline fueled vehicles. Tests conducted by the U.S. Environmental Protection Agency show that propane-fueled vehicles produce 30 percent to 90 percent less carbon monoxide and about 50 percent fewer toxins and other smog-producing emissions than gasoline engines, as reported by the Propane Education Resource Council.
We are directly involved in two 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.
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 compressed natural gas, or CNG, vehicles in use worldwide, either for personal mobility, fleet conveyance or public transportation. As the worlds 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. In Europe, Asia and Latin America, alternative fuel vehicles operating on propane and natural gas are widely available through OEM and aftermarket distribution channels and have gained important penetration of total vehicles in circulation in many countries.
In the United States the transportation market for LPG, CNG and other gaseous fuel vehicles has been limited, but recently a market for dedicated natural gas vehicles has emerged and we have recently invested in that market. See Item 7, Managements Discussion and Analysis, Overview.
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®.
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:
Customers and Strategic Relationships
IMPCOs customers include some of the worlds largest engine manufacturer OEMs, and BRCs customers include some of the worlds 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.
In 2010, one customer represented 14.6% of the consolidated sales. 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. During 2010, 2009 and 2008, sales to our top ten customers accounted for 53.0%, 62.0% and 36.3% 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:
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:
Sales and Distribution
We sell products through a worldwide network encompassing over 850 distributors and dealers in more than 65 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 2010, 2009 and 2008, sales to distributors accounted for 49.4%, 35.5%, and 60.5%, respectively, of our net revenue, and sales to OEM customers accounted for 50.6%, 64.5%, and 39.5%, 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 as well as in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
We manufacture and assemble a majority of our products at our facilities in Santa Ana, California, Union City, Indiana, Kitchener, Canada, Beccar, Argentina and Cherasco, Italy and to a lesser extent at some of our other international facilities. Current manufacturing operations consist primarily of mechanical 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 2010, one supplier represented 10.3% of the consolidated raw materials and services. During 2009, one supplier represented 12.4% of the consolidated raw materials and services. During 2008, no suppliers represented more than 10.0% of the consolidated 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. 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. In 2010, we expanded our research and development facility in Italy to continue to serve our customers with new products and capabilities. Our research and development expenditures were approximately $20.8 million, $15.2 million, $11.1 million in 2010, 2009, and 2008, respectively.
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.
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.
As of December 31, 2010, we employed approximately 1,600 persons, excluding those employed by our unconsolidated affiliates in India. Of these employees, 419 were employed in IMPCO operations, of which 199 are foreign employees, and approximately 1,175 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.
We currently rely primarily on patent and trade secret laws to protect our intellectual property. We currently have approximately one hundred patents registered in countries located in North America, Europe, and Asia. We do not expect the expiration of our patents to have a material effect on our revenue.
We also rely on a combination of trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights. However, we cannot be sure that these intellectual property rights provide sufficient protection from competition. We believe that our intellectual property protected by copyright and trademark protection is less significant than our intellectual property protected by patents. Third parties may claim that our products and systems infringe their patents or other intellectual property rights. Identifying third party patent rights can be particularly difficult, especially since patent applications are not published until 18 months after their filing dates. If a competitor were to challenge our patents, or assert that our products or processes infringe its patent or other intellectual property rights, we could incur substantial litigation costs, be forced to design around their patents, pay substantial damages or even be forced to cease our operations, any of which could be expensive and/or have an adverse effect on our operating results. Third party infringement claims, regardless of their outcome, would not only consume our financial resources, but also would divert the time and effort of our management and could result in our customers or potential customers deferring or limiting their purchase or use of the affected products or services until resolution of the litigation.
The success of our recent investments in the automotive alternative fuel transportation business in the United States is contingent on the growth of the gaseous alternative fuel industry in the United States.
We recently expanded our automotive alternative fuel transportation activities in the United States by acquiring two businesses. The return on our investments is dependent among other factors on the expansion of the United States market for vehicles that operate on gaseous alternative fuels. If this market does not expand, the revenues and profits generated by these investments may not justify the purchase prices that we paid for them.
Reduced consumer or corporate spending due to weakness in the financial markets and uncertainties in the economy, domestically and internationally, may materially and adversely affect our revenue, operating results and cash flows.
We depend on demand from the consumer, OEM, contract manufacturing, industrial, automotive and other markets we serve for the end market applications that use our products and services. All of these markets have been, and may continue to be, affected by the recent instability in global financial markets that have caused extreme economic disruption. Reductions in consumer or corporate demand for our products and services as a result of uncertain conditions in the macroeconomic environment, such as volatile energy prices, inflation, fluctuations in interest rates, difficulty securing credit, extreme volatility in security prices, diminished liquidity, mortgage failures, or other economic factors, may materially and adversely affect our revenue, operating results and cash flows.
Negative economic conditions may also materially impact our customers, suppliers and other parties with which we do business. Economic and financial market conditions that adversely affect our customers may cause them to terminate existing purchase orders, reduce the volume of products they purchase from us in the future or seek price concessions. In connection with the sale of products, we normally do not require collateral as security for customer receivables and do not purchase credit insurance. We may have significant balances owing from customers who operate in cyclical industries or who may not be able to secure sufficient credit in order to honor their obligations to us. Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations, liquidity and financial condition.
Adverse economic and financial market conditions may also cause our suppliers to be unable to provide materials and components to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for our amounts owing them or reducing the maximum amount of trade credit available to us. While we have not yet experienced changes of this type, they could have a material adverse effect on our results of operations, liquidity and financial condition. If we are unable to successfully anticipate changing economic and financial markets conditions, we may be unable to effectively plan for, and respond to, those changes, and we could be materially and adversely affected.
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 would lead to a decline in our revenue and could result in a decrease in our operating results and cash flows.
We do not have long-term contracts with our customers. Generally, our product sales are made on a purchase order basis, which allows our customers to reduce or discontinue their purchases from us. Accordingly, we cannot predict the timing, frequency or size of our future customer orders. Our ability to accurately forecast our sales is further complicated by the current global economic and financial uncertainty. We maintain significant inventories 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, 2010 was $85.9 million, a decrease of $4.5 million compared to our total inventory at December 31, 2009, nonetheless, if we fail to anticipate the changing needs of our customers and accurately forecast our customer demands, our existing and potential customers may not place orders with us, which would
decrease our revenue, and we may accumulate significant inventories of products that we will be unable to sell which may result in a significant decline in the value of our inventory. As a result, our revenue, gross profit and other operating results and cash flows may be materially and adversely affected.
In addition, during 2009, we expanded our operational capacity, including opening new facilities in Italy, to address increased demand for our fuel systems components and systems, and in 2010, we have increased substantially our investment in research and development. We may continue to make significant investments in our business without any guarantees or long-term commitments from our customers that they will continue to purchase our components and systems with the same timing, frequency and size as we expect. As a result, if there is insufficient demand for our components and systems, we may not recover the costs of any increased investment in our operations, which could have a material, adverse effect on our financial position, liquidity and results of operations.
The development of our business is dependent on the availability of gaseous fueling infrastructure
Many countries, including the United States, currently have limited or no infrastructure to deliver natural gas and propane to consumers. 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 and services. We cannot assure you that the United States or global market for gaseous fuel engines will expand broadly or, if it does, that it will result in increased sales of our fuel system products.
An expansion of OEM offering of gaseous fuel vehicles employing internally developed OEM technology would likely result in a decrease in our revenue and profit margins.
We derive a substantial portion of our revenue from the sale of gaseous fuel systems and components to automobile OEMs. An expansion in the offering of OEM gaseous fuel vehicles employing internally developed OEM technology could reduce demand for our systems and components and would likely have a negative impact on our revenue and profits.
We currently face, and will continue to face, significant competition, which could materially and adversely affect us.
We currently compete with companies that manufacture products to convert liquid-fueled internal combustion engines to gaseous fuels. Our competitors in the future may have greater name recognition, larger customer bases, broader global reach and a wider array of product lines, as well as greater financial resources and access to capital than we have. We are also subject to competition from other alternative fuels and alternative fuel technologies, including ethanol, electric and hybrid electric and fuel cells, and we cannot assure you that such technologies will not be favored over gaseous fuel technologies in the future. We also cannot assure you that our competitors will not create new and improved innovative gaseous fuel technologies. Increases in the market for alternative fuel vehicles may cause automobile or engine manufacturers to develop and produce their own fuel conversion or fuel management equipment rather than purchasing the equipment from suppliers such as us or to employ competing technologies. Further, greater acceptance of alternative fuel engines may result in new competitors. Should any of these events occur, either alone or in combination, the total potential demand for, and pricing of, our products could be negatively affected and cause us to lose business, which could materially and adversely affect us.
New technologies could render our existing products obsolete and materially and adversely affect us.
New developments in technology may negatively affect the development or sale of some or all of our products or make our products obsolete. Our inability to enhance existing products in a timely manner or to develop and introduce new products that incorporate new technologies, conform to increasingly stringent
emission standards and performance requirements, and achieve market acceptance in a timely manner could negatively impact our competitive position and may materially and adversely affect us. New product development or modification is costly, involves significant research, development, time and expense and may not necessarily result in the successful commercialization of any new products.
Fluctuation in oil or natural gas prices may result in a decline in the demand for our products and services, which would materially and adversely affect our revenue, operating results and cash flows.
We believe that our sales in recent years have been favorably impacted by changes in consumer demand prompted by rising oil prices and concern over potential increases in oil prices. Conversely, when oil prices decrease and remain low or continue to decrease, it may result in a decline of the demand for our products and services. In addition, volatility in the price of natural gas may have an equal though opposite impact on the demand for our products and services. The potential decline in the demand for our products and services caused by these price fluctuations could materially and adversely affect our revenue, operating results and cash flows.
Our business is directly and significantly affected by regulations relating to reducing vehicle emissions. If current regulations are repealed or if the implementation of current regulations is suspended or delayed, our revenue, operating results and cash flows may decrease significantly.
If regulations relating to vehicle emissions are amended in a manner that may allow for more lenient standards, or if the implementation of such currently existing standards is delayed or suspended, the demand for our products and services could diminish, and our revenue, operating results and cash flows could decrease significantly. In addition, demand for our products and services may be adversely affected by the perception that emission regulations will be suspended or delayed. Accordingly, we rely on stricter emissions regulations, the adoption of which are out of our control and cannot be assured, to stimulate our growth.
We are subject to governmental certification requirements and other regulations, and more stringent regulations in the future may impair our ability to market our products.
We must obtain product certification from governmental agencies, such as the Environmental Protection Agency and the California Air Resources Board, to sell certain of our products in the United States and must obtain other product certification requirements in Europe and other regions. A significant portion of our future revenue will depend upon sales of fuel management products that are certified to meet existing and future air quality and energy standards. We cannot assure you that our products will meet these standards in the future. We incur significant research and developments costs to ensure that our products comply with emissions standards and meet certification requirements in the countries where our products are sold. Our failure to comply with certification requirements could result in the recall of our products and 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 and adversely affect the effectiveness of the related technologies. As a result, these regulations could materially and adversely affect us.
Changes in tax policies and governmental incentives may reduce or eliminate the economic benefits that make our products attractive to consumers, which could materially and adversely affect us.
In some jurisdictions and from time to time, government authorities may provide tax benefits and incentives for clean-air vehicles, including tax credits, rebates and reductions in applicable tax rates. In certain of our markets, these benefits extend to vehicles powered by our systems and create economic benefits for our customers. Changes in these tax benefits or incentives, such as the expiration at the end of 2009 of the Italian governments economic incentives for the purchase of new dual fuel consumer automobiles, may reduce or eliminate the economic benefits that make our products attractive to customers, which could materially and
adversely affect us. Government authorities in some countries may from time to time use fuel prices as an instrument of fiscal policy and taxation may vary for different types of fuels, including gaseous fuels. Changes in taxation can affect the retail prices for alternative fuels which can negatively impact the attractiveness of our products.
Some of our foreign subsidiaries have done, and may continue to do, business in countries subject to U.S. sanctions and embargoes, including Iran, and we have limited managerial oversight over those activities.
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. Some of our foreign subsidiaries may in the future make sales to other countries subject to sanctions and embargoes imposed by the U.S. government. Although these sanctions and embargoes do not prohibit our foreign subsidiaries from selling products and providing services in Iran and these other countries, 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 Iran and these other countries. The constraints on our ability to have U.S. persons, including our senior management, provide managerial oversight and supervision over business activities in Iran and other U.S. sanctioned countries may negatively affect the financial or operating performance of such activities. We believe we have procedures in place to conduct these activities in compliance with applicable U.S. laws. Our foreign subsidiaries may also make sales to countries subject to sanctions and embargoes imposed by the European Union. These E.U. sanctions, as well as U.S. sanctions, are complex. We believe we have procedures in place to conduct foreign operations without violating E.U. sanctions. However, if we fail to comply with U.S. laws or E.U. sanctions in our foreign operations, we could be subject to material fines and penalties and incur damage to our reputation, which may lead to a reduction in the market price of our common stock.
In addition, our foreign subsidiaries activities in Iran and other U.S. or E.U. sanctioned countries could reduce demand for our common stock among certain of our investors for political reasons.
Recent Iranian sanction laws and regulations have adversely affected our revenues and may cause us other adverse consequences.
On June 9, 2010, the United Nations Security Council by Resolution voted to impose a new and expanded round of sanctions against Iran. On July 27, 2010, the European Union implemented the UN Resolution. On July 1, 2010, President Obama signed into law the new Comprehensive Iran Sanctions and Accountability and Divestment Act of 2010. Moreover, in response to the UN Resolution, other countries around the world have also strengthened and expended laws and regulations imposing sanctions against Iran. This new and expanded round of laws and regulations imposing sanctions on Iran has adversely impacted our revenues derived from Iran. We can offer no assurance that any further expansion of Iranian sanctions will not further adversely affect our revenues and cause us other adverse consequences.
Currency exchange rate fluctuations and devaluations may have a material adverse effect on our revenue and overall financial results.
For the year ended December 31, 2010, non-U.S. operations accounted for approximately 83.2% of our revenue. Most revenues and expenses of our non-U.S. operations are in local currency. Our financial statements are presented in U.S. dollars, therefore, gains and losses on the conversion of foreign currency denominated expenses into U.S. dollars could cause fluctuations in our operating results, and fluctuating exchange rates could cause significantly reduced revenue and gross margins from non-U.S. dollar-denominated revenue, which could materially and adversely affect our overall financial results.
Also, for the year ended December 31, 2010, Euro denominated revenue accounted for approximately 71.2% of our total revenue; therefore a substantial appreciation in the rate of exchange of the U.S. dollar against the Euro could have a significant adverse affect on our financial results.
We currently do not engage in financial hedging against these risks and may not 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 and may adversely affect our operating results and cash flows.
Because of our significant operations outside of the United States, we engage in business relationships and transactions that involve many different currencies. Exchange rates between the U.S. dollar and the local currencies in these foreign locations where we do business can vary unpredictably. These variations may have an effect on the prices we pay for key materials and services from overseas vendors in our functional currencies under agreements that are priced in local currencies. If the rate of the U.S. dollar depreciates against local currencies, our effective costs for such materials and services would increase, adversely affecting our operating results and cash flows.
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 Companys foreign subsidiaries and members of the family of our Chief Executive Officer, Director and largest stockholder, his brother Pier Antonio Costamagna (one of our executive officers who is Managing Director of BRC Group, the principal operating company in our transportation division, and Director of Mechanical Engineering of MTM, S.r.L., a wholly owned subsidiary of BRC), companies in which our Chief Executive Officers family has controlling or other ownership interests, companies that our employees and service providers own in whole or in part and former owners of the companies we have purchased in foreign countries. Many of these relationships stem from the fact that when we acquired these foreign subsidiaries they were privately owned and such transactions are not uncommon in privately owned companies. Our Board, its Audit Committee and its Nominating and Corporate Governance Committee seek to review on an ongoing basis related party transactions as well as new transactions which may be proposed for various issues related to the effect on our business. We cannot assure you that the terms of the transactions with these various related parties are on terms as favorable to us as those that could have been obtained in arms-length transactions with third parties, or that the existing policies and procedures are sufficient to identify and completely address conflicts of interest that may arise. Related party transactions could result in related parties receiving more favorable treatment than an unaffiliated third party would receive, although these parties may provide goods or services that are not readily available elsewhere in some situations. In addition, related party transactions present difficult conflicts of interest, could result in significant and minor disadvantages to our company and may impair investor confidence, which could materially and adversely affect us. Related party transactions could also cause us to become materially dependent on related parties in the ongoing conduct of our business, and related parties may be motivated by personal interests to pursue courses of action that are not necessarily in the best interests of our company and our stockholders.
We have a significant amount of goodwill and intangible assets that may become impaired, which could impact our results of operations.
Approximately $30.3 million, or 6.7%, of our total assets at December 31, 2010 were net intangible assets, including technology, customer relationships and trade name, and approximately $53.8 million, or 11.8%, of our total assets at December 31, 2010 were goodwill that relates to our acquisitions. We amortize the intangible assets, with the exception of goodwill, based on our estimate of their remaining useful lives and their values at the time of acquisition. We are required to test goodwill for impairment at least on an annual basis, or earlier if we determine it may be impaired due to change in circumstances. We are required to test the other intangible assets with definite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amounts of the intangible assets may not be recoverable. If impairment exists in any of these assets, we are required to write-down the related asset to its estimated recoverable value as of the measurement date. Such impairment write-downs may significantly impact our results of operations.
We are dependent on certain key customers, and the loss of one or more customers could have a material adverse effect on us.
A substantial portion of our business results from revenues from key customers. For the year ended December 31, 2010, one customer represented 14.6% of our consolidated revenues. In the year ended December 31, 2009, two customers represented 13.0% and 11.6% of our consolidated revenues, respectively. In the year ended December 31, 2008, one customer represented 10.7% of our consolidated revenues. Revenues from our top ten customers during the years ended December 31, 2010, 2009 and 2008 accounted for approximately 53.0%, 62.0% and 36.3% of our consolidated revenues, respectively. If one or more of these key customers were to reduce their orders from us substantially, we would suffer a decline in revenue, which may materially and adversely affect us.
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 Argentina companies Distribuidora Shopping S.A. Tomasetto Achille, S.A., and the Teleflex Systems business. During 2010, we acquired Productive Concepts International LLCs alternative fuel business and Evotek LLC and as a part of our business strategy we may seek to acquire additional businesses, technologies or products in the future. We cannot assure you that any acquisition or any future transaction we complete will result in long-term benefits to us or our stockholders or that our management will be able to integrate or manage the acquired business effectively, efficiently and in a timely manner. We could also incur unanticipated expenses or losses in connection with any acquisition or future transaction.
Acquisitions entail numerous risks, including difficulties associated with the integration of operations, technologies, products and personnel that, if realized, could harm our operating results. Risks related to potential acquisitions include, but are not limited to:
We face risks associated with marketing, distributing, and servicing our products internationally.
In addition to our operations in the United States, we currently operate in Canada, Italy, Australia, India, Pakistan, the Netherlands, Japan, Brazil, Argentina and Venezuela, and market our products and technologies in other international markets, including both industrialized and developing countries. During the year ended December 31, 2010, approximately 14% of our revenue was derived from sales to customers located within the United States and Canada, and the remaining 86% was derived from sales in Asia, Europe, Latin America and the Middle East. 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. Additionally, approximately 86% of our employees and 91% of our approximately 850 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:
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 suppliers failure to supply materials or components in a timely manner or to supply materials and components that meet our quality, quantity or cost requirements, combined with a delay in our ability to obtain substitute sources for these materials and components in a timely manner or on terms acceptable to us, would harm our ability to manufacture our products effectively, or would significantly increase our production costs, either of which could materially and adversely affect us. In addition, we rely on a limited number of suppliers for certain proprietary die cast parts, electronics, software, catalysts and engines for use in our end products. Approximately 28.9%, 45.7%, and 34.6% of our purchases of raw materials and services during the years ended December 31, 2010, 2009, and 2008, respectively, were supplied by ten entities. During 2010, one supplier represented 10.3% of our purchases of raw materials and services. During 2009, one supplier represented 12.4% of our purchases of raw materials and services. During 2008, no suppliers represented more than 10% of our purchases of raw materials and services.
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. We cannot assure that we will be able to retain all of our existing senior management personnel or attract additional qualified personnel when needed. Additionally, we do not maintain key-man life insurance on any of our senior management personnel.
Mariano Costamagnas employment agreement may limit our Board of Directors ability to change our senior management.
Mariano Costamagna, our Chief Executive Officer and a member of our Board of Directors, has entered into an employment agreement with us that is effective from January 1, 2009 until December 31, 2012. This new employment agreement provides for an annual base salary of $145,000 paid in U.S. dollars and 335,000 paid in Euros, as well as bonuses, benefits and reasonable business expenses. If, during the term of his employment, we
terminate Mr. Costamagnas employment other than for cause or disability or if Mr. Costamagna resigns for good reason, we must pay Mr. Costamagna a severance payment equal to $5.0 million divided into five equal installments (the first of which is due on the 60th day following termination with subsequent installments due on each anniversary of termination), provided that Mr. Costamagna abides by certain covenants limiting his ability to compete with us, solicit our employees or interfere with our business during those four years following his termination. The required severance payment may limit our Board of Directors ability to decide whether to retain or to replace Mr. Costamagna or to reallocate management responsibilities among our senior executives, a fact that could, in certain circumstances, materially and adversely affect us.
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 the year ended December 31, 2010, direct OEM product sales accounted for approximately 50.6% of our revenue. 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, they could materially and adversely affect us.
Our business is subject to seasonal influences.
Operating results for any quarter are not indicative of the results that may be achieved for any subsequent quarter or for a full year. Many of the factors that impact our operating results are beyond our control and difficult to predict. They include seasonal work patterns due to vacations and holidays, particularly in our European manufacturing facilities, and fluctuations in demand for the end-user products in which our products are placed.
Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our managements time and attention.
From January 1, 2010 through December 31, 2010, our stock price has fluctuated from a low of $24.50 to a high of $51.94. For 2009, our stock price fluctuated from a low of $9.83 to a high of $52.53. 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 time and attention of our management.
Our actual operating results may differ materially from our guidance.
From time to time, we release guidance in our quarterly earnings releases, quarterly earnings conference calls or otherwise, regarding our future performance that represent our managements estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to
future business decisions, some of which will change. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions and estimates inherent in the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon, or otherwise consider, our guidance in making an investment decision in respect of our common stock.
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:
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.
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.
Our common stock is traded on the NASDAQ Stock Market under the symbol FSYS. As of December 31, 2010, there were approximately 265 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:
We have not recently declared or paid dividends on our common stock, including during the past two fiscal years, and we currently expect to retain any earnings for reinvestment in our business. Accordingly, we do not expect to pay dividends in the foreseeable future. The timing and amount of any future dividends is determined by our Board of Directors and will depend on our earnings, cash requirements and the financial condition and other factors deemed relevant by our Board of Directors.
Sales of Unregistered Securities
Except as previously reported in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, we have not sold any equity securities during the three years ended December 31, 2010 which were not registered under The Securities Act of 1993 as amended.
Issuer Repurchases of Equity Securities
There were no repurchases of our common stock in the open market during the fourth quarter of 2010.
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, 2010 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. Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Effective January 1, 2009, we 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 parents 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 were required to be applied retrospectively for all periods presented. The following Five Year Summary Selected Financial Information reflects this new guidance for all periods presented.
The following discussion includes forward-looking statements about our business, financial condition, and results of operations, including discussions about managements 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 managements 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.
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 850 distributors and dealers in more than 65 countries and more than 175 original equipment manufacturers, or OEMs.
We offer an array of components, systems and fully integrated solutions for our customers, including:
Manufacturers of industrial mobile equipment and stationary engines are among the most active customers for our industrial products. Users of small and large industrial engines capitalize on the lower cost and pollutant benefits of using alternative fuels. For example, forklift and other industrial equipment users often use our products to operate equipment indoors resulting in lower toxic emissions. The wide availability of gaseous fuels in world markets combined with their lower emissions and cost compared to gasoline and diesel fuels is driving rapid growth in the global alternative fuel industry. Automobile manufacturers, taxi companies, transit and shuttle bus companies, and delivery fleets are among the most active customers for our transportation products where our largest markets are currently outside the United States.
We recently completed the acquisitions of Productive Concepts International, LLC (PCI) and Evotek LLC (Evotek) to expand our activities in the automotive markets within the United States. Evotek and PCI together
equip our U.S. automotive business with the capabilities necessary to be a leader in this market. Evotek is a strategic transaction that we believe immediately positions Fuel Systems to compete in the dedicated natural gas vehicle (NGV) OEM market emerging in the United States. PCI adds key technology and industry relationships to further our North American OEM and fleet market strategy, and also expands our vehicle modification and systems integration capabilities for a variety of alternative fuel applications, including hybrid, CNG, propane and dual-fuel diesel. We continue to believe fleet vehicles offer attractive opportunities for our gaseous fuel solutions in the U.S. We now have a full suite of automotive capabilities in this market, including a CARB certified, dedicated systems product line and in-house OEM systems engineering platform, enhancing our ability to leverage our existing relationships with fleet customers and other manufacturers as they roll out CNG and LPG versions of key fleet vehicles.
For the year ended December 31, 2010 revenue decreased approximately 4.8%, operating profit decreased approximately 27.4% and diluted EPS decreased by 24.4%. These results were driven primarily by the expiration of the Italian government incentives which drove strong results in our BRC operations related to our post-production OEM (DOEM) sales for the prior year. Beginning in the second quarter 2010 and continuing into the third and fourth quarters our volumes for DOEM conversions decreased approximately 49%, 80% and 92% respectively compared to the comparable prior year quarter. The expiration of the Italian government incentives were partially offset by increased activity in our IMPCO operations as well as our aftermarket business. We expect lower DOEM volumes to continue into 2011.
Net cash provided by operations was $66.7 million for the year ended December 31, 2010. In addition, we completed an underwritten offering for the sale of 2,300,000 shares of our common stock. Including the net proceeds from the sale of $64.9 million, our net cash position of $112.4 million provides us with adequate capital for working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets.
Acquisition of Productive Concepts International LLC
On September 2, 2010, we acquired Productive Concepts International LLCs alternative fuel vehicle business (PCI) for an estimated transaction value of approximately $13.0 million including $975,000 in assumed debt. Based in Union City, Indiana, PCI is a specialized vehicle modification and value-added systems integrator for a variety of alternative fuel applications including hybrid, CNG, propane and dual-fuel diesel. We paid $7.7 million at closing, with an additional cash payment of $4.0 million payable due upon the achievement of a system installation volume milestone prior to December 31, 2011. Further performance payments of up to $20 million in Fuel Systems Solutions stock may be made in the future based on the achievement of 2011 and 2012 revenue targets. The first performance payment of $20.0 million is expected to be paid no later than 90 days after the end of calendar year 2011 if revenue is greater than $45 million for 2011. The second performance payment of $20.0 million is expected to be paid no later than 90 days after the end of calendar year 2012 if revenue is greater than $65.0 million for 2012. The range of the undiscounted amounts that we could be required to pay for these earnout payments is between $0.0 and $40.0 million. In accordance with the FASB issued authoritative guidance, we determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The resultant probability-weighted cash flows were then discounted using a rate that reflects the uncertainty surrounding the expected outcomes, which we believe is appropriate and representative of a market participant assumption. Once the purchase accounting for PCI has been finalized, future changes to the fair value of the contingent consideration will be determined each period and charged to expense in the Consolidated Statements of Operations under operating expenses. As of the closing date of the acquisition, the PCI contingent consideration was assigned a preliminary fair value of approximately $5.1 million, of which $4.0 million is in escrow and classified in other current assets in the Condensed Consolidated Balance Sheet at December 31,
2010. The results of operations of PCI have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.
The purchase price has been allocated based on managements preliminary estimates as follows (in thousands):
Of the $8.9 million of acquired intangible assets, the entire amount relates to customer relationships with a useful life of approximately 8 years. The continued development of the U.S. alternative fuel vehicle market as well as potential legislative changes impacting this market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $3.5 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed. Management is in the process of finalizing its valuations of certain intangible assets as well as the contingent consideration; thus the value of the consideration paid and allocation of the purchase price is subject to refinement.
Management has determined that the acquisition of PCI was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.
Acquisition of Evotek LLC
On September 22, 2010, we acquired Evotek LLC (Evotek), a premier alternative fuel automotive systems developer in North America that offers dedicated CNG and LPG conversion systems across multiple U.S. fleet vehicle platforms. The aggregate purchase price for 100% of the equity of Evotek was approximately $4.0 million in cash. In addition, we issued 89,207 shares of common stock in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the issuance did not involve a public offering. The 89,207 shares of common stock are in escrow and will be released in three equal annual installments upon achievement of certain product development milestones. The Evotek contingent consideration (shares held in escrow) with a value of $3 million will be recognized as share based compensation expense (with a debit to research and development and a credit to additional paid-in capital), over the earn-out period provided generally that such former Evotek employee is an employee of the Company at the time the acquisition-related contingent consideration is earned. The results of operations of Evotek have been included in the accompanying consolidated statements of operations from the date of acquisition within the IMPCO operating segment.
The purchase price has been allocated based upon managements preliminary estimate as follows: $3.7 million to existing technology with an estimated useful life of 7 years and approximately $0.1 million to net tangible asset. As with the PCI acquisition, the continued development of the U.S. alternative fuel market as well as potential legislative changes impacting this market were among the factors that contributed to a purchase price resulting in the recognition of goodwill of $0.2 million. The acquired goodwill is deductible for tax purposes. The above purchase price has been allocated based on an estimate of the fair values of assets acquired and liabilities assumed. Management is in the process of finalizing its valuations of certain intangible assets as well as the contingent consideration; thus the value of the consideration paid and allocation of the purchase price is subject to refinement.
Management has determined that the acquisition of Evotek was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.
On December 15, 2010, we closed an underwritten public offering of 2,300,000 shares of common stock including 300,000 shares issued pursuant to an underwriters overallotment option at a price of $30.00 per share. Net proceeds from the offering were $64.9 million, after deducting underwriting discounts and offering expenses. Under a committed credit facility with Intesa Sanpaolo S.p.A., we were required to use the net proceeds from the offering to repay the outstanding balance under such facility. Following such mandatory repayment, we expect to use the remaining net proceeds from the offering for working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets.
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.
We recognize revenue upon transfer of title and risk of loss, generally when products are shipped provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and management believes collectability is reasonably assured. We consider arrangements with extended payment terms not to be fixed or determinable unless they are secured under an irrevocable letter of credit arrangement guaranteed by a reputable financial institution, and accordingly, we defer such revenue until amounts become due and payable. We classify shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred. We provide for returns and allowances as circumstances and facts require.
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 managements 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.
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.
We write down our inventory for estimated slow moving and obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Goodwill and Intangible Assets
We recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. In those acquisitions that include contingent considerationi.e. earnout payments to be paid upon the satisfaction of certain milestonesas part of the total consideration paid, we determine the fair value of this liability at the acquisition date using a probability weighted income approach. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed (including any contingent consideration) at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, support obligations assumed, estimated restructuring liabilities and pre-acquisition contingencies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and they are inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to:
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly, with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period, our final determination of the uncertain tax positions estimated value, or tax related valuation allowances, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
Goodwill and Intangible AssetsImpairment Assessments
We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The FASB issued authoritative guidance requiring that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit (i.e. an operating segment, or one level below an operating segment) to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. Our most recent annual goodwill impairment analysis, which was performed during the fourth quarter of fiscal 2010, did not result in an impairment charge, nor did we record any goodwill impairment in fiscal 2009 or 2008 in relation with our annual impairment analysis. However, during the second quarter of 2008, changes in the Australian business climate indicated that goodwill for IMPCO Australia might be impaired. As a result, we performed and analysis and recorded an impairment charge of $3.9 million to fully impair IMPCO Australias goodwill balance.
We make judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.
Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our
internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. We did not recognize any intangible asset impairment charges in fiscal 2010, 2009 or 2008.
Based upon the substantial net operating loss carryforwards and recent history of losses incurred in certain jurisdictions, we cannot conclude that it is more likely than not that the deferred tax assets in the United States and certain foreign jurisdictions as of December 31, 2010 will be realized within the foreseeable future. The balance of the total United States valuation allowance was $29.7 million as of December 31, 2010. In addition, we have a foreign valuation allowance of $7.0 million as of December 31, 2010. 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, 2010, undistributed earnings, except with respect to a portion of undistributed earnings from BRC, are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes is provided thereon. Residual U.S. taxes have been accrued (applied as a reduction of net operating loss carryforwards) on approximately $30.0 million of earnings of BRC that is not considered indefinitely reinvested. Such amounts could be drawn as a dividend or from BRC in the future without U.S. income tax consequences. Upon distributions of earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. We have accrued such residual income taxes for all undistributed foreign earnings not considered indefinitely reinvested. It is not practical to determine the income tax impact in the event we repatriate undistributed foreign earnings that are considered indefinitely reinvested. As of December 31, 2010, 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, 2010 and 2009
IMPCO Operations. The increase in revenue was primarily due to an increase in demand from the industrial market of approximately 31% as well as the transportation market, specifically an increase in the Asian market of more than two fold. In addition, the increase in revenue includes approximately $26.6 million from the acquisition of the Power Systems Business in July 2009 and approximately $5.8 million from the US Automotive market which includes the recent acquisitions of PCI and Evotek.
BRC Operations. The decrease in revenue was primarily due to lower sales for post-productions OEM (DOEM) conversions, partially offset by an approximate 17% increase in aftermarket sales. Volumes for the DOEM conversions decreased to approximately 109,000 for the full year 2010 compared with approximately 184,000 for the prior year. The lower DOEM volumes began in the second quarter of 2010, after the expiration of the Italian government auto incentives, continued into Q3 2010, and significantly impacted Q4 2010 as well. In Q4 2010 total revenues were approximately $42.4 million, which included DOEM conversions of approximately 5,300 units, compared to total revenues of $141.3 million in Q4 2009, which included conversions of approximately 66,600 units. We expect lower DOEM volumes to continue into 2011. BRCs revenue for 2010 includes a decrease of approximately $18.3 million or 4.8% from the weakening of local currencies compared to the dollar from 2009.
The followings represent revenues by product and by geographic location for the years ended December 31, 2010 and 2009:
COST OF REVENUE
IMPCO Operations. The increase relates primarily to the increased volume of sales in the industrial market as well as the full year impact of the Power Systems Business acquired in July 2009.
BRC Operations. The decrease of $39.8 million relates to the decrease in DOEM volumes, beginning in the second quarter 2010 and continuing into the third and fourth quarters, as well as lower compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Factory utilization and gross profit have been closely tied to DOEM volumes as well. The elimination of incentives has significantly decreased factory utilization resulting in reduced gross profit levels. These decreases
were partially offset by the increase in the aftermarket product costs due to higher volume. Cost of revenues for the quarter ended December 31, 2010 decreased to $36.3 million, from $89.0 million in the prior year quarter, primarily due to lower DOEM volumes. We expect pressure on gross profit margins to continue into 2011 due to lower DOEM volumes.
RESEARCH & DEVELOPMENT
IMPCO Operations. The increase relates to additional compensation and related expenses associated with the research and development for the US Automotive market, as well as the additional costs associated with the Power Systems Business, acquired in July 2009, of approximately $2.3 million.
BRC Operations. The increase relates to additional compensation and related expenses associated with the continued investment in various automotive projects including next generation products, OEM quality system solutions and expansion of current products.
SELLING, GENERAL & ADMINISTRATIVE
IMPCO Operations. The increase relates primarily to additional costs in 2010 associated with the Power Systems Business, acquired in July 2009, of approximately $2.1 million.
BRC Operations. The increase relates primarily to certain costs associated with lower sales volumes. Specifically, the fourth quarter of 2010 includes the write-off of certain DOEM assembly lines of approximately $0.7 million, and reserves for potential labor claims from former DOEM employees for approximately $1.2 million. These increases were partially offset by lower outside consultant costs.
Corporate Expenses. Corporate expenses consist of general and administrative expenses at the corporate level to support our business segments in areas such as executive management, finance, human resources, management information systems, legal and accounting services and investor relations. Corporate expenses in 2010 decreased compared to 2009 primarily because of a reduction in employees in our corporate office, as well as lower outside service costs.
Operating income for the year ended December 31, 2010 decreased for the reasons stated above. Operating loss for the quarter ended December 31, 2010 was $3.2 million compared to operating income of $33.4 million for the prior year quarter. This resulted primarily from the timing required to reduce our overall costs of our BRC Operations in proportion to the decrease in revenues.
Other Income (Expense), Net.
Other income (expense) includes foreign exchange gains and losses between various other assets and liabilities to be settled in other currencies. For the years ended December 31, 2010 and 2009 we recognized approximately $1.5 million and $3.1 million, respectively in gains on foreign exchange. We routinely conduct transactions in currencies other than our reporting currency, the U.S. dollar. We cannot estimate or forecast the direction or the magnitude of any foreign exchange movements with any currency that we transact in; therefore, we do not measure or predict the future impact of foreign currency exchange rate movements on our consolidated financial statements.
Included in other income for the year end December 31, 2009, is a gain of approximately $1.4 million associated with the acquisition of the remaining 50% ownership interest in WMTM. This acquisition qualified as a step acquisition which occurs when a shareholder obtains control over an entity by acquiring an additional interest in that entity. Under the appropriate FASB issued authoritative guidance, the previously held equity interest was remeasured to fair value at the date of the acquisition.
For the year ended December 31, 2010, interest expense decreased approximately $1.4 million to $0.9 million, from $2.3 million in 2009. This decrease was primarily due to a lower weighted average outstanding debt in 2010 compared to 2009.
Provision for Income Taxes.
Income tax expense for the year ended December 31, 2010 and 2009 was approximately $19.6 million and $34.0 million, representing an effective tax rate of 32.7% and 41.0%, respectively, and primarily consisted of the provision for our foreign operations. A full valuation allowance is maintained against the income tax benefits generated in the United States and certain foreign jurisdictions due to cumulative losses incurred in those jurisdictions, as we cannot conclude that such tax benefits meet the more likely than not threshold for realization. Accordingly, for the year ended December 31, 2010, we have not recorded income tax benefits for losses incurred or significant income tax expense for income generated for such jurisdictions as such amounts will be offset by the valuation allowance. We operate in an international environment with significant operations in various locations outside of the United States, which have statutory tax rates that are different from the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. The change in the effective tax rate is primarily a result of the fluctuation of earnings in the various jurisdictions.
Years Ended December 31, 2009 and 2008
IMPCO Operations. 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.
BRC Operations. The increase in revenue in 2009 was due to an increase in sales for DOEM conversions, 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. The higher DOEM volumes significantly impact Q4 2009 as well. In Q4 2009 total revenues were approximately $141.3 million which included DOEM conversions of approximately 66,600 units compare to total revenues of $66.5 million which included conversions of approximately 23,700 units in Q4 2008. Revenue for the year ended December 31, 2009 includes approximately $22.3 million of revenue associated with acquisitions of Distribuidora Shopping and WMTM. 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.
The followings represent revenues by product and by geographic location for the years ended December 31, 2009 and 2008:
COST OF REVENUE
IMPCO Operations. The decrease 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 partially offset by additional costs from the Power Systems Business acquisition.
BRC Operations. The increase related to the increase in DOEM volumes attributable to the Italian Government incentives, the acquisitions of Distribuidora Shopping and WMTM, and compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. These increases were partially offset by the decrease in product costs associated with the aftermarket due to volume. Cost of revenues for the quarter ended December 31, 2009 increased to $89.0 million from $47.4 million in the prior year quarter primarily due to higher DOEM volumes. The incentives significantly increased factory utilization, resulting in higher gross profit levels.
RESEARCH & DEVELOPMENT
IMPCO Operations. The increase relates to the additional costs associated with the Power Systems Business acquisition in July 2009 of approximately $1.6 million.
BRC Operations. The increase relates to additional headcount associated with the continue growth investment in various automotive projects.
SELLING, GENERAL & ADMINISTRATIVE
IMPCO Operations. The increase related primarily to additional costs associated with the Power Systems Business acquired in July 2009 of approximately $2.8 million
BRC Operations. The increase related primarily to the acquisitions of Distribuidora Shopping in January 2009 and WMTM in May of 2009 of approximately $4.3 million, as well as additional compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation.
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.
Operating income increased for the year ended December 31, 2009 for the reasons stated above. Included in the year ended December 31, 2008 operating income for the BRC Operations was a goodwill impairment charge of $3.9 million due to the changes in the business climate for IMPCO Australia. Operating income for the quarter ended December 31, 2009 was $33.4 million compared to operating income of $4.3 million for the prior year quarter.
Other Income (Expense), Net.
For the year ended December 31, 2009, we 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.
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 in 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.
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 Companys 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.
Our debt to total capitalization at December 31, 2010 has improved by 51.4% when compared to 2009 and our net cash has increased by approximately $85.3 million compared to December 31, 2009. This increase is mainly attributable to the net proceeds of the issuance of common stock in December 2010, which raised approximately $64.9 million, as well as the collection of accounts receivable.
Our ratio of current assets to current liabilities was approximately 3:1 and 2:1 at December 31, 2010 and December 31, 2009, respectively. At December 31, 2010, our total working capital had increased by $69.0 million to $210.8 million from $141.8 million at December 31, 2009. This increase is primarily due to the
following: (1) an increase of $78.3 million in cash; (2) a decrease of $27.2 million in accounts payable; (3) an increase of $14.1 million in other current assets, attributable to higher VAT receivables as well as $4 million in escrow related to the PCI acquisition; (4) a decrease of $12.5 million in income taxes payable; and (5) a decrease of $7.6 million in related party payables, which were all partially offset by a decrease of $71.2 million in net accounts receivable. The decrease in accounts receivable, the increase in other current assets, and the decreases in accounts payable, income taxes payable and related party payables are primarily attributable to our BRC operations.
The following table provides a summary of our operating, investing and financing activities as follows:
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.
2010 compared to 2009. In 2010, our net cash flow provided from operating activities was approximately $66.7 million, an increase of 104.0% from 2009. This increase was primarily driven by lower level of accounts receivable offset by decreases in accounts payable and income taxes payable at the end of the year at our BRC operations due to overall decrease in the volume of activity, specifically in our DOEM business.
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.
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 is within our BRC operations and related to the continued expansion of assembly lines.
In 2010, our PP&E additions were approximately $28.0 million or 116.9 % higher than in 2009. This was due primarily to the continued expansion of our BRC operations, specifically our new R&D center of approximately $13.4 million. In addition, we paid approximately $11.6 million for the acquisitions of Productive Concepts International and Evotek, net of cash acquired.
In 2009, our PP&E additions were approximately $12.9 million or 21% higher than in 2008. This was due primarily to the continued expansion of our BRC operations. In addition, we paid approximately $29.2 million for the acquisitions of Distribuidora Shopping, WMTM, the Power Systems Business and FuelMaker assets net of cash acquired.
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 our BRC operations. In additions, we 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 2010, our financing activities included net proceeds from issuance of 2,300,000 shares of common stock for approximately $64.9 million and proceeds from term and other loans of approximately $15.0 million, offset by repayments of term and other loans of approximately $20.3 million.
In 2009, our financing activities included proceeds from term loans of approximately $19.8 million related to the purchase of Distribuidora Shopping and FuelMaker; $27.7 million of net proceeds from the issuance of 1,500,000 shares of our common stock to fund the purchase of the Power Business Systems as well as other working capital requirements for us. In addition, we repaid approximately $18.0 million of term and other loans as well as our lines of credit.
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.
Our outstanding debt is summarized as follows (in thousands):
The debt is scheduled to be repaid as follows (in thousands):
At December 31, 2010, our weighted average interest rate on outstanding debt was 2.6%. We are party to numerous significant credit agreements and other borrowings. All foreign denominated revolving lines of credit have been converted using the average interbank currency rate at December 31, 2010.
(a) Revolving Lines of CreditItaly and Argentina
We maintain various revolving lines of credit in Italy and Argentina. The revolving lines of credit in Italy include $3.2 million which is unsecured and $6.0 million of which is collateralized by accounts receivable. The interest rates on these revolving lines of credit are fixed and variable and range from 2.0% to 5.0% as of December 31, 2010. At December 31, 2010 and 2009 there was no balance and $2.9 million outstanding, respectively.
The revolving lines of credit in Argentina, assumed in connection with the acquisition of Distribuidora Shopping, consist of two lines for a total amount of availability of approximately $1.7 million. These lines are unsecured with approximately $0.8 million and $3,000 outstanding at December 31, 2010 and December 31, 2009, respectively. At December 31, 2010, the interest rates for the lines of credit in Argentina ranged from 3.2% to 18.0%.
All lines are callable on demand.
(b) Revolving Line of CreditUSA
As of December 31, 2010, the Company and IMPCO Technologies, Inc. (IMPCO) maintain an unsecured, revolving short term credit facility with Intesa SanPaolo S.p.A. (Intesa) amounting to $10.5 million. IMPCO intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCOs payments. At December 31, 2010 and December 31, 2009, there were no balances outstanding, respectively. The maximum aggregate principal amount of loans outstanding at any time is $10.5 million and the maturity date for the agreement is April 30, 2014. At our option, the loans will bear interest on either the applicable LIBOR rate plus 2.0%, the banks prime rate plus 1.0% or the banks cost of funds rate plus 2.0%. The banks 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 loans maturity date, such amounts will bear interest at the banks prime rate plus 2.0%. In addition, this revolving credit facility carries a commitment fee of 0.5% of the average daily unused amount The line of credit contains quarterly covenants beginning September 30, 2009, which require us to maintain (1) a ratio of Net Debt/EBITDA for the then most recently concluded period of four consecutive fiscal quarters of the Company to be less than 2, (2) a consolidated net worth of at least $135 million, and (3) we shall not, and shall not permit any of its subsidiaries to create, incur, assume or permit to exist any Debt other than (i) debt of any such subsidiary owing to any other subsidiary or to us or (ii) debt for borrowed money in a total aggregate principal amount, the U.S. Dollar equivalent of which does not exceed $75 million. At December 31, 2010, we were in compliance with these covenants.
(c) Term LoanIntesa SanPaolo S.p.A.
On June 26, 2007, BRC 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 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 1.6% and 1.4% at December 31, 2010 and December 31, 2009, 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, 2010 and December 31, 2009, 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 2.4% at December 31, 2010. At December 31, 2010 and December 31, 2009, the amount outstanding was $2.8 million and $4.5 million, respectively.
(d) Term LoanBanca IMI S.p.A. and Intesa SanPaolo S.p.A.
On December 22, 2008, MTM S.r.L. (MTM), a subsidiary of the Company, entered into a financing agreement with Banca IMI S.p.A. and Intesa SanPaolo S.p.A. pursuant to which MTM may borrow up to
15.0 million (approximately $19.9 million converted into U.S. dollars) to be used for the acquisition of Distribuidora Shopping (see Note 3) as well as for investments in MTMs subsidiaries and certain capital expenditures for research and development. Approximately $7.7 million and $10.8 million were outstanding on this financing agreement as of December 31, 2010 and December 31, 2009, respectively. In addition, on May 28, 2009, MTM exercised its option to extend the maturity date of its borrowings under this financing agreement from June 22, 2009 to June 22, 2014. As specified in the financing agreement, MTM must make interest payments on June 30 and December 31 of each year beginning on June 30, 2009 and is obligated to repay the entire principal amount of the loan, 15.0 million, in ten equal semi-annual installments beginning on December 22, 2009 and ending on June 22, 2014.
The loan contains semi-annual covenants 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 Companys Chief Executive Officer) and his family to hold, directly or indirectly, 10% of the outstanding capital stock of the Company, unless the reduction in ownership is attributable to one or more issuances of the Companys capital stock or a merger or other fundamental corporate transaction which causes a variation in the outstanding capital stock. At December 31, 2010, MTM was in compliance with these covenants. The loan is collateralized by all of MTMs ownership interest in Distribuidora Shopping and all of Distribuidora Shoppings 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 4.0%.
Off-Balance Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet arrangements.
Recent Accounting Pronouncements
Accounting Standards Adopted in 2010
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 entitys 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. The new guidance also requires enhanced disclosures about an enterprises involvement with a VIE. The adoption of this guidance on January 1, 2010 did not have an impact on our consolidated financial statements.
The following table contains supplemental information regarding total contractual obligations as of December 31, 2010:
Foreign Currency Management. We operate on a global basis and are exposed to currency fluctuations related to the manufacture, assemble and sale of our products in currencies other than the U.S. Dollar. The major foreign currencies involve the markets in the European Union, Argentina, Australia and Canada. Movements in currency exchange rates may affect the translated value of our earnings and cash flow associated with out foreign operations as well as the translation of the net asset or liability positions that are denominated in foreign currencies. In countries outside of the United States, we generally generate revenues and incur operating expenses denominated in local currencies. These revenue and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates. We monitor this risk and attempt to minimize the exposure to our net results through the management of cash disbursements in local currencies. We mitigate our foreign currency economic risk by minimizing our U.S Dollar investment in foreign operations using foreign currency term loans to finance our foreign subsidiaries.
We prepared sensitivity analyses to determine the impact of hypothetical changes foreign currency exchange rates have on our results of operations. The foreign currency rate analysis assumed a uniform movement in currencies by 10% relative to the U.S. Dollar on our results. Based upon the results of these analyses, a 10% change in currency rates would have resulted in an increase or decrease in our earnings for the year ended December 31, 2010 by approximately $3.0 million. We seek to hedge our foreign currency economic risk by minimizing our U.S. dollar investment in foreign operations using foreign currency term loans to finance our foreign subsidiaries. The term loans are denominated in local currencies and translated to U.S. dollars at period end exchange rates.
Debt Obligation. The following table summarizes our debt obligations at December 31, 2010. 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, 2010 (U.S. dollar equivalent in thousands).
See pages F-1 through F-39 of this Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of December 31, 2010.
Based on such evaluation, our chief executive officer and our chief financial officer have concluded that as of December 31, 2010, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit to the SEC is (1) recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC and (2) accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosures.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Under the rules of the SEC, internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records, that in reasonable detail, accurately and fairly reflect our transactions and our dispositions of assets; provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America; provide reasonable assurance that receipts and expenditures of company assets are made only in accordance with management authorization; and provide reasonable assurance regarding the prevention or the timely detection of the unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this evaluation, management concluded that the companys internal control over financial reporting was effective as of December 31, 2010.
Attestation Report of the Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, (PwC) the independent registered public accounting firm that audited the financial statements included in this Form 10-K, has attested to, and reported on, the effectiveness of our internal control over financial reporting. The reports of PwC are included in the Financial Statements to this Form 10-K.
Changes in Internal Control over Financial Reporting
For the three month period ended December 31, 2010, there has been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 2011 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 2011 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 2011 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 2011 Proxy Statement and such information is incorporated by reference herein.
The information relating to executive compensation is set forth under the captions Executive Compensation and Directors Compensation in the Fuel Systems 2011 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.
The information relating to security ownership of management and certain beneficial owners is set forth under the caption Principal Stockholders in the Fuel Systems 2011 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, 2010:
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 2011 Proxy Statement and such information is incorporated by reference herein.
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 2011 Proxy Statement and such information is incorporated by reference herein.
(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, 2010 and 2009.
Consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008.
Consolidated statements of stockholders equity for the years ended December 31, 2010, 2009 and 2008.
Consolidated statements of cash flows for the years ended December 31, 2010, 2009 and 2008.
Notes to consolidated financial statements.
(2) Supplemental Financial Statement Schedules:
Schedule IIValuation Accounts.
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 Companys 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.
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 3, 2011.
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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fuel Systems Solutions, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Fuel Systems Solutions, Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years 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 December 31, 2010 and 2009 and for the years then ended 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, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys 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 Managements 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 Companys internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys 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 companys 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 companys 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Fuel Systems Solutions, Inc.
New York, NY
We have audited the accompanying consolidated statements of operations, stockholders equity, and cash flows of Fuel Systems Solutions, Inc. (the Company) for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Fuel Systems Solutions, Inc. for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP (formerly known as BDO Seidman, LLP)
Costa Mesa, CA
March 6, 2009, except as to Note 20, which is as of May 29, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fuel Systems Solutions, Inc.
New York, NY
The audit referred to in our report dated March 6, 2009, except as to Note 20 which is as of May 29, 2009, relating to the consolidated financial statements of Fuel Systems Solutions, Inc., which is contained in Item 15 of this Form 10-K also included the audit of the consolidated financial statement schedule for 2008 listed in the accompanying index. This financial statement schedule is the responsibility of the Companys management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ BDO USA, LLP (formerly known as BDO Seidman, LLP)
Costa Mesa, California
March 6, 2009, except as to Note 20 which is as of May 29, 2009
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In Thousands, Except Share Data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, except Share and Per Share Data)