Description
Fuel Systems Solutions, Inc. KEVIN DOUGLAS bought 69,800 shares on 7-23-2012 at $ 15.87
BUSINESS OVERVIEW
Overview
Founded over 50 years ago, Fuel Systems Solutions is a leader in providing alternative fuel systems for transportation, industrial, and refueling applications worldwide. We have a global presence and operate in geographies and markets that are underpenetrated and growing rapidly, driven by compelling economics, government support, and local demand. Our dedicated and bi-fuel technologies offer our customers a broad range of cost-effective products and applications that we tailor to local specifications. Our technologies enable our customers to:
• benefit from significantly lower retail fuel prices, capturing the differential between traditional fuels and compressed natural gas (CNG) and liquid propane gas (LPG);
• contribute to cleaner air and environment as carbon emissions of natural gas are in general lower than gasoline and diesel; and
• help displace oil and exploit natural gas reserves so as to increase energy independence.
Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. We supply our products and systems to the marketplace through a global distribution network of approximately 700 distributors and dealers in more than 70 countries and 175 original equipment manufacturers, or OEMs.
We offer an array of components, systems and fully integrated solutions for our customers, including:
• fuel delivery —pressure regulators, fuel injectors, flow control valves and other components designed to control the pressure, flow and/or metering of gaseous fuels;
• electronic controls —solid-state components and proprietary software that monitor and optimize fuel pressure and flow to meet manufacturers’ engine requirements;
• gaseous fueled internal combustion engines —engines manufactured by OEMs that are integrated with our fuel delivery and electronic controls;
• systems integration —systems integration support to integrate the gaseous fuel storage, fuel delivery and /or electronic control components and sub-systems to meet OEM and aftermarket requirements;
• auxiliary power systems— fully integrated auxiliary power systems for truck and diesel locomotives; and
• natural gas compressors— natural gas compressors and refueling systems for light and heavy duty refueling applications.
Automobile manufacturers, taxi companies, transit and shuttle bus companies and delivery fleets are among the most active customers for our transportation products. Our largest markets for transportation products are currently, and have historically been, outside the United States. To capture demand in the now emerging United States market for alternative gaseous fuel-powered vehicles and equipment, we recently made acquisitions in the United States, and now have a full suite of automotive capabilities, including a California Air Resources Board (“CARB”) certified product line and in-house OEM systems engineering platform, enhancing our ability to leverage our existing relationship with fleet customers and other manufacturers as they roll out CNG and LPG versions of key fleet vehicles in North America.
Manufacturers of industrial mobile and power generation equipment, stationary engines, and truck and rail locomotives are among the most active customers for our industrial products. Our broad product range allows us to provide turnkey EPA (“Environment Protection Agency”) and CARB-certified and non certified engine systems, customer specified fuel systems modules and/or components, as well as auxiliary power units (APUs). The wide availability of gaseous fuels in world markets combined with their lower emissions and cost compared to gasoline and diesel fuels is driving rapid growth in the global alternative fuel industry.
Unless the context otherwise requires, the terms “we,” “us,” “our”, “Fuel Systems” and “the Company” refer to Fuel Systems Solutions, Inc., or Fuel Systems and its subsidiaries. We were incorporated in Delaware in 1985 after having provided automotive and alternative fuel solutions in a variety of organizational structures since 1958. In 2006, we reorganized our business and corporate structure creating Fuel Systems Solutions, Inc. as a holding company with our two operating segments, IMPCO operations, and BRC operations. Our IMPCO operations consist mainly of our industrial business but include certain activities in the transportation market undertaken at our facilities. All other business in the transportation market is conducted by our BRC operations.
The predecessor to Fuel Systems was IMPCO Technologies, Inc., which we refer to as IMPCO U.S., and all of our filings with the SEC prior to our reorganization are filed under the name of IMPCO Technologies, Inc. Our periodic and current reports, and any amendments to those reports, are available, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC on our website: www.fuelsystemssolutions.com. The information on our website is not incorporated by reference into this report. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street N E, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding us at http://www.sec.gov.
Our Industry
Our business is focused on the alternative fuel industry. We believe three independent market factors—economics, energy independence and environmental concerns—are driving the growth of the market for alternative fuel technology. We believe the historic price differential between propane or natural gas and gasoline and diesel results in an economic benefit to end users of alternative fuel technology. In transportation markets, the price of alternative fuels such as natural gas or propane is typically substantially less than the price of gasoline. By converting a liquid fueled internal combustion engine to run on propane or natural gas, customers can capitalize on this fuel price differential. End-users may recoup the cost of the conversion within six to eighteen months, depending on the fuel cost disparity prevailing at the time and fuel usage. In addition to economic benefits of alternative fuels to end-users, some governments have sought to create a demand for alternative fuels in order to reduce their dependence on imported oil and reduce their unfavorable balance of payments by relying on their natural gas reserves. Alternative fuel vehicles that operate on natural gas or propane can lessen the demand for imported crude oil.
The World Energy Outlook 2011 projects the global primary energy demand to grow by 33% between 2010 and 2035 at an average annual rate of 3.5% per year. Even though the earth’s energy resources are adequate to meet this demand, the amount of investment that will be needed to exploit these resources will be higher than in the past. World Energy Outlook 2011 estimated that an investment of $38.0 trillion is needed through 2035. According to the World Energy Outlook 2011, world oil resources are judged to be sufficient to meet the projected growth in demand to 2035; however, a supply-side crunch involving an abrupt escalation in oil prices cannot be ruled out.
Consequently, natural gas remains a key fuel in the electric power and industrial sectors. Consumption of natural gas worldwide is expected to rise from 3.3 trillion cubic meters in 2010 to 5.1 trillion cubic meters in 2035. Gaseous fuels such as natural gas, have significant reserves available worldwide that are less costly to refine compared to crude oil and have historically been less expensive than liquid fuels. According to the U.S.
Geological Survey’s World Petroleum Assessment 2000, a significant volume of natural gas remains to be discovered. China and India, the world’s most heavily populated nations, are actively developing their infrastructure to facilitate natural gas consumption and imports.
Environmental concerns have also driven the growth of the alternative fuel industry. According to the Natural Gas Vehicles for America, per unit of energy, natural gas contains less carbon than any other fossil fuel, and thus produces lower carbon dioxide (CO2) emissions per vehicle mile traveled. Tests have shown that vehicles operating on natural gas produce up to 20 to 30 percent less greenhouse gas emissions than comparable diesel and gasoline fueled vehicles. Tests conducted by the U.S. Environmental Protection Agency show that propane-fueled vehicles produce 30 percent to 90 percent less carbon monoxide and about 50 percent fewer toxins and other smog-producing emissions than gasoline engines, as reported by the Propane Education Resource Council.
We are directly involved in two markets: transportation and industrial, including mobile and power generation equipment. These markets have seen growth in the use of clean-burning gaseous fuels due to the less harmful emissions effects of gaseous fuels and the cost advantage available in many markets of gaseous fuels over gasoline and diesel fuels.
Transportation
According to the most recent statistics from the World LP Gas Association and International Association for Natural Gas Vehicles, there are over seventeen million propane, or LPG, vehicles and nearly thirteen million Natural Gas (“NG”) vehicles in use worldwide, either for personal mobility, fleet conveyance, or public transportation. As the world’s vehicle population increases, it is expected that the passenger vehicle fleet doubles by 2035 and most growth will occur in developing countries within Asia, North Africa and areas of the Middle East. These regions currently have the lowest ratio of vehicles per one thousand people and are slated to grow rapidly over the next ten years as economic improvements stimulate personal vehicle ownership. In Europe, Asia and Latin America, alternative fuel vehicles operating on propane and natural gas are widely available through OEM and aftermarket distribution channels and have gained important penetration of total vehicles in circulation in many countries.
In the United States the transportation market for LPG, NG and other gaseous fuel vehicles has been limited, but recently a market for dedicated and bi-fuel natural gas vehicles has emerged and we have recently invested in that market. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview”.
Industrial
Engines in equipment such as forklifts, aerial platforms, sweepers, turf equipment, power generators and other mobile industrial equipment have long been workhorses of developed countries and comprise a significant portion of our global business. With developed countries such as the United States, and the countries in Asia and Europe seeking a broader consensus on regulation of emission sources in an attempt to further reduce air pollution, many countries have legislated, and we believe will continue to legislate, emission standards for this type of equipment.
Our industrial brands focus on serving the market with fuel systems, services and emission certified engine packages. With the imposition of new emissions regulations, OEMs will require advanced technologies that permit the use of gaseous fuels in order to satisfy not only new regulations but also their customers’ requirements for durability, performance and reliability. We have developed and are currently supplying a series of advanced technology alternative fuel systems to the industrial OEM market under the brand name Spectrum ® .
Customers and Strategic Relationships
Our customers include some of the world’s largest engine, vehicle and industrial equipment OEMs.
We are working with a number of our customers to address their future product and application requirements as they integrate more advanced, certified gaseous fuel systems into their business strategies. Additionally, we continually survey and evaluate the benefits of joint ventures, acquisitions and strategic alliances with our customers and other participants in the alternative fuel industry to strengthen our global business position.
In 2011, no customers represented more than 10.0% of our consolidated sales. In 2010, one customer represented 14.6% of our consolidated sales. In 2009, two customers represented 13.0% and 11.6% of our consolidated sales, respectively. During 2011, 2010, and 2009 sales to our top ten customers accounted for 32.8%, 53.0%, and 62.0% of our consolidated sales, respectively. If our largest customer or several of these key customers were to reduce their orders substantially, we would suffer a decline in sales and profits, and those declines could be substantial.
Products and Services
Our products include gaseous fuel regulators, fuel shut-off valves, fuel metering and delivery systems, complete engine systems, auxiliary power systems and electronic controls for use in internal combustion engines for the transportation, industrial and power generation markets. In addition to these core products, which we manufacture, we also design, assemble and market ancillary components required for complete systems operation on alternative fuels.
Sales and Distribution
We sell products through a worldwide network encompassing over 700 distributors and dealers in more than 70 countries and through a sales force that develops sales with distributors, OEMs and large end-users. Our operations focus on OEM and aftermarket distributors in the transportation, industrial and power generation markets. Of these markets, we believe that the greatest potential for growth is in the, Asia, North and South America and Middle East regions in sales to transportation OEMs and aftermarket distributors and installers and in North America in sales to industrial OEMs and the related aftermarket.
During the years 2011, 2010 and 2009, sales to distributors accounted for 63.5%, 49.4%, and 35.5%, respectively, of our revenue, and sales to OEM customers accounted for 36.5%, 50.6%, and 64.5%, respectively, of our revenue.
Distributors generally service the aftermarket business for the conversion of liquid fueled engines to gaseous fuels. Many domestic distributors have been our customers for more than 30 years, and many of our export distributors have been our customers for more than 20 years.
Information regarding revenue, income and assets of each of our two business segments, IMPCO operations and BRC operations, and our revenue and assets by geographic area is included in Note 15 to the consolidated financial statements included elsewhere in this Annual Report on Form 10K as well as in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Manufacturing
We manufacture and assemble a majority of our products at our facilities in Santa Ana, California, Union City, Indiana, Kitchener, Canada, Beccar, Argentina and Cherasco, Italy and to a lesser extent at some of our other international facilities. Current manufacturing operations consist primarily of mechanical component assembly and test, forging and light machining, electronic PCB assembly and testing and system up-fitting. We rely on outside suppliers for parts and components and obtain components for products from a variety of domestic and foreign automotive and electronics suppliers, die casters, stamping operations, specialized diaphragm manufacturers and machine shops. During 2011, no suppliers represented more than 10.0% of consolidated purchases of raw materials and services. During 2010 and 2009, one supplier represented 10.3% and 12.4%, respectively, of the consolidated purchases of raw materials and services.
Machined die cast aluminum parts and supplier engineered parts represent the major components of our cost of sales. Coordination with suppliers for quality control and timely shipments is a high priority to maximize inventory management. We use a computerized material requirement planning system to schedule material flow and balance the competing demands of timely shipments, productivity and inventory management. Our manufacturing facilities in California, Canada, and Argentina are ISO-9001 certified, while the facilities in Italy are ISO/TS-16949 and ISO-9001 certified.
Research and Development
Our research and development programs provide the technical capabilities that are required for the development of systems and products that support the use of gaseous fuels in internal combustion engines. Our research and development is focused on fuel delivery and electronic control systems and products for motor vehicles, engines, forklifts, stationary engines and small industrial engines. In 2010, we expanded our research and development facility in Italy to continue to serve our customers with new products and capabilities. In 2011, we expanded our research and development facilities in the U.S. to address the increasing U.S. automotive market. Our research and development expenditures were approximately $28.1 million, $20.8 million, $15.2 million, in 2011, 2010, and 2009, respectively.
Competition
Our key competitors in gaseous fuel delivery products, accessory components and engine conversions markets include Westport Innovations Inc. in Canada and its subsidiaries OMVL, S.r.L. and EMER, S.p.A. in Italy, Landi Group and O.M.T. Tartarini, S.r.L. located in Italy; Aisan Industry Co. Ltd. and Nikki Company Ltd. in Japan. These companies, together with us, account for a majority of the world market for alternative fuel products and services. In the future, we may face competition from traditional automotive component suppliers, such as the Bosch Group, Delphi Corporation, Siemens VDO Automotive AG and Visteon Corporation, and from motor vehicle OEMs that develop fuel systems internally. Industry participants compete on price, product performance and customer support.
Product Certification
We must obtain emission compliance certification from the Environmental Protection Agency to sell certain of our products in the United States, receive certification from CARB to sell certain products in California and meet European standards for emission regulations in Europe. Each car, truck or van sold in each of these markets must be certified before it can be introduced into commerce, and its products must meet component, subsystem and system level durability, emission, refueling and various idle tests. We have also obtained international emissions compliance certification in Argentina, Australia, Brazil, Canada, Chile, Europe, Russia, Mexico and Thailand. We strive to meet stringent industry standards set by various regulatory bodies. Approvals enhance the acceptability of our products in the worldwide marketplace. Many foreign countries also accept these agency approvals as satisfying the “approval for sale” requirements in their markets.
Employees
As of December 31, 2011, we employed approximately 1,700 persons, excluding those employed by our unconsolidated affiliates in India. Of these employees, approximately 405 were employed in IMPCO operations, of which 170 are foreign employees, and approximately 1,285 were employed in BRC operations, all of which are foreign employees. Employees in Italy, the Netherlands and Argentina are represented by a collective bargaining agreement. Personnel employed by our foreign subsidiaries are often subject to national labor contracts. We consider our relations with our current employees and unions to be good.
Intellectual Property
We currently rely primarily on patent and trade secret laws to protect our intellectual property. We currently have approximately one hundred patents registered in countries located in North America, Europe, and Asia. We do not expect the expiration of our patents to have a material effect on our revenue.
We also rely on a combination of trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights. However, we cannot be sure that these intellectual property rights provide sufficient protection from competition. We believe that our intellectual property protected by copyright and trademark protection is less significant than our intellectual property protected by patents. Third parties may claim that our products and systems infringe their patents or other intellectual property rights. Identifying third party patent rights can be particularly difficult, especially since patent applications are not published until 18 months after their filing dates. If a competitor were to challenge our patents, or assert that our products or processes infringe its patent or other intellectual property rights, we could incur substantial litigation costs, be forced to design around their patents, pay substantial damages or even be forced to cease our operations, any of which could be expensive and/or have an adverse effect on our operating results. Third party infringement claims, regardless of their outcome, would not only consume our financial resources, but also would divert the time and effort of our management and could result in our customers or potential customers deferring or limiting their purchase or use of the affected products or services until resolution of the litigation.
CEO BACKGROUND
Mariano Costamagna , 61, has served as a director of Fuel Systems since June 2003. On January 1, 2005, he became the Company’s Chief Executive Officer. He is also the Managing Director and Chief Executive Officer of M.T.M., S.r.L., an Italian limited liability company founded by Mr. Costamagna and his family in 1977 and headquartered in Cherasco, Italy. MTM develops, manufactures and installs alternative fuel systems and components under the BRC Gas Equipment trademark, and Mr. Costamagna has served as MTM’s principal executive officer since it was incorporated. Mr. Costamagna became a director in connection with the Company’s acquisition of the initial 50% of the equity interest of BRC and later became the Company’s Chief Executive Officer in connection with the acquisition of the remaining 50% of BRC. Mr. Costamagna is the brother of Pier Antonio Costamagna, who is the Managing Director of MTM and Director of Mechanical Engineering of MTM. Mr. Costamagna’s term as a director expires at our annual meeting in 2012. Mr. Costamagna’s over 30 years of experience in the alternative fuels industry and entrepreneurial skills were important factors contributing to his nomination as a director.
Norman L. Bryan, 70 , has served as a director of Fuel Systems since November 1993. He is our Lead Director, Chair of our Nominating and Corporate Governance Committee, and a member of our Audit Committee. He has been a consultant since January 1995. Mr. Bryan was employed as the Senior Vice President of Sales and Marketing of EIT, Inc., an electric meter manufacturing company, from October 1998 to July 2002.
Prior to retiring in 1994 from Pacific Gas and Electric Company, he was Vice President, Marketing from February 1993 until December 1994, and was Vice President, Clean Air Vehicles from February 1991 to February 1993. Mr. Bryan holds an M.S. degree in business from Stanford University and a B.S.M.E. degree in mechanical engineering from California State University in San Jose. Mr. Bryan is also an advisory board member of the Institute of Transportation Studies at the University of California, Davis. Mr. Bryan’s term expires at our annual meeting in 2014. Mr. Bryan’s leadership experience in the electric and natural gas utility industry and knowledge of the natural gas vehicle market were important factors contributing to his nomination as a director.
Marco Di Toro , 50, has served as a director of Fuel Systems since April 1, 2005 and currently serves on our Nominating and Corporate Governance Committee. He has been a partner in the law firm of Grosso, de Rienzo, Riscossa e Associati in Turin, Italy since 1994. Mr. Di Toro holds a law degree from Università Cattolica del Sacro Cuore, Milan (Catholic University of Sacred Heart of Jesus, Milan). Mr. Di Toro’s term expires at our annual meeting in 2013. Mr. Di Toro’s knowledge of Italian and international business law were important factors contributing to his nomination as a director.
Joseph E. Pompeo , 73, has served as a director of Fuel Systems since December 2010 and currently serves on our Audit Committee and Nominating and Corporate Governance Committee. Mr. Pompeo is a Certified Public Accountant with significant experience in the accounting industry, including over 30 years of auditing experience at Arthur Andersen, LLP where he held the position of partner for 26 years. As Director of the International Business Practice of the New York metropolitan area, he assisted several non-US corporations with initial public offerings and listing on US stock exchanges. He also served in numerous technical and management roles, including partner in charge of the Accounting and Auditing Divisions in San Juan, Puerto Rico and managing partner of the New Jersey office. He has also served on various educational and philanthropic boards and on the Board of Directors of Aeroflex, Inc., a public company, where he served on the Audit, Compensation, and Nominating and Governance Committees. Mr. Pompeo’s term expires at our annual meeting in 2014. Mr. Pompeo’s extensive accounting and auditing experience and management skills were important factors contributing to his nomination as a director.
James W. Nall, 63, has served as a director of Fuel Systems since May 2008 and currently serves as Chairman of our Audit Committee and as a member of our Compensation Committee. Mr. Nall is a Certified Public Accountant with significant experience in the accounting and finance industry. Mr. Nall is currently serving as a tax commissioner for the State of New Jersey, a position he has held since July 2005. Prior to Mr. Nall’s appointment as tax commissioner by the governor of New Jersey, he was executive vice president and chief financial officer of New Jersey-based Hudson United Bancorp, a multi-billion dollar financial institution listed on the New York Stock Exchange, from September 2003 until its sale to TD Banknorth Inc. in January 2006. Mr. Nall also served as a member of the board of directors and as chairman of the audit committee of Interaudi Bank, a $1 billion private bank based in New York, from April 2003 to April 2004. Mr. Nall’s experience also includes serving for more than eighteen years as a partner with Arthur Andersen LLP. Mr. Nall earned a Masters of Business Administration in professional accounting from Rutgers University. Mr. Nall’s term expires at our annual meeting in 2013. Mr. Nall’s public accounting skills and experience as a finance executive for public and private companies were important factors contributing to his nomination as a director.
William J. Young , 69, has served as a director of Fuel Systems since August 2008. He currently serves as Chairman of our Compensation Committee and as a member of our Audit Committee. Mr. Young has over 30 years of experience in the automotive industry, most recently, serving as a director for Oregon-based Lithia Motors, a billion dollar automotive retailer listed on the New York Stock Exchange, from March 1997 until July 2008. Mr. Young also served as executive director of J.D. Power and Associates, a global marketing information services firm specializing in consumer research for the automotive industry, from September 2003 through February 2008. From 1994 through July 2000, Mr. Young was the Chairman, President and Chief Executive Officer of Advanced Machine Vision Corporation, operating in the machine vision industry. Prior to 1994, Mr. Young served with Volkswagen of America in various capacities for a period of 18 years, most recently as its President and Chief Executive Officer. Mr. Young also has extensive experience as an independent automotive marketing consultant. Mr. Young’s term expires at our annual meeting in 2012. Mr. Young’s automotive industry experience and marketing skills were important factors contributing to his nomination as a director. Mr. Young rejoined the Board of Lithia Motors in May 2010.
Troy A. Clarke , 56, has served as director of Fuel Systems since December 2011 and currently serves on our Compensation Committee. Mr. Clarke has 38 years of automotive industry experience and currently serves as president of Navistar Asia Pacific and Strategic Initiatives, which includes truck and diesel joint ventures in China and India and developing alternative growth strategies. Prior to Navistar, Mr. Clarke held a variety of leadership positions at General Motors Company (GM) where he began his career in 1973, including: Group VP—President GM North America from 2006 to 2009; Group VP—President GM Asian Pacific from 2004 to 2006; Group VP—Manufacturing and Labor Relations from 2001 to 2004; Corporate VP—President GM Mexico from 1998 to 2001. Mr. Clarke holds a bachelor’s degree in mechanical engineering from the General Motors Institute and a master’s degree in business administration from the University of Michigan. Mr. Clarke’s term expires at our annual meeting in 2012. Mr. Clarke’s wide range of experience in international automotive Original Equipment Manufacturer (“OEM”) and marketing were important factors contributing to his nomination as a director.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We design, manufacture and supply alternative fuel components and systems for use in the transportation and industrial markets on a global basis. Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. For over 50 years, we have developed alternative fuel products. We supply our products and systems to the market place through a global distribution network of over 700 distributors and dealers in more than 70 countries and 175 original equipment manufacturers, or OEMs.
The IMPCO Automotive Acquisitions equip our U.S. automotive business with the capabilities necessary to be a leader in this market. Evotek and NaturalDrive are strategic transactions that we believe position Fuel Systems to compete in the dedicated natural gas vehicle (NGV) OEM market emerging in the United States. PCI adds key technology and industry relationships to further our North American OEM and fleet market strategy, and also expands our vehicle modification and systems integration capabilities for a variety of alternative fuel applications, including hybrid, CNG, propane and dual-fuel diesel. We continue to believe fleet vehicles offer attractive opportunities for our gaseous fuel solutions in the U.S. We now have a full suite of automotive capabilities in this market, including a CARB certified, dedicated systems product line and in-house OEM systems engineering platform, enhancing our ability to leverage our existing relationships with fleet customers and other manufacturers as they roll out CNG and LPG versions of key fleet vehicles.
In addition to the IMPCO Automotive Acquisitions, we added Alternative Fuel Systems (2004) Inc. (“AFS”) and purchased the remaining 50% interest in MTE S.r.l. in an effort to continue to expand our core businesses and geographic footprint.
For the year ended December 31, 2011 revenue decreased approximately 2.9%, operating profit decreased approximately 79.7% and diluted EPS decreased by 88.3%. These results were driven primarily by the expiration of the Italian government incentives which drove strong results in our BRC operations related to our post-production OEM (“DOEM”) sales for the prior year. Beginning in the second quarter of 2010 and continuing through subsequent quarters, our volumes for DOEM conversions decreased significantly. The expiration of the Italian government incentives were partially offset by increased activity in our IMPCO operations as well as our aftermarket business. These changes in the mix of our revenues also resulted in lower gross margin, as factory utilization and gross profit were closely tied to DOEM volumes. In addition, we incurred higher research and development costs as we continue to focus our efforts to support the US automotive market as well as other next generation products.
Net cash provided by operations was $10.4 million for the year ended December 31, 2011. We believe that our net cash position of $86.7 million provides us with adequate capital for working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets.
Recent Developments
Purchase of remaining 50% interest in MTE S.r.l.
On June 1, 2011, we purchased the remaining 50% ownership interest in MTE S.r.l. (“MTE”), for €7.5 million (approximately $10.4 million), of which €5.3 million (approximately $7.5 million), was paid on the closing date, with the remaining balance of €2.2 million (approximately $2.9 million) classified as restricted cash in Other Current Assets at December 31, 2011 as a guarantee towards possible indemnification obligations of the seller until its payment, which was subsequently paid on January 15, 2012 in accordance with the terms of the agreement. Further performance payments of up to €1.0 million (approximately $1.3 million) in cash may be made no later than 5 days after May 31, 2014 based on the achievement of 2012 and 2013 gross profit targets. As of the closing date of the transaction, the MTE contingent consideration was assigned a preliminary fair value of approximately $0.4 million. Future changes to the fair value of the contingent consideration will be determined each period and charged to expense in the Consolidated Statements of Operations under operating expenses. Management believes that the model used in the determination of the fair value of the MTE contingent consideration agreement is sensitive to changes in the unobservable inputs on which it is based and their interrelationships, changes that may be driven by mutated market conditions, different demand level, alternative strategies that management may pursue, and other factors.
Since we previously had control of MTE prior to this transaction and the results of MTE were consolidated within the BRC operation segment, the excess purchase price of the remaining 50% over the non-controlling interest is recorded to additional paid in capital.
Acquisition of NaturalDrive Partners LLC
On April 18, 2011, through our wholly owned subsidiary IMPCO US, we completed the purchase of NaturalDrive, a premier alternative fuel automotive systems developer in North America that offers dedicated CNG and LPG conversion systems across multiple U.S. fleet vehicle platforms. The transaction was valued at $6.0 million, comprised of $4.5 million in cash and $1.5 million of Fuel Systems’ stock paid at closing. More specifically, we issued 52,317 shares of common stock in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the issuance did not involve a public offering. The transaction also includes provisions for earn-out payments totaling up to $6.75 million in the form of Fuel Systems stock, which would be payable during the three years following closing based upon achievement of business volume and general milestones. The earn-out will be paid in three equal installments of $1.5 million no later than 90 days after the end of each yearly period ending in March 2012, March 2013, and March 2014 if specified target customer volumes for the year are achieved, and reasonable progress is made on the general milestones. In the case the earn-out for a specific period is determined to be payable in accordance with the aforementioned target customer volumes and additional GM volume thresholds are met for the same period, the earn-out shares for the applicable period will be multiplied by a factor of 1.5 for purposes of determining the number of earn-out shares payable. As of the closing date of the acquisition, the NaturalDrive contingent consideration was assigned a fair value of approximately $1.4 million. Future changes to the fair value of the contingent consideration will be determined each period and charged to expense in the Consolidated Statements of Operations under operating expenses. Management believes that the model used in the determination of the fair value of the NaturalDrive contingent consideration agreement is sensitive to changes in the unobservable inputs on which it is based and their interrelationships, changes that may be driven by mutated market conditions, different demand level, alternative strategies that management may pursue, and other factors.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, goodwill, taxes, inventories, warranty obligations, long-term service contracts, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates.
Revenue Recognition
We recognize revenue upon transfer of title and risk of loss, generally when products are shipped provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and management believes collectability is reasonably assured. We consider arrangements with extended payment terms not to be fixed or determinable unless they are secured under an irrevocable letter of credit arrangement guaranteed by a reputable financial institution, and accordingly, we defer such revenue until amounts become due and payable. We classify shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred. We provide for returns and allowances as circumstances and facts require.
Sales to our unconsolidated subsidiaries are made on terms similar to those prevailing with unrelated customers as noted above.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate the allowance for doubtful accounts based on historical experience and any specific customer collection issues that have been identified through management’s review of outstanding accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized based, in part, on historical experience. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability may be required. We believe that our warranty experience is within the industry norms. Our standard warranty period is 18 to 24 months from the date of delivery to the customer depending on the product. The warranty obligation on our certified engine products can vary from three to five years depending on the specific part and the actual hours of usage.
Inventory Reserves
We write down our inventory for estimated slow moving and obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Goodwill and Intangible Assets
We recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. In those acquisitions that include contingent consideration—i.e. earnout payments to be paid upon the satisfaction of certain milestones—as part of the total consideration paid, we determine the fair value of this liability at the acquisition date using a probability weighted income approach. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed (including any contingent consideration) at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, support obligations assumed, estimated restructuring liabilities and pre-acquisition contingencies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and they are inherently uncertain.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly, with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period, our final determination of the uncertain tax positions estimated value, or tax related valuation allowances, changes to these uncertain tax positions’ and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
Goodwill and Intangible Assets—Impairment Assessments
We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The FASB issued authoritative guidance requiring that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit (i.e. an operating segment, or one level below an operating segment) to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. All our reporting units examined for goodwill impairment purposes had fair values in excess of their carrying values by at least 40 percent, except for one reporting unit, which we estimated had a fair value 8 percent higher than its carrying value. This reporting unit comprises approximately one-half of our total goodwill. If the terminal growth rate of 5% for this reporting unit decreased by 50 basis points, fair value would be reduced by approximately $5 million, assuming all other components of the fair value estimate remain unchanged. If the applicable discount rate of 15.75% on this reporting unit increased by 50 basis points, fair value would be reduced by approximately $8 million, assuming all other components of the fair value estimate remain unchanged. In both cases, step I of the goodwill impairment test would still be passed.
Our most recent annual goodwill impairment analysis, which was performed during the fourth quarter of fiscal 2011, did not result in an impairment charge, nor did we record any goodwill impairment in fiscal 2010 or 2009 in relation with our annual impairment analysis.
We make judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.
Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. We recognized intangible asset impairment charges of $0.4 million in fiscal 2011 associated with the relocation of our automotive operations in the Netherlands and did not recognize any such impairment charge in 2010 and 2009.
Deferred Taxes
Based upon the substantial net operating loss carryforwards and recent history of losses incurred in certain jurisdictions, we cannot conclude that it is more likely than not that the deferred tax assets in the United States and certain foreign jurisdictions as of December 31, 2011 will be realized within the foreseeable future. The balance of the total United States valuation allowance was $33.5 million as of December 31, 2011. In addition, we have a foreign valuation allowance of $6.9 million as of December 31, 2011. We expect to provide a full valuation allowance on future tax benefits generated in the United States and in certain foreign jurisdictions until we can sustain a level of profitability that demonstrates our ability to utilize the deferred tax assets.
As of December 31, 2011, undistributed earnings, except with respect to a portion of undistributed earnings from BRC, are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes is provided thereon. Residual U.S. taxes have been accrued (applied as a reduction of net operating loss carryforwards) on approximately $30.0 million of earnings of BRC that is not considered indefinitely reinvested. Such amounts could be drawn as a dividend or from BRC in the future without U.S. income tax consequences. Upon distributions of earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. We have accrued such residual income taxes for all undistributed foreign earnings not considered indefinitely reinvested. It is not practical to determine the income tax impact in the event we repatriate undistributed foreign earnings that are considered indefinitely reinvested. As of December 31, 2011, approximately $1.5 million in foreign withholding taxes was accrued related to undistributed earnings not considered to be indefinitely reinvested.
We believe that we have considered relevant circumstances that we may be currently subject to, and the financial statements accurately reflect our best estimate of the results of our operations, financial condition and cash flows for the years presented. We have discussed the decision process and selection of these critical accounting policies with the Audit Committee of the Board of Directors.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We design, manufacture and supply alternative fuel components and systems for use in the transportation and industrial markets on a global basis. Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. For over 50 years, we have developed alternative fuel products. We supply our products and systems to the market place through a global distribution network of over 700 distributors and dealers in more than 70 countries and 175 original equipment manufacturers, or OEMs.
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.
Our U.S. automotive business, through recent acquisitions, has the capabilities necessary to be a leader in this market. We believe Fuel Systems is positioned to compete in the dedicated and dual-fuel natural gas vehicle (NGV) OEM market emerging in the United States. We maintain certain key technology and industry relationships to further our North American OEM and fleet market strategy. Our vehicle modification and systems integration capabilities for a variety of alternative fuel applications, including hybrid, CNG, propane and dual-fuel diesel present us with a unique advantage in the market. While we have limited visibility with respect to the evolving US automotive market, 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.
We recently completed the acquisition of Cubogas, specializing in natural gas compressors and packaging solutions, to build our infrastructure and natural gas compressor product lines and to serve the growing demand from commercial, fleet and consumer customers. The CUBOGAS brand acquired with the Cubogas acquisition adds a new line of CNG compressor and packaging products for a wide range of applications, and will enable us to maximize the scale and efficiency of the former Dresser CNG compressor business.
For the three months ended March 31, 2012 revenue increased approximately 7.2%, operating income decreased 65.1% and diluted EPS decreased by approximately $0.08. While the revenue increase was driven primarily by stronger industrial sales as well as higher aftermarket and compressor activity, we incurred higher material costs due to the product mix, higher compensation and consulting costs which resulted in a decrease in operating profit. Although we had an operating income for the three months ended March 31, 2012, certain foreign jurisdictions and the United States incurred losses which we could not benefit from for tax purposes. As a result our overall tax expense exceeded our consolidated operating income thus negatively impacting our diluted EPS.
Net Cash used in operations was $13.0 million for the three months ended March 31, 2012. Our net cash position, including marketable securities, of $66.0 million provides us with the adequate capital for working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets.
Recent Developments
On February 10, 2012, through our wholly owned subsidiary MTM S.r.L. (“MTM”), we purchased from the Wayne business of Dresser Italia S.r.l. (the “seller”), the net assets of its Cubogas compressor division (the “Cubogas” acquisition), specializing in natural gas compressors and packaging solutions, in an all-cash transaction. The aggregate purchase price totals approximately $6.7 million (approximately €5.0 million), of which $5.0 million (€3.8 million) was paid at closing, $0.9 million (€0.7 million) is payable in two equal installments 60 and 120 days after closing, and $0.8 million (€0.6 million) will be paid in three equal installments one year, two years, and three years from the closing date, respectively. The deal includes the purchase of the Cubogas trademarks, a manufacturing license for Nuovo Pignone vertical reciprocating compressors, and a license to use the “Dresser” trademark in connection with the manufacture, development and distribution of former Dresser CNG compressor systems.
Through our international subsidiaries we have previously sold products to customers in Iran. We have currently taken action to cease all direct sales to Iran. In addition, we will take further actions to eliminate all indirect sales to Iran through our distributors.
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 we have considered relevant circumstances that we may be currently subject to and the financial statements accurately reflect our estimate of the results of our operations, financial condition and cash flows for the periods presented. Our accounting for acquisitions involves significant judgments and estimates, including the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenue and cash flows, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives and, as applicable, the reporting unit, of the assets. Our financial position or results of operations may be materially impacted by changes in our initial assumptions and estimates relating to prior or future acquisitions. Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition included in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes, subsequent to December 31, 2011, to information previously disclosed in our Annual Report on Form 10-K with respect to our critical accounting policies.
Results of Operations
In an effort to more appropriately align the structure and business activities within Fuel Systems into two operating segments, in 2011 we relocated a portion of the automotive business (GFI BV) from the Netherlands to Italy. Our historical consolidated results were not impacted, but we began reporting GFI BV within our BRC operations segment in the fourth quarter of 2011. For comparison purposes, the previously reported financial information by business segment includes the reclassification of GFI BV’s operations for the three months ended March 31, 2012 and 2011, respectively, within BRC operations.
Other Income (Expense), Net.
Other income (expense) includes foreign exchange gains and losses between various other assets and liabilities to be settled in other currencies. For the three months ended March 31, 2012 we recognized approximately $0.2 million in losses on foreign exchange compared to $0.4 million in losses on foreign exchange for the three months ended March 31, 2011, respectively. We routinely conduct transactions in currencies other than our reporting currency, the U.S. dollar. We cannot estimate or forecast the direction or the magnitude of any foreign exchange movements with any currency that we transact in; therefore, we do not measure or predict the future impact of foreign currency exchange rate movements on our consolidated financial statements.
Provision for Income Taxes.
Income tax expense for the three months ended March 31, 2012 and 2011 was approximately $2.1 million and $2.3 million, representing an effective tax rate of 231.4% and 84.6%, 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 (“loss jurisdictions”) due to cumulative losses incurred in those loss jurisdictions, as we cannot conclude that such tax benefits meet the more likely than not threshold for realization. For the three months ended March 31, 2012 and 2011, the Company incurred a pre-tax loss of approximately $4.6 million and $3.8 million, respectively, in the loss jurisdictions. Accordingly, for the three months ended March 31, 2012, 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 and losses incurred in the United States and certain foreign jurisdictions for which no tax benefit has been recorded.
Liquidity and Capital Resources
Overview —Our primary sources of liquidity are cash provided by operating activities and debt financing. Additionally from time to time we raise funds from the equity capital markets to fund our working capital and general corporate purposes, which may include expansion of our business, additional repayment of debt and financing of future acquisitions of companies or assets. We believe the amounts available to us under our various credit agreements together with cash on hand will continue to allow us to meet our needs for working capital and other cash needs for worldwide operations for at least the next 12 months. For periods beyond 12 months, although we do not have any plans to do so, we may seek additional financing to fund future operations through future offerings of equity or debt securities or through agreements with corporate partners with respect to the development of our technologies and products. However, we can offer no assurances that we will be able to obtain additional funds on acceptable terms, if at all. Nevertheless, our ability to satisfy our working capital requirements will substantially depend upon our future operating performance (which may be affected by prevailing economic conditions), and financial, business and other factors, some of which are beyond our control. We continue to evaluate our need to increase liquidity.
We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. In February 2012, our BRC Operations purchased approximately $12.0 million of prime-rated German government bonds with a maturity date of December 14, 2012 and placed these in the available for sale category. As of March 31, 2012 we had approximately $33.3 million of cash held in accounts outside the U.S., primarily in Europe. Although we currently do not intend nor foresee a need to repatriate these funds, residual US taxes have been accrued on approximately $30.0 million of earnings not considered to be indefinitely reinvested from our BRC Operations. We expect existing domestic and foreign cash and cash equivalents and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
CONF CALL
Kirsten Chapman
Thank you all for joining us on the call today. With me from management are Mariano Costamagna, CEO, Matthew Beale, President and CFO and Mike Helfand, CAO. Today Mariano will provide an overview, Matthew will review operations and Mike will follow with the financial detail, and then Matthew will conclude with closing remarks and open the call for questions.
Before I turn the call over to the team, I would like to remind everyone of the Safe Harbor statement included the earnings press release issued yesterday. If you've not received a copy of the release and would like one, please call Lippert/Heilshorn & Associates at 415-433-3777, and we will send one to you.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during the course of today's call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company.
There can be no assurance that future developments affecting the company will be those anticipated by Fuel Systems Solutions. Actual results may differ from those projected in the forward-looking statements.
These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and subject to change based upon various factors. For more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission.
And now it is my pleasure to turn the call over to Mariano Costamagna, CEO. Please go ahead, Mariano.
Mariano Costamagna
Welcome to the Fuel Systems Solutions 2009 second quarter conference Call. We had a very successful quarter. We reported better than anticipated quarterly revenue of $92.3 million. The significant change in year-over-year euro to U.S. dollars exchange rate has reduced our revenues 10%. Without this impact our revenue would have been up slightly, even in this global recession.
Our revenue was solid due to the strong performance of our Delayed-Original Equipment Manufacturers transportation business, called DOEM. During the second quarter we achieved 37,000 DOEM system installations, up from 30,000 in the first quarter, plus 20%.
Our great volume is creating economies of scale and gross margins reached 31%. Coupled with a cost saving program, our operating margin also improved. And we delivered earning per share of $46.00. In addition, we advanced our strategies to acquire complementary technologies and product capability that enable us to future leverage our platform. In May we purchased certain assets from FuelMaker and this week we closed the Teleflex Power Systems acquisition we began during the quarter.
Now I will turn the call over to Matthew to provide an operational review.
Matthew Beale
Our investments thus far in 2009 mark our commitment to advancing fuel systems leadership position in the transportation and industrial alternative fuel systems markets. We intend to continue to identify opportunities that expand our capabilities and enable us to capitalize on the attractive medium term growth drivers in our chosen markets.
The completion of our acquisition of Teleflex's Power Systems business earlier this week, marks an important step forward in the execution of our growth strategy. The alternative fuel components and systems are highly complementary and assert our leadership positions in the transportation and industrial businesses.
The auxiliary power systems business produces anti-idling auxiliary power units that are used to generate power for operators of parts, Class A trucks and diesel locomotives. This business broadens our markets with diverse growth potential driven by regulatory and emissions standards.
Like our prior successful acquisitions we will be integrating operations and provide you with updates on the quarterly calls. While the acquired businesses delivered approximately $40 million in the first half 2009, current market conditions suggest a $60 million to $70 million annual run rate. We will own the business for almost five months in 2009.
We continue to expect this transaction to be mildly accretive in 2009 earnings and greater contributions beginning in 2010 when we expect to benefit from these synergies we create. We have updated our 2009 financial guidance to include this.
Next I'll provide an update on our transportation business which continues to be our strongest business. In Europe the demand for alternative fuel vehicles continues to be solid supported by attractive fuel price differentials, government incentives and a favorable regulatory environment. We are capturing the opportunities to supply the market with our broad offering of quality bi-fuel solutions through our key OEM relationships and expanded DOEM installation capacity.
In the second quarter, our DOEM business completed 37,000 installations, exceeding our first quarter 2009 rate of 30,000. We would like to remind you of our seasonality. Regarding DOEM conversions, we typically have greater volumes in the first half of the year due to the European summer and December holidays in the second half of the year.
Currently we are on track to exceed 120,000 conversions in 2009 up from nearly 58,000 in 2008. In the U.S. we are making progress executing our fleet strategy. To ensure breadth and longevity to serve the automotive market, we are building our EPA certification portfolio.
This quarter we earned six certifications for several Chevrolet and GM-branded vehicles including passenger cars, light duty class pickups, cargo vans and SUVs commonly used for fleet vehicles. In addition, we continue to work with industry advocacy organizations such as [NGDAmerica] and the Propane Education and Research Council that promote the use of natural gas and liquid propane gas vehicles in America.
While our OEM business is performing better than anticipated in the recession, we continue to experience softness in our aftermarket business. We believe this reflects mainly continued weakness in the global economy. Nonetheless, we are beginning to see preliminary signs of improvement in the aftermarket in some European markets.
In the U.S. automotive business we've begun to build out our distribution channels. In June we signed an agreement with CleanFUEL USA, an established player in the LPG alternative fuel vehicle market. CleanFUEL will distribute fuel systems EPA certified bi-fuel kits for conversion of light duty GM and Ford vehicles through its authorized installation network.
Regarding our Argentine subsidiary, DS, we are substantially completed with the integration and are now focused on improving efficiencies and allocating production across our manufacturing platform. In addition, we are updating our marketing strategy for our recent acquisitions including Teleflex Power Systems which adds brands to our BRC, [Dobaly] and Tomasetto Achille portfolio.
Lastly we are adapting our existing CNG refueling production to incorporate the assets and technology we acquired from FuelMaker. By blending our manufacturing expertise with the new product capabilities we can offer a complete range of refueling products for commercial, small to medium fleets and consumers in existing and developing markets. We believe that this expanded capability will be an asset as we roll out our North American automotive strategy.
In our industrial business, as anticipated, capital constraints and the slow economy continue to create a challenging market environment. As discussed on previous calls, while we are managing the current market we are focused on the future.
In our new industrial engine dressing facility we are providing a turnkey package that addresses the new 2010 emissions standards and we are well positioned to benefit when the global economic climate improves.
Regarding corporate events, in June we successfully raised $30 million in gross proceeds in a registered direct offering to fund growth initiatives as well as working capital needs. In May, we announced we are relocating our corporate headquarters to New York City to create a central base for managing operations in Europe, Latin America and the United States.
The move will be instrumental in streamlining our corporate offices and physically positions our team more centrally to improve global communication logistics. The move is expected to be completed by mid August.
In conjunction with the move we named Mike Helfand Senior Vice President of Finance and Chief Accounting Officer. Mike has been consulting with the company since the beginning of 2009. We are very excited to have him aboard permanently and he has joined me in our investor relations efforts.
Now I'd like to welcome Mike to the call and give him the floor for a review of the financials.
Michael Helfand
I'm going to begin with a review of the second quarter ended June 30, 2009. Our total revenue for the second quarter was $92.3 million compared to $98.3 million in the prior year. Our transportation segment represented 88% of those revenues with a significant portion contributed from the OEM and our industrial segment represented 12% of the revenue.
For the second quarter our non-U.S. operations accounted for approximately 91% of our revenue and the impact of foreign changes in currency when translating our foreign subsidiary financial statements which are predominantly euro into U.S. dollars resulted in a decrease of approximately 10% with $10.2 million for the second quarter of 2009 when compared to the prior period. So excluding the foreign currency exchange impact, second quarter revenue would have been up slightly compared to a year ago.
Gross profit for the quarter was $28.6 million with 31% of revenues for the second quarter of 2009 compared to a comparable $28.6 million or 29% of revenue a year ago. And this reflects that this quarter, the greater DOEM volume have reached a critical mass and delivered some economies of scale which helped improve those margins.
Second quarter 2009 SG&A expense was $12.7 million including approximately $1 million in costs related to acquisitions and our reorganization and move to New York as compared to $11.7 million in the year-ago quarter.
R&D expense during the second quarter 2009 was $3.3 million as compared to $2.7 million in the second quarter of 2008. And our total operating expenses for the quarter were $16.1 million or 17% of revenue and for the second quarter of 2008 total operating expenses were $18.4 million or 18.7% of revenue, and that included a non-cash $3.9 million goodwill impairment charge relating to our Australian operations.
Operating income for the second quarter of 2009 was $12.5 million or 14% of our revenue compared to $10.2 million or 10% of our revenue a year ago.
Our other income was $836,000 as compared to other expense of 43 a year ago which primarily represents net gains on foreign currency transactions and our income tax for the quarter was $5.6 million, primarily representing foreign taxes and an effective rate of 43.1 as compared to $4.9 million a year ago.
And our second quarter net income was $7.4 million or $0.46 per diluted share as compared to $4.6 million or $0.29 per diluted share in 2008 second quarter, which included that non-cash $3.9 million impairment charge or $0.25 per diluted share.
On to the six months ended June 2009, our total revenue for the first half of 2009 was $172.4 million as compared to $192.9 million for the first half of last year.
The impact of changes in foreign currency when translating the foreign subsidiary financial statements into U.S. dollars for the six months resulted in a comparable decrease of the quarter of approximately 10% or $19 million for the first half of 2009 when compared to the prior year period. And our net income for the first half of 2009 was $14.5 million as compared to $10.8 million in the same period last year.
EPS for the first half of 2009 was $0.90 per share and $0.69 per share in the year-ago period including that impairment charge.
Now I'd like to just take a couple of moments to talk about the balance sheet. At June 30, 2009 our cash and cash equivalent balance was $53.1 million compared to $26.5 million at December 31, 2008. During the quarter we received $30 million in gross proceeds from the sale of common stock in a registered direct offering.
Importantly, cash generated from operations during the second quarter was $21 million. At the end of second quarter working capital as $129.6 million compared to $82.8 million at December 31, 2008, and in the second quarter, we improved our net debt from a negative $28 million to a positive $11 million. And in addition, our efforts to better working capital were also successful as both inventory and accounts receivables have improved, excluding the effect of the acquisitions on the balance sheet.
Lastly, I'd like to talk about our financial guidance. As part of our overarching goal of simplifying our corporate structure, we continue to evaluate manufacturing and G&A cost reductions as well as a more effective means of managing inventories and receivables.
Today we are adjusting our 2009 annual guidance from the current market outlook, margin improvements and acquisitions, and we expect 2009 revenue to be between $370 million and $380 million. We are also targeting 2009 gross margins between 28% and 30% reflecting improved efficiencies resulting from greater DOEM volume. And we are targeting our 2009 operating margin to be between 11 and 13%.
Now I can turn the call back to Matt.
Matthew Beale
We continue to create opportunities to leverage our diversified platform and expand our engineering production and distribution capabilities. Our DOEM transportation businesses have remained strong even with the global recession, but we are positioning all of our businesses to capitalize on growth opportunities when the global economic climate improves.
We continue to further our leadership positions in industrial and transportation. The addition of Teleflex's power systems expands our global platform and broadens our target markets. With the addition of FuelMaker for fueling technology, we have capabilities from domestic and commercial to heavy duty for a complete refueling product line.
In summary we are excited about our leading position in the growing alternative fuel industry in our future prospects. We would now like to open the call for questions.
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Fund Letters
