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EXCEL - IDEA: XBRL DOCUMENT - Fuel Systems Solutions, Inc.Financial_Report.xls

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2014

or

¨

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

For the transition period from                      to                      

Commission File No. 001-32999

 

FUEL SYSTEMS SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

20-3960974

(State of Incorporation)

 

(IRS Employer I.D. No.)

780 Third Avenue 25th Floor New York, NY 10017

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (646) 502-7170

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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

Number of shares outstanding of each of the issuer’s classes of common stock as of October 31, 2014:

20,105,520 shares of Common Stock, $0.001 par value per share.

 

 

 

 

 


FUEL SYSTEMS SOLUTIONS, INC.

INDEX

 

 

 

 

  

Page

Part I. Financial Information

  

 

Item 1.

 

Financial Statements (unaudited)

  

3

 

 

Condensed Consolidated Balance Sheets—September 30, 2014 and December 31, 2013

  

3

 

 

Condensed Consolidated Statements of Operations—Three and nine months ended September 30, 2014 and 2013

  

4

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income—Three and nine months ended September 30, 2014 and 2013

  

5

 

 

Condensed Consolidated Statements of Cash Flows—Nine months ended September 30, 2014 and 2013

  

6

 

 

Notes to Condensed Consolidated Financial Statements

  

7

Item 2.

 

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

  

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

35

Item 4.

 

Controls and Procedures

  

36

Part II. Other Information

  

 

Item 1.

 

Legal Proceedings

  

37

Item 1A.

 

Risk Factors

  

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

37

Item 3.

 

Defaults Upon Senior Securities

  

37

Item 4.

 

Mine Safety Disclosure

  

37

Item 5.

 

Other Information

  

38

Item 6.

 

Exhibits

  

38

Signature

  

39

Exhibits

  

 

 

 

 

2


PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

  

September 30,
2014

 

  

December 31,
2013

 

ASSETS

  

 

 

 

  

 

 

 

Current assets:

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

73,486

  

  

$

80,961

  

Accounts receivable, less allowance for doubtful accounts of $3,497 and $3,993 at September 30, 2014 and December 31, 2013, respectively

  

 

53,236

  

  

 

65,008

  

Inventories

  

 

88,448

  

  

 

95,052

  

Deferred tax assets, net

  

 

12,257

  

  

 

10,234

  

Other current assets

  

 

22,454

  

  

 

21,490

  

Short-term investments

 

 

17,031

 

 

 

14,615

 

Related party receivables

  

 

733

  

  

 

2,787

  

Total current assets

  

 

267,645

  

  

 

290,147

  

Equipment and leasehold improvements, net

  

 

53,357

  

  

 

58,402

  

Goodwill, net

  

 

7,388

  

  

 

48,896

  

Deferred tax assets, net

  

 

3,946

  

  

 

4,129

  

Intangible assets, net

  

 

7,679

  

  

 

11,790

  

Other assets

  

 

1,129

  

  

 

1,260

  

Long-term investments

  

 

0

  

  

 

675

  

Total Assets

  

$

341,144

  

  

$

415,299

  

LIABILITIES AND EQUITY

  

 

 

 

  

 

 

 

Current liabilities:

  

 

 

 

  

 

 

 

Accounts payable

  

$

35,495

  

  

$

40,702

  

Accrued expenses

  

 

43,136

  

  

 

42,094

  

Income taxes payable

  

 

595

  

  

 

216

  

Current portion of term loans and debt

  

 

194

  

  

 

213

  

Related party payables

  

 

2,337

  

  

 

2,860

  

Total current liabilities

  

 

81,757

  

  

 

86,085

  

Term and other loans

  

 

99

  

  

 

215

  

Other liabilities

  

 

7,371

  

  

 

8,364

  

Deferred tax liabilities

  

 

1,278

  

  

 

1,583

  

Total Liabilities

  

 

90,505

  

  

 

96,247

  

Equity:

  

 

 

 

  

 

 

 

Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued and outstanding at September 30, 2014 and December 31, 2013

  

 

  

  

 

  

Common stock, $0.001 par value, authorized 200,000,000 shares; 20,113,519 issued and 20,105,520 outstanding at September 30, 2014; and 20,104,009 issued and 20,096,010 outstanding at December 31, 2013

  

 

20

  

  

 

20

  

Additional paid-in capital

  

 

320,680

  

  

 

320,345

  

Shares held in treasury, 7,999 shares at September 30, 2014 and December 31, 2013

  

 

(276

)

  

 

(295

Accumulated Deficit

  

 

(50,138

)

  

 

(735

)

Accumulated other comprehensive loss

  

 

(19,798

)

  

 

(439

Total Fuel Systems Solutions, Inc. Equity

 

 

250,488

 

 

 

318,896

 

Non-controlling interest

 

 

151

 

 

 

156

 

Total Equity

  

 

250,639

  

  

 

319,052

  

Total Liabilities and Equity

  

$

341,144

  

  

$

415,299

  

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Revenue

 

$

85,077

 

   

$

97,573

 

 

$

253,764

 

 

$

307,268

 

Cost of revenue

 

 

65,101

 

 

 

75,506

 

 

 

198,535

 

 

 

237,764

 

Gross profit

 

 

19,976

 

 

 

22,067

 

 

 

55,229

 

 

 

69,504

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

 

6,281

 

 

 

6,889

 

 

 

19,787

 

 

 

20,682

 

Selling, general and administrative expense

 

 

15,084

 

 

 

13,554

 

 

 

42,680

 

 

 

41,240

 

Impairments

 

 

0

 

 

 

0

 

 

 

44,341

 

 

 

0

 

Total operating expenses

 

 

21,365

 

 

 

20,443

 

 

 

106,808

 

 

 

61,922

 

Operating (loss) income

 

 

(1,389

)

 

 

1,624

 

 

 

(51,579

)

 

 

7,582

 

Other income (expense) , net

 

 

238

 

 

 

346

 

 

 

1,657

 

 

 

(898

)

Interest income (expense), net

 

 

116

 

 

 

(7

)

 

 

102

 

 

 

36

 

(Loss) income from operations before income taxes and non-controlling interest

 

 

(1,035

)

 

 

1,963

 

 

 

(49,820

)

 

 

6,720

 

Income tax (expense) benefit

 

 

(2,168

)

 

 

(918

)

 

 

417

 

 

 

(3,820

)

Net (loss) income

 

 

(3,203

)

 

 

1,045

 

 

 

(49,403

)

 

 

2,900

 

Less: Net (income) attributable to the non-controlling interest

 

 

(4

)

 

 

(13

)

 

 

0

 

 

 

(13

)

Net (loss) income attributable to Fuel Systems Solutions, Inc.

 

 

(3,207

)

 

 

1,032

 

 

 

(49,403

)

 

 

2,887

 

Net (loss) income per share attributable to Fuel Systems Solutions, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.16

)

 

$

0.05

 

 

$

(2.46

)

 

$

0.14

 

Diluted

 

$

(0.16

)

 

$

0.05

 

 

$

(2.46

)

 

$

0.14

 

Number of shares used in per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,105,520

 

 

 

20,082,143

 

 

 

20,100,887

 

 

 

20,065,906

 

Diluted

 

 

20,105,520

 

 

 

20,113,272

 

 

 

20,100,887

 

 

 

20,083,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands); (Unaudited)

 

 

  

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

  

2014

 

  

2013

 

 

2014

 

  

2013

 

Net (loss) income

  

$

(3,203

)  

  

$

1,045

  

 

$

(49,403

)

  

$

2,900

  

Other comprehensive (loss) income, net of tax:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Foreign currency translation adjustments

  

 

(13,100

)

  

 

7,025

  

 

 

(18,338

)

  

 

719

 

Unrealized (loss) gain on investments arising during period

  

 

(75

)

  

 

22

  

 

 

(50

)

  

 

43

  

Foreign currency unrealized (loss) gain on investments during period (1)

  

 

(866

)

  

 

608

  

 

 

(976

)

  

 

159

 

Net realized gain reclassified during period (1)

  

 

0

 

  

 

0

 

 

 

0

 

  

 

(686

Other comprehensive (loss) income, net of tax except for foreign currency items

  

 

(14,041

)

  

 

7,655

  

 

 

(19,364

)

  

 

235

 

Comprehensive (loss) income

 

 

(17,244

)

 

 

8,700

 

 

 

(68,767

)

 

 

3,135

 

Less: Net comprehensive loss (income) attributable to non-controlling interest

 

 

7

 

 

 

(3

)

 

 

5

 

 

 

(3

)

Comprehensive (loss) income attributable to Fuel Systems Solutions, Inc.

  

$

(17,237

)

  

$

8,697

  

 

$

(68,762

)

  

$

3,132

 

(1)

See Note 12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands); (Unaudited)

 

 

  

Nine  Months Ended
September 30,

 

 

  

2014

 

  

2013

 

Cash flows from operating activities:

  

 

 

 

  

 

 

 

Net (loss) income

  

$

(49,403

)  

  

$

2,900

  

Less: Net loss attributable to the non-controlling interest

 

 

0

 

 

 

(13

)

Net (loss) income attributable to Fuel Systems Solutions, Inc.

 

 

(49,403

)

 

 

2,887

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

  

 

 

 

  

 

 

 

Depreciation and other amortization

  

 

8,193

  

  

 

8,105

  

Amortization of intangibles arising from acquisitions

  

 

1,783

  

  

 

2,233

  

Impairments

 

 

44,341

 

 

 

0

 

Provision for doubtful accounts

  

 

313

  

  

 

634

  

Write down of inventory

  

 

2,532

  

  

 

2,093

  

Loss on acquisition

 

 

0

 

 

 

1,687

 

Other non-cash items

 

 

14

 

 

 

(234

)

Deferred income taxes

  

 

(3,377

)  

  

 

(890

Unrealized (gain) loss on foreign exchange transactions

  

 

(476

)  

  

 

2,010

  

Compensation expense related to equity awards

  

 

336

  

  

 

277

  

Loss (gain) on disposal of equipment and other assets

  

 

643

  

  

 

(359

Reduction of contingent consideration

  

 

0

  

  

 

(406

Changes in assets and liabilities, net of acquisitions:

  

 

 

  

  

 

 

 

Decrease in accounts receivable

  

 

7,123

  

  

 

9,690

 

Increase in inventories

  

 

(3,159

)  

  

 

(6,178

Increase in other current assets

  

 

(3,777

)  

  

 

(2,664

Decrease (increase) in other assets

  

 

737

  

  

 

(599

Decrease in accounts payable

  

 

(2,264

)  

  

 

(3,813

)  

Increase (decrease) in income taxes payable

  

 

432

  

  

 

(2,499

)  

Increase in accrued expenses

  

 

4,808

  

  

 

182

  

Decrease in long-term liabilities

  

 

(551

)  

  

 

(305

Receivables from/payables to related party, net

  

 

1,276

  

  

 

(2,006

)  

Net cash provided by operating activities

  

 

9,524

  

  

 

9,845

  

Cash flows from investing activities:

  

 

 

 

  

 

 

 

Purchase of equipment and leasehold improvements

  

 

(10,903

)  

  

 

(5,816

Purchase of investments

  

 

(3,000

)  

  

 

(12,626

Sale of investments

  

 

0

  

  

 

6,753

  

Acquisition, net of cash acquired

 

 

0

 

 

 

(841

)

Other

  

 

136

  

  

 

226

  

Net cash used in investing activities

  

 

(13,767

)  

  

 

(12,304

Cash flows from financing activities:

  

 

 

 

  

 

 

 

Payments on term loans and other loans

  

 

(109

)  

  

 

(485

Other

  

 

19

  

  

 

327

  

Net cash used in financing activities

  

 

(90

)  

  

 

(158

Net decrease in cash and cash equivalents

  

 

(4,333

)  

  

 

(2,617

Effect of exchange rate changes on cash

  

 

(3,142

)  

  

 

1,042

 

Net decrease in cash and cash equivalents

  

 

(7,475

)  

  

 

(1,575

Cash and cash equivalents at beginning of period

  

 

80,961

  

  

 

75,675

  

Cash and cash equivalents at end of period

  

$

73,486

  

  

$

74,100

  

Supplemental disclosures of cash flow information:

  

 

 

 

  

 

 

 

Non-cash investing and financing activities:

  

 

 

 

  

 

 

 

Acquisition of equipment in accounts payable

  

$

622

  

  

$

109

  

See accompanying notes to condensed consolidated financial statements.

 

 

 

6


FUEL SYSTEMS SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(Unaudited)

 

1. Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements included in the Fuel Systems Solutions, Inc. (“Fuel Systems” or “the Company”) 2013 Annual Report on Form 10-K. The accompanying condensed consolidated financial statements as of and for the periods ended September 30, 2014 and 2013 are unaudited and reflect all adjustments (including normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in Fuel Systems’ Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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

The Consolidated Financial Statements include the accounts of the Company and our majority-owned subsidiaries. All intercompany transactions, including intercompany profits and losses and intercompany balances, have been eliminated in consolidation. Investments in unconsolidated joint ventures or affiliates (“joint ventures”) are accounted for under the equity method of accounting, whereby the investment is initially recorded at the cost of acquisition and adjusted to recognize the Company’s share in undistributed earnings or losses since acquisition.

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

The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2014, or for any future period. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

 

2. Recent Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update that improves the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results.  The amendments in this update are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Early adoption is permitted.  The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In May 2014, the FASB issued a new accounting standard update providing additional guidance for revenue recognition in relation to contractual arrangements with customers.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.  The amendments in this update are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016.  Early adoption is not permitted. The Company is currently defining the approach and planning the initial review activities necessary for the transition to the new standard.

In June 2014, the FASB issued a new accounting standard update providing additional guidance on how to account for share-based payments where the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period.  The amendments require that a performance target that affects vesting and that could be achieved after the requisite period is treated as a performance condition.  The amendments in this update are effective for fiscal years, and interim periods within those years beginning after December 15, 2015, and may be applied (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. Earlier adoption is permitted.  The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

7


In August 2014, the FASB issued a new accounting standard update intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. The amendments in this update apply to all companies and not-for-profit organizations. They become effective in the annual period ending after December 15, 2016, with early application permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

 

 

3. Acquisitions

Acquisition of additional equity interest in Rohan BRC

On September 13, 2013, the Company acquired an additional 44.89% equity interest in Rohan BRC Gas Equipment Private Limited (“Rohan BRC”), an Indian company that assembles, sells and services Liquefied Petroleum Gas (“LPG”) and Compressed Natural Gas (“CNG”) equipment for automotive or other use, for both Original Equipment Manufacturers (“OEM”) and retrofit markets. This acquisition was justified by business and operations opportunities. The aggregate purchase price for the acquisition of the additional ownership interest in Rohan BRC totaled approximately $1.2 million (€0.9 million), net of cash acquired of $0.1 million (€0.1 million), of which $0.8 million (€0.6 million) was paid at closing, with the remainder to be settled within two years from the acquisition date.

The Company previously owned an equity interest of 50.01% in Rohan BRC and accounted for it under the equity method due to a lack of control on its board of directors and on the majority of its operations. Consequently, the acquisition of the additional 44.89% qualified as a step-acquisition. In accordance with the step-acquisition authoritative guidance, the previously held equity interest in Rohan BRC, including inventory on consignment, was re-measured at fair value on the date of acquisition resulting in a fair value of $2.0 million (€1.5 million), and then the total consideration paid for the additional equity interest acquired was compared to its fair value on the date of acquisition. The re-measurement resulted in a loss of $2.0 million (€1.5 million), recorded in cost of revenue for the year ended December 31, 2013.

The results of operations of Rohan BRC have been included in the accompanying consolidated statements of operations from the date of acquisition within the FSS Automotive operating segment.

The Company has determined that the acquisition of the additional 44.89% equity interest in Rohan BRC was a non-material business combination.

 

4. Cash and Investments

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term. The Company’s marketable securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’ equity. The Company determines realized gains and losses on the sale of marketable securities on a specific identification method, and reflects such gains and losses as a component of interest and other income, net, in the accompanying Consolidated Statements of Operations.

The Company maintains investments in trading securities in connection with its non-qualified Deferred Compensation Plan, whereby selected key employees and directors may elect to defer a portion of their compensation each year. The Company’s investments associated with its Deferred Compensation Plan consist of mutual funds that are publicly traded and for which inputs are directly or indirectly observable in the marketplace. These trading securities are reported at fair value, with unrealized gains and losses included in earnings. In addition, the Deferred Compensation liability includes the value of deferred shares of the Company’s common stock, which is publicly traded and for which current market prices are readily available. The fair market value of the investments in the Deferred Compensation Plan is included in short-term investments starting from the second quarter of 2014 (following termination of the plan, as discussed below), with the corresponding deferred compensation obligation included in accrued expenses on the Condensed Consolidated Balance Sheets. Changes in the fair value of the benefits payable to participants and investments are both recognized as components of compensation expense. The net impact of changes in fair value was not material. The Deferred Compensation Plan was terminated during the second quarter of 2014 and the funds will be distributed within one year.

8


Cash, cash equivalents, and marketable securities consist of the following (in thousands):

 

 

  

As of

 

 

  

September 30, 2014

 

  

December 31, 2013

 

Cash and cash equivalents:

  

 

 

 

  

 

 

 

Cash

  

$

62,346

  

  

$

72,302

  

Money market funds

  

 

11,140

  

  

 

8,659

  

Total cash and cash equivalents

  

$

73,486

  

  

$

80,961

  

Investments:

  

 

 

 

  

 

 

 

Available for sale securities:

  

 

 

 

  

 

 

 

German Government bonds (1)

  

 

11,421

  

  

 

12,615

  

Trading securities:

  

 

 

 

  

 

 

 

Deferred Compensation Plan assets

  

 

610

  

  

 

675

  

Other investments, held to maturity:

  

 

 

 

  

 

 

 

Time deposits (2)

  

 

5,000

  

  

 

2,000

  

Total investments

  

$

17,031

  

  

$

15,290

  

Short term investments

  

$

17,031

  

  

$

14,615

  

Long term investments

  

$

0

  

  

$

675

  

Notes:

(1): The contractual maturity date is October 10, 2014. Upon expiration the liquidity was temporarily invested in a high-yield deposit.

(2): Represents two Bank of America certificates of deposit each with an interest rate of 0.26% (no interest if withdrawn before maturity): a $2 million certificate of deposit with a maturity date of January 16, 2015, and a $3 million certificate of deposit with a maturity date of January 22, 2015.

The following table summarizes unrealized gains and losses related to the Company’s investments designated as available-for-sale (in thousands):

 

 

  

As of September 30, 2014

 

 

  

Amortized
Cost

 

  

Gross
Unrealized
Gain

 

  

Gross 
Unrealized
(Loss)

 

  

Forex
Effect

 

  

Fair
Value

 

German Government bonds

  

$

12,147

  

  

$

5

  

  

$

0

  

  

$

(731

)  

  

$

11,421

  

Total

  

$

12,147

  

  

$

5

  

  

$

0

  

  

$

(731

)  

  

$

11,421

  

 

 

  

As of December 31, 2013

 

 

  

Amortized
Cost

 

  

Gross
Unrealized
Gain

 

  

Gross
Unrealized
(Loss)

 

  

Forex
Effect

 

  

Fair
Value

 

German Government bonds

  

$

12,315

  

  

$

55

  

  

$

0

  

  

$

245

  

  

$

12,615

  

Total

  

$

12,315

  

  

$

55

  

  

$

0

  

  

$

245

  

  

$

12,615

  

In the nine months ended September 30, 2013, there were realized gains of approximately $0.4 million pertaining to €5.0 million of notional amount of German Government bonds acquired above par at 100.435 in June of 2012 for $6.3 million, with a maturity date of March 14, 2014, and sold before maturity at 100.09 on February 8, 2013 for approximately $6.8 million.

Unrealized gains and losses on trading securities pertaining to the Company’s Deferred Compensation Plan included in earnings for the three and nine months ended September 30, 2014 and 2013 were less than $0.1 million in all periods.

As of September 30, 2014 and 2013, the Company did not have any investments in available for sale marketable securities that were in an unrealized loss position for a period of 12 months or greater.

At September 30, 2014 and December 31, 2013, restricted cash balance was approximately $0.4 million and $0.5 million, respectively, included in other assets.

 

9


5. Fair Value Measurements

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs that are supported by little or no market activities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company classifies its cash equivalents and securities within Level 1 or Level 2. This is because the Company values its cash equivalents, available for sale and trading securities using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

 

 

  

As of
September 30,
2014

 

  

Fair value measurement at
reporting date using

 

 

  

  

Level 1

 

  

Level 2

 

  

Level 3

 

Assets (in thousands):

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash equivalents:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Money market funds

  

$

11,140

  

  

$

11,140

  

  

$

0

  

  

$

0

  

Available for sale securities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

German Government bonds

  

 

11,421

  

  

 

11,421

  

  

 

0

  

  

 

0

  

Trading securities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Deferred Compensation Plan assets

  

 

610

  

  

 

0

  

  

 

610

  

  

 

0

  

Other investments, held to maturity:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Time deposits

  

 

5,000

  

  

 

0

  

  

 

5,000

  

  

 

0

  

Total

  

$

28,171

  

  

$

22,561

  

  

$

5,610

  

  

$

0

  

 

 

  

As of
December 31,
2013

 

  

Fair value measurement at
reporting date using

 

 

  

  

Level 1

 

  

Level 2

 

  

Level 3

 

Assets (in thousands):

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash equivalents:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Money market funds

  

$

8,659

  

  

$

8,659

  

  

$

0

  

  

$

0

  

Available for sale securities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

German Government bonds

  

 

12,615

  

  

 

12,615

  

  

 

0

  

  

 

0

  

Trading securities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Deferred Compensation Plan assets

  

 

675

  

  

 

0

  

  

 

675

  

  

 

0

  

Other investments, held to maturity:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Time deposits

  

 

2,000

  

  

 

0

  

  

 

2,000

  

  

 

0

  

Total

  

$

23,949

  

  

$

21,274

  

  

$

2,675

  

  

$

0

  

 

 

6. Inventories

Inventories, consisting of raw materials and parts, work-in-process, and finished goods are stated at the lower of cost or market value. Cost is determined by the first-in, first-out, or the FIFO method, while market value is determined by replacement cost for raw materials and parts and net realizable value for work-in-process and finished goods.

10


Inventories are comprised of the following (in thousands):

 

 

  

As of

 

 

  

September 30, 2014

 

  

December 31, 2013

 

Raw materials and parts

  

$

54,753

  

  

$

56,790

  

Work-in-process

  

 

2,328

  

  

 

1,503

  

Finished goods

  

 

31,367

  

  

 

36,759

  

Total inventories

  

$

88,448

  

  

$

95,052

  

 

 

7. Equipment and Leasehold Improvements, Net

Equipment and leasehold improvements, net, consist of the following (in thousands):

 

 

  

As of

 

 

  

September 30, 2014

 

 

December 31, 2013

 

Dies, molds, and patterns

  

$

5,616

  

 

$

5,677

  

Machinery and equipment

  

 

64,331

  

 

 

67,673

  

Office furnishings and equipment

  

 

21,819

  

 

 

21,092

  

Automobiles and trucks

  

 

4,920

  

 

 

4,548

  

Leasehold improvements

  

 

23,018

  

 

 

25,259

  

Total equipment and leasehold improvements

  

 

119,704

  

 

 

124,249

  

Less: accumulated depreciation

  

 

(66,347

 

 

(65,847

Equipment and leasehold improvements, net of accumulated depreciation

  

$

53,357

  

 

$

58,402

  

Depreciation expense related to equipment and leasehold improvements was approximately $2.7 million and $2.7 million for the three months ended September 30, 2014 and 2013, respectively. Depreciation expense related to equipment and leasehold improvements was $8.2 million and $8.1 million for the nine months ended September 30, 2014 and 2013, respectively.

 

8. Goodwill and Intangibles

The changes in the carrying amount of goodwill by business segment for the nine months ended September 30, 2014 are as follows (in thousands):

 

 

  

FSS Automotive

 

 

FSS Industrial

 

 

Total

 

Goodwill, gross

  

$

50,071

  

 

$

15,651

  

 

$

65,722

  

Accumulated impairment losses

  

 

(9,043

 

 

(7,783

 

 

(16,826

Net balance as of December 31, 2013

  

$

41,028

  

 

$

7,868

  

 

$

48,896

  

Impairment loss (1)

 

 

(35,780

)

 

 

(4,158

)

 

 

(39,938

)

Currency translation

  

 

(1,518

)

 

 

(52

)

 

 

(1,570

)

Goodwill, gross

  

$

48,258

 

 

$

15,760

 

 

$

64,018

 

Accumulated impairment losses

  

 

(44,528

)

 

 

(12,102

)

 

 

(56,630

)

Net balance as of September 30, 2014

  

$

3,730

 

 

$

3,658

 

 

$

7,388

 

Note (1): see Note 14 Impairments

At September 30, 2014 and December 31, 2013, intangible assets consisted of the following (in thousands):

 

 

  

WT Average
Remaining
Amortization
period (in years)

 

  

As of September 30, 2014

 

  

As of December 31, 2013

 

  

  

Gross
Book Value

 

  

Accumulated
Amortization

 

 

Net
Book Value

 

  

Gross
Book Value

 

  

Accumulated
Amortization

 

 

Net
Book Value

 

Existing technology

  

 

5.0

  

  

$

26,180

  

  

$

(22,176

)

 

$

4,004

  

  

$

27,774

  

  

$

(21,150

)

 

$

6,624

  

Customer relationships

  

 

11.0

  

  

 

19,757

  

  

 

(17,444

)

 

 

2,313

  

  

 

21,013

  

  

 

(17,909

)

 

 

3,104

  

Trade name

  

 

4.4

  

  

 

4,596

  

  

 

(3,234

)

 

 

1,362

  

  

 

5,005

  

  

 

(2,944

)

 

 

2,061

  

Non-compete agreements

  

 

0.0

  

  

 

0

  

  

 

0

  

 

 

0

  

  

 

158

  

  

 

(157

)

 

 

1

  

Total

  

 

 

 

  

$

50,533

  

  

$

(42,854

)

 

$

7,679

  

  

$

53,950

  

  

$

(42,160

)

 

$

11,790

  

11


Amortization expense related to existing technology and customer relationships of $0.4 million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, and of $1.4 million and $1.7 million for the nine months ended September 30, 2014 and 2013, respectively, is reported as a component of cost of revenue. Amortization expense related to trade name and non-compete agreements of $0.1 million and $0.1 million for three months ended September 30, 2014 and 2013, respectively, and of $0.4 million and $0.5 million for the nine months ended September 30, 2014 and 2013, respectively, is reported as a component of operating expenses.

Amortization expense for the remaining lives of the intangible assets is estimated to be as follows (in thousands):

 

 

  

Amortization
Expense

 

Three months ending December 31, 2014

  

$

505

  

2015

  

 

1,923

  

2016

  

 

1,549

  

2017

  

 

1,100

  

2018

  

 

922

  

2019

  

 

614

  

Thereafter

  

 

1,066

  

 

  

$

7,679

  

 

 

9. Warranties

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

Changes in the Company’s product warranty liability, included within Accrued expenses on the Condensed Consolidated Balance Sheets, during the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):

 

 

  

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

  

2014

 

  

2013

 

 

2014

 

  

2013

 

Balance at beginning of period

  

$

7,516

  

  

$

9,756

  

 

$

8,695

  

  

$

11,639

  

Provisions charged to costs and expenses

  

 

1,905

  

  

 

202

  

 

 

3,602

  

  

 

2,967

  

Settlements

  

 

(1,477

)  

  

 

(854

 

 

(3,731

)  

  

 

(3,861

Adjustments to pre-existing warranties

  

 

(207

)  

  

 

(102

 

 

(774

)  

  

 

(1,483

Effect of foreign currency translation

  

 

(377

)

  

 

195

 

 

 

(432

)  

  

 

(65

Balance at end of period

  

$

7,360

  

  

$

9,197

  

 

$

7,360

  

  

$

9,197

  

 

 

10. Income Taxes

The Company’s effective tax rate for the three months ended September 30, 2014 was (209.5)% compared to an effective tax rate of 46.8% for the three months ended September 30, 2013. The Company’s effective tax rate for the nine months ended September 30, 2014 was 0.8% compared to an effective tax rate of 56.8% for the nine months ended September 30, 2013.

The Company operates 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 (“loss jurisdictions”) for which no tax benefit has been recorded. For the three months ended September 30, 2014 and 2013 the Company incurred a pre-tax loss of approximately $4.1 million and $0.9 million, respectively, in the loss jurisdictions. For the nine months ended September 30, 2014 and 2013, the Company incurred a pre-tax loss of approximately $7.2 million and $5.0 million, respectively, in the loss jurisdictions. The Company continues to believe that the likelihood of recoverability of the net deferred tax assets in the loss jurisdictions is less than the “more likely than not” threshold, therefore, a valuation allowance is maintained on the entire domestic and certain foreign jurisdictions deferred tax assets.

As of September 30, 2014, the Company had approximately $13.0 million of unrecognized tax benefits. There was no significant change in unrecognized tax benefits for the three and nine months ended September 30, 2014. Although it is reasonably possible that our unrecognized tax benefits will change over the next 12 months, the Company does not anticipate such changes to have a significant impact on our income tax expense due to the valuation allowance position maintained in certain jurisdictions.

12


 

11. Debt Payable

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

 

 

  

Available as of
September 30,
2014

 

  

September 30,
2014

 

  

December 31,
2013

 

(a) Revolving lines of credit—Italy and Argentina

  

$

11,939

  

  

$

0

  

  

$

0

  

(b) Revolving line of credit—USA

  

 

20,000

  

  

 

0

  

  

 

0

  

(c) Other indebtedness

  

 

0

  

  

 

293

  

  

 

428

  

 

  

$

31,939

  

  

 

293

  

  

 

428

  

Less: current portion

  

 

 

 

  

 

194

  

  

 

213

  

Non-current portion

  

 

 

 

  

$

99

  

  

$

215

  

At September 30, 2014, the Company’s weighted average interest rate on outstanding debt was 0.9%. The Company is party to numerous credit agreements and other borrowings. All foreign denominated revolving lines of credit have been converted using the average interbank currency rate at September 30, 2014. The fair value of the debt obligations approximated the recorded value as of September 30, 2014 and December 31, 2013 and represents a level 3 measurement within the fair value hierarchy (see Note 5).

(a) Revolving Lines of Credit – Italy and Argentina

The Company maintains various revolving lines of credit in Italy and Argentina. The revolving lines of credit in Italy include $6.4 million which is unsecured and $3.7 million which is collateralized by accounts receivable. The interest rates on these revolving lines of credit are fixed and variable and range from 1.1% to 4.1% as of September 30, 2014. At September 30, 2014 and December 31, 2013, there were no balances outstanding.

The revolving lines of credit in Argentina consist of two lines for a total amount of availability of approximately $1.9 million. These lines are unsecured with no balance outstanding at September 30, 2014 and December 31, 2013. At September 30, 2014, the interest rates for the lines of credit in Argentina ranged from 4.5% to 30.0%.

All lines are callable on demand.

(b) Revolving Line of Credit – USA

As of September 30, 2014, the Company and IMPCO Technologies, Inc. (“IMPCO”) maintain an unsecured, revolving short term credit facility with Intesa SanPaolo S.p.A. (“Intesa”) amounting to $20.0 million. IMPCO intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCO’s payments. At September 30, 2014 and December 31, 2013, there were no balances outstanding. The maximum aggregate principal amount of loans available at any time was originally $13.0 million with a maturity date of April 30, 2014, which was subsequently renewed to April 30, 2015 with a new aggregate principal amount of loans available at any time increased to $20.0 million. At the Company’s option, the loans will bear interest on either the applicable LIBOR rate plus 2.0%, the bank’s prime rate plus 1.0% or the bank’s cost of funds rate plus 2.0%. The bank’s prime rate is a floating interest rate that may change as often as once a day. If any amounts under a loan remain outstanding after the loan’s maturity date, such amounts will bear interest at the bank’s prime rate plus 2.0%. In addition, this revolving credit facility carries a commitment fee of 0.5% of the average daily unused amount. The line of credit contains quarterly covenants, which require the Company 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 $135.0 million, and (3) the Company 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 the Company or (ii) debt for borrowed money in a total aggregate principal amount, the U.S. Dollar equivalent of which does not exceed $75.0 million. At September 30, 2014, the Company was in compliance with these covenants.

(c) Other indebtedness

Other indebtedness includes capital leases and various term loans and lines of credits involving the Company’s foreign subsidiaries. These term loans and lines of credit are used primarily to fund the operations of these subsidiaries and bear interest ranging from 0.50% to 6.95%.

 

13


12. Changes and Reclassifications in Accumulated Other Comprehensive Loss by Component

(a)

Changes in Accumulated Other Comprehensive Loss by Component (all amounts are net of tax, except foreign currency items)

 

 

  

Three Months Ended September 30, 2014
(in thousands)

 

 

  

Unrealized Gains and
(Losses) on Available-
for-Sale Securities

 

  

Foreign
Currency
Items

 

 

Total

 

Beginning balance, June 30, 2014

  

 

80

  

  

 

(5,848

)

 

 

(5,768

)

Current period Other Comprehensive Loss activity before reclassifications

  

 

(75

  

 

(13,966

)  

 

 

(14,041

)  

Net current-period Other Comprehensive Loss

  

 

(75

  

 

(13,966

)  

 

 

(14,041

)  

Net current-period Other Comprehensive Income attributable to noncontrolling interest

 

 

0

 

 

 

11

 

 

 

11

 

Ending balance, September 30, 2014

  

 

5

  

  

 

(19,803

)  

 

 

(19,798

)  

 

 

  

Nine Months Ended September 30, 2014
(in thousands)

 

 

  

Unrealized Gains and
(Losses) on Available-
for-Sale Securities

 

  

Foreign
Currency
Items

 

 

Total

 

Beginning balance, December 31, 2013

  

 

55

  

  

 

(494

)

 

 

(439

)

Current period Other Comprehensive Loss activity before reclassifications

  

 

(50

  

 

(19,314

)  

 

 

(19,364

)  

Net current-period Other Comprehensive Loss

  

 

(50

  

 

(19,314

)  

 

 

(19,364

)  

Net current-period Other Comprehensive Income attributable to noncontrolling interest

 

 

0

 

 

 

5

 

 

 

5

 

Ending balance, September 30, 2014

  

 

5

  

  

 

(19,803

)  

 

 

(19,798

)  

 

 

  

Three Months Ended September 30, 2013
(in thousands)

 

 

  

Unrealized Gains and
(Losses) on Available-
for-Sale Securities

 

 

Foreign
Currency
Items

 

 

Total

 

Beginning balance, June 30, 2013

  

 

21

 

 

 

(9,501

 

 

(9,480

Current period Other Comprehensive Income activity before reclassifications

  

 

22

  

 

 

7,643

  

 

 

7,665

  

Amounts reclassified from Accumulated Other Comprehensive Loss

  

 

0

 

 

 

0

 

 

 

0

 

Net current-period Other Comprehensive Income

  

 

22

  

 

 

7,643

  

 

 

7,665

  

Ending balance, September 30, 2013

  

 

43

  

 

 

(1,858

 

 

(1,815

 

 

  

Nine Months Ended September 30, 2013
(in thousands)

 

 

  

Unrealized Gains and
(Losses) on Available-
for-Sale Securities

 

 

Foreign
Currency
Items

 

 

Total

 

Beginning balance, December 31, 2012

  

 

(9

 

 

(2,051

 

 

(2,060

Current period Other Comprehensive Income activity before reclassifications

  

 

43

  

 

 

888

 

 

 

931

 

Amounts reclassified from Accumulated Other Comprehensive Income (Loss)

  

 

9

  

 

 

(695

 

 

(686

Net current-period Other Comprehensive Income

  

 

52

  

 

 

193

 

 

 

245

 

Ending balance, September 30, 2013

  

 

43

  

 

 

(1,858

 

 

(1,815

14


(b) Reclassifications out of Accumulated Other Comprehensive Loss

 

For the three months ended September 30, 2014 and 2013, there were no reclassifications out of Accumulated Other Comprehensive Loss.

Reclassifications for the nine month periods ended September 30, 2014 and 2013 were as follows:

 

 

  

Amount Reclassified from Accumulated Other
Comprehensive Income (Loss) (in thousands)

Details about Accumulated Other

Comprehensive Income (Loss)

Components

  

Nine Months Ended
September 30, 2014

 

  

Nine Months Ended
September 30, 2013

 

 

Affected Line Item in the
Statement Where Net
Income is Presented

Unrealized losses on available-for-sale
securities

  

$

0

  

  

$

9

  

 

Other Expense
(Income), net

Foreign Currency Items:

  

 

 

Foreign currency gain on available for sale securities

  

 

0

  

  

 

(429

)

 

Other Expense
(Income), net

Foreign currency gain on available for sale securities

  

 

 

 

  

 

(266

 

Other Expense
(Income), net

Total reclassifications for the period

  

$

0

  

  

$

(686

)

 

 

 

 

13. Stock-Based Compensation

The Company has two stock option plans that provide for the issuance of options to key employees and directors of the Company at the fair market value at the time of grant. Options previously granted under these plans generally vest in four or five years and are generally exercisable while the individual is an employee or a director, or ordinarily within one month following termination of employment. In no event may options be exercised more than ten years after date of grant. Under the Company’s 2009 Restricted Stock Bonus Plan, the Company’s Board of Directors may grant restricted stock to officers, employees and non-employee directors.

Stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 was allocated as follows (in thousands):

 

 

  

Three Months Ended
September 30,

 

  

Nine Months Ended
September 30,

 

 

  

2014

 

  

2013

 

  

2014

 

  

2013

 

Cost of revenue

  

$

12

  

  

$

10

  

  

$

33

  

  

$

27

  

Research and development expense

  

 

9

  

  

 

7

  

  

 

25

  

  

 

18

  

Selling, general and administrative expense

  

 

119

  

  

 

86

  

  

 

278

  

  

 

232

  

 

  

$

140

  

  

$

103

  

  

$

336

  

  

$

277