Fuel Systems Solutions: Converting engines to clean-burning gas
When Mexico City, one of the most polluted cities in the world, a few years ago declared that vehicles using liquid fuels could be curbed during pollution alerts while those using clean-burning fuels like propane and natural gas would be exempt, Coca-Cola Mexico decided on a fuel change to keep its fleet of 6,000 delivery vehicles running uninterrupted.
Coca-Cola turned to California-based IMPCO Technologies, now an operating subsidiary of Fuel Systems Solutions Inc. (Nasdaq: FSYS), for the devices to convert its vehicles’ engines to propane use, saving money by using cheaper propane and contributing to the reduction of pollution in Mexico City.
Fuel Systems Solutions has not been what you could call a model company, but it is orders like these that keep investors interested in the world’s leading supplier of alternative fuel systems for internal combustion engines. Even now, as the company faces delisting for the second time in three years for late reporting of its financials, the stock has been treading water around the $17 level, down from its 52-week high of $25.11 in February, giving it a market cap of about $250 million.
The company has not yet filed financial statements for the fourth quarter and full year 2006 and the first two quarters of 2007 because of a voluntary investigation into its stock option grant practices between 1996 and 2006. After the close of trading on Friday, the company said that preliminary review from this investigation indicates that the company will probably need to restate its results for the years 2001 to 2005 to account for non-cash charges with regard to stock-based compensation.
The company also said Friday that it believes it has fulfilled the requirements set by Nasdaq to submit information by last Thursday (July 26) to keep the exchange from proceeding with delisting for the late filings of financials. Nasdaq also set a deadline of September 6 for Fuel Systems to submit the late filings.
The company, which is one of more than 200 conducting such probes with regard to stock options, said the internal investigation has not yet been completed. In the meantime, however, its statements for 2001 to 2005 as well as the quarterly statements for 2004 and 2005 “should no longer be relied upon.”
On Monday, in the wake of Friday’s announcement, the stock was little changed, up $0.12 to $16.53. Despite the uncertainties, Fuel Systems Solutions is scheduled to present at the Canaccord Adams Global Growth Conference August 7 in Boston, at which the company may be able to shed some light on its current business prospects and its handling of the stock options issue.
Until then, investors are in the dark about the company’s recent performance, though the fact that Canaccord Adams has invited the company to the conference – Canaccord’s John Quealy is the sole analyst covering the stock and had it at a “strong buy” until the current snafu, with a target of $25 – is a sign of faith that the company will resolve its issues and fulfill some of investors’ expectations.
IMPCO Technologies faced a similar situation in 2005 – then citing compliance with Sarbanes-Oxley as the reason for its late reporting. It was at the time in the process of taking over BRC Gas Equipment in Italy, a company similarly specialized in alternative fuel technologies. IMPCO’s CEO and CFO left the company, and BRC’s Mariano Costamagna became the chief executive of the merged group, since renamed Fuel Systems Solutions, and relocated into a new headquarters building in Santa Ana, Calif.
Earlier this year, longtime top IMPCO executive Brad Garner left the company – shortly before the announcement of the stock option probe – and Costamagna took over direct management of day-to-day operations at the IMPCO subsidiary as acting chief executive.
Going into the current blackout on information, the analysts’ estimate of 2006 fourth-quarter earnings for Fuel Systems Solutions was for $0.14 a share, against a loss of $0.04, and full-year earnings of $0.70, against a loss of $0.80. For 2007, the expectation was for earnings of $0.99 a share. Revenue was projected at $213.6 million for all of 2006, against $174.5 million in 2005, and at $246.7 for 2007.
IMPCO Technologies, one of the two operating subsidiaries, supplies advanced products and systems to enable internal combustion engines to run on clean-burning gaseous fuels such as natural gas, propane and biogas. IMPCO is a leader in the heavy-duty, industrial, power generation and stationary engines sectors. Headquartered in Santa Ana, IMPCO has offices throughout Asia, Europe, Australia and North America.
The other subsidiary, BRC Gas Equipment, produces a range of systems for converting vehicles to gaseous fuel. BRC is a leader in the light-duty and automobile alternative fuel sectors and has established alliances with several major automobile manufacturers for OEM projects. Headquartered in Cherasco, Italy, BRC has offices in Asia, Europe and South America. Among the carmakers using BRC equipment are Ford, Jaguar, DaimlerChrysler, MAN, Volkswagen, Fiat, Mitsubishi, Chevrolet, Peugeot-Citroën and Subaru.
In June, Fuel Systems Solutions received EPA certification to modify Ford F-150 pickups to operate on either gasoline or liquefied petroleum gas, and achieve ultra-low emissions in the latter case. The first order will be for a municipal fleet of F-150s in Austin, Texas. The company hopes to leverage this initial certification and order into a more widespread demand from other municipalities and other models. Last December, the BRC subsidiary introduced a system that allows direct injection engines to operate on LPG.
In a world increasingly preoccupied with the level of carbon emissions, Fuel Systems Solutions, which has products that already work, would appear to have a bright future. If it can successfully resolve its accounting and regulatory issues, the company will be appealing to investors looking for a play in alternative energy.
