Thursday, August 7, 2008

Fuel Systems Solutions (FSYS) - Monster Quarter but Impairment Charge will Confuse

Fuel Systems Solutions (FSYS) just put out a huge beat, but there is a goodwill charge of $3.9M or $0.25 which will cause confusion. Adding that non-cash charge back to results and they made $.54. Analysts were in at $0.27. While America sits on its hands, other countries are providing incentivizes to their consumers to begin the switch over to natural gas.
  • `The second quarter marks another quarter of growth. Revenue increased approximately 50% year-over-year, reflecting the rapidly expanding demand for alternatives to petroleum to fuel vehicles. Additionally, we drove gross margin improvements with successful engineering, production and distribution synergies developed in the past year. US-based Fuel Systems Solutions delivers alternative fuel solutions for transportation and industrial applications that reduce emissions, displace petroleum and generate savings. We are capturing the demand for our immediate, real-world solutions with our extensive reach in Europe, Asia and Latin America, where high fuel costs have long been a concern. As oil prices continue to rise and emissions concerns increase, we perceive important medium term opportunities in the United States for our transportation products and technology. We expect the macro environment to continue to drive growth, and we are excited about the future.''
Financial Results
  • Revenue for the second quarter was $98.3 million, up 49.9% from revenue of $65.6 million for the second quarter 2007, driven by strong performance in the transportation business.
  • Gross profit for the quarter reached $28.6 million and represented 29% of revenue, compared to $14.5 million, or 22% of revenue, in the second quarter 2007.
  • In the second quarter of 2008, the company recorded a non-cash goodwill impairment charge related to the company's Australian operations of $3.9 million, or $0.25 per diluted share.
  • Net income for the second quarter of 2008 reached $4.6 million, or $0.29 per diluted share, including the non-cash goodwill impairment charge of $3.9 million, compared to $395,000, or $0.03 per share, in the second quarter of 2007.
  • Based on its current assessment of near-term market trends, the and company is increasing its full year 2008 consolidated revenue guidance to $350 million increasing its gross profit margin to approximately 27% and operating margin to approximately 12%.
Guidance last time around was for $320 million in sales (so new guidance is up about 10%), gross margin at 24% (new gross margin guidance up 3%), and operating margins at 9% (new operating margins up 3%) The latter two are huge moves up for such a short time frame. Under promise. Over deliver. The know the Wall Street game.

It looks like the results are a bit better than the previous quarter (when they made .40), and obviously far greater than last year. The tax rate was lower this Q which led to some of the out performance in earnings. But they seem to be somewhat capacity constrained and hence revenue moving to the next level will have to wait for the completion of their expansion of the Italian manufacturing facility which will allow them to "more than double" 2007 levels of output.

Now if I know this market, since no one reads past the headline the stock will be down on disappointment of "only" beating estimates by 2 cents when in reality, the operations beat estimates by 27 cents aka 100% (analysts were estimating 27 cents) But that's the market for you and no one can be bothered with actually reading a press release. Can you imagine if put out the "FSYS beats estimates by 100%" headline if there was not an impairment charge this quarter? ;)

Next quarter analysts are still only in at .16 which (ahem) they will trounce. The full year estimate of $1.01 is also looking a bit silly considering they did 40 cents last quarter and (operationally) 54 cents this quarter or if you want to count good will, "27 cents". They could in fact be close to $2 of EPS by the end of 2008, not $1 (ex goodwill charge this Q), or $1.75ish with the goodwill charge. This is assuming similar output to this Q - I don't know exactly how much they will be able to expand production by the end of 2008... if they can double it by beginning of 2009, we might be getting some staggering EPS figures in 09. I'll hold off with my back of envelope numbers until I have a better idea when the new manufacturing comes online.

[Aug 4: Fuel Systems Solutions Garnering Attention]
[Jul 2: Bookkeeping: Buying Fuel Systems Solutions for the 3rd Piece of my Alternative Energy Basket]

Long Fuel Systems Solutions in fund and personal account

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