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Re: Democritus_of_Abdera post# 384

Friday, 08/22/2014 10:17:52 AM

Friday, August 22, 2014 10:17:52 AM

Post# of 405
Re: Q2 Impairment....

The $44.3M impairment recorded this quarter removed most of the goodwill and half of the intangible assets from FSYS' balance sheet... i.e. Goodwill was reduced to $7.5M from $48.9M and Intangible Assets were reduced to $8.6M from $11.8M.

A Goodwill impairment of $36M was attributed to FSS Automotive in Italy; $4M was attributed to FSS Industrial in Canada & the Netherlands. Intangibles were reduced relatively evenly across the technology, customer relationships, & Trade name categories.

One short term advantage of the long-lived asset impairment is that it produced a tax benefit of $1.1M.... Of course, this savings will be reversed if the impaired property is divested.

I suspect that the timing of the impairment is correlated to the closure of the Livorno automotive conversion facilities due to the trend towards lower DOEM volumes; albeit, I believe the impairment greatly exceeded that specific to Livorno.

The reason for the impairment stated in this quarter's 10Q is:

During the second quarter of 2014, we determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis. These indicators included the recent trading values of our stock, and corresponding decline in our market capitalization, coupled with market conditions and business trends within our various reporting units. As a result, we examined the Italian reporting units of our FSS Automotive segment, as well as the Canadian and Netherlands reporting units of our FSS Industrial segment.... The income approach requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins, and capital expenditures. These assumptions are the basis for the information used in the discounted cash flow model. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the five years forecasted by the reporting units), as well as projections of future gross and operating margins (for the period beyond the forecasted five years). During the second quarter of 2014, in relation with the above-mentioned reporting units, management used discount rates ranging from 13.75% to 19.25% and a terminal growth rates of 3% (the differences in discount rates reflect considerations about differences in the underlying businesses, as well as local economic conditions/environments). The discount rates used for the above-mentioned reporting units increased significantly from the fourth quarter of 2013 analysis due to the decrease in our market capitalization.

I had thought that the impairment might have been triggered by the Argentine debt crises (#msg-104835850). But, I was wrong. Argentine revenues remain strong primarily due to aftermarket sales. Never the less, FSYS warns that the strength in Argentina may yet be impacted by the debt problems; i.e.

The debt default by the Government of Argentina could have a material adverse effect on our business, financial condition and liquidity. We operate a subsidiary in Argentina which has significant sales to customers in Argentina and elsewhere in South America. We also sell inventory from our facility in Italy to our subsidiary in Argentina. The default by the Government of Argentina on its debt obligations has negatively impacted economic conditions in Argentina. In addition, the debt crisis in Argentina subjects us to risks related to fluctuations in currency values, restrictions on imports and exports, trade limitations, restrictions on the ability to repatriate funds and other potentially detrimental governmental practices or policies impacting companies doing business in Argentina. The continued uncertainty caused by the debt crisis may materially disrupt our markets in Argentina and possibly elsewhere in South America. If economic conditions in Argentina remain uncertain or deteriorate further, customer demand for our products could decline, and we may experience a material adverse effect on our business, financial condition and liquidity.

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2014 Q2 10-Q: http://www.sec.gov/Archives/edgar/data/1340786/000156459014003843/fsys-10q_20140630.htm