The Rising Influence of Rising Affluence

[Democritus_of_Abdera]

FSYS - a brief history by someone who was not there (caveat emptor)....

This message is in response to the_8th's request for my thoughts regarding FSYS in #msg-64481862 .

FSYS grew out of the ashes of IMPCO in 2004-2006.

IMPCO was a California based company that got caught up in the dot.com mania at the turn of the century. It over extended, failed to make regulatory filings with the SEC, and was threatened with delisting by NASDAQ in 2005. During these times IMPCO had a profitable business building compressed natural gas/propane engines for industrial applications (including the cng forklifts that the_8th referenced in #msg-64480129). I blame management for IMPCOs troubles during those times... That management team was replaced in 2005.

Just before it failed in 2005, IMPCO purchased its final tranche of BRC, an Italian company that specialized in the conversion of gasoline driven automobiles into compressed natural gas/propane driven vehicles which maintained the option to run on gasoline (i.e. bi-fuel conversions). This was a major purchase for IMPCO and was the proximal cause of its over-extended leverage. At the time IMPCO initiated this purchase (its first equity investment in BRC was in July 2003) IMPCO had revenues of about $70M and BRC had revenues of about $35M (30M euros)...

As I reconstruct events, the BRC owners (i.e. the Costamagna brothers) were given stock rather than cash when BRC was purchased. Upon IMPCOs demise, the Costamagna's were left holding the bag. IMPCO's Feb 8, 2005 registration statement with the SEC is interesting reading (surprisingly) with regard to these events (see: http://www.sec.gov/Archives/edgar/data/790708/000119312505021442/ds4a.htm
).

The Costamagna brothers executed a nearly flawless turn-around of the company, even though, being Italian businessmen, they were not intimately familiar with the US/SEC ground rules. My faith in management rests in part upon this skillful execution. To make this turn-around, the Costamagnas personally guaranteed a substantial loan to the company (with binding covenants) and they recruited a Board of Directors skilled in US accounting practices and security regulations. This traumatic time has impacted current management policy (IMO). For example, FSYS is extraordinarily shy of issuing stock options to management. And, it is shy of taking on excessive debt. These are attributes that I like.

Then in 2009-2010, FSYS reaped a tremendous windfall. The Italian government significantly enhanced an incentive program designed to increase the use of CNG vehicles in Italy. FSYS executed nearly flawlessly. They rapidly expanded their industrial capacity to take advantage of the enhanced incentives, they right-sized the expansion and maintained high-margin output while incentives were driving demand, and they quickly and relatively painlessly downsized when the incentives abruptly (and unexpectedly) ended. This performance is a second reason that I have been impressed by management.

FSYS has been and is currently using their windfall/incentive driven profits to grow the company. Importantly, in my opinion, they are making incremental purchases that are synergistic with their current configuration. The result is that they have a broad-based profitable international income stream.

With respect to current market sentiment....

The proximate cause for FSYS's sudden loss of momentum in Dec 2010 was its decision to enter the equity market and dilute stock. This was a surprise because FSYS was cash rich at the time (ala the Italian incentives).

FSYS remains in the doldrums today because hopes of a US stimulus program have faded (although not completely extinguished).

The recent earnings quarterly comparisons look bad because the comparisons are against quarters when the Italian incentive windfall was in progress. The last windfall profits were a year ago, so from now on quarterly comparisons should be on an equal basis.

Many investors feel that management fails to excite the imagination. This attitude partially reflects the CEO's (Mario Costamagna) heavy accent and poor English language skills (he is Italian). I, on the other hand, feel that management effectively, albeit conservatively, conveys the company's message.