In this report, references to "Fuel Systems" or the "Company" and to first-person pronouns, such as "we", "our" and "us", refer to Fuel Systems Solutions, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

This discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Fuel Systems' Annual Report on Form 10-K for the year ended December 31, 2008.

The Company's business is subject to seasonal influences. Therefore, operating results for any quarter are not indicative of the results that may be achieved for any subsequent quarter or for a full year.

Forward-looking Statements

This Quarterly Report on Form 10-Q, particularly Management's Discussion and Analysis of Financial Condition and Results of Operations that follows, contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate" and variations of these words and similar expressions in part to help identify forward-looking statements. These statements are not guarantees of future performance or promises of specific courses of action and instead are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in the section below entitled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008. You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of the filing of this Quarterly Report on Form 10-Q.

Overview

We design, manufacture, install and supply alternative fuel components and systems for use in the transportation, industrial and power generation industries on a global basis. Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. For 50 years, we have developed alternative fuel products. We supply our products and systems to the market place through a global distribution network of over 180 distributors and dealers in more than 60 countries and more than 100 original equipment manufacturers, or OEMs.

The Company is organized into two business segments, IMPCO operations and BRC operations. IMPCO manufactures and sells products for use primarily in the industrial market, including complete certified engines, fuel systems, parts and conversion systems for applications in the transportation, material handling, stationary and portable power generator markets. Its sales are conducted through its U.S. and foreign facilities in the Netherlands and Japan and through distribution channels. BRC manufactures, installs and sells products for use primarily in the transportation market in Italy and through its foreign facilities in Argentina, Brazil and Australia. IMPCO recently announced its intention to expand into the U.S. automotive alternative fuel transportation market. As of September 30, 2009, the IMPCO had not yet derived any significant sales from the U.S. automotive alternative fuel transportation market. Corporate expenses consist of general and administrative expenses at Fuel Systems. Intercompany sales between IMPCO and BRC have been eliminated in the results reported.

Revenue for the three months ended September 30, 2009 increased by approximately $10.7 million to $116.2 million from $105.5 million for the same three month period in 2008. For the nine months ended September 30, 2009 revenue decreased by approximately $9.8 million to $288.6 million from $298.4 million.

Net income for the three months ended September 30, 2009 was $15.5 million, or $0.88 per diluted share, as compared to net income of $11.9 million, or $0.75 per diluted share, for the same period in 2008. Net income for the nine months ended September 30, 2009 was $30.0 million, or $1.80 per diluted share compared to $22.7 million or $1.44 per diluted share during the same period in the prior year. The increase in net income during third quarter 2009 was due to an increase in sales for post production OEM conversions as well as a gain associated with our acquisition of the remaining 50% of WMTM Equipamentos de Gases, Ltda of approximately $2.0 million, partially offset by the slowdown of sales for aftermarket conversion kits in the transportation market and sales in the industrial market.

Recent Developments

Acquisition of Distribuidora Shopping S.A.

On January 15, 2009, we completed the acquisition of Distribuidora Shopping S.A. and its subsidiary Tomasetto Achille S.A. ("Distribuidora Shopping") from Carlo Evi and Susana Iallonardi (collectively, the "Sellers"). Distribuidora Shopping are headquartered in Argentina and, operating under the brand name Tomasetto Achille, manufacture, import, export and market natural gas kits for vehicles. The results of Distribuidora Shopping have been included in the BRC operation from the date of the acquisition.

The aggregate purchase price after post-closing adjustments for 100% of the equity of Distribuidora Shopping was $17.5 million, net of cash acquired of $0.1 million. At the time of the signing of the share purchase agreement on December 16, 2008, MTM paid the Sellers $2.0 million in cash as a down payment on the purchase price. This down payment was reflected in "Other Assets" at December 31, 2008.

Of the aggregate purchase price of $17.5 million net of cash acquired of $0.1 million, MTM paid $7.6 million in cash and Fuel Systems issued 322,800 shares of common stock with a value of $9.9 million on the closing date to the Sellers in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the issuance did not involve a public offering. Of the 322,800 shares of Fuel Systems common stock issued to Sellers in the private placement, 39,868 shares were issued from treasury stock with a historical cost basis of $0.8 million. In addition, of the 322,800 shares, 129,120 shares will remain in escrow for up to six years in order to cover unknown or contingent liabilities of Distribuidora Shopping and to satisfy any claims for indemnification that MTM may have against the Sellers during that time. MTM's losses will not be limited to the value of the escrow shares, but MTM must deplete the escrow shares before seeking any amount in cash from the Sellers. Subject to certain limitations, the Sellers' maximum liability for indemnification obligations is $8.2 million.

We have determined that the acquisition of Distribuidora Shopping was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

MTM Loan

On January 22, 2009, IMPCO U.S. repaid in full the outstanding principal and accrued interest on the amounts it owed to MTM under the intercompany loan originally entered into on December 23, 2004. The aggregate amount IMPCO U.S. paid to retire the MTM loan was $10.8 million, comprising $10.6 million of principal and $0.2 of accrued and unpaid interest. Since IMPCO U.S. has fulfilled its financial obligation under the MTM loan, the guarantors have cancelled their guarantees and released us from our related pledge of BRC's stock.

Acquisition of FuelMaker Corporation Assets

On May 28, 2009, we completed the acquisition of selected assets and technology for compressed natural gas (CNG) refueling products manufactured by FuelMaker Corporation ("FuelMaker") and American Honda Motor Co., Inc. ("American Honda"), including the home refueling appliance marketed under the Phill™ brand, for approximately $7.0 million in cash.

As part of the purchase agreements, we have agreed to fulfill certain FuelMaker service obligations and have assumed certain outstanding purchase orders. In an additional agreement with American Honda, MTM has made provisions to license technology back to American Honda under certain circumstances to support its natural gas vehicle activities.

We are in the process of finalizing valuations of intangible assets; thus the allocation of the purchase price is subject to refinement.

Purchase of Remaining 50% Interest in WMTM

On May 5, 2009, the Company purchased the remaining 50% ownership interest in WMTM Equipamentos de Gases, Ltda ("WMTM"), from White Martin Gases Industriais S.A. ("White Martin"), BRC Brasil's 50% joint venture partner in WMTM, for approximately R$5.0 million (approximately $2.7 million U.S. dollars excluding $0.6 million of cash acquired) of which R$1.0 million (approximately $0.5 million U.S. dollars) was paid on the closing date and a monthly installment of R$0.5 million was paid in June, July, August and September 2009. The remaining R$2.0 million (approximately $1.2 million U.S. dollars) at September 30, 2009 will be paid in two monthly installments of R$0.5 million (approximately $0.3 million U.S. dollars) from October 5, 2009 through November 5, 2009 and a last installment of R$1.0 million (approximately $0.6 million U.S. dollars) to be paid on December 5, 2009. The results of WMTM have been included in the accompanying condensed consolidated statements of income from the date of acquisition within the BRC operations segment.

This acquisition qualified as a step acquisition which occurs when a shareholder obtains control over an entity by acquiring an additional interest in that entity. Under the appropriate FASB issued authoritative guidance, the previously held equity interest was remeasured to fair value at the date of the acquisition. Any difference between the carrying value and the fair value of the previously held equity interest is recognized as a gain or loss in the income statement. The Company calculated the difference to be approximately $2.0 million gain which is included in other income (expense) net for the three and nine month periods ended September 30, 2009. Under current accounting guidance adopted on January 1, 2009, This gain is no longer considered extraordinary. The Company is in the process of finalizing its valuations of certain tangible and intangible assets; thus the allocation of the purchase price is subject to refinement and could adjust the gain recognized. The Company has determined that the acquisition of the remaining 50% of WMTM was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Capital Transactions

On June 26, 2009, we completed the public sale to selected institutional investors of an aggregate of 1,500,000 shares of our common stock at a price of $20.00 per share. Net proceeds from the offering were $27.7 million, after deducting offering expenses and placement agency fees. The sale of the shares was made in an issuer direct public offering pursuant to subscription agreements, dated June 22, 2009, between us and each of the purchasers. We used the net proceeds of the offering for general corporate purposes, which included the repayment of indebtedness and the acquisition of Power Systems Business.

Intesa Sanpaolo Unsecured Committed Credit Facility

On July 10, 2009, Fuel Systems and IMPCO converted its existing uncommitted, unsecured, revolving short-term credit facility with Intesa into a committed, unsecured, revolving credit facility. IMPCO intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCO's payments, but does not currently intend to use any of the funds for its own purposes.

The maximum aggregate principal amount of loans outstanding at any time is $13.0 million and the maturity date for the agreement is April 30, 2014. 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 0.50% of the average daily unused amount and also includes financial covenants regarding the Company's ratio of net debt to EBITDA, consolidated net worth and aggregate debt level.

Acquisition of Teleflex Incorporated's Power Systems Business

On July 19, 2009, we entered into an equity interest purchase agreement (the "Equity Interest Purchase Agreement") through which we agreed to acquire Teleflex Incorporated's Power Systems business (the "Power Systems Business"). On August 4, 2009, we completed the acquisition of Teleflex Incorporated's Power Systems business (the "Power Systems Business") for $14.6 million in an all cash transaction ($15.0 million less $0.4 million of cash acquired). The Power Systems Business operates in Canada, The Netherlands and Italy and manufactures, imports and exports auxiliary power systems and anti-idling auxiliary power units for transportation and industrial vehicles. We acquired the equity interests of the Power Systems Business companies and partnerships, including Teleflex Ecotrans Technologies Inc. and Teleflex GFI Control Systems, Inc. which includes industrial and transportation alternative fuel components and systems and auxiliary power systems. The results of the Power Systems Business have been included in the IMPCO operations from the date of the acquisition.

We are in the process of finalizing valuations of certain tangible and intangible assets; thus the allocation of the purchase price is subject to refinement. We have determined that the acquisition of the Power Systems Business was a non-material business combination. As such, pro forma disclosures are not required and are not presented within this filing.

Stockholder Protection Rights Agreement

On July 21, 2009, the Board of Directors of the Company entered into Amendment No. 1 to the our Stockholder Protection Rights Agreement, dated as of June 27, 2006, to extend the expiration date of the rights agreement from July 22, 2009 to July 22, 2019. No other material changes were made to the rights agreement.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, goodwill, taxes, inventories, warranty obligations, long-term service contracts, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. Our critical accounting policies are described in the Management's Discussion and Analysis of Financial Condition included in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes, subsequent to December 31, 2008, to the information previously disclosed in our Annual Report on Form 10-K with respect to our critical accounting policies, except for the following:

Business Combinations

In accordance FASB issued authoritative guidance, we allocate the purchase prices of acquired businesses to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Such a valuation requires significant estimates and assumptions, including but not limited to future expected cash flows from acquired businesses and the brand and market position of the acquired businesses. We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions, however, these assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. We continue to evaluate events and circumstances on an ongoing basis.

Results of Operations

The following table sets forth our revenue and operating income (in thousands):



                                        Revenue                       Revenue
                                   Three Months Ended            Nine Months Ended
                                     September 30,                 September 30,
                                  2009           2008           2009           2008
       IMPCO Operations         $  19,497      $  22,057      $  48,591      $  73,599
       BRC Operations              96,706         83,482        240,017        224,824

       Total                    $ 116,203      $ 105,539      $ 288,608      $ 298,423


                                    Operating Income              Operating Income
                                   Three Months Ended            Nine Months Ended
                                     September 30,                 September 30,
                                  2009           2008           2009           2008
       IMPCO Operations         $  (3,588 )    $   1,511      $  (2,863 )    $   6,185
       BRC Operations              27,876         18,188         55,270         41,562
       Corporate Expenses (1)      (1,201 )       (1,528 )       (5,482 )       (5,970 )

       Total                    $  23,087      $  18,171      $  46,925      $  41,777

(1) Represents corporate expense not allocated to either business segment.

For the quarter ended September 30, 2009, revenue increased approximately $10.7 million, or 10.1%, to $116.2 million from $105.5 million for the three months ended September 30, 2008. The increase in revenue was due primarily to an increase in revenue from BRC operations of approximately $13.2 million offset by a decrease from IMPCO operations of approximately $2.6 million. Revenues for the three months ended September 30, 2009 includes approximately $14.8 million associated with companies acquired in 2009 ($7.0 million from BRC operations and $7.8 from IMPCO Operations). Revenue for the third quarter of 2009 includes a decrease of approximately $4.6 million from weakening of local currencies compared to the dollar from the third quarter of 2008. For the nine months ended September 30, 2009, revenue decreased approximately $9.8 million, or 3.3%, to $288.6 million from $298.4 million for the nine months ended September 30, 2008. The decrease in revenue for the nine months ended September 30, 2009 is primarily due to a decrease in revenue from IMPCO operations of $25.0 million, partially offset by an increase of $15.2 million in revenue from our BRC operations. Revenues for the nine months ended September 30, 2009 includes approximately $21.7 million associated with companies acquired in 2009 ($13.9 million from BRC operations and $7.8 from IMPCO operations). Revenue for the nine months ended September 30, 2009 includes a decrease of approximately $26.5 million from weakening of local currencies compared to the dollar from the same nine month period of 2008.

For the quarter ended September 30, 2009, operating income increased approximately $4.9 million or 27.1% to $23.1 million from $18.2 million for the three months ended September 30, 2008. The increase in operating income for the quarter ended September 30, 2009 was primarily composed of an increase in operating income from BRC operations of $9.7 million, partially offset by a decrease in IMPCO operations operating income of $5.1 million and a decrease in corporate expenses of $0.3 million. For the nine months ended September 30, 2009, operating income increased approximately $5.1 million, or 12.3%, to $46.9 million from $41.8 million for the nine months ended September 30, 2008. The increase in operating income for the nine months ended September 30, 2009 was composed of an increase in operating income from BRC operations of $13.7 million, partially offset by a decrease in IMPCO operations operating income of $9.0 million and a decrease in corporate expenses of $0.5 million.

IMPCO Operations. For the three months ended September 30, 2009, revenue decreased by approximately $2.6 million, or 11.6%, as compared to the same period in the prior year. For the nine months ended September 30, 2009, revenue decreased by $25.0 million, or 34.0%, as compared to the same period in the prior year. The decrease in revenue during the third quarter of 2009 and the first nine months of 2009 was due primarily to a decrease in demand in the industrial market caused by reduced spending by original equipment manufacturers as a result of uncertainties associated with the U.S. economy combined with competitive pressures. Revenue for the three and nine months ended September 30, 2009 includes approximately $7.8 million from the acquisition. The weakening of local currencies compared to the US dollar negatively impacted revenues by approximately $0.2 million and $1.9 million for the three and nine months ended September 30, 2009, respectively.

For the three months ended September 30, 2009, the operating loss for IMPCO operations was $3.6 million, or (18.4)% of revenue, compared to operating income of $1.5 million or 6.8% of revenue, for the same period in 2008. For the nine months ended September 30, 2009, operating loss was $2.9 million, or (5.9%) of revenue, compared to operating income of $6.2 million or 8.4% of revenue for the same period in 2008. The operating loss is a result of a decrease in revenue combined with erosion in gross margins due to decreased absorption of fixed costs, as start up costs of $1.5 million associated with the automotive business and approximately $1.2 million of costs associated with the acquisition of the Power Systems Business.

BRC Operations. For the three months ended September 30, 2009, revenue increased by approximately $13.2 million, or 15.8%, compared to the same period in the prior year. For the nine months ended September 30, 2009, revenue for this segment increased by $15.2 million, or 6.8% from the same nine month period in 2008. The increase in revenue in 2009 was due to an increase in sales for post production OEM conversions, partially offset by the slowdown of sales for aftermarket conversion kits in the transportation market driven by decreasing gasoline prices, seasonality and the global economic climate. Revenue for the three and nine months ended September 30, 2009 includes approximately $7.0 and $13.9 million of revenue, respectively, associated with acquisitions. The weakening of local currencies compared to the US dollar negatively impacted revenues by approximately $4.4 million and $24.7 million for the three and nine months ended September 30, 2009 respectively.

For the three months ended September 30, 2009, operating income for BRC was $27.9 million, or 28.8% of revenue, compared to $18.2 million, or 21.8% of revenue, for the same period in 2008. The increase in operating income of 53.3% was primarily due to the increase in revenues combined with an increase in our gross margin. The increase in our gross margin is attributed to the increase in unit volume output from post production OEM conversions in the third quarter of 2009 compared to the third quarter of 2008. For the nine months ended September 30, 2009, operating income for BRC was $55.3 million, or 23.0% of revenue, compared to $41.6 million, or 18.5% of revenue, for the same period in 2008. The increase in operating income of 33.0% was primarily due to the increase in revenues combined with an increase in our gross margin. The increase in our gross margin is attributed to the increase in unit volume output from post production OEM conversions in the first nine months of 2009 compared to the first nine months of 2008. Included in the operating income for the nine months ended September 30, 2008 was a goodwill impairment charge of $3.9 million due to the changes in the business climate for IMPCO Australia.

Corporate Expenses. Corporate expenses consist of general and administrative expenses at the corporate level to support our business segments in areas such as executive management, finance, human resources, management information systems, legal and accounting services and investor relations. Corporate expenses for the three and nine months ended September 30, 2009 were $1.2 million and $5.5 million, respectively, an decrease of $0.3 million and $0.4 million from the same periods of 2008, respectively. Corporate expenses in 2009 remained fairly consistent as compared to prior year.

Other Income (Expense), Net. For the three and nine months ended September 30, 2009, the Company recognized a gain of approximately $2.0 million associated with the acquisition of the remaining 50% ownership interest in WMTM. This acquisition qualified as a step acquisition which occurs when a shareholder obtains control over an entity by acquiring an additional interest in that entity. Under the appropriate FASB issued authoritative guidance, the previously held equity interest was remeasured to fair value at the date of the acquisition. Any difference between the carrying value and the fair value of the previously held equity interest is recognized as a gain or loss in the income statement. Under current accounting guidance adopted on January 1, 2009, this gain is no longer considered extraordinary.

Other income (expense), net includes foreign exchange gains and losses between the U.S. dollar and the euro with respect to "marking to market" of the intercompany MTM loan balance as well as other assets and liabilities to be settled in other currencies. For the three and nine months ended September 30, 2009, we recognized approximately $0.8 million and $2.7 million in gains on foreign exchange. For the three and nine months ended September 30, 2008, we recognized approximately $0.5 million in gains on foreign exchange and $0.6 million in losses on foreign exchange, respectively.

We routinely conduct transactions in currencies other than our reporting currency, the U.S. dollar. We cannot estimate or forecast the direction or the magnitude of any foreign exchange movements with any currency that we transact . . .