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The Clock Is Ticking for Westport Innovations Inc. (USA)

FSYS Cash from Operations (Annual) Chart
FSYS Cash from Operations (Annual) Chart

FSYS Cash from Operations (Annual) data by YCharts .

Yes, it was cash flow negative in the first quarter, but it typically is in the first quarter. This occurs because it spends cash to build up inventory early in the year that it will sell as the year progresses, producing positive cash for the full year. Furthermore, Fuel Systems also has $49 million in cash on the balance sheet, and no long-term debt.

At the same time, Westport isn't the only partner to this arranged marriage that would benefit. Westport President and COO Nancy Gougarty said on the recent earnings call that the combined business would realize $18 million in annual cost savings. Furthermore, Fuel Systems doesn't participate in heavy-duty transportation, focusing instead on light-duty vehicles, infrastructure such as refueling systems, and industrial technology, such as forklift engines.

In the short term, Westport would certainly get a huge lift from Fuel Systems' stronger operating business and the capital that it would bring to the combined venture. In the long term, however, prospects for Fuel Systems and its shareholders would be enhanced with a much-larger addressable market.

Why HPDI 2.0 might actually be the big one

The enticing potential of Westport's technology -- particularly high-pressure, direct-injection, or HPDI -- to unlock the massive (and potentially massively profitable) heavy-duty trucking industry, has been a siren's call, destroying many an investor's capital ship on the stony shore of "Just keep waiting" island. HPDI has been the key technology that Westport has touted for many, many years, but has yet to bring to market in any meaningful way.

The company produced an in-house 15-liter version of the engine several years back, but relatively low sales -- largely because of the high cost of each of these essentially hand-built engines -- led the company to discontinue it, and make the shift to HPDI 2.0.

HPDI 2.0, however, might actually be different. I know... I can hear you now: "This time it's different... right?" Yes, it's true that "This Time it's different" and "Just keep waiting" are merely two islands in an archipelago of destroyed investor returns.

But seriously, here's why HPDI 2.0 could actually work out:

First, HPDI 2.0 won't be manufactured by Westport. The company is partnering with Delphi Automotive (NYSE: DLPH) , one of the largest global manufacturers of engine injectors in the world. Delphi and Westport are currently installing production lines inside Delphi facilities, and are on track to start production this year. This move will mean three major things:

  • Significantly lower unit costs
  • Significantly higher volume capabilities
  • Significantly simpler OEM integration

Lower cost and easier OEM integration are key, because that will drive more buyer demand, while also reducing the cost and complexity for OEMs to work HPDI 2.0 into their assembly lines. But here's the real bottom line: Delphi isn't in this to just take up space on its manufacturing floors, and it has strong credibility with vehicle and engine OEMs. This is a real positive for HPDI 2.0, and a solid reason why it should progress toward commercialization in 2016.

The clock is ticking

The reality is, if the Fuel Systems deal falls through -- and a co-founder with a nearly 9% stake in the company says he will vote against it -- Westport's financial situation will be much, much more uncertain, and there will be real concerns whether the company will have enough capital to bridge the gap between now and HPDI 2.0 generating meaningful revenue. Bottom line: the Fuel Systems merger is good for both companies, but Westport needs Fuel Systems more than Fuel Systems needs Westport.

Assuming the deal closes, there's a lot to be optimistic about. Failing that, Westport shareholders should be at least a little bit worried.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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