SEC Company Response from WESTPORT FUEL SYSTEMS INC. (WPRT) (CIK 0001370416) (AETR) — Dec 19, 2012
WESTPORT FUEL SYSTEMS INC. (WPRT) (CIK 0001370416)
Date: Dec. 19, 2012 · CIK: 0001370416 · Accession: 0001279569-12-001463
AI Filing Summary & Sentiment
Reasoning
Referenced dates: November 16, 2012, October 29, 2012
Letter
Division of Corporation Finance Amendment No. 2 to Form 40-F for the Nine months Ended December 31, 2011 Filed October 29, 2012 File No. 1-34152
Dear Mr. James:
I am writing in response to your letter dated November 16, 2012 setting forth comments regarding our Amendment No. 2 to Form 40-F for the nine months ended December 31, 2011 (the “2011 Form 40-F/A”) of Westport Innovations Inc. (“Westport” or the “Company”) and our response letters dated October 29, 2012 and September 25, 2012.
To facilitate your consideration of Westport’s response, we have included below the comments and have provided Westport’s response immediately following.
Amendment No. 2 to Form 40-F for the Nine Months Ended December 31, 2011
Exhibit 99.2
Note 21. Investment in Joint Ventures, page 37
(a) Cummins Westport Inc., page 37
1.
Further to your response to prior comments 1 and 2, in determining whether or not CWI is a VIE, we note that you point to the fact that Westport guaranteed the losses of CWI during the 2004 calendar year and received the entire benefit of any financial profits of CWI up to and including December 31, 2004. We note that after December 31, 2004, Westport and Cummins share equally in the profits and losses of CWI. Please discuss how you considered the temporary nature of Westport’s obligations during 2004, whether these terms are substantive and how you considered that under FASB ASC 810-10-25-37, the determination of whether a legal entity is a VIE should be based on the circumstances on that date including future changes that are required in existing governing documents and existing contractual arrangements.
Response:
Our conclusion that CWI is a VIE is not solely based on the guarantee of losses for the 2004 fiscal year. As described in our letter of February 25, 2010, on January 1, 2004, CWI did not have sufficient equity at risk as required by ASC 810-10-15-14 to finance its own activities without subordinated financial support provided by the equity holders. At that date, while US$38.4 million had been contributed as share capital to CWI, all by Westport, CWI also had a deficit of US$45.7 million with the difference also to be funded by Westport. Therefore, at that date the equity at risk was insufficient to fund its activities without additional subordinated financial support. With respect to the substantiveness of Westport’s obligations under the First Amended and Restated Joint Venture Agreement (the “First Amended and Restated JVA”), we note that CWI’s losses for fiscal 2003 were US$17.8 million and there was no certainty that additional losses would not occur throughout 2004. Westport was also required to fund the then existing $5.4 million in warranty costs at January 1, 2004. Under the First Amended and Restated JVA, Westport absorbed 100% of variability in CWI’s fiscal 2004 year, and subsequently, Westport and Cummins shared equally in the variability. All the factors and terms above were substantive at the date of reassessment and future changes at that time regarding existing governing documents and existing contractual agreements were contemplated. CWI would continue to not have sufficient equity at risk to finance its own activities. Westport, through its initial contribution, losses Westport absorbed through fiscal 2003 and additional requirement to absorb 100% of variability of CWI’s fiscal 2004 year, was expected to absorb a majority of CWI’s expected losses and receive a majority of CWI’s expected residual returns disproportionately in excess of the percentage of shares it holds.
Westport Innovations Inc.
December 19, 2012
Page 2
Based on these considerations, we concluded that CWI was a variable interest entity in accordance with U.S. GAAP as of January 1, 2004 as we noted in our letter to the Securities and Exchange Commission dated February 25, 2010. Please see our response to comment 2, for further analysis supporting our conclusion that CWI is a VIE and Westport was the primary beneficiary.
2.
We note the following from your responses to prior comments 1 and 2 and the disclosure in your Form 40-F:
•
Cummins and Westport each own 50% of the common shares of CWI. No preferred shares have been issued. There are no differences in the rights or responsibilities attached to Cummins’ common shares as compared to Westport’s common shares.
•
From January 1, 2005, Cummins and Westport share equally in the profits and losses of CWI.
•
Westport and Cummins have equal representation on the Board of Directors.
•
CWI is primarily responsible to obtain the financing resources it requires for any and all working capital, capital expenditures, and financial requirements. While CWI may request financing from the holders of the common shares, Westport and Cummins have no obligation to provide such financial resources or to assist CWI in terms of third party guaranties or otherwise.
Given the above, please tell us in more detail how you determined that Westport (a) has the power to direct the activities of CWI that most significantly impact CWI’s economic performance and (b) the obligation to absorb losses of CWI that could potentially be significant to CWI or the right to receive benefits from CWI that could potentially be significant to CWI. Refer to FASB ASC 810-10-25-38A and 38B.
Response:
Under ASC 810-10-25-37, we assessed whether Cummins or Westport was the primarily beneficiary on January 1, 2004 and considered whether subsequent re-evaluation of the primary beneficiary over time would result in any change to our initial conclusion. As part of this assessment, we also considered whether there were qualitative factors that have occurred subsequent to January 1, 2004 that would impact upon the determination of the primary beneficiary.
a) Power to Exercise Control:
First, we determined which party has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance under ASC 810-10-25-38A (a). In section 810-10-25-38B “a reporting entity must identify which activities most significantly impact the VIE’s economic performance and determine whether it has the power to direct those activities.”
Westport Innovations Inc.
December 19, 2012
Page 3
As specified in the First Amended and Restated JVA, “CWI’s vision is to be the world’s leading provider of gaseous fueled, high performance, low emission and economically viable engines by bringing to market, now and in the future, the best available technologies engineered into the Cummins line of engine products. CWI shall undertake the spark-ignited business (“SI Business”) and develop, support and market the Products.”
Both parties provide some support to the joint venture in fulfilling this objective. Further to our comments in our response letter dated October 29, 2012, we consider below the most significant activities in achieving this objective.
Activities Significantly Impacting Economic Performance
The most significant activities impacting the joint venture are categorized below and ranked in order of importance in terms of driving CWI’s profitability and success. As noted below, the activities directed by Westport have the most significant impact on CWI’s profit and loss.
Key day-to-day activities
Authority to direct
1. Product Management (technology and product development choices)
Westport
2. Sales and marketing and market penetration
Westport
3. Manufacturing process
Cummins (subject to royalty and included in the overhead allocation) (Second Amended and Restated
JVA specified it is now royalty free but subject to applicable mark-ups on engine cost)
4. Distribution channel
Cummins
At the relevant date, Westport has the authority to direct the most significant activities of CWI relating to its economic performance and profitability, principally in the areas of (1) product management, intellectual property and technology since Westport has held the key positions relating to product choices, product specifications, and product strategy and since Westport made the initial investments and contributions to the joint venture’s fundamental natural gas technology, Stoichiometric EGR Spark Ignition (“SESI”), and (2) sales and marketing and market penetration. Cummins’ seconded employees are responsible for performing the product development engineering and Cummins’ primary functions in the joint venture, such as manufacturing and distribution, could be outsourced to any OEM with a similar cost plus mark-up arrangement.
Product Management. Westport made significant investments required in the development of the spark ignited technology and intellectual property (“IP”) that generated the main platforms that drive CWI’s business today. The First Amended and Restated JVA gave (and the Second Amended and Restated JVA gives) the joint venture the right to use the IP associated with spark-ignited natural gas products contributed by Westport. Westport has further been controlling the key functions of product management and strategy for the joint venture through seconded employees, including the Director, Product & Market Planning. Through these functions, Westport controlled which product to develop, for what geographies, for which OEM partners, what the key specifications ought to be and what technology should be used.
Sales and Marketing; Market Penetration. The primary driver of CWI’s revenue growth is the sales and marketing function. Westport dictates market development and customer growth strategies. The Westport seconded employees, including the Director, Marketing and Business Segment, have the distributor relationships and strategic relationships with operators of bus and refuse fleets enabling them to execute the sales and marketing strategy and generate new business for CWI. As the sales and marketing team penetrate new markets, revenue has increased.
Westport Innovations Inc.
December 19, 2012
Page 4
Manufacturing Process. Since the core engine and chassis have not changed significantly with each new product launch and since manufacturing engineering is outsourced to Cummins through seconded employees to the joint venture from Cummins. Cummins is remunerated for its manufacturing expertise. Cummins provides manufacturing and distribution functions including manufacturing engineering; however, these functions can more easily be outsourced and replicated by another OEM with a similar cost plus mark-up arrangement. Cummins also controls manufacturing in order to plan manufacturing capacity for all of its manufacturing commitments including build slots for diesel deliveries. While manufacturing and distribution are important to cost control and managing bottom line, they are not as integral to the success of the joint venture as the low emission product expertise and customer and distribution relationships and discretion on execution of the sales and marketing strategy which are provided by Westport as described above.
Distribution. Cummins has a firmly established worldwide reputation as a diesel engine manufacturer and has developed an effective and efficient global distribution channel for engine products for commercial vehicle and industrial applications; Westport seeks to access Cummins’ established global distribution channel for engine products for automotive, industrial and power generation applications for the development, support and marketing of its proprietary intellectual property. Cummins grants CWI access to its established global distribution channel according to the terms of the Original Joint Venture Agreement and each subsequent First and Second Amended and Restated JVA. Although the distribution channels are important, the absence of the direct access to Cummins’ distribution channels is not considered to have a significant impact on the economic performance or profitability of CWI.
The foregoing analyses of the primary day-to-day activities of CWI were the basis for Westport concluding that it continued to be the primary beneficiary at January 1, 2004, the date of reassessment, as it had contributed the fundamental technology and had the authority at that date to direct product management, sales and marketing and market penetration. We consider these to be at that date the most significant elements in the table above since they have the most significant impact on CWI’s profitability and financial performance.
b) Obligation to Absorb Losses:
Under Accounting Standard Codification 810-25-38A(b), Westport shall be deemed to have a controlling financial interest in CWI, a VIE if it has “the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.”
Under the First Amended and Restated JVA, Appendix E, Fiscal 2004 Losses, effective January 1, 2004,
“Westport shall have the sole responsibility for reimbursing any financial losses incurred by CWI up to and including December 31, 2004. Westport shall receive the entire benefit of any financial profits of CWI up to and including December 31, 2004. Financial losses and profits will be calculated in accordance with generally accepted accounting practices in the United States on a consistent basis (unless change is required by GAAP) and will be subject to audit. Cummins, CWI and Westport agree to work together to determine the most efficient way to implement this condition.
Westport will reimburse CWI for its actual financial losses in fiscal year 2004 as defined by the net income or loss line in CWI’s fiscal 2004 audited financial statements.”
As Westport guaranteed the losses during the 2004 calendar year and received the entire benefit of any financial profits of CWI up to and including December 31, 2004, the Company was expected to absorb a majority of CWI’s expected losses, receive a majority of CWI’s expected residual returns, or both that could be significant to the variable interest entity as discussed in 810-25-38.
See also our comments in response to comment 1, above, as to the substantive nature of Westport’s obligation to absorb losses at January 1, 2004. As a result, Westport was responsible for all of the upfront risk and also had the obligation to finance any warranty claims in excess of liquid assets. The preference shares issued to Cummins were at a nominal value and all of the upfront investment was provided by Westport.
Westport Innovations Inc.
December 19, 2012
Page 5
On January 1, 2004, the Cummins natural gas operating unit had a nominal value as the unit had ongoing losses. Westport also contributed advancements to the spark ignited technology prior to the commencement of the joint venture. Westport also contributed tax losses to the joint venture since it funded the operation, which were subject to a full valuation allowance, had an ongoing commitment to Technology Partnerships Canada (“TPC”) for original funding received, and provided access to Westport’s senior executives who directed the improvements to the spark ignited technology and drove the business forward towards profitability. Based on these considerations, we conclude that Westport had an obligation to absorb losses of CWI that could potentially be significant to CWI or the right to receive benefits from CWI that could potentially be significant to CWI.
Westport also continues to absorb losses through its 50% equity shareholdings in CWI.
Based on these qualitative considers, Westport meets the criteria as the primary beneficiary when viewing the guidance from both the power to exercise control and obligation to absorb losses criteria.
3.
Your response notes that while Westport and Cummins h
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CORRESP
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corresp.htm
December 19, 2012
Mr. Martin James
Senior Assistant Chief Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Westport Innovations Inc.
Amendment No. 2 to Form 40-F for
the Nine months Ended December 31, 2011
Filed October 29, 2012
File No. 1-34152
Dear Mr. James:
I am writing in response to your letter dated November 16, 2012 setting forth comments regarding our Amendment No. 2 to Form 40-F for the nine months ended December 31, 2011 (the “2011 Form 40-F/A”) of Westport Innovations Inc. (“Westport” or the “Company”) and our response letters dated October 29, 2012 and September 25, 2012.
To facilitate your consideration of Westport’s response, we have included below the comments and have provided Westport’s response immediately following.
Amendment No. 2 to Form 40-F for the Nine Months Ended December 31, 2011
Exhibit 99.2
Note 21. Investment in Joint Ventures, page 37
(a) Cummins Westport Inc., page 37
1.
Further to your response to prior comments 1 and 2, in determining whether or not CWI is a VIE, we note that you point to the fact that Westport guaranteed the losses of CWI during the 2004 calendar year and received the entire benefit of any financial profits of CWI up to and including December 31, 2004. We note that after December 31, 2004, Westport and Cummins share equally in the profits and losses of CWI. Please discuss how you considered the temporary nature of Westport’s obligations during 2004, whether these terms are substantive and how you considered that under FASB ASC 810-10-25-37, the determination of whether a legal entity is a VIE should be based on the circumstances on that date including future changes that are required in existing governing documents and existing contractual arrangements.
Response:
Our conclusion that CWI is a VIE is not solely based on the guarantee of losses for the 2004 fiscal year. As described in our letter of February 25, 2010, on January 1, 2004, CWI did not have sufficient equity at risk as required by ASC 810-10-15-14 to finance its own activities without subordinated financial support provided by the equity holders. At that date, while US$38.4 million had been contributed as share capital to CWI, all by Westport, CWI also had a deficit of US$45.7 million with the difference also to be funded by Westport. Therefore, at that date the equity at risk was insufficient to fund its activities without additional subordinated financial support. With respect to the substantiveness of Westport’s obligations under the First Amended and Restated Joint Venture Agreement (the “First Amended and Restated JVA”), we note that CWI’s losses for fiscal 2003 were US$17.8 million and there was no certainty that additional losses would not occur throughout 2004. Westport was also required to fund the then existing $5.4 million in warranty costs at January 1, 2004. Under the First Amended and Restated JVA, Westport absorbed 100% of variability in CWI’s fiscal 2004 year, and subsequently, Westport and Cummins shared equally in the variability. All the factors and terms above were substantive at the date of reassessment and future changes at that time regarding existing governing documents and existing contractual agreements were contemplated. CWI would continue to not have sufficient equity at risk to finance its own activities. Westport, through its initial contribution, losses Westport absorbed through fiscal 2003 and additional requirement to absorb 100% of variability of CWI’s fiscal 2004 year, was expected to absorb a majority of CWI’s expected losses and receive a majority of CWI’s expected residual returns disproportionately in excess of the percentage of shares it holds.
Westport Innovations Inc.
December 19, 2012
Page 2
Based on these considerations, we concluded that CWI was a variable interest entity in accordance with U.S. GAAP as of January 1, 2004 as we noted in our letter to the Securities and Exchange Commission dated February 25, 2010. Please see our response to comment 2, for further analysis supporting our conclusion that CWI is a VIE and Westport was the primary beneficiary.
2.
We note the following from your responses to prior comments 1 and 2 and the disclosure in your Form 40-F:
•
Cummins and Westport each own 50% of the common shares of CWI. No preferred shares have been issued. There are no differences in the rights or responsibilities attached to Cummins’ common shares as compared to Westport’s common shares.
•
From January 1, 2005, Cummins and Westport share equally in the profits and losses of CWI.
•
Westport and Cummins have equal representation on the Board of Directors.
•
CWI is primarily responsible to obtain the financing resources it requires for any and all working capital, capital expenditures, and financial requirements. While CWI may request financing from the holders of the common shares, Westport and Cummins have no obligation to provide such financial resources or to assist CWI in terms of third party guaranties or otherwise.
Given the above, please tell us in more detail how you determined that Westport (a) has the power to direct the activities of CWI that most significantly impact CWI’s economic performance and (b) the obligation to absorb losses of CWI that could potentially be significant to CWI or the right to receive benefits from CWI that could potentially be significant to CWI. Refer to FASB ASC 810-10-25-38A and 38B.
Response:
Under ASC 810-10-25-37, we assessed whether Cummins or Westport was the primarily beneficiary on January 1, 2004 and considered whether subsequent re-evaluation of the primary beneficiary over time would result in any change to our initial conclusion. As part of this assessment, we also considered whether there were qualitative factors that have occurred subsequent to January 1, 2004 that would impact upon the determination of the primary beneficiary.
a) Power to Exercise Control:
First, we determined which party has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance under ASC 810-10-25-38A (a). In section 810-10-25-38B “a reporting entity must identify which activities most significantly impact the VIE’s economic performance and determine whether it has the power to direct those activities.”
Westport Innovations Inc.
December 19, 2012
Page 3
As specified in the First Amended and Restated JVA, “CWI’s vision is to be the world’s leading provider of gaseous fueled, high performance, low emission and economically viable engines by bringing to market, now and in the future, the best available technologies engineered into the Cummins line of engine products. CWI shall undertake the spark-ignited business (“SI Business”) and develop, support and market the Products.”
Both parties provide some support to the joint venture in fulfilling this objective. Further to our comments in our response letter dated October 29, 2012, we consider below the most significant activities in achieving this objective.
Activities Significantly Impacting Economic Performance
The most significant activities impacting the joint venture are categorized below and ranked in order of importance in terms of driving CWI’s profitability and success. As noted below, the activities directed by Westport have the most significant impact on CWI’s profit and loss.
Key day-to-day activities
Authority to direct
1. Product Management (technology and product development choices)
Westport
2. Sales and marketing and market penetration
Westport
3. Manufacturing process
Cummins (subject to royalty and included in the overhead allocation) (Second Amended and Restated
JVA specified it is now royalty free but subject to applicable mark-ups on engine cost)
4. Distribution channel
Cummins
At the relevant date, Westport has the authority to direct the most significant activities of CWI relating to its economic performance and profitability, principally in the areas of (1) product management, intellectual property and technology since Westport has held the key positions relating to product choices, product specifications, and product strategy and since Westport made the initial investments and contributions to the joint venture’s fundamental natural gas technology, Stoichiometric EGR Spark Ignition (“SESI”), and (2) sales and marketing and market penetration. Cummins’ seconded employees are responsible for performing the product development engineering and Cummins’ primary functions in the joint venture, such as manufacturing and distribution, could be outsourced to any OEM with a similar cost plus mark-up arrangement.
Product Management. Westport made significant investments required in the development of the spark ignited technology and intellectual property (“IP”) that generated the main platforms that drive CWI’s business today. The First Amended and Restated JVA gave (and the Second Amended and Restated JVA gives) the joint venture the right to use the IP associated with spark-ignited natural gas products contributed by Westport. Westport has further been controlling the key functions of product management and strategy for the joint venture through seconded employees, including the Director, Product & Market Planning. Through these functions, Westport controlled which product to develop, for what geographies, for which OEM partners, what the key specifications ought to be and what technology should be used.
Sales and Marketing; Market Penetration. The primary driver of CWI’s revenue growth is the sales and marketing function. Westport dictates market development and customer growth strategies. The Westport seconded employees, including the Director, Marketing and Business Segment, have the distributor relationships and strategic relationships with operators of bus and refuse fleets enabling them to execute the sales and marketing strategy and generate new business for CWI. As the sales and marketing team penetrate new markets, revenue has increased.
Westport Innovations Inc.
December 19, 2012
Page 4
Manufacturing Process. Since the core engine and chassis have not changed significantly with each new product launch and since manufacturing engineering is outsourced to Cummins through seconded employees to the joint venture from Cummins. Cummins is remunerated for its manufacturing expertise. Cummins provides manufacturing and distribution functions including manufacturing engineering; however, these functions can more easily be outsourced and replicated by another OEM with a similar cost plus mark-up arrangement. Cummins also controls manufacturing in order to plan manufacturing capacity for all of its manufacturing commitments including build slots for diesel deliveries. While manufacturing and distribution are important to cost control and managing bottom line, they are not as integral to the success of the joint venture as the low emission product expertise and customer and distribution relationships and discretion on execution of the sales and marketing strategy which are provided by Westport as described above.
Distribution. Cummins has a firmly established worldwide reputation as a diesel engine manufacturer and has developed an effective and efficient global distribution channel for engine products for commercial vehicle and industrial applications; Westport seeks to access Cummins’ established global distribution channel for engine products for automotive, industrial and power generation applications for the development, support and marketing of its proprietary intellectual property. Cummins grants CWI access to its established global distribution channel according to the terms of the Original Joint Venture Agreement and each subsequent First and Second Amended and Restated JVA. Although the distribution channels are important, the absence of the direct access to Cummins’ distribution channels is not considered to have a significant impact on the economic performance or profitability of CWI.
The foregoing analyses of the primary day-to-day activities of CWI were the basis for Westport concluding that it continued to be the primary beneficiary at January 1, 2004, the date of reassessment, as it had contributed the fundamental technology and had the authority at that date to direct product management, sales and marketing and market penetration. We consider these to be at that date the most significant elements in the table above since they have the most significant impact on CWI’s profitability and financial performance.
b) Obligation to Absorb Losses:
Under Accounting Standard Codification 810-25-38A(b), Westport shall be deemed to have a controlling financial interest in CWI, a VIE if it has “the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.”
Under the First Amended and Restated JVA, Appendix E, Fiscal 2004 Losses, effective January 1, 2004,
“Westport shall have the sole responsibility for reimbursing any financial losses incurred by CWI up to and including December 31, 2004. Westport shall receive the entire benefit of any financial profits of CWI up to and including December 31, 2004. Financial losses and profits will be calculated in accordance with generally accepted accounting practices in the United States on a consistent basis (unless change is required by GAAP) and will be subject to audit. Cummins, CWI and Westport agree to work together to determine the most efficient way to implement this condition.
Westport will reimburse CWI for its actual financial losses in fiscal year 2004 as defined by the net income or loss line in CWI’s fiscal 2004 audited financial statements.”
As Westport guaranteed the losses during the 2004 calendar year and received the entire benefit of any financial profits of CWI up to and including December 31, 2004, the Company was expected to absorb a majority of CWI’s expected losses, receive a majority of CWI’s expected residual returns, or both that could be significant to the variable interest entity as discussed in 810-25-38.
See also our comments in response to comment 1, above, as to the substantive nature of Westport’s obligation to absorb losses at January 1, 2004. As a result, Westport was responsible for all of the upfront risk and also had the obligation to finance any warranty claims in excess of liquid assets. The preference shares issued to Cummins were at a nominal value and all of the upfront investment was provided by Westport.
Westport Innovations Inc.
December 19, 2012
Page 5
On January 1, 2004, the Cummins natural gas operating unit had a nominal value as the unit had ongoing losses. Westport also contributed advancements to the spark ignited technology prior to the commencement of the joint venture. Westport also contributed tax losses to the joint venture since it funded the operation, which were subject to a full valuation allowance, had an ongoing commitment to Technology Partnerships Canada (“TPC”) for original funding received, and provided access to Westport’s senior executives who directed the improvements to the spark ignited technology and drove the business forward towards profitability. Based on these considerations, we conclude that Westport had an obligation to absorb losses of CWI that could potentially be significant to CWI or the right to receive benefits from CWI that could potentially be significant to CWI.
Westport also continues to absorb losses through its 50% equity shareholdings in CWI.
Based on these qualitative considers, Westport meets the criteria as the primary beneficiary when viewing the guidance from both the power to exercise control and obligation to absorb losses criteria.
3.
Your response notes that while Westport and Cummins h