Turbo Power Systems Inc. Announces Its Results for the Year and Quarter Ended 31 December 2007
2008-03-30 23:00:00
Turbo Power Systems Inc. Announces Its Results for the Year and Quarter Ended 31 December 2007
CALGARY, ALBERTA–( EMWNews – March 31, 2008) – Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS):
Highlights
– Full year production and development income increased by 75 percent to Pounds Sterling 11.0 million (2006: Pounds Sterling 6.3 million)
– Full year loss before tax of Pounds Sterling 6.4 million (2006: Pounds Sterling 6.3 million)
– Year end unrestricted cash of Pounds Sterling 4.2 million and further restricted funds of Pounds Sterling 1.4 million
– Investment in aerospace capability now substantially complete
– Rail electronics contracts for Chicago Transit Authority (US$14 million) and Toronto Transit Commision (US$8 million) announced in the year
– Motor and drive contract for initial 75 systems announced in December
– Successful move to new Gateshead premises
Commenting on the results Graham Thornton, Chairman, said:
“During 2007 our core rail electronics business continued to grow strongly and we also announced significant production orders in our electrical machines division. In our aerospace business the investment in building the capability to complete development and move towards production on our Boeing 787 programmes has adversely impacted our bottom line performance for the year, however, this investment is now substantially complete and we look forward to moving into aerospace production in 2008.
“On becoming Chairman of the company I instigated an operational review which is now largely complete and we intend to update the market with the outcome of this review in due course. I have been encouraged by the opportunities that exist and pleased by the response from our major customers. I look forward with optimism to a year of significant progress.”
NOTES TO EDITORS
About Turbo Power Systems
Turbo Power Systems Inc (TSX:TPS) (AIM:TPS). is a leading UK based designer and manufacturer of innovative power solutions. The Group’s products are all based on its core technologies of power electronics and high speed motors and generators and are sold into a number of market sectors including aerospace, rail, and various industrial sectors. The Company’s products provide improved efficiency and reduced energy consumption compared to existing technologies.
Turbo Power System’s existing customers include bluechip companies such as Hamilton Sundstrand, Bombardier, The National Rail Equipment Company, Eaton Aerospace and Lotus.
Forward looking statements
This news release contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities.
New or updated CICA Handbook sections that have been issued but are not yet effective, and have a potential implication for the Company, are as follows:
(a) Section 3862 “Financial Instruments – Disclosure” and Section 3863 “Financial Instruments -Presentation”
Section 3862, Financial Instruments – Disclosure, increases the disclosures currently required to enable users to evaluate the significance of financial instruments for an entity’s financial position and performance, including disclosures about fair value. Section 3863, Financial Instruments – Presentation, replaces the existing requirements on the presentation of financial instruments, which have been carried forward unchanged. These standards are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of the adoption of these changes on the disclosure and presentation within its financial statements.
(b) Section 1535 “Capital Disclosures”
Section 1535, Capital Disclosures, requires disclosure of an entity’s objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently assessing the impact of the new standard.
(c) Section 3031 “Inventory”
In June 2007, the CICA released new Handbook Section 3031, Inventories, effective for annual and interim periods beginning on or after January 1, 2008. This new section requires inventory to be measured at the lower of cost or net realizable value and provides guidance on the methodology used to assign costs to inventory, it disallows the use of the last-in first-out inventory costing methodology and requires that, when circumstances which previously caused inventories to be written down below cost no longer exist, the amount of the write-down is to be reversed. The Company is currently assessing the impact of the new recommendations on its financial statements.
Harmonizing Of Canadian and International Standards
In March 2006, the Accounting Standards Board of the CICA released its new strategic plan which will abandon Canadian generally accepted accounting principles (“GAAP”) and affect a complete convergence to the International Financial Reporting Standards. At the end of a transitional period of approximately five years, Canadian GAAP will cease to exist as a separate, distinct basis of financial reporting for public companies. The Company will closely monitor changes arising from this proposed convergence.
Definition of non-GAAP financial measures
EBITDA is calculated as the net loss for the period less financial interest income and charges, foreign exchange gains and losses, tax charges and receipts, depreciation, amortization, and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortization. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company’s method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.
CHAIRMAN’S STATEMENT
During 2007 the Company continued to win significant orders and again demonstrated strong turnover growth with combined production and development revenues up 75% to Pounds Sterling 11.0 million.
Whilst we were pleased with the level of turnover in 2007, delayed aerospace milestone receipts coupled with increased technical resource deployment on the aerospace programmes, has meant that the planned reduction in losses was not achieved. The Group’s loss before interest, tax, depreciation, amortization and stock compensation was Pounds Sterling 4.9 million.
The majority of production revenue, and a significant proportion of our development income, came from our existing core business of rail power electronics. In this area the year began well with the announcement of a US$14 million contract for the Chicago Transit Authority in January and a US$8 million contract for the Toronto Transit Commission in March. Both of these contracts were placed through Bombardier and demonstrate the continued benefits of our strategic relationship. I am pleased to report that the prototypes for both contracts have now been built and are currently undergoing qualification testing at our Gateshead facility.
The rail business grew strongly in the year and the company delivered production units to Bombardier on the Beijing and London Underground programmes, as well as to the Toronto Transit Commission on the H6 programme and various smaller production and spares contracts. Our largest rail production customer in the year was NREC and we were pleased to receive follow-on production orders from them in May and August 2007 and January 2008.
In the area of Electrical Machines, the company spent considerable effort refining its product offerings during the year, and exhibited at a number of key industry events. This effort has led to a significantly increased number of enquiries and requests for quotation for motor and generator systems. Our key programme in this area with a major international capital equipment manufacturer proceeded well in 2007. Our successful development efforts were rewarded in December with an initial production contract for 75 systems. The Company is now finalising production arrangements, and the majority of these systems are expected to be delivered in 2008. On the ALC down-hole pump programme, UK testing is proceeding ahead of operational testing in North America later in 2008.
In the aerospace sector, 2007 has been a necessary period of investing to gain experience for the future. Our Boeing 787 programmes with Hamilton Sundstrand and Eaton Aerospace have made good technical progress, but non-recurring engineering costs have exceeded planned levels, particularly on the Hamilton Sundstrand contract. Project milestones were not met, and so development income will be received later than originally planned. Positive progress has been made so far in 2008, and the expected qualification of the units in 2008 should generate further development income and see the start of long-term production revenues. During 2007 we continued to build a new aerospace design and production capability at Gateshead with enhanced quality systems to meet aerospace requirements. While our investment in this capability and the resource required on our development programmes has been greater than originally anticipated, this investment positions the Company well to win further orders in this long-term, international growth market.
Following my appointment as Chairman the Company instigated a review of costs and operations with the objective of identifying ways to significantly improve our earnings performance over the next 18 months. This continuous operational improvement process will become a key part of our strategy to increase competitiveness and therefore position the Company for growth. Significant progress has already been made and opportunities for substantial improvement have been identified. We will update the market with the outcome of this review in due course.
I would like to take this opportunity to thank Stephen Sadler who will leave his position as Chief Financial Officer in early May, for his valuable contribution to the Company over the past three years. We are actively looking for a replacement for Stephen and will update the market when appropriate.
Outlook
In 2008 I expect to see continued progress in our core market of rail power electronics with the Chicago Transit and Toronto programmes moving towards production. In the Electrical Machines area we look forward to the transition into production with our major capital equipment customer and will continue to seek new customers for this key part of our technology portfolio. In the aerospace sector we will look to achieve qualification of the two units with a subsequent move into production.
Looking forward, the Company will pursue a two-pronged strategy of building significant business value with a number of key customers in the transport, energy and aerospace markets while at the same time working on margin improvement across all product lines. As our installed base grows, we should start to benefit from higher-margin, aftermarket services business without the investment levels associated with new design.
With our successful move to new Gateshead premises in June 2007, and our investment in developing an aerospace design and build capability, the Company now has in place a strong platform for growth across all three of our sectors and I anticipate further progress in 2008.
OPERATIONAL REVIEW
Business of the Company
Turbo Power Systems
– Designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional technology.
– Designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.
Strategy
Since the Company’s products are sub-systems rather than end-products in themselves, the TPS marketing strategy is targeted towards major Original Equipment Manufacturers (“OEMs”) and system integrators, with the objective of developing long term agreements covering both technology development and volume manufacturing.
During the year, the Company continued the process of transforming its Heathrow facility and the Electrical Machines operation from a development and prototyping facility into a growing production centre, by expanding the number of funded customer demonstrator programmes using the existing design and IPR base.
TPS policy is to undertake demonstrator programmes only where OEM customers have an established business case for ongoing production volumes, or where the application extends the Company’s installed base of equipment into sectors and applications considered to offer considerable future growth potential.
TPS maintains the capacity and capability to develop, manufacture and fully test all of its products, however where appropriate it does review the potential for outsourcing those elements of the process where volumes and technical complexity are appropriate.
The Company is currently in discussion with a potential partner in India in order to access the rapidly growing rail and transport markets in India, China and SE Asia, combining the design, application and technical expertise of the Company with the necessary low cost base manufacturing resource required to sell into those markets.
In addition, in recognition of the increasing importance of the North American market to our future revenue stream, the Company intends to open a sales and service centre in Chicago, to support our expanding product field population, and our increasing number of OEM customers.
2007 summary
During 2007 there were many positives in the Company’s performance. The number of opportunities for the Heathrow electrical machines business increased significantly with important contracts being won and very positive feedback being received from our new customers. Revenues in the year grew strongly once again, and the rail and industrial product sales from Gateshead showed strong growth in order intake.
The new power electronics facility has provided much needed additional capacity and a high quality environment for staff and customers.
In the aerospace sector, the Eaton project although incurring some additional cost overruns is now proceeding through to final qualification.
The exception to this strong underlying performance has been the Hamilton Sundstrand project, which has seen significant increases in TPS design costs over budget for both the hardware and software phases, and incurred project delays which meant that key income milestones were not met. Considerable progress has recently been made in resolving both the software and hardware issues in conjunction with both Boeing and Hamilton Sundstrand, and updated hardware is expected to be available to the customer in time for the initial power-up and flight test programme.
High speed electrical machines
The optimal size range for electrical machines based on the Company’s permanent magnet technology is between 15kW and 2MW.
Markets
The key markets for the motor derivatives are:
– HVAC and refrigeration
– Air and gas compression
– Turbo-machinery
– Aerospace – actuators, pumps, fans
– Ship propulsion
– Rail traction motors
The key markets for generator derivatives are:
– Distributed generation (gas turbines)
– Micro-generation
– Vehicle based auxiliary power generation
– Flywheel systems
Customers and contracts
During the last year, the Company has announced a number of contract awards, which confirmed the commercial viability of our high speed electrical machine products.
Industrial motor and drive agreement
In December 2007 TPS received the launch production order for 75 sets of motor and drive systems valued at some US$2 million. The order for these systems, which is subject to commercial confidentiality, follows earlier announcements detailing the framework memorandum and the alpha unit testing programme. These units are expected to be delivered during the latter part of 2008 to provide the initial stock in support of the formal product launch in early 2009. Once launched, the drive system will replace an existing mechanically driven arrangement used on the existing capital equipment products in this size range, and can also be supplied for retro-fit to reduce electrical consumption on existing installations world-wide. Initial alpha testing has gone well, and extensive field testing will continue throughout 2008.
The framework agreement anticipates sales of 500 systems over the first two years of production, and incorporates a manufacturing agreement with an initial term of 5 years. TPS is continuing discussions with the customer regarding the scaling of these systems to cover a wider range of product sizes.
US process gas customer
In January 2008 TPS received an order from an industrial and process gas company to supply a high speed electrical machine and variable frequency drive for a development project. The products to be supplied by TPS utilise the Company’s permanent magnet and inverter technologies, giving a high performance and high efficiency solution. Once the development phase has been completed it is intended that these systems will be deployed in the customers’ sites.
European programme
Turbo Power Systems recently received an order from a European research organisation, acting on behalf of a major international manufacturing company, for the supply of a high speed electrical machine and variable frequency drive which will be used in a process system development programme.
SKF
Production requirements for the 35kW, 70,000 rpm high speed motor and drive system (motor elements being manufactured in Heathrow and the drive and magnetic bearing control systems being integrated at Gateshead) are being discussed following the extended customer reliability testing programme.
ALC
UK testing of the complete down hole pump system incorporating the TPS motors is still underway, with the final, high temperature, trials to be concluded prior to shipment to North America for full operational evaluation.
The North American tests will consist of two, three month periods of continuous operation, with a removal and assessment review between them, and are not expected to be completed before the end of 2008.
End customer interest and demand remains very high, particularly given the current oil pricing.
High performance power electronics
TPS designs and manufactures rugged power electronics products for rail, industrial and transport applications, all of which require high reliability and availability in operation.
Markets
The key markets for the electronics products are:
– Auxiliary power conversion for rail and light transit
– Variable frequency drives to complement HSEMs
– Motor drives for aerospace application
– Industrial pulsed power supplies
– Grid connected inverters
Customers and contracts
Bombardier Transportation-Canada
Bombardier Transportation – Beijing
Deliveries of the auxiliary power systems for the unmanned rail transit cars for the Beijing airport subway extension are on programme and the contract should be completed on schedule. Bombardier and its Chinese partners have delivered the first car sets to the customer for testing in advance of revenue service and the Olympics. TPS is continuing to provide periodic commissioning and engineering support in China.
Bombardier Transportation – Chicago Transit Authority
The initial prototype units have now been built and are undergoing functional testing at TPS, to be followed by formal qualification tests which will be observed by both Bombardier and the Chicago Transit Authority. Once the initial auxiliary power units have been supplied to Canada, Bombardier will build the vehicles and then commence extended vehicle trials on a number of evaluation cars, which will continue throughout 2008 and into 2009.
The Chicago (and Toronto) designs incorporate a new generation of hardware and software microprocessor control system which the Company is investing in as a common modular platform for all future rail products.
The base Chicago Transit Authority contract is valued at US$14 million including production, spares and engineering services, which with possible options for additional cars, could increase the value to in excess of US$20 million.
Bombardier Transportation – Toronto
As with the Chicago Transit Authority hardware, the Toronto prototypes, which consist of three unit types (a main Power Supply and two variants of HVAC Inverter), have also been built and are undergoing functional tests to be followed by the formal qualification programme.
Unlike the Chicago Transit Authority work, the Toronto programme does not include an extended vehicle testing phase and TPS production deliveries are scheduled to commence in 2008 and then ramp up.
The contract for the initial quantity of 234 cars is expected to exceed US$8 million, with the potential for further option quantities to extend that to some US$14 million.
National Rail Equipment Co (“NREC”)
Sales of the traction power electronics system to NREC in support of their low emissions switcher locomotives accounted for a significant proportion of the increased sales turnover in 2007.
In order to support the expanding field population of NREC locomotives, additional TPS field service resources have been provided in North America, and the planned Sales and Service centre in Chicago will be well located to support both the NREC locomotive build yards and their customers.
Toronto Transit Commission (“TTC”) – H6 Subway Programme
Manufacture of the final quantities of the auxiliary power supply supplied to TTC for the H6 vehicle upgrade programme will be made in Q1 2008 in accordance with the programme schedule. Following the success of this programme, TPS is intending to use the Chicago service centre as a base to offer refurbishment of auxiliary power hardware, repairs and upgrades to rail and subway operators throughout the US.
Other Rail Products
Bombardier -UK London Underground
Production of the drivers air-conditioning power supply for London Underground’s District Line, which has been a very successful programme, will complete in early 2008.
PT3000
Regular small orders for the PT3000 At-Seat power supply, currently in operation with many UK operators including Virgin and National Express, continue to be received, however there are a number of UK rolling stock refurbishment programmes currently under review where the potential quantities of PT3000s are considerably larger. TPS has now produced over a thousand of these units which allows the commuter to safely charge up mobile phones and laptops.
PRC Industrial Lasers
TPS continues to see strong ongoing demand from PRC Lasers who have now standardised on the TPS high voltage power supply for their complete range of industrial lasers. Recently TPS has developed a new “higher power” derivative which is now undergoing testing.
Aerospace
Boeing 787
Our first steps in the commercial aerospace sector have represented a very steep learning curve, and undertaking two major programmes effectively in parallel gave us little opportunity to apply the lessons learned on the Eaton programme to the Hamilton Sundstrand programme. As a consequence, the level and depth of engineering required on the Hamilton Sundstrand work was underestimated and the resulting costs exceeded both our expectations and the customer’s contractual funding. Additionally, programme delays have deferred contracted stage payments from 2007 to 2008.
TPS has now absorbed the lessons of these two contracts and is now much better placed to bid on future aerospace programmes from a basis of experience. Dedicated production and test facilities, including temperature cycling and vibration testing have been put in place, and aerospace product assembly staff have been trained. We still believe that the core TPS technology of high performance electrical machines and matched power electronics is well suited to the growing demands of the All-electric aircraft, and are continuing to identify opportunities on other programmes and platforms.
Eaton Aerospace
Override Jettison Pump Control Unit
The hardware has successfully met the first major qualification requirement by completing the Safety of Flight Test programme. The initial batch of units has been delivered to Boeing to support the Aircraft Flight Test Programme.
The formal qualification programme is underway with encouraging initial results. The programme has been subject to a delay as a result of a change in technical requirement.
The Company has now ensured that production facilities and trained staff are in place at our facilities and materials are on hand to support the aggressive Boeing production ramp up this year.
Hamilton Sundstrand
Ram Fan Motor Controller
The motor controller, which was a late addition to the 787 programme following weight reduction reviews by Boeing, has suffered a number of delays due to technical problems incurred by TPS in developing both the hardware and the software, which is largely outsourced to an aerospace approved software house in India.
With support from both Boeing and Hamilton Sundstrand, the software is now performing well, and a series of interim modifications have been identified to resolve the outstanding hardware issues in time for updated hardware to be available to the customer for the initial power -up and flight test programme.
Work is continuing in procurement and discussions are ongoing with Hamilton Sundstrand to ensure that profitability is achieved in the production phase once a final design has been approved.
TPS North America
In order to support our growing customer base in North America and to take the opportunity to expand both direct sales and aftermarket revenues, TPS is setting up TPS North America in a facility in Greater Chicago.
Initial activities will be focused on sales and service functions, however it is anticipated that some elements of hardware upgrades/modification and partial final assembly may follow in due course.
Financial Performance
During 2007, TPS’s existing core business sectors of rail and industrial power electronics showed continued development on the back of increased production. However, work on our new aerospace programmes has consumed more resource than was expected which has had a detrimental impact on EBITDA and cash flow. As a result the company has shown strong revenue growth in 2007 but increased EBITDA losses and cash outflows compared to 2006. Significant technical progress has been made on the Hamilton Sundstrand programme in the first quarter of 2008 and the company expects to receive the remaining development income and move into the production phase during 2008. As a result the extra front end investment in this programme during 2007 is expected to be recovered from 2008 onwards.
In terms of orders won 2007 began well with the award of two major rail contracts from Bombardier in the first quarter. The base CTA contract is expected to be worth US$14m over 6 years with options which could increase the contract value to US$20 million. Similarly, the Toronto Transit Commission order has a base value of US$8 million over 5 years with options to increase to US$14 million. Orders worth US$5.5 million were received from NREC during the year for our traction control electronics with a further order for US$1 million announced in January 2008.
In the Electrical machines division we announced a production order from a major industrial motor and drive customer for 75 systems which is worth US$2 million to be delivered in 2008. A number of bid enquiries requiring similar technology have been received in early 2008.
Production revenue grew strongly in the year as new power electronics programmes moved into production and in particular volumes shipped to NREC grew steadily. Total production revenue of Pounds Sterling 9.8 million for the year is a 79% increase over 2006.
Development income increased 48% to Pounds Sterling 1.2 million and includes receipts from the Hamilton Sundstrand, Eaton Aerospace and Bombardier Rail programmes.
Development costs of Pounds Sterling 5.5 million reflect the increased development activity on the two new Bombardier contracts and on the Eaton and Hamilton Sundstrand Aerospace programmes. Development expenditure on the Hamilton Sundstrand programme was Pounds Sterling 1.7 million.
Administrative costs including amortization increased by 12% to Pounds Sterling 4.7 million in 2007.
The group’s loss before interest, tax, depreciation, amortization and stock compensation increased by 15% to Pounds Sterling 4.9 million.
Financing costs for 2007 reduced significantly as the benefits of the restructuring of convertible notes, which was completed in December 2006, were seen. Interest expense for 2007 was Pounds Sterling 0.2 million compared with Pounds Sterling 1.0 million for 2006.
Staff numbers increased steadily in the areas of development and production to reflect the increased activity but remained steady in administrative departments. Overall permanent headcount at the year end was 165 (2006: 139).
Operating cash outflows before tax increased to Pounds Sterling 6.0 million (2006: Pounds Sterling 5.1 million) reflecting the increased losses and increased stock.
Purchases of long term assets of Pounds Sterling 0.7 million (2006: Pounds Sterling 0.2 million) relate primarily to the new premises in Gateshead and are partially offset by grant funding from One North East of Pounds Sterling 0.1m.
In June 2007 the Company raised Pounds Sterling 3.8 million net from the placing of 44,500,000 Common shares.
The Company finished the year with an unrestricted cash balance of Pounds Sterling 4.2 million and held further cash of Pounds Sterling 1.4 million associated with performance bonds.
These consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realise its assets and discharge its liabilities in the normal course of operations for the foreseeable future. The Company has incurred cumulative losses including a loss of Pounds Sterling 6.42 million in 2007 and has a cumulative deficit of Pounds Sterling 62.67 million as at 31 December 2007. The Company’s ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.
Further detail of the Company's financial performance is shown below:
Production revenue
Production revenue in the year ended 31 December 2007 was Pounds Sterling
9.80 million compared with Pounds Sterling 5.48 million in 2006 and
comprised
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Power electronics 9,581 5,257
Electrical machines 244 225
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9,825 5,482
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The Power electronics division has seen continued strong turnover growth, primarily as a result of increased volumes on established programmes but also through initial production runs on new contracts such as the Beijing Airport project. Output volumes have grown significantly on the existing production contracts for NREC, Toronto Transit Commission H6 and Bombardier London Underground.
Spares and service revenues within the Power electronics division were Pounds Sterling 0.42 million for the year (2006: Pounds Sterling 0.98 million).
In the Electrical machines division revenue increased marginally over 2006 as the first units were delivered as part of the Industrial Motor and Drive agreement.
Development income
Development income in the year was Pounds Sterling 1.18 million compared with Pounds Sterling 0.79 million in 2006 and included further milestone receipts from Eaton Aerospace and Hamilton Sundstrand on the Boeing 787 Dreamliner programmes.
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Development income 1,176 794
Production costs
The cost of product revenues in the year amounted to Pounds Sterling 7.28
million (2006: Pounds Sterling 4.23 million).
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Power electronics 6,280 3,423
Electrical machines 999 804
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7,279 4,227
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Production costs include certain fixed facilities costs attributable to the manufacturing operation. Overall gross margin for the year was 26% compared to 23% in 2006. The improvement reflects production efficiency gains from the move to new premises which were partially offset by New Product Introduction costs on NREC and other new production programmes.
Included in production costs for the year are stock compensation charges on options awarded of Pounds Sterling 91,000 (2006: Pounds Sterling 51,000).
Research and product development
Research and product development expenditure in the year was Pounds Sterling
5.48 million compared with Pounds Sterling 3.32 million in 2006, and
comprised
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Research and product
development expenditure 5,509 3,734
Accrued R&D tax credits (27) (410)
------ ------
Total expenditure 5,482 3,324
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Product development costs increased in 2007 as work commenced on both the Bombardier Chicago and Toronto rail programmes and activity increased on the Eaton and Hamilton Sundstrand contracts for the Boeing 787 Dreamliner. Development expenditure on the Hamilton Sundstrand programme was Pounds Sterling 1.7 million.
Included in research and product development expenditure for the year are stock compensation charges on options awarded of Pounds Sterling 405,000 (2006: Pounds Sterling 255,000).
The level of R&D tax credits accrued in the year reduced as more of the Company’s development resource moved on to commercial programmes.
General and administrative
General and administrative costs of Pounds Sterling 3.86 million (2006: Pounds Sterling 3.12 million) consist mainly of staff costs and facilities costs, which have increased following the relocation of the Gateshead operation to larger facilities. Also included are stock compensation charges on options awarded of Pounds Sterling 203,000 (2006: Pounds Sterling 205,000), and increased costs for additional sales and promotional activities.
Amortisation
Amortisation was Pounds Sterling 0.86 million compared with Pounds Sterling 1.09 million in 2006. The reduction reflects a number of assets becoming fully written down during the year.
Interest income
Interest income for the twelve months was Pounds Sterling 0.37 million compared with Pounds Sterling 0.23 million in 2006 reflecting a higher average cash balance held in the year.
Interest expense and finance charges
Interest expenses arise from the issue of convertible notes in July 2003 and
March 2005 and comprise
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Interest 188 662
Accretion of debt 60 387
------ ------
248 1,049
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Convertible notes are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the notes issued and the fair value of the liability is assigned to the equity component. The equity element of the March 2005 note issue was estimated at Pounds Sterling 1.11 million. The equity element of the 2003 note issue was estimated at Pounds Sterling 0.91 million. The carrying value of the debt element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the twelve months this charge amounted to Pounds Sterling 0.06 million (2006: Pounds Sterling 0.39 million).
Finance charges for 2007 were Pounds Sterling 66,000 (2006: Pounds Sterling nil) and were made up as below:
During the fourth quarter the company purchased U.S. dollar denominated currency contracts covering expected dollar income from programmes scheduled for 2008. The premium cost for these options was Pounds Sterling 51,000 (2006: Pounds Sterling 81,000) and has been charged to profit and loss in the year. The maturing 2007 US dollar option returned Pounds Sterling 8,000, resulting in a net loss for the year of Pounds Sterling 36,000 (2006: gain of Pounds Sterling 62,000).
During the first quarter the company redeemed Pounds Sterling 4,860,000 loan notes, resulting in a net credit of Pounds Sterling 47,000 (2006: charge of Pounds Sterling 190,000).
Financial service charges primarily related to the cost of creating and maintaining performance bonds were Pounds Sterling 16,000 in 2007. In 2006 the transfer to the AIM market resulted in the release of the provision for financial costs on share issuance of Pounds Sterling 230,000.
During the year the Company recorded a fair value adjustment of Pounds Sterling 10,000 (2006: Pounds Sterling 21,000) against the investment in Altek Power Corporation.
Cash flows for the twelve months
Cash outflow from operating activities
Operating cash outflow before movements in working capital was Pounds Sterling 5.20 million for the year (2006: Pounds Sterling 4.17 million), as a result of higher incurred costs on the aerospace development programmes in 2007.
Movements in stocks, work in progress and debtors and creditors resulted in a net cash outflow of Pounds Sterling 0.79 million during the year (2006: outflow of Pounds Sterling 0.97 million).
Tax credits
During the year the company received research and development tax credits of Pounds Sterling 0.31 million (2006: Pounds Sterling 0.12 million).
Investing activities
Purchases of long term tangible assets amounted to Pounds Sterling 0.73 million (2006: Pounds Sterling 0.22 million) and relate to production equipment and leasehold property improvements.
Cash outflows related to financial instruments of Pounds Sterling 0.05 million (2005: Pounds Sterling 0.06) are the net premium costs of currency contracts.
Cash flow from financing activities
Cash inflow from financing in 2007 of Pounds Sterling 3.80 million during the twelve months relates to net funds received from the issue of shares in June 2007, when the Company completed a Pounds Sterling 4,000,000 (gross) financing agreement with institutional investors. The financing comprised placing of Common Shares in Turbo Power Systems Inc.
Cash inflow from financing in 2006 of Pounds Sterling 5.45 million during the twelve months relates to net funds received from the issue of shares in December 2006, when the Company completed a Pounds Sterling 6,000,000 (gross) financing agreement with institutional investors. The financing comprised placing of Common Shares and A -Ordinary shares in Turbo Power Systems Limited.
Overall cash outflow for the twelve months
Overall the cash outflow for the period was Pounds Sterling 2.43 million. This compares with a cash inflow of Pounds Sterling 0.14 million in 2006.
Summary of quarterly results
The following table sets forth selected quarterly consolidated financial
information of the Company for the last two years;
All amounts in Revenue Research General and Net loss Loss per
Pounds Sterling and product administrative share
'000 development
March 2006 969 826 752 (1,770) (0.9)
June 2006 1,192 867 818 (1,742) (0.9)
September 2006 1,470 917 814 (1,623) (0.8)
December 2006 1,851 714 735 (1,123) (0.6)
March 2007 2,033 1,015 841 (1,403) (0.5)
June 2007 2,342 1,151 1,102 (1,768) (0.6)
September 2007 2,700 1,736 1,083 (1,666) (0.5)
December 2007 2,750 1,580 831 (1,578) (0.5)
Quarterly revenue has increased during 2007 reflecting increased production. Research and development expenditure has increased reflecting development activities on the new Bombardier Chicago and Toronto rail programmes and continuing development on the Eaton and Hamilton Sundstrand Boeing 787 contracts. General and administrative costs increased as the Gateshead facility relocated to larger premises in quarter two of 2007.
Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.
Review of fourth quarter 2007
Production revenue
Production revenue in the three months ended 31 December 2007 was Pounds
Sterling 2.75 million compared with Pounds Sterling 1.85 million in 2006 and
comprised
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Power electronics 2,726 1,798
Electrical machines 24 53
------ ------
2,750 1,851
------ ------
------ ------
Revenues from the Power electronics division increased as a result of
production revenues from contracts with NREC, Toronto Transit Commission,
Bombardier and PRC.
Revenue in the Electrical machines division relates primarily to the SKF
contract.
Development income
Development income in the three months was lower in 2007 at Pounds Sterling
0.16 million compared with Pounds Sterling 0.22 million in 2006 as a result
of fewer milestone payments falling due in the quarter.
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Development Income 159 217
------ ------
------ ------
Production costs
The cost of product revenues in the three months amounted to Pounds Sterling
1.96 million (2006 : Pounds Sterling 1.43 million).
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Power electronics 1,736 1,174
Electrical machines 223 251
------ ------
1,959 1,425
------ ------
------ ------
Production costs include certain facilities costs attributable to the
manufacturing operation.
Included in production costs for the three months are stock compensation
charges on options awarded of Pounds Sterling 11,000 (2006: Pounds Sterling
17,000).
Research and product development
Research and product development expenditure in the three months was Pounds
Sterling 1.58 million compared with Pounds Sterling 0.71 million in 2006,
and comprised
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Research and product
development expenditure 1,607 1,074
Accrued R&D tax credits (27) (360)
------ ------
Total expenditure 1,580 714
------ ------
------ ------
Included in research and product development costs for the three months are stock compensation charges on options awarded of Pounds Sterling 115,000 (2006: Pounds Sterling 67,000).
General and administrative
General and administrative costs in the three months of Pounds Sterling 0.83 million (2006: Pounds Sterling 0.74 million) consist mainly of staff costs, facilities costs and the costs associated with the Company’s public listings. Included in general and administrative costs for the quarter are stock compensation charges on options awarded of Pounds Sterling 33,000 (2006: Pounds Sterling 55,000).
Amortisation
Amortisation was Pounds Sterling 0.20 million compared with Pounds Sterling 0.19 million in 2006.
Interest income
Interest income in the three months was Pounds Sterling 0.10 million compared with Pounds Sterling 0.02 million in 2006.
Interest expense and finance charges
Interest expenses arise from the issue of convertible bonds in July 2003 and
March 2005 and comprise
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Interest payable 50 245
Accretion of debt 49 (28)
------ ------
99 151
------ ------
------ ------
During the quarter receipts on maturing options were received of Pounds Sterling 8,000 (2006: Pounds Sterling 17,000).
During the fourth quarter the company purchased a U.S. Dollar option to cover expected 2008 programme dollar income at a cost of Pounds Sterling 51,000.
During the quarter the Company recorded an impairment of Pounds Sterling 10,000 (2006: Pounds Sterling 21,000) against the investment in Altek Power Corporation.
Cash flows for the fourth quarter
Cash outflow from operating activities
Operating cash outflow before movements in working capital was Pounds Sterling 1.46 million for the quarter (2006: Pounds Sterling 0.67 million).
Movements in stocks, work in progress, and debtors and creditors produced a net cash inflow of Pounds Sterling 0.47 million during the quarter (2006: outflow of Pounds Sterling 0.75 million).
Tax credits
During the quarter the company received no research and development tax credits (2006: Pounds Sterling nil).
Investing activities
Cash outflows from capital investments in the three months were Pounds Sterling 0.14 million compared with Pounds Sterling 0.01 million in 2006. This spend was primarily on the new facilities at Gateshead.
Overall cash outflow for the period
Overall the cash outflow during the three months was Pounds Sterling 1.34 million. This compares with an overall cash inflow of Pounds Sterling 4.21 million for the fourth quarter of 2006 which included fundraising receipts of Pounds Sterling 5.45 million.
Balance sheet as at 31 December 2007
The Company ended the period with an unrestricted cash balance of Pounds Sterling 4.24 million compared with Pounds Sterling 6.67 million at 31 December 2006. Substantially all of the Company’s cash balances are denominated in Sterling.
In addition the Company had restricted cash amounts of Pounds Sterling 1.36 million relating to performance bonds entered into as part of contracts with the Toronto Transit Commission and Bombardier (2006: Pounds Sterling 1.50 million).
Long term assets excluding restricted cash have decreased from Pounds Sterling 3.69 million at 31 December 2006 to Pounds Sterling 3.00 million at 31 December 2007, after depreciation charges of Pounds Sterling 0.86 million.
Long term liabilities have decreased significantly to Pounds Sterling 1.98 million at 31 December 2007 compared to Pounds Sterling 6.13 million at 31 December 2006, reflecting the reduction in Loan Notes following the redemption of 4,500,000 notes in January 2007.
Net working capital at 31 December 2007, excluding cash balances, was Pounds Sterling 1.62 million, compared with Pounds Sterling 0.60 million as at 31 December 2006.
As at 31 December 2007, the Company had 318,571,062 common shares issued and outstanding and 115,000,000 A ordinary shares issued and outstanding. As at that date there were 30,847,250 outstanding share options and 10,500,000 outstanding warrants.
----------------------------------------------------------------------------
Payments Due by Period
Contractual Obligations -----------------------------------------------
Pounds Sterling '000 at Less than 1-3 4-5 After
31 December 2007 Total 1 year years years 5 years
----------------------------------------------------------------------------
Convertible notes 1,789 - 1,789 - -
----------------------------------------------------------------------------
Operating leases 4,990 519 1,583 858 2,030
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total contractual
obligations 6,779 519 3,372 858 2,030
----------------------------------------------------------------------------
Liquidity
Cash, cash equivalents and short-term investments at 31 December 2007 were Pounds Sterling 4,235,000, compared with Pounds Sterling 6,669,000 at 31 December 2006.
Restricted cash at 31 December 2007 was Pounds Sterling 1,362,000, compared with Pounds Sterling 1,496,000 at 31 December 2006.
Convertible bonds
On 11 March 2005 the Company completed a Pounds Sterling 8,000,000 (gross) financing agreement with institutional investors. The financing comprised Convertible Notes and Warrants. The Convertible Notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling 0.12 per share. The Convertible notes are unsecured. The Warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share. On 28 December 2006 2,360,000 Convertible Notes were redeemed. On 6 January 2007 a further 2,000,000 Convertible Notes were redeemed. At 31 December 2007 there were 1,789,000 Convertible Notes outstanding.
On 11 July 2003, the Company completed a Pounds Sterling 5,000,000 financing agreement with Island Investment (Securities) Ltd. and Argun Investments Limited. The financing comprised Convertible Notes and Warrants. The Convertible Notes have a term of five years, bear an annual interest rate of 3.5% and are convertible into an aggregate of 25 million Common Shares of Turbo Power Systems Inc. at a conversion price of Pounds Sterling 0.20 per share. The Warrants had a term of three years and were convertible into an aggregate of 3.5 million Common Shares of Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share. These warrants expired on 11 July 2007. On 28 December 2006 2,500,000 Convertible Notes were redeemed. The remaining 2,500,000 Convertible Notes were redeemed on 6 January 2007.
Currency risk management
Principally all of the Company’s expenditure is denominated in Sterling, which is funded from Sterling cash balances. Exchange differences, which arise on consolidation of the Company’s Canadian operations, are included in exchange adjustments within the income statement. At 31 December 2007 the Sterling equivalent of Canadian Dollar denominated net assets amounted to Pounds Sterling 60,000 (2006 – Pounds Sterling 59,000), and the principle element comprised the investment of Pounds Sterling 25,000 in the loan note issued by Altek.
Interest rate risk management
The analysis of the Company's financial assets and borrowings analysed
between floating and fixed interest rates is shown below;
2007 2006
Pounds Sterling '000 Pounds Sterling '000
Floating rate financial
assets 5,597 8,165
Fixed rate financial assets 25 31
Floating rate borrowings - -
Fixed rate borrowings 2003
Bond - (2,500)
Fixed rate borrowings 2005
Bond (1,789) (3,789)
The fixed rate borrowings for the 2003 Bond were at 3.5% per annum, and for the 2005 Bond are at 6.5% per annum, and the fixed rate financial assets are at 6.0% per annum.
The Company invests surplus cash funds in short term money market deposits with financial institutions and cash funds which have at least a short term credit rating of F1. The maturity of the deposits is between one and three months.
Derivative financial instruments
During the fourth quarter the company purchased U.S. dollar denominated currency contracts covering expected dollar income from programmes scheduled for 2008. The premium cost for these options was Pounds Sterling 51,000 (2006: Pounds Sterling 81,000) and has been charged to profit and loss in the year. The maturing 2007 US dollar option returned Pounds Sterling 8,000, resulting in a net loss for the year of Pounds Sterling 36,000 (2006: gain of Pounds Sterling 62,000).
TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS, COMPREHENSIVE LOSS AND DEFICIT
Quarter ended
Notes 31 December Year ended 31 December
2007 2006 2007 2006
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
restated restated
Production revenue 2,3 2,750 1,851 9,825 5,482
Development income 2,3 159 217 1,176 794
--------- --------- --------- ---------
2,909 2,068 11,001 6,276
Expenses
Production costs 1,959 1,425 7,279 4,227
Research and
product
development 4 1,580 714 5,482 3,324
General and
administrative 831 735 3,857 3,119
Amortisation 198 194 858 1,086
--------- --------- --------- ---------
4,568 3,068 17,476 11,756
Loss before
interest, finance
charges
and foreign
exchange (1,659) (1,000) (6,475) (5,480)
Interest income (98) (20) (367) (226)
Interest expense 5 99 151 248 1,049
Finance
charge/(income) (52) - 66 -
Foreign exchange
loss/(gain) (30) (8) (7) (45)
--------- --------- --------- ---------
(81) 123 (60) 778
--------- --------- --------- ---------
Net loss and
Comprehensive loss (1,578) (1,123) (6,415) (6,258)
--------- --------- --------- ---------
--------- --------- --------- ---------
Statement of
Deficit
Deficit, beginning
of year, as
previously stated (53,636) (44,718)
Prior period
adjustment 13 (68) (128)
--------- ---------
Deficit, beginning
of year, as
restated (53,704) (44,846)
Net loss (6,587) (6,258)
Transitional
adjustment (140) -
Equity adjustment
on issue of shares (2,512) (2,600)
--------- ---------
Deficit, end of
year (62,943) (53,704)
--------- ---------
--------- ---------
Loss per share -
basic 7 (0.5)p (0.6)p (2.1)p (3.3)p
Loss per share -
diluted 7 (0.5)p (0.6)p (2.1)p (3.3)p
Weighted average
number of shares
outstanding 318,571,062 195,079,375 310,387,089 191,827,517
TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
Notes As at 31 December As at 31 December
2007 2006
Pounds Sterling Pounds Sterling
'000 '000
Current assets restated
Cash and cash equivalents 4,235 6,669
Restricted cash 8 - 765
Trade and other receivables 2,871 1,817
Stock and work in progress 2,376 1,230
Prepayments
For more information, please contact
Turbo Power Systems
Michael Hunt
Chief Executive Officer
+44 (0)20 8564 4460
or
Turbo Power Systems
Stephen Sadler
Chief Financial Officer
+44 (0)20 8564 4460
Website: www.turbopowersystems.com
or
Gavin Anderson (PR)
Ken Cronin
+44 (0)20 7554 1400
or
Gavin Anderson (PR)
Michael Turner
+44 (0)20 7554 1400
or
KBC Peel Hunt
Oliver Scott
+44 (0)20 7418 8900
or
KBC Peel Hunt
Nicholas Marren
+44 (0)20 7418 8900Major Newsire & Press Release Distribution with Basic Starting at only $19 and Complete OTCBB / Financial Distribution only $89
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