Torotrak PLC Regulatory News (TRK)

25 May 2011

Torotrak PLC (LSE: TRK)

("Torotrak" or "the Company" or "the Group")

Preliminary results announcement for the year ended 31 March 2011

Financial and Operational Highlights

Financial highlights

·; Timing and level of licence payments and restructuring costs results in increased loss after tax of £3.1 million, as expected

·; Restructuring of Infinitrak JV leads to a net £0.2 million positive contribution and reduced expenditure going forward

·; Cash of £8.3 million at year end strengthened post year end by £3.5 million licence payment from Allison Transmissions Inc ("Allison") in April 2011, recovering much of the £4.8 million operating cash outflow in the year

·; One-off restructuring charges of £0.7 million in the year is expected to yield cash savings of £1.4 million in first year (£1.8 million annualised)

Operational highlights

·; Substantial engineering programmes with our two lead commercial vehicle customers lead to successful installation of prototype transmissions in each customer's vehicle

·; Allison committed in April 2011 to £8.0 million in further licensing and Torotrak engineering support, moving to a multi-stage, production-intent, transmission programme

·; Torotrak gearbox technology installed in Tata's Pixel concept car, highlighting opportunities in the small car market

·; Rapid progress with our key partners in developing Torotrak technology in engine downsizing and enhanced stop start hybrid systems

Dick Elsy, Chief Executive said:

"We set out a year ago with a change in Torotrak's strategic focus and a determination to transform the business. We have done exactly what we said we would do in terms of advancing our major licensee programmes; maintaining our financial strength; re-organising and reducing our costs; and putting in place effective structures to work more effectively with suppliers and customers. Torotrak's opportunities have never been greater and we are well positioned to deliver real change in our industry, and growth for our shareholders".

Marc Milmo

Karri Vuori

Carl Holmes

Charles Stanley Securities

Financial Adviser & Broker

Tel: +44 20 7149 6000

Chairman's Review

In this, my last report to shareholders, I am pleased to record that Torotrak has had a successful year, building on the new strategic focus described in last year's Annual Report and delivering significant progress, particularly in our important commercial vehicle and energy efficiency programmes. Our strategy and our people are generating tangible results, and the reputation and awareness of our Company and its technology among the industries we serve is stronger than ever before.

Results

For the year to 31 March 2011, revenue was £5.1 million, reduced from last year's £7.6 million mainly because of the timing of lump sum licence fees. Lower revenues and £0.7 million of restructuring costs resulted in an after tax loss of £3.1 million for the year (2010: £0.4 million profit). Operating cash flow, also reflecting the timing of licence payments, was negative by £4.8 million (2010: £1.1 million), although it should be noted that a further £3.5 million licence fee was received from Allison Transmission Inc (Allison) shortly after the year-end.

Cash of £8.3 million at the end of the year (2010: £13.1 million), taken together with the additional licence fees contracted with Allison over the coming year, leaves the Company in a strong position to deliver its plans for commercialisation.

Further explanation of these results is provided in the Financial Review.

Business developments

A year ago, I indicated that Torotrak would increase its commitment of resources to deliver programmes for our high-value customers and to developing applications of our technology in the rapidly growing markets for efficiency enhancing devices to reduce CO2 emissions. I am pleased to report that the Company has made significant progress in its highest value projects and we sense real momentum in several energy efficiency opportunities.

Co-operative programmes with both of our major commercial vehicle licensees, Allison and the as yet unnamed European Truck and Bus Manufacturer ("ETBM") have continued to achieve their project milestones. In both cases, prototype transmissions are now undergoing in-vehicle testing, with encouraging early results and positive reactions from our licensees. In April 2011, we concluded licence and engineering agreements with Allison to start development of a production intent design - reinforcing the commitment to our technology by the world's largest producer of automatic transmissions for trucks. This brings Allison's cumulative commitment to licence and engineering fees to £18.0 million since March 2009.

In the energy efficiency space, several programmes are advancing. Our joint venture company, Rotrak, is developing a variable drive supercharger to provide a more efficient and cost-effective solution to the pressure charging of smaller engines, which is the direction being pursued by many vehicle manufacturers to improve fuel efficiency without compromising performance. A first prototype is now running on a test rig and will shortly be installed in a small car.

The UK Government sponsored Flywheel Hybrid System for Premium Vehicles ("FHSPV") project for a flywheel-based kinetic energy recovery system, using a Torotrak variable drive transmission to enhance the performance of mechanical hybrid vehicles, has demonstrated double-digit improvement in fuel economy. This has encouraged our partners, including Jaguar Land Rover, to support the next phase of development. The similar 'Flybus' programme for buses is continuing to develop a prototype unit, although timing has been delayed by several months due to the need for further development in an area of the system not related to the drive technology.

For some time, we have seen the potential for a low-cost version of a Torotrak transmission to be used in small cars to enhance fuel efficiency and driveability. To this end, we were therefore pleased by the interest generated by our licensee, Tata Motors, when it displayed a concept city car (the Tata Pixel) at the Geneva Motor Show in March 2011using the Torotrak transmission with its 'zero turn' capability. Although there is as yet no production committment, this concept has helped to highlight the relevance of Torotrak's technology for small cars.

We announced in January 2011 that we had agreed with our partners, the MTD Holdings Group ("MTD"), to replace the Infinitrak joint venture with a new non-exclusive licence for MTD to produce transmissions for its own lawn and garden products. This will be financially beneficial to Torotrak in avoiding future manufacturing investment, reducing development costs and opening up other potential licensing opportunities. Torotrak also benefitted from $1.6 million paid by MTD on completion of these agreements.

Torotrak team

As the cycle of development of Torotrak's technology has reached the point where more of the future development burden will be carried by our partners and licensees, the Board decided that the organisation should be streamlined by a substantial restructuring, which has now been implemented. This has involved thinning out senior manager roles and delegating more responsibility for innovation, business development and programme management to three newly defined engineering product director roles reporting directly to the Chief Executive. In addition, the number of administrative and support functions has been reduced. This is expected to reduce the cost base by some £1.4 million in the year to March 2012 compared with implementation costs of £0.7 million (charged in the year to March 2011). Annualised savings are expected to be in the order of £1.8 million. Crucially, the ability to innovate and support our customers and licensees will be fully maintained.

Consistent with this organisation philosophy, we decided that the re-organisation should be led by reducing the size of the Board. We have eliminated one executive and one non-executive position, resulting in a board comprising just two executives - the Chief Executive and the Finance Director (who also takes over commercial responsibilities) - and two non-executives - a non-executive chairman and one independent non-executive director. Whilst this will inevitably entail some compromise when measured against the 'ideal' corporate governance criteria, the Board concluded that that this was the right approach for a lean organisation and that high corporate governance standards can be maintained by a four-person board exercising appropriate discipline.

I would like to express the Board's appreciation to the entire Torotrak team, including those who will be leaving as part of the restructuring, for the enormous progress made in the last year. In particular, I thank James Batchelor, previously Commercial Director, and David MacKay, previously Non-Executive Director for their important contributions to the Board and the Company over the past years and for leading from the front by agreeing to step down from the Board as part of the restructuring.

Outlook

Torotrak is in good organisational shape. It has a wide array of licensees, including several world class businesses, and a technology that is increasingly recognised as providing C02 emissions reduction in a variety of applications. The board is confident that the business focus is delivering tangible successes and that the strategy for commercialisation, based on a sound and sufficient level of funding, will deliver for our shareholders.

Chairmanship

I have greatly enjoyed my thirteen years at Torotrak, including almost six years as Chairman. We have encountered many challenges over this period but the Company today has a clear strategic direction, a strong reputation in its target markets and growing business momentum.

With Torotrak in a strong financial position, and now entering a new phase in the commercialisation of its technology, I believe the time is right for me to hand over to a new Chairman with a fresh perspective. The Board is delighted to have attracted someone of the calibre and experience of John Weston to take over the chairmanship from 1 June 2011.

I wish him and the Company success in the coming years.

Chief Executive's Review

Progress against key objectives

We laid out last year the change of emphasis in our strategic focus and the new priorities that we had set ourselves. It has been a year of substantial change: change in the market climate and progress with our lead customers, as well as change in our structure as an organisation in preparation for taking serious steps towards commercialisation in volume. The market for clean technology has also changed and Torotrak's prospects for success have grown. Our technology is ever more relevant as the pressure for change builds demand for cleaner technology solutions.

Market background - pressure for change in the way that fuel is used for transportation

The world needs to save fuel and there are now fiscal and commercial pressures to enforce this. The combination of confirmed and emerging fuel economy and emission legislation, coupled with growing fuel costs, is driving demand for fuel efficiency technology across the whole automotive, commercial vehicle and off highway markets. The legal framework is in place and there is a clear commercial case to introduce new technology.

Moreover, there is a growing and strong sense of social responsibility. Consumers are putting pressure on companies across all transportation sectors to be cleaner, greener and more efficient. Reducing emissions in vehicles is becoming a moral imperative as much as an economic one, not only for the vehicle manufacturers but also for end-users.

Commercial vehicles

For commercial vehicles there exists draft regulation in the USA which targets the achievement of a 20% reduction in fuel consumption, to be progressively introduced within an expected 2016 - 2020 timeframe. In Europe, the European Automobile Manufacturers Association ("ACEA"), the body which represents the major vehicle manufacturers, has committed to its 'Vision 20-20' which seeks to reduce commercial vehicle fuel consumption by 20% by 2020.

The commercial vehicle market has to date concentrated on meeting noxious gas emissions targets , however there is growing realisation that this market also needs to focus on developing products with better fuel economy. The noxious gas targets have begun to tighten towards automotive levels and this has necessitated the use of exhaust treatment systems to clean up the exhaust gas. A dilemma for commercial vehicle manufacturers is that this exhaust treatment technology has a detrimental impact on vehicle fuel economy.

The commercial vehicle industry needs, and is prepared to pay for, technology which can address fuel economy and emissions at source. The most obvious way to achieve this is to allow the engine to run under optimum conditions to get a cleaner burn and to make best use of the fuel. Torotrak's gearless variable drive technology can enable this, with the right efficiency and ability to handle the high power of truck and bus engines.

When Torotrak technology is fitted to such vehicles, although the results are dependent upon the specific test cycle used (long haul truck versus city delivery for example), we know that fuel economy gains in excess of 10% are achievable and that the savings are greater in high traffic urban environments.

This is a material market for Torotrak. After the recent global economic downturn, which has affected the sales of commercial vehicles, forecasts predict that there will be a strong increase in commercial vehicle production. In North America, on-highway commercial vehicle production is expected to grow annually by roughly 20%, from around 180,000 units in 2010 to around 310,000 units in 2013. Similarly, in Western Europe, annual growth is expected to be around 20% over the same period, culminating in a total annual production of around 600,000 vehicles by 2013.

Our licensee Allison has a market leading position in automated transmissions for delivery, distribution trucks and buses. Allison estimates that in 2010 it had 60% of the global market share for fully automatic transmissions in the medium and heavy duty on-highway commercial vehicle market. Allison has also said that it expects a strong trend towards greater transmission automation.

In North America, automatic transmissions are dominant, representing 79% of the medium and heavy-duty commercial vehicle transmissions sold. In contrast to this, in the rest of the world use of automatic transmissions in the medium and heavy-duty commercial vehicle sector is very low and is believed to be around 5%. With the increasing legislative, economic and social demands for reduced fuel consumption and lower emissions, and where the solutions point heavily towards greater automation, we see a very good reason for this percentage to substantially increase. This represents a growing and tangible market for Torotrak's technology.

Off highway market

The off highway market, encompassing agricultural vehicles, construction equipment and material handling vehicles, is also facing the stringent noxious gas emissions legislation of US EPA Tier IV Final and EU Stage IV. There are, however, significant drivers in this sector to improve overall productivity by maximising vehicle efficiency and drivability which in turn increases operator productivity and serves to reduce overall fuel consumption.

Torotrak's access to this market is through the vehicle manufacturers and their key transmission suppliers, for example Carraro, a Torotrak licensee. Through our work with Carraro, Torotrak technology has been presented at major trade exhibitions including BAUMA 2010 at Munich, as class leading in efficiency, economy and refinement for variable drive transmissions.

Automotive

The automotive market for Torotrak comprises passenger cars and transportation other than commercial vehicles. As part of the global commitment to reduce greenhouse gas emissions, CO2 (fuel consumption) targets have been introduced for the developed economies. In Europe, Regulation EC 443/2009 requires car manufacturers to deliver a 'fleet average' CO2 target of 130g/km, starting in 2015. A further tightening of this Regulation proposed to reduce fleet average emissions to 95g/km from 2020. This represents improvements of 11% and 35% over measured 2008/9 levels. In the USA, targets for cars are related directly to fuel economy, and President Obama set new national targets for fuel consumption in 2009 to achieve a fleet average of 35.5mpg from 2016, representing a 35% improvement on 2007 levels.

Vehicle manufacturers in the automotive market therefore face a direct legislative challenge: if they do not provide vehicles with better fuel economy, then they will suffer financial penalties levied against every vehicle sold. This has driven vehicle manufacturers to assign a value for new technology in relation to each gram of CO2 reduction that it can achieve. There is therefore a readiness to pay for new technology that delivers the required CO2 reduction in a cost efficient way. Much of this new investment is going into improvements in:

1. engine downsizing enabled by pressure charging devices

2. stop/start technology

3. hybrid technology

Torotrak's technology has direct application in each of these categories. This introduces an entirely new range of opportunities outside main drive transmissions, where Torotrak's variable drive technology facilitates new solutions for engine downsizing and enhanced stop start systems, and provides a mechanical hybrid alternative to the current electrical hybrid solution.

For main drive transmissions, our opportunities in this market lie mainly in areas where new investment can be justified. Torotrak's technology focus here lies with the market for small cars, where customers in emerging markets are seeking next generation solutions and where Torotrak's technology can provide additional benefits, such as improved manoeuvrability and cost effective automation.

Priorities and programmes

Summary

Torotrak's focus as a provider of gearless variable transmissions has been primarily directed this year at the commercial vehicle market, where we have two substantial lead customers. The requirement for Torotrak's new technology is driven by strong commercial need and our capability to provide a smart solution at an economic price.

Elsewhere, we have focused our resources on the automotive market, where there are clear opportunities for our technology to deliver CO2 reduction through mechanical hybrids incorporating stop start and engine boost solutions; in addition, we have worked on a high profile concept city car main drive transmission project.

Our lead licensee in the off highway market, Carraro, continues to make good progress to bring a range of new transmissions encompassing Torotrak technology towards market launch.

During the year, we took the decision to exit our joint venture arrangements with lawn tractor manufacturer, MTD as we saw our respective strategic interests better served by a non-exclusive licensing arrangement from Torotrak to MTD. More detail of this restructuring is in the Financial Review.

Allison Transmissions Inc ("Allison")

The strong collaboration between Allison's engineers and the team at Torotrak successfully delivered the first programme result of a transmission in vehicle. Our work included extensive rig and vehicle testing of the concept prototype transmission, as well as the conclusion of a substantial 'technology transfer' programme. This has enabled Allison's engineers to acquire the knowledge of Torotrak's technology necessary for them to be able to take product development ownership and direction from their base in Indianapolis.

We stated in November 2010 in our interim statement that we were confident that Allison had the determination and capability to move quickly onto a production intent prototype design in 2011. On 12 April 2011, we announced that Allison had made substantial further licensing and engineering services commitments. For further details, see the Financial Review.

Most significantly, Allison has contracted Torotrak to provide engineering support in its next stage production intent transmission design programme, which commences in the first quarter of the new financial year. The initial first year order value for engineering support is $2 million. Torotrak will assist Allison throughout its multi-stage programme, which aims ultimately to deliver a production ready transmission. The first two years of this programme have been carefully mapped out and detail the requirements for Torotrak's engineering input.

Working very closely with Allison through this multi-stage programme will enable Torotrak to help them make engineering decisions as they configure the design for production. This will enhance the prospect of a successful and timely outcome.

European Truck and Bus Manufacturer ("ETBM")

Torotrak's £2.9 million engineering contract to carry out a full milestone-driven design, build, and test programme to deliver a total of five prototype transmissions for ETBM reached its final and most material stages during the year. We have completed the build and initial test and installation of all of these transmissions. One has been installed into a truck involving a full vehicle integration programme and delivery back to the customer. One is in the process of being installed into a bus. The remaining three transmissions have been used for rig testing purposes.

We have delivered the first vehicle, a large distribution truck, to ETBM having achieved the important milestone of 'Handover acceptance criteria achieved'. This means that the vehicle, equipped with Torotrak's prototype transmission, has delivered the in-vehicle performance targets that were set at the beginning of the programme. Achievement of this handover triggered a milestone payment of £0.3 million in March 2011. This project is now nearing its final stages, which include the handover of a bus similarly equipped and fully integrated with a Torotrak transmission and triggers a final milestone payment, representing the remaining 5% of the contract value.

Behind these vehicle installations is a series of rigorous rig tests both in the UK and at the customer's test facilities, where the prototype transmissions have been subjected to an array of specific test conditions designed to measure performance and efficiency. Transmission efficiency is vital to achieving fuel economy in the final vehicle and measurements from the rig tests have shown that there is a very close correlation between the results and the predicted performance. The client uses these results as an accurate tool to assess the likely fuel economy and emissions performance of future vehicles, and to confirm the benefits derived from using Torotrak technology.

With the tests yielding promising results, ETBM has now embarked on a programme of technology transfer wherein Torotrak is imparting its knowledge and expertise to engineers at the ETBM's headquarters. This knowledge will equip the engineers to be able to develop the technology further on a self-sustained basis.

Torotrak is currently scoping out a programme of additional work with the ETBM to further develop and improve the performance of the first vehicle.

ETBM is currently formulating its plans for the next programme steps.

Tata Motors

Torotrak's relevance as a gearbox technology provider to the small car market was highlighted in the 'reveal' of Tata's Pixel concept car at the Geneva Motor Show in March 2011. Equipped with a Torotrak transmission, the Pixel is a bold and radical new design concept for an urban/city car and is being used by TATA to gauge market reaction.

The concept transmission in the Pixel allows independent speed control of each of the rear wheels which, in combination with Tata's novel steering mechanism, allows the Pixel to turn around almost within its own length.

We believe the use of Torotrak's technology in the Pixel, even at a concept stage, shows the potential for Torotrak's technology in the development of compact, clean urban vehicles as a solution to issues of pollution and traffic density in major conurbations.

Joint venture with Rotrex AS - 'Rotrak'

Technology and opportunity

Pressures on the high volume automotive market to reduce CO2 emissions have led the car industry to focus on technologies that can offer the greatest gains at the lowest unit cost. A key way to achieve savings at low cost is engine downsizing: a small engine has lower friction and pumping losses than a larger one and is therefore more fuel-efficient. Consumers however do not want to compromise on vehicle performance, so pressure-charging technology is being deployed to 'boost' the power of small engines to match the levels of the larger engines they replace.

Conventional technologies for achieving this, such as turbocharging and supercharging, have their limitations and these are exacerbated as the size of the engine gets smaller. This is principally to do with deficiencies in performance and response at low speeds, where the pressure charging devices are at their least effective. There is considerable technical effort and investment going into resolving this shortfall across the industry. Most of this centres on increasing the technical complexity of turbochargers as well as technology pairing, whereby a small engine may have twin turbochargers or a turbocharger and a supercharger combined.

Nonetheless, increasing complexity also increases cost and here the commercial case for downsizing as a means of achieving CO2 reduction weakens. This however has not stopped continued investment into pressurechargers, which are expected to reach an industry volume of 26 million units per annum by 2015, at the point where the first tranche of the EC 443/2009 Regulation comes into force.

Progress

There is a significant opportunity in both the petrol and diesel markets for a single pressurecharging device with a cost advantage over the incumbent solutions. This is the addressable and material market opportunity for Rotrak, our joint venture with Rotrex AS (a Danish supercharging company) established in April 2010. To reinforce our working relationship, Torotrak acquired a 15% shareholding April 2010 in Rotrex AS, which is making considerable progress in its own right.

Rotrak has combined the two joint venture partners' technologies to create a variable drive supercharger capable of addressing the shortfalls of the incumbent technologies in this downsizing market. The benefits of our collaboration have yielded early results, with our first proof of concept prototype units being tested at Torotrak's facilities within eight months of the joint venture's formation. Initial work has been confined to test rigs, which have shown that the Rotrak unit is capable of delivering the crucial 'time to torque' response that is key in overcoming the limitations of other engine downsizing technologies.

The next step is to install a proof of concept unit in our own vehicle to demonstrate the benefits to interested Tier 1 and vehicle manufacturers. We aim to show that we can deliver the driving feel of a car with a 1.8 litre engine from one fitted with a 1.2 litre Rotrak boosted unit. We expect to have initial results from this vehicle in the first half of the new financial year.

Our commercial strategy for Rotrak remains based upon two routes. Firstly, we are setting out to prove the technology's capability for self-financed lower volume supply. Secondly, we are working with interested vehicle manufacturers and Tier 1 suppliers to develop the technology on a licensee basis for higher volume market supply.

Recovering wasted energy in a smarter and more environmentally sound way - a new type of pragmatic hybrid and 'stop start' system

Technology and opportunity

Recovery of the energy otherwise lost when a vehicle is braking is the central premise of the hybrid vehicle industry, which is currently focused on battery-electric technology as the only 'developed' solution. The challenges posed by this form of hybrid system are the cost, package space and the disposal and replacement of the high cost batteries during vehicle life cycles. The battery industry has not yet produced a convincing case that the batteries in hybrid application are able to meet the criterion of 'fit for vehicle lifetime' that is the industry standard. There are also growing concerns over the environmental impact of widespread battery manufacture and end of life disposal.

There is significant demand, therefore, for a cost effective, environmentally robust and fit for life system. Torotrak's technology addresses this opportunity by linking its variable drive technology with a mechanical flywheel to enable a cost effective method of recovering wasted braking energy. We are working with flywheel technology partners such as Ricardo and Flybrid Systems, and industry partners such as Allison, Jaguar LandRover, and Optare. Early results have generated considerable industry interest, in both the automotive and commercial vehicle markets.

The mechanical flywheel hybrid (Kinetic Energy Recovery System, or KERS) is a different proposition from the electrical systems and is suitable for both cars and commercial vehicles (particularly urban trucks and buses that stop and start repeatedly). The energy recovered from bringing the vehicle to rest is stored in a spinning flywheel as opposed to being stored in a battery as electrical potential energy.

In commercial vehicles, an electric hybrid bus can deliver considerable fuel economy savings but the high cost of the additional electrical systems and batteries almost doubles the transaction price of a new vehicle. This means that government subsidies are required in order to make them economically viable. In contrast, the Torotrak enabled mechanical flywheel hybrid offers a realistic commercial proposition to bus operators and with no fundamental concerns over durability or battery disposal at the end of the vehicle's life.

In cars, the cost of a hybrid system is also higher than that of a conventional powertrain. The higher cost of hybrid vehicles, together with concerns over battery life and disposal, mean that the market for such vehicles is still limited. Indeed, despite the technology being available for a number of years, the number of hybrid cars sold in Europe last year was less than 1% of total sales. The lower unit cost of a Torotrak enabled mechanical flywheel hybrid is a stronger commercial proposition able to address a far wider market.

In this context, the mechanical flywheel hybrid linked to stop start technology is an effective and affordable mechanical hybrid suited to more universal application.

Progress - automotive

Torotrak is a partner within the FHSPV (Flywheel Hybrid System for Premium Vehicles) consortium programme led by Jaguar LandRover, which has recently completed an investigation into the benefits of a mechanical flywheel hybrid in a premium saloon. The Jaguar XF used as the test platform has the flywheel and its drive system installed adjacent to the rear axle, in the space normally occupied by the spare wheel. The development vehicle drives well and has demonstrated good fuel economy improvements that will translate directly to lower CO2 emissions.

In the ARTEMIS test cycle, the standard developed by the industry to most closely represent typical real-world usage, the flywheel hybrid system with the addition of stop-start delivered an impressive 22.4% improvement compared with the base vehicle. In the regulatory standard NEDC (New European Driving Cycle), an 11.9% benefit was achieved. This is a very positive outcome for an early development system, prior to any design refinements and without related optimisation of other vehicle systems. The consortium members are confident that the system warrants taking to the next stage.

To further improve the business case for widespread adoption of mechanical flywheel hybrid systems, a further consortium called Kinerstor has been established. Kinerstor's remit is to develop very low cost solutions for mechanical flywheel hybrid systems, which would justify fitting such systems into high volume 'commodity' production cars as a cost effective means of reducing CO2. Torotrak's role is to develop a low cost variable drive, which dovetails well with our work on low cost drives for superchargers.

Progress - commercial vehicles

Torotrak's key programme during the year has been in conjunction with the Flybus consortium, which includes companies such as Ricardo, Optare, and Allison as development partners. The programme is currently running several months behind plan but has generated significant industry interest. With the support of the Technology Strategy Board, which has part funded this programme, there has been an agreed extension to the project to deliver the results.

The results of the modelling work for fuel economy and performance are attractive commercially, and fleet operators and vehicle manufacturers have expressed strong interest in the system either as original equipment or as a retrofit. Confirmation of this interest came in the form of an event sponsored by the Low Carbon Vehicle Partnership, following the presentation of its award to the Flybus consortium as winners of the HGV (Heavy Goods Vehicle) Technology Challenge.

Financial Review

Summary

This has been a year of fundamental change and progress towards our goals. Demonstrable steps in support of this have been:

·; Conclusion of further licensing agreements with Allison, securing £8 million of additional financial commitments over the next 12 months and the commitment to a multi-stage engineering programme to develop the next prototypes towards our joint goal of production

·; A root and branch restructuring of Torotrak's organisation, starting with a one third reduction in the board and its costs

·; Further focus on costs means that Torotrak starts the new financial year with a leaner structure, fit for purpose and annualised savings of around £1.8 million

·; Robust cash funds of £8.3 million at the year end, which increased by a further £3.5 million in April 2011

·; The focus of engineering resources on our commercial vehicle customers has delivered both substantial projects according to plan: on budget, delivering what we promised, and on time. Engineering revenues of £1.8 million were earned from these two projects

·; A restructuring of our interests in the former Infinitrak joint venture , such that Torotrak retains core licence rights in this market place, but which eliminates the cash costs otherwise required to support manufacturing investment and start-up losses

·; A healthy forward order book for our engineering consultancy activities centred around our objectives to support our core licensees.

Revenue

Revenue 2011 - £5.1 million vs. 2010 - £7.6 million

Although engineering revenues increased by 36% to £2.2 million, overall revenue fell by 34% as a result of the lower level of licensing income in the year. As explained in previous years, the timing of licence payments materially impacts our annual results and hence year on year revenue comparisons at this stage (prior to production royalties) are not necessarily informative of progress made.

Engineering fees remain an important source of income, and the increased contribution reflects the high calibre and demand for our technical expertise. Our engineers are the cornerstone of Torotrak and are there principally to support the commercialisation and development of Torotrak technology, rather than generate consultancy income in its own right. Prioritisation of their time aligned to the right opportunities is clearly an important judgment call and is fundamental to the relationships that we seek to develop.

Cash

Cash balances 2011 - £8.3 million vs. 2010 - £13.1million

Torotrak's total cash outflow during the year was £4.7 million (2010: £1.9 million outflow) of which £3.2 million reflects the timing of lump sum licence payments. In addition, capital expenditure of £0.7 million on patents and improvements to our infrastructure increased the cash outflow this year.

Our closing cash balance of £8.3 million was increased immediately following the year end by £3.5 million of licence payments from Allison. This provides Torotrak with a sound level of financing to progress to the point where we expect to generate recurring income flow from the production of products containing our technology.

Organisational restructuring

In the final quarter of the financial year we have undertaken a fundamental restructuring of our operations and staff structures. The principle has been to obtain far greater leverage from fewer directors and senior managers, and to develop more effective and more empowered teams working for them. 'Teams' in this sense can of course extend beyond Torotrak's own employee base, into contractors and partner companies that we work with.

Our strategy is to work more closely with technology and supplier partners as well as our licensees, with commercial arrangements that involve greater sharing of development costs. This, combined with seeking to introduce more efficient and empowered internal delivery structures, should enable us to make substantial reductions in ongoing Torotrak costs, whilst preserving, and in cases enhancing, our ability to progress our technological and business growth.

The organisational restructuring started at board level, with a one-third reduction both in costs and in board members, which reduced from six down to four. Intermediate director layers were also removed, with the engineering teams now reporting directly to the CEO through our new team of engineering product directors. Reductions in staff numbers elsewhere focused mainly on support functions, although there have been reductions in engineers in areas that were considered appropriate to changing the balance of in house capability versus external support.

The staff reductions, taking the organisation to around 40 full time employees, took effect from 1 April although some departures will be phased over the coming months. The associated costs of £0.7 million have been charged as a 'one off' exceptional item in the year under review.

The net changes in staff and contractors, together with associated overhead reductions, will result in £1.8 million of annualised cash savings (before inflation) and an expected benefit of £1.4 million in the financial year ending 31 March 2012.

It should be noted that Torotrak's relatively low level of employee numbers is a misleading indicator as to the true level of investment in Torotrak technology. In this respect, when taking into account partner and licensee employees and programmes, which are spread internationally, we perceive the level of activity and investment to be continuing to increase and gather pace. An illustration of this, is that we currently have seven component suppliers working with Torotrak to develop and validate their capability for production supply.

Licensing

In April 2011, we concluded further licensing arrangements with Allison valued at £8.0 million. This comprises a £3.5 million licence fee that was received immediately; £3.3 million licence fees due a year thereafter and £1.2 million by way of engineering order value over 12 months.

Part of each licence payment secures Allison's rights to a non-exclusive licence in 2013 in the above 14,000kg gross vehicle weight commercial vehicle market; such rights are currently held on an exclusive basis (other than pre-existing licensees) until 2013 by ETBM. Such amounts will only be recognised in revenue in 2013 when Allison has the rights to use the licence in this defined field.

The remaining part of each licence payment secures exclusivity for Allison for a period of two years up to March 2013 during which Torotrak agrees not to pursue further licensing with other parties in key areas within the commercial vehicle market ("Exclusivity Rights"). These amounts are recognised in Revenue when they are committed and we are confident they will be paid. Accordingly £1.8 million was recognised in the financial year to 31 March 2011, as this was contractually committed by Allison prior to the conclusion of our overall arrangements in April.

Following this two year period, Allison has the option to continue with its Exclusivity Rights on a perpetual basis for a further payment of £10.6 million, although at that stage it will have purchased full licence rights on a non-exclusive basis. If Allison does not require further exclusivity at that time, then Torotrak will have the ability to license other commercial vehicle customers from 2013 onwards. In line with the need to ensure resilience, we are of course planning for either eventuality in terms of our business development.

Allison's licence, as with all our manufacturing licenses, provides for per unit royalties payable to Torotrak upon start of production based on a percentage of the assessed manufactured value of each transmission produced.

Disposal of Infinitrak joint venture interest and restructuring of OPE licence rights

As reported in January 2011, we have exited the Infinitrak joint venture that was formed in November 2005 between Torotrak and MTD to develop, manufacture and sell transmissions for outdoor power equipment. Infinitrak's previously exclusive licence was replaced in January 2011 with a non-exclusive licence to MTD Products Inc. This new licence restricted MTD's use to the 0 - 25kw field solely for lawn and garden products, which MTD itself manufactures for its own demand. The licence is royalty bearing after the first 20,000 units of annual production. As part of the restructuring, MTD took over Infinitrak's tooling assets and assumed all actual and contingent liabilities, including stocking costs at MTD Products and at suppliers. Torotrak received $1.6 million in cash and took over the intangible patent assets relating to Infinitrak's transmission developments.

The restructuring allows MTD to focus on its own branded products and Torotrak to have the freedom to develop commercial relationships with other OPE suppliers and develop the 25 - 45kw licensed field that can extend beyond OPE products.

We have accounted for Infinitrak as a discontinued operation in order to highlight the net impact of Infinitrak on Torotrak's results. Going forward, Torotrak will not have the expense of funding manufacturing development and tooling, as well as early year start-up losses, which may otherwise have been incurred.

Financial risk management and cash deposits

The Group's overall risk management approach is to adopt a conservative approach and not to take major risk positions or use complex instruments. Cash continues to be deposited according to the policies previously stated, such that the security of the Group's financial assets is the primary objective.

Deposits at year end were held as follows:

Financial Information 2011

Consolidated Income Statement

* 2010 results have been restated to eliminate the activities of Infinitrak LLC which are discontinued in the current year.

Consolidated Statement of Comprehensive Income

Balance Sheet

Consolidated Statement of Changes in Equity

The other reserve represents 787,494 ordinary shares of 10p each issued to Torotrak (Holdings) Limited, which have been debited against reserves. These shares represent the free, partnership and matching shares issued during the year.

Statement of Cash Flows

The Financial Statements were approved by the Board of Directors on 25 May 2011.

Notes to the Financial Information

1. General Information

Torotrak plc (the Company) is a publicly traded company incorporated and domiciled in the UK. The address of its registered office is 1 Aston Way, Leyland, Lancashire PR26 7UX. The Company is listed on the London Stock Exchange.

The Annual Report and Financial Statements for the year ended 31 March 2010 have been delivered to the Registrar of Companies and are available on Torotrak's website www.torotrak.com and the Annual Report and Financial Statements for the year ended 31 March 2011 will be posted to shareholders and made available on Torotrak's website in June 2011.

The auditors have reported under section 495 of the Companies Act 2006 on the Group's statutory accounts for the years ended 31 March 2011 and 31 March 2010 and the auditors' reports were unqualified and did not contain any emphasis of matter paragraphs or statements under Section 498 of the Companies Act 2006.

2. Basis of Preparation

This preliminary announcement does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006 . The financial information for the year ended 31 March 2011 has been prepared under the historical cost convention and in accordance with EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies used are the same as those disclosed in the audited Financial Statements for the year ended 31 March 2010.

3. New standards, amendments to standards or interpretations

 (a) Standards, amendments and interpretations to existing standards effective in 2010 but not relevant to the Group

·; IFRS 3 (revised), 'Business combinations', and consequential amendments to IAS 27, 'Consolidated and separate financial statements', IAS 28, 'Investments in associates', and IAS 31, 'Interests in joint ventures', are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. This is not currently applicable to the Group, as it has not made any business combinations transactions.

·; IFRIC 17, 'Distributions of non-cash assets to owners', effective for annual periods beginning on or after 1 July 2009. This is not currently applicable to the Group, as it has not made any non-cash distributions.

·; IFRIC 18, 'Transfers of assets from customers', effective for transfer of assets received on or after 1 July 2009. This is not relevant to the Group, as it has not received any assets from customers.

·; 'Additional exemptions for first-time adopters' (Amendment to IFRS 1) was issued in July 2009. The amendments are required to be applied for annual periods beginning on or after 1 January 2010. This is not relevant to the Group, as it is an existing IFRS preparer.

(b) The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year beginning 1 April 2010 and have not been early adopted:

·; IFRS 9, 'Financial instruments', issued in December 2009. This addresses the classification and measurement of financial assets and is likely to affect the Group's accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. The Group is yet to assess IFRS 9's full impact. However, initial indications are that it may affect the Group's accounting for its available-for-sale financial assets, as IFRS 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available-for-sale debt investments, for example, will therefore have to be recognised directly in profit or loss. In the current reporting period, the Group recognised £13k of such losses in other comprehensive income. The Group has not yet decided when to adopt IFRS 9.

·; Revised IAS 24, 'Related party disclosures', issued in November 2009. It supersedes IAS 24, 'Related party disclosures', issued in 2003. The revised IAS 24 is required to be applied from 1 January 2011. Earlier application, in whole or in part, is permitted.

·; 'Classification of rights issues' (Amendment to IAS 32), issued in October 2009. For rights issues offered for a fixed amount of foreign currency, current practice appears to require such issues to be accounted for as derivative liabilities. The amendment states that if such rights are issued pro rata to all the entity's existing shareholders in the same class for a fixed amount of currency, they should be classified as equity regardless of the currency in which the exercise price is denominated. The amendment should be applied for annual periods beginning on or after 1 February 2010. Earlier application is permitted.

·; 'Prepayments of a minimum funding requirement' (Amendments to IFRIC 14), issued in November 2009. The amendments correct an unintended consequence of IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction'. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct the problem. The amendments are effective for annual periods beginning 1 January 2011. Earlier application is permitted. The amendments should be applied retrospectively to the earliest comparative period presented.

·; IFRIC 19, 'Extinguishing financial liabilities with equity instruments'. This clarifies the requirements of IFRSs when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept the entity's shares or other equity instruments to settle the financial liability fully or partially. The interpretation is effective for annual periods beginning on or after 1 July 2010. Earlier application is permitted.

·; Improvements to International Financial Reporting Standards 2010 were issued in May 2010. The effective dates vary standard by standard but most are effective 1 January 2011.

4. Segmental analysis

Year ended 31 March 2011

Year ended 31 March 2010 - Restated

Note 1. Development activities include research and the creation of intellectual property.

Note 2. 2010 results have been restated to eliminate the activities of Infinitrak LLC which are discontinued in the current year.

Significant customers

The following revenues are attributable to significant customers:

Business segment Balance Sheet

As at 31 March 2011

Business segment Balance Sheet

As at 31 March 2010

5. Continuing operating (loss)/profit

2010 figures have been restated to remove amounts relating to Infinitrak which are now included in discontinued operations.

Expenses by nature

6. Exceptional item

During the year the group undertook an organisational restructuring in order to better align its structures with ongoing strategic requirements, resulting in a reduction of ongoing operating costs.

7. Discontinued operations

The result on discontinued operations relates to all transactions resulting from the exit of Infinitrak LLC, the joint venture previously held by the group.

8. Trade and other receivables

Amounts owed by subsidiary undertakings are recoverable on demand but are expected to be recovered after more than one year. No interest is charged on this receivable and no security is held.

There is no provision for impairment of receivables at 31 March 2011 (2010: £nil). Included in trade receivables is a balance of £53k which is overdue. The remainder of receivables are within normal due dates for collection.

9. Trade and other payables

Amounts owed to subsidiary undertakings are payable on demand but are expected to be paid after more than one year. No interest is charged on this payable and no security given.

10. Issued share capital

11. Financial record

For the years ended 31 March